UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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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 0-3698
Siliconix incorporated
(Exact name of registrant as specified in its charter)
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Delaware |
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94-1527868 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. employer identification no.) |
2201 Laurelwood Road
Santa Clara, California 95054
(Address of principal executive offices)
(408) 988-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o
The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter ($47.63 on July 3, 2004) was $278,400,000. There is no non-voting stock.
As of March 9, 2005, registrant had 29,879,040 shares of its common stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, which will be filed within 120 days of December 31, 2004, are incorporated by reference into Part III.
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Siliconix incorporated
Form 10-K for the year ended December 31, 2004
CONTENTS
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General
Siliconix incorporated (“Siliconix” or the “Company”) designs, markets, and manufactures power and analog semiconductor products. We focus on technologies and products for the communications, computer and automotive markets. Additionally, many of our products are used in industrial and consumer applications.
Founded in 1962, Siliconix uses its advanced technology and applications expertise to develop value-added products for power management and conversion. These products serve two types of markets. The first type, represented by the communications and computer markets, features design cycles as short as a few months and product life cycles as short as six to twelve months, thus creating numerous new opportunities for us. The other type, represented by the automotive market, features long design cycles, sometimes as much as four or five years, and product life cycles as long or longer. Participation in both types of businesses helps us balance growth opportunities with research and development investments required to maintain technology leadership.
Siliconix was a member of TEMIC Semiconductors, a division of the Daimler-Benz microelectronics consortium, for several years. On March 2, 1998, Daimler-Benz sold the Semiconductor Division of TEMIC, which included its interest in Siliconix, to Vishay Intertechnology, Inc. (“Vishay”).
Vishay owns an 80.4% interest in Siliconix. Vishay, a Fortune 1,000 company listed on the New York Stock Exchange, is one of the world’s largest manufacturers of discrete semiconductors (diodes, rectifiers, transistors, optoelectronics, and selected ICs) and passive electronic components (resistors, capacitors, inductors, and transducers). Vishay’s components can be found in products manufactured in a very broad range of industries worldwide. Vishay is headquartered in Malvern, Pennsylvania, and has plants in seventeen countries employing over 25,000 people.
On February 1, 2005, the Board of Directors of Siliconix approved the acquisition by Siliconix of Vishay Semiconductor Itzehoe GmbH (“VSIG”) from Vishay. The acquired entity has been renamed “Siliconix Itzehoe GmbH.” VSIG had been a wholly owned subsidiary of Vishay, and Siliconix Itzehoe GmbH is now a wholly owned subsidiary of Siliconix. This transaction has been accounted for as a merger of entities under common control and has been recorded in a manner similar to a pooling of interests. Accordingly, the accompanying combined consolidated financial statements and information presented in this Form 10-K include the accounts of Siliconix incorporated and VSIG for all periods presented. Adjustments recorded to restate previously reported financial statements as of December 31, 2003 and for the years ended December 31, 2003 and 2002 consisted of those necessary to include the balances and results of VSIG and to eliminate intercompany balances and transactions between Siliconix incorporated and VSIG. See Note 1 to our combined consolidated financial statements for additional information.
We maintain various agreements, transactions and relationships with Vishay. Our products are sold by the Vishay worldwide sales organizations. Effective from January 2001, Vishay Americas, Inc., a wholly owned subsidiary of Vishay, assumed responsibility for collecting our accounts receivable and the associated bad debt risk for the North America region. Under the terms of the agreement, Vishay Americas effectively purchases the receivables from Siliconix as they are generated. Effective from July 2004, Vishay Semiconductor GmbH, a wholly owned subsidiary of Vishay, assumed responsibility for collecting our accounts receivable and the associated bad debt risk for the Europe region. Under the terms of the agreement, Vishay Semiconductor GmbH effectively purchases the receivables from Siliconix as they are generated. Other relationships with Vishay include administrative service sharing agreements, centralized payment services, a short-term loan agreement (which expired January 2, 2005), and management fees for services provided by the Vishay corporate office. All agreements and relationships with Vishay are reviewed and approved by directors serving on the Siliconix Board of Directors who are not affiliated with Vishay.
As further described in Note 13 to our combined consolidated financial statements, on March 3, 2005, Vishay announced its intention to commence a tender offer for all outstanding shares of Siliconix not owned by Vishay.
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Products
The power and analog semiconductor products produced by Siliconix can be divided into two general classes: discrete devices and integrated circuits (ICs). Discrete devices are active components that generate, control, regulate and amplify or switch electronic signals or energy. They must be interconnected with passive components (resistors, capacitors, inductors, etc.) or other active components to create an electronic circuit. ICs consist of a number of active and passive components, interconnected on a single chip, that are intended to perform a specific function. See Note 7 to our combined consolidated financial statements for information on sales by operating segment.
