UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended December 30, 2001
------------------------------------------------
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____ to ____
Commission File No. 0-8866
MICROSEMI CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2110371
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2381 Morse Avenue, Irvine, California 92614
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(Address of principal executive offices) (Zip Code)
(949) 221-7100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares of the issuer's Common Stock, $.20 par value, outstanding
on January 14, 2002 was 28,505,107.
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The unaudited consolidated financial information for the quarter ended December
30, 2001 of Microsemi Corporation and Subsidiaries ("Microsemi" or the
"Company") and the comparative unaudited consolidated financial information for
the corresponding period of the prior year, together with the balance sheet as
of September 30, 2001, are attached hereto and incorporated herein.
2
MICROSEMI CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Balance Sheets
(amounts in thousands, except par value per share)
September 30, December 30,
2001 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 24,808 $ 23,003
Accounts receivable less allowance for doubtful accounts,
$3,584 at September 30, 2001 and $3,712 at December 30, 2001 ......... 37,950 37,149
Inventories ............................................................ 58,889 60,436
Deferred income taxes .................................................. 12,277 12,277
Other current assets ................................................... 2,072 1,749
---------- ----------
Total current assets ................................................... 135,996 134,614
Property and equipment, net .............................................. 63,380 67,823
Deferred income taxes 1,671 1,671
Goodwill and other intangible assets, net ................................ 37,306 36,336
Other assets ............................................................. 1,818 1,874
---------- ----------
TOTAL ASSETS ............................................................. $ 240,171 $ 242,318
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable .......................................................... $ 9,766 $ 9,766
Current maturities of long-term debt ................................... 3,573 3,315
Accounts payable ....................................................... 11,385 8,948
Accrued liabilities .................................................... 22,158 21,047
Income taxes payable ................................................... 6,862 6,515
---------- ----------
Total current liabilities .............................................. 53,744 49,591
---------- ----------
Long-term debt ........................................................... 6,078 6,051
---------- ----------
Other long-term liabilities .............................................. 4,960 4,876
---------- ----------
Commitments and contingencies (Note 3)
Stockholders' equity:
Preferred stock ........................................................ - -
Common stock, $.20 par value; authorized 100,000 shares; issued and
outstanding 28,248 and 28,500 shares at September 30, 2001 and
December 30, 2001, respectively ..................................... 5,650 5,700
Capital in excess of par value of common stock ......................... 110,729 112,835
Retained earnings ...................................................... 60,096 64,358
Accumulated other comprehensive loss ................................... (1,086) (1,093)
---------- ----------
Total stockholders' equity ............................................. 175,389 181,800
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $ 240,171 $ 242,318
========== ==========
The accompanying notes are an integral part of these statements.
3
MICROSEMI CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Income Statements
(amounts in thousands, except earnings per share)
Quarter Ended
-------------------------------
December 31, December 30,
2000 2001
--------------- --------------
Net sales ................................................. $ 63,005 $ 57,018
Cost of sales ............................................. 43,031 35,198
---------- ---------
Gross profit .................................. 19,974 21,820
---------- ---------
Operating expenses:
Selling, general and administrative .................... 9,940 9,119
Amortization of goodwill and other intangible assets ... 673 1,092
Research and development ............................... 3,423 5,154
---------- ---------
Total operating expenses ...................... 14,036 15,365
---------- ---------
Operating income .............................. 5,938 6,455
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Other income (expense):
Interest, net .......................................... 158 (161)
Other, net ............................................. 22 67
---------- ---------
Total other income (expense) .................. 180 (94)
---------- ---------
Income before income taxes ................................ 6,118 6,361
Provision for income taxes ................................ 2,019 2,099
---------- ---------
Net income ................................................ $ 4,099 $ 4,262
========== =========
Earnings per share:
-Basic ............................................... $ 0.15 $ 0.15
========== =========
-Diluted ............................................. $ 0.14 $ 0.14
========== =========
Weighted average common shares outstanding:
-Basic ............................................... 27,608 28,331
========== =========
-Diluted ............................................. 29,112 30,120
========== =========
The accompanying notes are an integral part of these statements.
4
MICROSEMI CORPORATION AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(amounts in thousands)
Quarter Ended
------------------------------
December 31, December 30,
2000 2001
-------------- --------------
Cash flows from operating activities:
Net income ....................................................... $ 4,099 $ 4,262
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................. 2,880 3,673
Provision for doubtful accounts ............................... 313 128
Loss on retirement of assets .................................. -- 23
Changes in assets and liabilities:
Accounts receivable ...................................... (1,742) 673
Inventories .............................................. 1,339 (1,547)
Other current assets ..................................... (1,279) 323
Accounts payable ......................................... (849) (2,438)
Accrued liabilities ...................................... 2,528 (1,111)
Income taxes payable ..................................... (644) (347)
-------- --------
Net cash provided by operating activities ........... 6,645 3,639
-------- --------
Cash flow from investing activities:
Purchases of property and equipment .......................... (2,865) (7,054)
Other assets ................................................. 140 (171)
-------- --------
Net cash used in investing activities ............... (2,725) (7,225)
-------- --------
Cash flows from financing activities:
Decrease in notes payable .................................... (21) --
Payments on long-term debt ................................... (286) (285)
Increase (decrease) in other long-term liabilities ........... 8 (83)
Proceeds from exercise of stock options ...................... 269 2,156
-------- --------
Net cash (used in) provided by financing activities... (30) 1,788
-------- --------
Effect of exchange rate changes on cash .......................... (29) (7)
-------- --------
Net increase (decrease) in cash and cash equivalents ............. 3,861 (1,805)
Cash and cash equivalents at beginning of period ................. 30,460 24,808
-------- --------
Cash and cash equivalents at end of period ....................... $ 34,321 $ 23,003
======== ========
The accompanying notes are an integral part of these statements.
5
MICROSEMI CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 30, 2001
1. PRESENTATION OF FINANCIAL INFORMATION
The financial information furnished herein is unaudited, but in the opinion of
management of Microsemi Corporation includes all adjustments (all of which are
normal, recurring adjustments) necessary for a fair presentation of the results
of operations for the periods indicated. The results of operations for the first
quarter of the current fiscal year are not necessarily indicative of the results
to be expected for the full year.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q, and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. The unaudited consolidated financial statements
and notes should be read in conjunction with the consolidated financial
statements and notes thereto in the Annual Report on Form 10-K for the fiscal
year ended September 30, 2001.
2. INVENTORIES
Inventories used in the computation of cost of goods sold were (amounts in
thousands):
September 30, December 30,
2001 2001
-------------------- --------------------
Raw materials $ 14,751 $ 16,008
Work in process 23,565 24,113
Finished goods 20,573 20,315
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$ 58,889 $ 60,436
============= ================
3. CONTINGENCY
In Broomfield, Colorado, the owner of a property located adjacent to a
manufacturing facility owned by a subsidiary of the Company had notified the
subsidiary and other parties, claiming that contaminants migrated to his
property, thereby diminishing its value. In August 1995, the subsidiary,
together with former owners of the manufacturing facility, agreed to settle the
claim and to indemnify the owner of the adjacent property for remediation costs.
Although TCE and other contaminants previously used at the facility are present
in soil and groundwater on the subsidiary's property, the Company vigorously
contests any assertion that the subsidiary is the cause of the contamination. In
November 1998, the Company signed an agreement with three former owners of this
facility whereby the former owners 1) reimbursed the Company for $530,000 of
past costs, 2) will assume responsibility for 90% of all future clean-up costs,
and 3) indemnify and protect the Company against any and all third-party claims
relating to the contamination of the facility. An Integrated Corrective Action
Plan has been submitted to the State of Colorado. Sampling and free phase
management plans are in preparation for the Colorado Department of Public Heath
& Environment. State and local agencies in Colorado are reviewing current data
and considering study and cleanup options, and it is not yet possible to predict
costs for remediation. In the opinion of management, the final outcome of the
Broomfield, Colorado environmental matter will not have a material adverse
effect on the Company's financial position, results of operations or cash flows.
The Company is involved in various pending litigation matters, arising out of
the normal conduct of its business, including from time to time litigation
relating to commercial transactions, contracts, and environmental matters. In
the opinion of management, the final outcome of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
6
4. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during the period from transactions and other events and
circumstances from non-owner sources. Accumulated other comprehensive loss
consists of the change in the cumulative translation adjustment. Total
comprehensive income of the Company for the quarters ended December 31, 2000 and
December 30, 2001 was $4,070,000 and $4,255,000, respectively.