Our discrete power MOSFETs (an acronym for “metal oxide semiconductor field effect transistor”) and power ICs are designed for similar applications and can often be used together as chip sets with complementary performance characteristics optimized for a specific application.
Power MOSFETs are our largest product line in terms of sales. In this product line, Siliconix has traditionally focused on low-voltage products that are prevalent in battery-operated products (e.g., cellular phone handsets and notebook computers) and in automotive systems. Siliconix has maintained technology leadership in low-voltage, surface-mount power MOSFETs through advances in both silicon technology and product packaging. Siliconix extended its product coverage to the medium voltage (250 V and below) spectrum mainly for fixed telecom (networking, routers, etc.) applications, where product performance is a very important feature.
Advanced process technologies, such as our TrenchFET® technology, offer very high transistor cell density, very low on-resistance and optimized switching parameters for high frequency dc-to-dc power conversion.
These process technologies have been coupled with innovative packaging techniques to create surface mount product families, such as LITTLE FOOT® power MOSFETs, which provide customers with size and performance benefits as well as manufacturing compatibility with digital ICs. Our new package innovation, PowerPAK® power MOSFETs, drastically improves thermal performance, giving a higher current capability than other package solutions for a given footprint. This leadless package with ultra thin height profile combined with bond wireless technology such as PowerConnectTM allows for desirable characteristics such as extreme low on-resistance, small size and better power dissipation. Other package innovations are focused on making the overall size of the device smaller, and include the introduction of LITTLE FOOT® power MOSFETs in SC-75A and SC-89 packages as well as chipscale MICRO FOOT® power MOSFETs in which the plastic package is eliminated altogether. These product platforms provide competitive advantages to our customers by offering better performance and smaller form factors for new product development.
Siliconix power ICs include power conversion, low-dropout regulator, power interface and motor control ICs. Our power conversion and interface ICs are based on low-voltage, mixed-signal silicon processes that offer customers higher frequencies without compromising efficiencies compared to competitive products. They are used in applications, such as cellular phone handsets, where an input voltage from a battery or other supply source must be converted to a level that is compatible with logic signals used by power amplifiers, base-band logic, DSPs, CPU I/O and other sub-circuits in the system. Our motor control ICs are used to control motion in data storage applications (e.g., optical and hard disk drives) and to control the speed of small motors in office equipment (e.g., printers and copy machines). In addition to these products, we offer a line of power conversion ICs for higher-power applications in the fixed telecom market.
The balance of our product line includes discrete small-signal transistors and signal processing ICs (e.g., analog switches and multiplexers). Our small-signal transistors range from junction field-effect transistors (JFETs), which was Siliconix’s original product line and even today remain critical for some applications, to newer transistor processes, such as our double-diffused metal oxide transistor (DMOS) processes, which offer performance advantages over competitors’ products. The analog switch and multiplexer product family has long been used in instrumentation and industrial equipment that receives and/or outputs real-world analog signals. A recent application for this technology is in broadband communication devices such as xDSL modems.
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Manufacturing Operations
Our manufacturing operations are strategically located to support customer-manufacturing locations, cultivate growth markets and access cost-effective labor markets. All of our manufacturing sites use Statistical Process Control methods of total quality control and have ISO 9000 certification. In addition, we have ISO 14001 certification for manufacturing sites in the United States, Germany, the Republic of China (Taiwan), and the People’s Republic of China.
Our manufacturing process is comprised of two primary phases. The first, or “front-end” phase, involves the foundry of silicon wafers. The second, or “back-end” phase, involves the assembly of our end-products and all necessary testing of product performance.
We manufacture power products in a Siliconix-owned Class 1 six-inch wafer fabrication facility in Santa Clara, California. Siliconix Itzehoe GmbH also manufactures power products, pursuant to an existing agreement entered into in 1996 with Fraunhofer Gesellschaft (“FHG”). This agreement allows us to use the FHG wafer fabrication facility in Itzehoe, Germany until December 31, 2007. We are presently negotiating the terms of an extension of this agreement, which will enable us to expand production capacity at the Itzehoe facility to enable 8-inch wafer fabrication capabilities. Prior to our acquisition of VSIG, we subcontracted wafer fabrication through this affiliate.
A subcontractor in Japan also manufactures our power products for us under a five-year foundry agreement entered into in 2004. The manufacturing of wafers for analog switches and multiplexers is done in Santa Clara and through an outsourcing arrangement with a foundry in Dresden, Germany. A subcontractor in Beijing, People’s Republic of China manufactures small signal transistors. We use additional fabrication subcontractors in the Republic of China (Taiwan) and the United States for selected processes. Assembly and test facilities include a Siliconix-owned facility in Kaohsiung, Republic of China (Taiwan) and a Siliconix-leased facility in Shanghai, People’s Republic of China. Additionally, we subcontract assembly and testing through an affiliate of Vishay in Israel, as well as through independent subcontractors in the Philippines, the Republic of China (Taiwan), the People’s Republic of China, Thailand and Korea.