5. EARNINGS PER SHARE
Basic earnings per share have been computed based upon the weighted average
number of common shares outstanding during the respective periods. Diluted
earnings per share have been computed, when the result is dilutive, using the
treasury stock method for stock options outstanding and giving effect to
issuance of shares upon conversion of debt during the respective periods.
Earnings per share for the respective quarters ended December 31, 2000 and
December 30, 2001 were calculated as follows (amounts in thousands, except per
share data):
Quarter Ended
--------------------------
December 31, December 30,
2000 2001
------------ ------------
BASIC
Net income ......................................... $ 4,099 $ 4,262
======= =======
Weighted-average common shares
outstanding ..................................... 27,608 28,331
======= =======
Basic earnings per share ........................... $ 0.15 $ 0.15
======= =======
DILUTED
Net income ......................................... $ 4,099 $ 4,262
Interest savings from assumed conversions of
convertible debt, net of income taxes ........... 29 29
------- -------
Net income assuming conversions .................... $ 4,128 $ 4,291
======= =======
Weighted-average common shares outstanding for
basic ........................................... 27,608 28,331
Dilutive effect of stock options ................... 1,170 1,455
Dilutive effect of convertible debt ................ 334 334
------- -------
Weighted-average common shares
outstanding on a diluted basis .................. 29,112 30,120
======= =======
Diluted earnings per share ......................... $ 0.14 $ 0.14
======= =======
Approximately 26,000 and 618,000 options in the first quarters of fiscal years
2001 and 2002, respectively, were not included in the computation of diluted EPS
because the exercise price was greater than the average market price of the
common stock, thereby resulting in an antidilutive effect.
7
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes new
accounting and reporting standards for business combinations and requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for by
the purchase method for which the date of acquisition is after June 30, 2001.
Use of the pooling-of-interest method is prohibited. The acquisitions of New
England Semiconductor Corp. and Compensated Devices, Inc. (see Note 10 to the
consolidated financial statements) were accounted for under the provisions of
SFAS No. 141. Further, goodwill and other intangible assets acquired in these
acquisitions will be subject immediately to the provisions of SFAS No. 142. SFAS
No. 142, which changes the accounting for goodwill from an amortization method
to an impairment-only approach, will be effective on a Company-wide basis at the
beginning of the first quarter of fiscal year 2003. The Company is currently
evaluating the Company-wide impact of adopting SFAS No. 142.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement will be effective for the
Company no later than the first quarter of fiscal year 2003. The Company is
currently evaluating the impact of adopting SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement will be effective for the Company no later than the first quarter of
fiscal year 2003. The Company is currently evaluating the impact of adopting
SFAS No. 144.
8
7. SEGMENT INFORMATION
The Company's reportable operating segments are based on geographic location and
the measure of segment profit is income from operations.
The Company operates predominantly in a single industry segment as a
manufacturer of discrete semiconductors and whole-circuit solutions. Geographic
areas in which the Company operates include the United States, Europe and Asia.
Inter-geographic sales primarily represent intercompany sales which are
accounted for based on established sales prices between the related companies
and are eliminated in consolidation.
Financial information by geographic segments is as follows (amounts in
thousands):
Quarter Ended
-------------------------------------
December 31, 2000 December 30, 2001
----------------- -----------------
Net sales:
United States
Sales to unaffiliated customers ........... $ 55,876 $ 51,025
Intergeographic sales ..................... 6,377 5,704
Europe
Sales to unaffiliated customers ........... 6,160 5,939
Intergeographic sales ..................... 1,094 1,175
Asia
Sales to unaffiliated customers ........... 969 54
Intergeographic sales ..................... 1,058 294
Eliminations of intergeographic sales .......... (8,529) (7,173)
--------- ---------
$ 63,005 $ 57,018
========= =========
Income (loss) from operations:
United States ................................ $ 5,572 $ 6,169
Europe ....................................... 323 385
Asia ......................................... 43 (99)
--------- ---------
Total ..................................... $ 5,938 $ 6,455
========= =========
Capital expenditures:
United States ................................ $ 2,832 $ 7,034
Europe ....................................... 32 20
Asia ......................................... 1 --
--------- ---------
Total ..................................... $ 2,865 $ 7,054
========= =========
Depreciation and amortization:
United States ................................ $ 2,768 $ 3,584
Europe ....................................... 56 59
Asia ......................................... 56 30
--------- ---------
Total ..................................... $ 2,880 $ 3,673
========= =========
September 30, 2001 December 30, 2001
------------------ -----------------
Identifiable assets:
United States ................................ $ 224,271 $ 226,935
Europe ....................................... 10,609 10,765
Asia ......................................... 5,291 4,618
--------- ---------
Total ..................................... $ 240,171 $ 242,318
========= =========
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q includes current beliefs, expectations and
other forward looking statements, the realization of which may be adversely
impacted by any of the factors discussed below or the additional factors
referenced under the heading "Important Factors Related to Forward-Looking
Statements and Associated Risks," found below. This Management's Discussion and
Analysis of Financial Condition and Results of Operations and the accompanying
unaudited consolidated financial statements and notes should be read in
conjunction with the Management's Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial statements and notes
thereto in the Annual Report on Form 10-K for the fiscal year ended September
30, 2001.
INTRODUCTION
- ------------
Microsemi Corporation is a global supplier of commercial and high-reliability
analog and mixed-signal integrated circuits ("IC") and power and signal discrete
semiconductors serving the satellite, telecommunications, digital media,
computer and peripherals, military/aerospace, industrial/commercial, and medical
markets.
The Company's IC products offer light, sound and power management for desktop
and mobile computing platforms as well as other power control applications.
Power management generally refers to a class of standard linear integrated
circuits ("SLICs") which perform voltage regulation and reference in most
electronic systems. The definition of power management has broadened in recent
years to encompass other devices and modules, often application specific
standard products ("ASSPs"), which address particular aspects of power
management, such as audio or display related ICs. This business is composed of
both a core platform of traditional SLICs, such as low dropout regulators
("LDOs") and pulse width modulators ("PWMs"), and differentiated ASSPs such as
backlight inverters, audio amplification ICs and small computer standard
interface ("SCSI") terminators. The Company's integrated circuit products are
used in computer and data storage, lighting, automotive, telecommunications,
test instruments, defense and aerospace equipment, high-quality sound
reproduction and data transfer.
Major discrete products are silicon rectifiers, zener diodes, low leakage and
high voltage diodes, temperature compensated zener diodes, transistors and a
family of subminiature high power transient suppressor diodes. The Company also
manufactures discrete semiconductors for commercial applications, such as
automatic surge protectors, transient suppressor diodes used for telephone
applications and computer switching diodes used in computer systems. A partial
list of applications of the Company's discrete semiconductor products includes:
heart pacer transient shock protector diodes (where the Company believes it is
the leading supplier in that market), low leakage diodes, transistors used in
jet aircraft engines and high performance test equipment, high temperature
diodes used in oil drilling sensing elements operating at 200 degrees
centigrade, temperature compensated zener or rectifier diodes used in missile
systems, power transistors and other electronic systems.
The Company currently serves a broad group of customers including Boeing,
Guidant/Cardiac Pace Makers, Seagate Technology, Astrium, Universal
Semiconductor, Motorola, Alcatel, and Medtronic.
10
The Company closed Microsemi PPC Inc. ("PPC") in March 2001 and ceased the
operations at Microsemi (H.K.) Ltd. ("Hong Kong") in June 2001. On August 2,
2001, Microsemi NES, Inc. ("MNES"), a wholly-owned subsidiary of the Company,
acquired the assets of New England Semiconductor Corp. and its wholly-owned
subsidiary, of Lawrence, Massachusetts ("NES"). On August 15, 2001, Microsemi
CDI, Inc. ("MCDI"), a wholly-owned subsidiary of the Company, acquired the
assets of Compensated Devices, Inc., of Melrose, Massachusetts ("CDI").
Results Of Operations For The Quarter Ended December 31, 2000 Compared To The
Quarter Ended December 30, 2001.
Net sales decreased $6.0 million, from $63.0 million for the first quarter of
fiscal year 2001 to $57.0 million for the first quarter of fiscal year 2002. The
decrease was primarily attributable to a decline in lower gross margin products
sold to the PC, mobile telephone and industrial markets and by the reduction or
elimination of revenues generated by subsidiaries that were closed, partially
offset by higher sales of the military and medical products and by the additions
of MNES and MCDI. For the first quarter of fiscal year 2001, PPC and Hong Kong
had revenues of $1.2 million and $1.0 million, respectively. For the first
quarter of fiscal year 2002, MNES and MCDI had revenues of $3.6 million and $2.9
million, respectively.