Our manufacturing strategy is to supply about 80% of our customer demand from internal capacity, and to rely on foundries and assembly and testing subcontractors to meet the other 20% of the demand. This strategy enables us to deal effectively with the fluctuating cycles of the semiconductor industry.
Sources of Supplies
Raw materials used by us include single-crystal silicon wafers, chemicals, gases, metal wire, and ceramic, plastic and glass-to-metal packages. Although these materials are generally available from two or more sources, we experience difficulties in obtaining supplies of some raw materials from time to time. Also, certain key materials are obtained from a limited group of suppliers, some of which are thinly capitalized independent companies.
Inventory and Backlog
We manufacture both standardized products and those designed and produced to meet customer specifications. We maintain an inventory of standardized components. Backlogs of outstanding orders for our products were $110.0 million, $120.6 million, and $62.3 million at December 31, 2004, 2003, and 2002, respectively.
We include in our backlog only open orders that have been released by the customer for shipment in the next twelve months. Our customers encounter uncertain and changing demand for their products. They typically order products from us based on their forecasts. If demand falls below customers’ forecasts, or if customers do not control their inventory effectively, they may cancel or reschedule the shipments that are included in our backlog, in many instances without the payment of any penalty. Therefore, the backlog at any point in time is not necessarily indicative of the results to be expected for future periods.
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Customers and Marketing
We sell our products to original equipment manufacturers (OEMs), electronic manufacturing services (EMS) companies, which manufacture for OEMs on an outsourcing basis, and independent distributors that maintain large inventories of electronic components for resale to OEMs and EMSs. Sales to distributors typically represent between 65% and 70% of our total sales.
Since the acquisition by Vishay of a majority interest in Siliconix in 1998, our products have been sold by the Vishay worldwide sales organization.
Vishay has established a Strategic Global Account program, which aligns its top customers with an identified Strategic Global Account manager, enabling Vishay’s diverse product families to have “one face to the customer.” This Strategic Global Account manager coordinates sales, marketing, and contract administration for all products manufactured by Vishay companies, providing “one-stop” access to one of the broadest selections of discrete electronic components available directly from a manufacturing source anywhere in the world. We believe that our participation in this program provides us with better access to these key customers.
The affiliated sales organizations are regionally based, functioning as undisclosed agents that earn a commission as a fixed percentage of sales and perform all sales-related activities. We market our products in different geographic areas as follows:
North America: Sales are made by Vishay’s North American sales force, sales representative organizations, and distributors. Regional sales directors employed by Vishay coordinate these representatives and the North American sales force. Vishay’s North American sales headquarters are located in Shelton, Connecticut. Regional sales offices are located in or near Chicago, Illinois; Tampa, Florida; Irving, Texas; Santa Clara, California; Orange County, California; Hauppauge, New York; Juarez, Mexico; and Guadalajara, Mexico.
Sales are made directly to OEMs and through distributors at approximately 350 locations throughout the United States and Canada. Siliconix provides certain distributors with contracts to protect inventory against reductions in published prices and against product obsolescence.
South America: Sales are made by Vishay’s South American sales force, sales representative organizations and distributors. Regional sales directors employed by Vishay coordinate these representatives and the South American sales force. Vishay’s South American sales office is located in Campinas, Brazil.
Sales are made directly to OEMs and through distributors. Siliconix provides certain distributors with contracts to protect inventory against reductions in published prices and against product obsolescence.
Europe: Sales of our products in Europe are made by Vishay’s European sales force, sales representative organizations, and distributors. As in North America, sales are made directly to OEMs and through distributors, with approximately 125 locations. European distributors are provided with certain inventory obsolescence and price protections similar to those granted to United States distributors. Vishay’s European headquarters are in Selb, Germany. Regional sales offices are in Heilbronn, Heide, and Selb, Germany; Sunderland and Bracknell, United Kingdom; Paris, Lyon, and Nice, France; Madrid, Spain; Stockholm, Sweden; Helsinki, Finland; Milan, Italy; Istanbul, Turkey; Warsaw, Poland; Moscow, Russia; Budapest, Hungary; Voecklabruck, Austria; and Eindhoven, the Netherlands.
Japan: Sales in Japan are made both by Vishay’s Japan sales force and distributors. Regional sales offices are located in Tokyo and Osaka.
Asia-Pacific: Sales are made in Hong Kong, Korea, the Republic of China (Taiwan), the People’s Republic of China and in Southeast Asia by Vishay’s Asia-Pacific sales force, sales representative organizations, and distributors. Vishay’s Asian sales headquarters are in Singapore. Regional sales offices are located in Singapore; Taipei, Republic of China (Taiwan); Beijing, Shanghai, Shenzhen and Hong Kong, People’s Republic of China; Seoul and Gumi, Korea; New Delhi, Pune and Bangalore, India; Penang, Malaysia; and Bangkok, Thailand.