Gross profit increased $1.8 million, from $20.0 million for the first quarter of
fiscal year 2001 to $21.8 million for the first quarter of fiscal year 2002. As
a percentage of sales, gross profit was 31.7% for the first quarter of fiscal
year 2001, compared to 38.3% for the first quarter of fiscal year 2002. This
increase was due primarily to higher capacity utilization, a shift in revenues
from lower-margin commodity products in the computer/peripherals and industrial
markets to higher-margin application-specific products in the defense mobil
connectivity and medical markets and the consolidation of certain operations
into other locations. In the first quarter of fiscal year 2001, PPC and Hong
Kong had gross profit of $0.3 million and $0.2 million, respectively. In the
first quarter of fiscal year 2002, both MNES and MCDI had gross profit of $1.0
million each.
Selling, general and administrative expenses decreased from $9.9 million for the
first quarter of fiscal year 2001 to $9.1 million for the first quarter of
fiscal year 2002, primarily due to lower commission and other selling expenses.
Research and development expense increased $1.8 million, from $3.4 million for
the first quarter of fiscal year 2001 to $5.2 million for the first quarter of
fiscal year 2002. The increase was primarily due to higher spending to develop
new higher-margin application-specific products.
Amortization of goodwill and other intangible assets increased $0.4 million, due
to the increase of non-goodwill intangible assets related to the acquisitions of
NES and CDI.
The Company earned less interest income in the first quarter of fiscal year 2002
compared to the first quarter of fiscal year 2001 and incurred additional
interest expense from the notes payable related to the acquisitions of NES and
CDI.
The effective tax rate for each of the quarters ended December 31, 2000 and
December 30, 2001 was 33.0%.
11
Capital Resources And Liquidity
Net cash provided by operating activities was $6.6 million and $3.6 million for
the first quarters of fiscal years 2001 and 2002, respectively. The $3.0 million
decrease in net cash provided by operating activities was a result of the
combined effect of differences in depreciation and amortization, accounts
receivable, inventories, other current assets, accounts payable and accrued
liabilities. The decreases in accounts receivable, accounts payable and accrued
liabilities and the increase in inventories were primarily due to lower sales.
Net cash used in investing activities was $2.7 million and $7.2 million for the
first quarters of fiscal years 2001 and 2002, respectively. The $4.5 million
increase of net cash used in investing activities was primarily due to a higher
amount of purchases of property and equipment.
Net cash (used in) provided by financing activities was ($0.03) million and $1.8
million for the first quarters of fiscal years 2001 and 2002, respectively. The
increase was primarily due to proceeds from exercises of employee stock options.
Microsemi's operations in the quarter ended December 30, 2001 were funded with
internally generated funds. The Company has maintained a credit line with a
bank, from which it can borrow up to $30 million. The credit line is secured by
substantially all of the assets of the Company. This credit line expires in
March 2003. As of December 30, 2001, there were no funds borrowed under this
credit facility. The credit line includes a facility to issue letters of credit,
and $4.1 million was outstanding in the form of letters of credit as of December
30, 2001. At December 30, 2001, Microsemi had $23.0 million in cash and cash
equivalents. As of December 30, 2001, Microsemi was in compliance with the
covenants required by its banks and lessors.
Based upon information currently available, management believes that Microsemi
can meet its current operating cash, debt service requirements and capital
commitments with internally generated funds together with its available
borrowings.
Outlook
There has been a broad slowdown affecting the technology sector, including many
end-markets which the Company's products address; however the military/defense
and medical business were strong in the first quarter of fiscal year 2002,
partially offsetting a downward trend in revenues in the other end markets. The
Company continues to see long-term strength in the military/aerospace end
markets. However, in the near term, including the second quarter, the Company is
affected by an abrupt significant decline in commercial aircraft product sales
due to events of September 11th. Order activity following September 11th for
commercial aircraft products, those used by Boeing subcontractors, were halted
as customers rationalized the long-term effects of September 11th. While this
did not significantly affect the first quarter shipment stream, it is a major
component of the decline in revenues that the Company is forecasting for the
second quarter. The Company estimates that commercial aircraft business is
approximately 5% of its overall business.