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In the Asia-Pacific region, as in the United States, sales are made directly to OEMs through field sales engineers and through distributors, which currently have approximately 75 locations in the region. The distributors are provided with certain inventory obsolescence and price protections similar to those granted to distributors in the United States.
Sales in the rest of the world are made through sales representatives, stocking representatives and distributors.
During 2004, approximately 15% of our net sales were attributable to customers in the Americas, approximately 15% were attributable to customers in Europe, and approximately 70% were attributable to customers in Asia. Additional information on net sales on a geographic basis is included in Note 7 to our combined consolidated financial statements. Additional information on customer concentrations is also included in Note 7 to our combined consolidated financial statements.
Competition
The semiconductor industry is highly competitive. Many of our competitors are larger companies with greater financial resources and limited dependency on semiconductor products as their sole source of sales and earnings. We have been able to compete effectively by being selective in our choice of products and markets, and by being a technology leader in those areas. Our main competitors include Fairchild Semiconductor Corp., International Rectifier, Renesas, Infineon AG, Rohm Corp., Maxim, Analog Devices Inc., and ON Semiconductor. There are many other companies that produce products in the markets in which we compete.
Research and Development
Research and development activities are directed toward expanding our technology leadership. Our focus is on developing new products and technologies with particular attention to activities that improve the cycle time from new product development to product release. Total research and development expenditures were $21.2 million in 2004, $19.5 million in 2003, and $19.3 million in 2002. The increase in annual research and development expenditures since 2002 was due to our continuing commitment and effort to develop new products and technologies.
Patents and Licenses
We have made a significant investment in securing intellectual property protection for our technology and products. We seek to protect our technology by, among other things, filing patent applications for technology considered important to the development of our business. We also rely upon trade secrets, unpatented know-how, continuing technological innovation and the aggressive pursuit of licensing opportunities to help develop and maintain our competitive position.
As of December 31, 2004, Siliconix owned 200 U.S. patents, covering primarily semiconductor device structures, processes, and circuitry. Expiration dates for these patents range from 2005 to 2022. At December 31, 2004, there were also 36 U.S. patent applications pending. Foreign counterparts of certain of these applications have been filed, or may be filed at an appropriate time. We decide on a case-by-case basis whether, and in what countries, we will file counterparts of a United States patent application outside the United States.
Our ability to compete effectively with other companies depends, in part, on our ability to maintain the proprietary nature of our technology. Although we have been awarded, have filed applications for, or have been licensed under numerous patents in the United States and other countries, there can be no assurance concerning the degree of protection afforded by these patents or the likelihood that pending patents will be issued.
We require all employees and most consultants and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information developed or made known to the entity or individual during the course of the entity’s or individual’s relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. All of our employees have entered into agreements providing for the assignment to us of rights to inventions made by them while employed by us.
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Our legal costs for patent matters in 2004 were more than double the legal expenses incurred in 2003. The increase in legal costs reflects our commitment to vigorously defend our intellectual property, which we view as central to our continued success in the marketplace. When we believe other companies are misappropriating our intellectual property rights, we vigorously enforce those rights through legal action, and we intend to continue to do so. See Item 3, “Legal Proceedings.”
During 2004, we settled one suit which we had initiated to enforce our intellectual property rights. We are receiving royalty income on all sales of that company’s products which use our technology. We presently have one other pending legal action that we have initiated against a company which we believe is misappropriating our intellectual property rights.
Although we have numerous United States and foreign patents covering certain of our products and manufacturing processes, no particular patent is considered individually material to our business.
Environment, Health and Safety
We have adopted an Environmental Health and Safety Corporate Policy that commits us to achieve and maintain compliance with applicable environmental laws, to promote proper management of hazardous materials for the safety of our employees and the protection of the environment, and to minimize the hazardous materials generated in the course of our operations. This policy is implemented with accountability directly to the President and Chief Executive Officer. In addition, our manufacturing operations are subject to various federal, state and local laws restricting discharge of materials into the environment.
We are not involved in any pending or threatened proceedings that would require curtailment of our operations. We continually expend funds to ensure that our facilities comply with applicable environmental regulations. While we believe that we are in material compliance with applicable environmental laws, we cannot accurately predict future developments and do not necessarily have knowledge of past occurrences on sites that we currently occupy. More stringent environmental regulations may be enacted in the future, and we cannot determine the modifications, if any, in our operations that any such future regulations might require, or the cost of compliance with such regulations. Moreover, the risk of environmental liability and remediation costs is inherent in the nature of our business and, therefore, there can be no assurance that material environmental costs, including remediation costs, will not arise in the future.
See also the environmental matters described in more detail in Item 3, “Legal Proceedings.”
Employees
As of December 31, 2004, we employed 2,033 people, of whom 610 were employed in the United States, 1,246 in Asia, and 177 in Europe. Our future success is substantially dependent on our ability to attract and retain these highly qualified technical and administrative personnel.
There are no collective bargaining agreements between us and our employees, and there have been no work stoppages due to labor difficulties. We consider our relations with our employees to be good.
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Company Information and Website
We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at http://www.sec.gov.
In addition, our company website can be found on the Internet at http://www.siliconix.com. The website contains information about us and our operations. Copies of each of our filings with the SEC on Form 10-K, Form 10-Q and Form 8-K, and all amendments to those reports, can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC. To view the reports, access ir.siliconix.com, and click on “SEC Filings.”
Any of the above documents can also be obtained in print by any shareholder by request to our Investor Relations Department at the following address:
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Investor Relations |
We own our principal manufacturing plant and general offices, which are located in four two-story buildings totaling 220,100 square feet on a 12-acre site in Santa Clara, California. Siliconix Limited, a subsidiary, currently occupies, under an agreement with Vishay UK Limited, approximately 2,000 square feet at Vishay’s Bracknell, United Kingdom location, where our European headquarters are located. Siliconix (Taiwan) Limited, a subsidiary, owns a 50,000-square-foot portion of a building in the Nan-Tse Export Processing Zone, a suburb of Kaohsiung, Republic of China (Taiwan), which consists of manufacturing and general office space. Shanghai Simconix Co. Ltd., a joint venture between Siliconix and the Shanghai Institute of Metallurgy (the “SIM”), leases 85,000 square feet of manufacturing and general office space in Shanghai from the SIM.
The VSIG acquisition provides us access to the Itzehoe wafer fabrication facility, which is utilized pursuant to an agreement with Fraunhofer Gesellschaft (“FHG”), an institute partially owned by the German government. The Itzehoe wafer fabrication facility provides an additional 26,900 square feet of leased manufacturing space. We plan to expand the Itzehoe wafer fabrication facility’s manufacturing capabilities to include 8-inch wafer fabrication.
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From time to time we are involved in routine litigation incidental to our business. Management believes that such matters, either individually or in the aggregate, should not have a material adverse effect on our business or financial condition.
Environmental Matters
As of December 31, 2004, we remained a party to two environmental proceedings. The first involves property that we vacated in 1972. In July 1989, the California Regional Water Quality Control Board (“RWQCB”) issued Cleanup and Abatement Order No. 89-115 both to us and the then-owner of the property. The Order alleged that we contaminated both the soil and the groundwater on the property by the improper disposal of certain chemical solvents. The RWQCB considered both parties to be liable for the contamination and sought to have them decontaminate the site to acceptable levels. We subsequently reached a settlement of this matter with the then-owner of the property. The settlement provided that said owner will indemnify us and our employees, officers, and directors against any liability that may arise out of any governmental agency actions brought for environmental cleanup of the subject site, including liability arising out of RWQCB Order No. 89-115, to which we remain nominally subject.
The second proceeding involves our Santa Clara, California facility, which we have owned and occupied since 1969. In February 1989, the RWQCB issued Cleanup and Abatement Order No. 89-27 to us. The Order was based on the discovery of contamination of both the soil and the groundwater on the property by certain chemical solvents. The Order called for us to specify and implement interim remedial actions and to evaluate final remedial alternatives. The RWQCB issued subsequent orders regarding monitoring and clean-up of the site. We have substantially complied with the RWQCB’s orders to date.
Intellectual Property Matters
We are engaged in discussions with various parties regarding patent licensing and cross patent licensing issues. In addition, we have observed that in the current semiconductor industry business environment, companies have become more aggressive in asserting and defending patent claims against competitors. We will continue to vigorously defend our intellectual property rights, and may become party to disputes regarding patent licensing and cross patent licensing. An unfavorable outcome regarding one of these intellectual property matters could have a material adverse effect on our business and operating results.
When we believe other companies are misappropriating our intellectual property rights, we vigorously enforce those rights through legal action, and we intend to continue to do so. During 2004, we settled one suit which we had initiated to enforce our intellectual property rights. We are receiving royalty income on all sales of that company’s products which use our technology. We presently have one other pending legal action that we have initiated against a company which we believe is misappropriating our intellectual property rights.