Opening backlog for the second quarter of fiscal year 2002 was lower than what
it was at the beginning of the first quarter. Book-to-bill ratio for the first
quarter was 0.89.
12
In the Mobile Connectivity end market, the Company continues to see pricing
pressure on the Powermite products. Management is attempting to reposition these
products into new products for this end market in an effort to achieve higher
gross margins.
The Telecommunications end market has historically been comprised of customers
in the transoceanic fiber optic space including Alcatel, Tycom, and Pirelli, as
well as base-station and infrastructure customers like Ericsson, Nortel, and
Motorola. Business in these two areas has been hit hard. The Company sees no
significant upside in the long haul fiber optic and base-station market for at
least another two to three quarters.
The Automotive end market has grown to 5% as a percentage of the whole of the
Company's business through OEM's. The Company expects a further increase in
revenues in the latter part of fiscal year 2002 as automobile makers plan to
launch several new multimedia systems this fall.
The first quarter was, and the Company foresees that the second quarter will
continue to be, weak for general purpose linear regulator products that were
used in low end desktop computers. Competitors in this market have opted to
seize market share at the expense of appreciably lower gross margins. Microsemi
has selected not to participate in this business. The Company's strategy in the
computer/peripherals end market is to focus on higher gross margin LoadShare
regulators for Digital Media applications as well as our LED Driver and Class D
audio circuits.
The Company is accelerating its facility consolidations to help improve capacity
utilization and gross margins. Management intends to continue to consolidate its
facilities and to dispose of low-growth businesses within Microsemi's operating
units. As the Company foregoes sources of low-gross margin revenues, or dispose
of business operations, Management expects revenues to be adversely impacted.
The Company announced recently its intentions to close the Watertown,
Massachusetts, facility and move its production to other facilities in order to
improve capacity utilization and gross-margins.
13
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
- ----------------------------------------------------------------------------
Some of the statements in this report or incorporated by reference are
forward-looking, including, without limitation, the statements under the
captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations". These statements include those that contain words like
"may," "will," "could," "should," "project," "believe," "anticipate," "expect,"
"plan," "estimate," "forecast," "potential," "intend," "maintain," "continue"
and variations of these words or comparable words. In addition, all of the
non-historical information herein is forward-looking, include any statement or
implication about a future time, result or other circumstance. Forward-looking
statements are not a guarantee of future performance and involve risks and
uncertainties. Actual results may differ substantially from the results that the
forward-looking statements suggest for various reasons. These forward-looking
statements are made only as of the date of this report. Microsemi does not
undertake to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise.
The forward-looking statements included in this report are based on, among other
items, current assumptions that Microsemi will be able to meet its current
operating cash and debt service requirements, that Microsemi will be able to
successfully resolve disputes and other business matters as anticipated, that
competitive conditions within the analog, mixed signal and discrete
semiconductor, integrated circuit or custom component assembly industries will
not affect the Company materially or adversely, that Microsemi will retain
existing key personnel, that Microsemi's forecasts will reasonably anticipate
market demand for its products, and that there will be no other material adverse
change in its operations or business. Other factors that could cause results to
vary materially from current expectations are referred to elsewhere in this
report. Assumptions relating to the foregoing involve judgments that are
difficult to make and future circumstances that are difficult to predict
accurately or correctly. Forecasting and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause Microsemi to alter its internal forecasts, which may in turn
affect results or expectations. Microsemi Corporation does not undertake to
announce publicly these changes that may occur in our expectations after the
periods presented herein. Readers are cautioned against giving undue weight to
any of the forward-looking statements.
Adverse changes to our results could result from any number of factors,
including for example fluctuations in economic conditions, potential effects of
inflation, lack of earnings visibility, dependence upon certain customers or
markets, dependence upon suppliers, future capital needs, rapid technological
changes, difficulties in integrating acquired businesses, ability to realize
cost savings or productivity gains, potential cost increases, dependence on key
personnel, difficulties regarding hiring and retaining qualified personnel in a
competitive labor market, risks of doing business in international markets, and
problems of third parties.