Shareholder Matters
In January 2005, an amended class action complaint was filed on behalf of all non-Vishay shareholders of Siliconix against Vishay, Ernst & Young LLP (independent registered public accounting firm that audits the Company’s financial statements), Dr. Felix Zandman, Chairman and Chief Technical and Business Development Officer of Vishay, and, as a nominal defendant, Siliconix. The suit purports to state various derivative and class claims against the defendants including the purported taking by Vishay of Siliconix sales subsidiaries and the profits of those subsidiaries; the purported taking by Vishay of Siliconix’s SAP software system without compensation to Siliconix; the alleged use by Vishay of Siliconix’s assets as security for Vishay loans without compensation to Siliconix; the purported misappropriation by Vishay of Siliconix’s identity; the alleged taking by Vishay of Siliconix testing equipment; the alleged use by Vishay of Siliconix to save Vishay certain credits made available by an Israeli business development agency; the alleged misuse by Vishay of Siliconix’s patents to help Vishay acquire General Semiconductor; and the allegedly improper identification of Dr. Zandman as a co-inventor on certain Siliconix patents. The action seeks injunctive relief and unspecified damages.
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As further described in Note 13 to our combined consolidated financial statements, on March 3, 2005, Vishay announced its intention to commence a tender offer for all outstanding shares of Siliconix not owned by Vishay. Following this announcement by Vishay, several purported class-action complaints were filed against Vishay, Siliconix, and the Siliconix directors, alleging, among other things, that the intended offer is unfair and a breach of fiduciary duty, and seeking, among other things, to enjoin the transaction. We and the other defendants have not yet responded to the complaints.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding our executive officers as of March 15, 2005:
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Name |
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Age |
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Positions Held |
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King Owyang |
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59 |
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President & Chief Executive Officer |
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Nick Bacile |
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57 |
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Executive Vice President & Chief Operating Officer |
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Dr. Owyang joined Siliconix in January 1988 as a divisional Vice President of Research and Development. He assumed additional responsibility for Corporate Reliability and Quality Assurance in April 1990. He became Vice President, Engineering in May 1990; Executive Vice President, Technology and Silicon Operations in April 1992; and President and Chief Executive Officer in March 1998. Dr. Owyang holds B.S. and Ph.D. degrees in Physics.
Mr. Bacile joined Siliconix in May 1999 as Senior Vice President of the Siliconix Standard Products Unit. He became Executive Vice President and Chief Operating Officer in September 2000. Prior to joining Siliconix, Mr. Bacile served as Vice President of Marketing for California Micro Devices Corporation, Milpitas, California, from July 1996 to April 1999. Mr. Bacile holds a Bachelor Degree in Electronics.
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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the NASDAQ Stock Market under the symbol SILI. The following table sets forth the high and low sales prices for our common stock as reported on the NASDAQ composite tape for the indicated fiscal quarters. Under Delaware law, we may pay dividends only from retained earnings or, if none, from net profits for the current or preceding fiscal year. We have paid no dividends since December 1980 in order to retain our earnings to fund future growth requirements. No change in such policy is anticipated in the near future. As of March 9, 2005, there were 525 holders of record of our common stock.
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2004 |
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2003 |
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Low |
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Fourth quarter |
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$ |
42.04 |
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$ |
35.00 |
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Fourth quarter |
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$ |
56.38 |
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$ |
43.56 |
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Third quarter |
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$ |
48.01 |
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$ |
32.51 |
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Third quarter |
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$ |
54.75 |
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$ |
35.78 |
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Second quarter |
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$ |
50.42 |
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$ |
37.50 |
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Second quarter |
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$ |
37.00 |
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$ |
23.46 |
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First quarter |
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$ |
50.57 |
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$ |
41.44 |
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First quarter |
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$ |
26.47 |
|
$ |
20.81 |
|
-13-
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected combined consolidated financial information as of and for the fiscal years ended December 31, 2004, 2003, 2002, 2001, and 2000.
On February 1, 2005, the Board of Directors of Siliconix approved the acquisition by Siliconix of Vishay Semiconductor Itzehoe GmbH (“VSIG”) from Vishay. The acquired entity has been renamed “Siliconix Itzehoe GmbH”. VSIG had been a wholly owned subsidiary of Vishay, and Siliconix Itzehoe GmbH is now a wholly owned subsidiary of Siliconix. This transaction has been accounted for as a merger of entities under common control and has been recorded in a manner similar to a pooling of interests. Accordingly, the accompanying combined consolidated financial statements and information presented in this Form 10-K has been restated to include the accounts of Siliconix incorporated and VSIG for all periods presented. Please see Note 1 to the combined consolidated financial statements for additional information on the basis of presentation.
This table should be read in conjunction with our combined consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K (in thousands, except per share and employment data):
|
|
|
As of and for the years ended December 31, |
|
|||||||||||||
|
|
|
|
|
|||||||||||||
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net sales |
|
$ |
466,131 |
|
$ |
398,092 |
|
$ |
379,119 |
|
$ |
306,965 |
|
$ |
474,048 |
|
|
Operating income |
|
$ |
66,315 |
|
$ |
49,630 |
|
$ |
55,697 |
|
$ |
16,502 |
|
$ |
138,745 |
|
|
Net income |
|
$ |
54,780 |
|
$ |
39,453 |
|
$ |
46,367 |
|
$ |
15,576 |
|
$ |
107,924 |
|
|
Net income per share (basic and diluted) |
|
$ |
1.83 |
|
$ |
1.32 |
|
$ |
1.55 |
|
$ |
0.52 |
|
$ |
3.61 |
|
|
Shares used to compute basic and diluted net income per share |
|
|
29,879 |
|
|
29,879 |
|
|
29,879 |
|
|
29,879 |
|
|
29,879 |
|
|
Total assets |
|
$ |
683,702 |
|
$ |
631,724 |
|
$ |
548,991 |
|
$ |
505,256 |
|
$ |
530,880 |
|
|
Capital expenditures |
|
$ |
57,549 |
|
$ |
30,889 |
|
$ |
26,061 |
|
$ |
43,033 |
|
$ |
68,884 |
|
|
Year-end worldwide employment |
|
|
2,033 |
|
|
1,900 |
|
|
1,901 |
|
|
1,767 |
|
|
2,047 |
|
-14-
|
MANAGEMENT’S DISCUSSION AND ANALSYIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
Siliconix incorporated is engaged in designing, manufacturing, and marketing power and analog semiconductor products. We are a leading manufacturer of power MOSFETs (an acronym for “metal oxide semiconductor field effect transistor”), power ICs, and analog signal processing devices for computers, cellular phones, fixed communication networks, automobiles and other electronic systems. Siliconix power MOSFETs are low-voltage, surface-mount products primarily used in the communication, computer, and automotive markets, as well as other industrial and consumer applications. Siliconix power ICs are integrated circuits used in communication and data storage applications. Siliconix signal processing products include a wide array of commodity products such as analog switches, low power MOSFETs, and junction field effect transistors (“JFETs”) used in the industrial and consumer markets.
Vishay Intertechnology, Inc. (“Vishay”) owns an 80.4% interest in Siliconix. Vishay, a Fortune 1,000 company listed on the New York Stock Exchange, is one of the world’s largest manufacturers of discrete semiconductors (diodes, rectifiers, transistors, optoelectronics, and selected ICs) and passive electronic components (resistors, capacitors, inductors, and transducers). Vishay’s components can be found in products manufactured in a very broad range of industries worldwide. Vishay is headquartered in Malvern, Pennsylvania, and has plants in seventeen countries employing over 25,000 people. As further described in Note 13 to our combined consolidated financial statements, on March 3, 2005, Vishay announced its intention to commence a tender offer for all outstanding shares of Siliconix not owned by Vishay.
On February 1, 2005, the Board of Directors of Siliconix approved the acquisition by Siliconix of Vishay Semiconductor Itzehoe GmbH (“VSIG”) from Vishay. The acquired entity has been renamed “Siliconix Itzehoe GmbH”. VSIG had been a wholly owned subsidiary of Vishay, and Siliconix Itzehoe GmbH is now a wholly owned subsidiary of Siliconix. This transaction has been accounted for as a merger of entities under common control and has been recorded in a manner similar to a pooling of interests. Accordingly, the accompanying combined consolidated financial statements and information presented in this Form 10-K include the accounts of Siliconix incorporated and VSIG for all periods presented. Please see Note 1 to the combined consolidated financial statements for additional information on the basis of presentation.
We manufacture power products in a Siliconix-owned Class 1 six-inch wafer fabrication facility in Santa Clara, California. Siliconix Itzehoe GmbH also manufactures power products, pursuant to an existing agreement entered in 1996 with Fraunhofer Gesellschaft (“FHG”). This agreement allows us to use the FHG wafer fabrication facility in Itzehoe, Germany until December 31, 2007. We are presently negotiating the terms of an extension of this agreement, which will enable us to expand production capacity at the Itzehoe facility to enable 8-inch wafer fabrication capabilities. Prior to our acquisition of VSIG, we subcontracted wafer fabrication through this affiliate.
A subcontractor in Japan also manufactures our power products for us. The manufacturing of wafers for analog switches and multiplexers is done in Santa Clara and through an outsourcing arrangement with a foundry in Dresden, Germany. A subcontractor in Beijing, People’s Republic of China manufactures small signal transistors. We use additional fabrication subcontractors in the Republic of China (Taiwan) and the United States for selected processes. Assembly and test facilities include a Siliconix-owned facility in Kaohsiung, Republic of China (Taiwan) and a Siliconix-leased facility in Shanghai, People’s Republic of China. Additionally, we subcontract assembly and testing through an affiliate of Vishay in Israel, as well as independent subcontractors in the Philippines, the Republic of China (Taiwan), the People’s Republic of China, Thailand and Korea.