The inclusion of forward-looking information should not be regarded as a
representation by Microsemi or any other person that its objectives or plans
will be achieved. Additional factors that could cause results to vary materially
from current expectations are discussed under the heading "Important Factors
Related to Forward-Looking Statements and Associated Risks" in the Annual Report
in the Form 10-K as filed with the Securities and Exchange Commission on
December 24, 2001, and elsewhere in that Form 10-K, including but not limited
to, under the headings, "Legal Proceedings," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the notes to the
financial statements included therein.
14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and changes in interest rates. Market risk is the
potential loss arising from adverse changes in exchange rates and prices.
The Company conducts business in a number of foreign currencies, principally
those of Europe and Asia, directly or in its foreign operations. The Company may
receive some revenues in foreign currencies and purchase some inventory in
foreign currencies. Accordingly, Microsemi is exposed to transaction gains and
losses that could result from changes in exchange rates of foreign currencies
relative to the U.S. dollar. Transactions in foreign currencies have represented
a relatively small portion of the Company's business. Also these currencies have
been relatively stable against the U.S. dollar for the past several years. As a
result, foreign currency fluctuations have not had a material impact
historically on Microsemi's revenues or results of operations. There can be no
assurance that those currencies will remain stable relative to the U.S. dollar
or that future fluctuations in the value of foreign currencies will not have
material adverse effects on the results of operations, cash flows and financial
condition of the Company. The largest foreign currency exposure of the Company
results from activity in British pounds and the European Union Euro. The Company
has not conducted a foreign currency hedging program thus far. The Company has
and may continue to consider the adoption of a foreign currency hedging program.
The Company did not enter into derivative financial instruments and did not
enter into any other financial instruments for trading, speculative purposes or
to manage its interest rate risk. The Company's other financial instruments
consist primarily of cash, accounts receivable, accounts payable, and long-term
obligations. The Company's exposure to market risk for changes in interest rates
relates primarily to short-term investments and short-term obligations. As a
result, the Company does not expect fluctuations in interest rates to have a
material impact on the fair value of these instruments. The Company does not
engage in transactions intended to hedge its exposure to changes in interest
rates.
The Company maintains a $30,000,000 revolving line of credit, which expires in
March 2003. The line of credit is collateralized by substantially all of the
assets of the Company. It bears interest at the bank's prime rate plus 0.75% to
1.5% per annum or, at the Company's option, at the Eurodollar rate plus 1.75% to
2.5% per annum. The interest rate is determined by the ratio of total funded
debt to Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA").
On August 2, 2001, in connection with an acquisition of operating assets, the
Company issued a one-year promissory note in the original principal amount of
approximately $5.8 million structured in such a way that the interest expense on
the maturity date will be in a range of a minimum of approximately $0.2 million
or up to a maximum of approximately $1.4 million. Within that range, the
interest rate is related linearly to the market price of the Company's Common
Stock on the maturity date divided by its price on the issuance date. An
increase in the market price of the Company' Common Stock over the period will
result in an increase in the related interest payable. The Company is recording
interest expense at the Company's market rate at the date of acquisition.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Inapplicable.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Inapplicable
Item 5. Other information
-----------------
Inapplicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K:
On November 7, 2001, the Company filed a report on Form 8-K/A,
Amendment No. 2 to the Current Report on Form 8-K that was filed
August 16, 2001, reporting under Item 5 that the acquisition of
assets of Compensation Devices, Inc., previously filed under Item
2, is being reported only under Item 5, Item 7 and Item 9. In
addition, Regulation FD Disclosure was made under Item 9
concerning two acquisitions and revised financial guidance.
On November 7, 2001, the Company filed a report on Form 8-K,
reporting cautionary language under Item 5, attaching an exhibit
under item 7, and under Item 9 reporting as to the Registrant's
presentations to securities analysts and others at the AEA
Classic Financial Conference and subsequently at the Registrant's
corporate headquarters.
On November 13, 2001, the Company filed a report on Form 8-K/A,
Amendment No. 1 to the Current Report on Form 8-K that was filed
November 7, 2001, reporting cautionary language under Item 5,
attaching exhibits under item 7, and reporting under Item 9 as to
the Registrant's presentations to securities analysts and others
at the Registrant's corporate headquarters.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROSEMI CORPORATION
By: /s/ DAVID R. SONKSEN
--------------------
David R. Sonksen
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer and duly
authorized to sign on behalf of the
Registrant)
DATED: February 11, 2002
17