We maintain various agreements, transactions and relationships with Vishay. Our products are sold by the Vishay worldwide sales organizations, and our accounts receivable for the North America and Europe regions are transferred to wholly owned subsidiaries of Vishay as soon as invoices are generated. These subsidiaries of Vishay assume all bad debt risk and pay for the receivables in cash no later than the end of the month in which the receivables are generated. Other relationships with Vishay include administrative service sharing agreements, centralized payment services, a now-expired short-term loan agreement, and management fees for services provided by the Vishay corporate office. All agreements and relationships with Vishay are reviewed and approved by the directors serving on the Siliconix Board of Directors who are not affiliated with Vishay.
-15-
Net income for the year ended December 31, 2004 was $54.8 million, or $1.83 per share, an increase of 39% from the $39.5 million, or $1.32 per share achieved in 2003. Net sales in 2004 were $466.1 million, a 17% increase from net sales of $398.1 for 2003.
Results for the year ended December 31, 2004 reflected a strong first half and a weaker second half. Overall results for 2004 were significantly improved versus 2003, which included a weaker first half and strong second half. While we do not expect a rapid improvement in business conditions, we continue to position Siliconix for long-term growth. We continue to operate near full internal capacity, and are proceeding with plans to expand production capacity at the facility leased by our newly acquired subsidiary in Itzehoe, Germany.
Financial Metrics
We utilize several financial measures and metrics to evaluate the performance and assess the future direction of our business. These key financial measures and metrics include sales, gross profit margin, end-of-period backlog, and the book-to-bill ratio. We also monitor changes in average selling prices (“ASP”) and inventory turnover.
End-of-period backlog is one indicator of future sales. However, if demand falls below customers’ forecasts, or if customers do not control their inventory effectively, they may cancel or reschedule the shipments that are included in our backlog, in many instances without the payment of any penalty. Therefore, the backlog is not necessarily indicative of the results to be expected for future periods.
Another important indicator of demand in our industry is the book-to-bill ratio, which is the ratio of the amount of product ordered during a period as compared with the product that we ship during that period. A book-to-bill ratio that is greater than one indicates that our backlog is building and that we are likely to see increasing revenues in future periods. Conversely, a book-to-bill ratio that is less than one is an indicator of declining demand and may foretell declining sales.
We focus on our inventory turnover as a measure of how well we are managing our inventory. We define inventory turnover for a financial reporting period as our cost of products sold for the four fiscal quarters ending on the last day of the reporting period divided by our average inventory (computed using each quarter-end balance) for this same period. A higher level of inventory turnover reflects more efficient use of our capital.
Pricing in our industry can be volatile. We analyze trends and changes in average selling prices to evaluate likely future pricing.
The quarter-to-quarter trends in these financial metrics can also be an important indicator of the likely direction of our business. The following table shows sales, the end-of-period backlog, the book-to-bill ratio, the inventory turnover, and changes in average selling prices for our business as a whole during the five quarters beginning with the fourth quarter of 2003 and through the fourth quarter of 2004 (dollars in thousands):
|
|
|
4th Quarter |
|
1st Quarter |
|
2nd Quarter |
|
3rd Quarter |
|
4th Quarter |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Sales |
|
$ |
110,830 |
|
$ |
120,667 |
|
$ |
121,960 |
|
$ |
117,222 |
|
$ |
106,282 |
|
|
Gross profit margin |
|
|
28.5 |
% |
|
29.7 |
% |
|
32.6 |
% |
|
31.8 |
% |
|
25.4 |
% |
|
End-of-Period Backlog |
|
$ |
120,600 |
|
$ |
149,800 |
|
$ |
170,400 |
|
$ |
132,800 |
|
$ |
110,000 |
|
|
Book-to-Bill Ratio |
|
|
1.34 |
|
|
1.24 |
|
|
1.18 |
|
|
0.68 |
|
|
0.78 |
|
|
Inventory Turnover |
|
|
4.80 |
|
|
5.17 |
|
|
5.13 |
|
|
4.97 |
|
|
4.65 |
|
|
Change in ASP vs. prior quarter |
|
|
-1.1 |
% |
|
3.5 |
% |
|
-1.7 |
% |
|
0.8 |
% |
|
-5.6 |
% |
-16-
Despite the decline in sales in the second half of 2004 as compared to the first half, overall sales levels were higher than for the prior year. During the second half of 2004, we noted a 45% decline in orders as compared to the first half of the year, yet our strong backlog as of the end of the second quarter enabled us to moderate the decrease noted in sales. The decline in orders is almost entirely from distributors, as orders from original equipment manufacturers and electronic manufacturing services companies have been stable.
At the present time, the contracting backlog and decline in order rates has not changed our capacity planning or overall long-term strategy.
During the fourth quarter of 2004, we noted an approximate 5.6% decline in average selling prices as compared to the third quarter of 2004 due to weakness in the market for our products. This decline followed increases in prices in the first and third quarters. The average pricing levels for 2004 were approximately 3% lower than the average prices attained in 2003, which represents historically low volatility in prices. We expect pricing to be flat to moderately lower for 2005.
Capacity Utilization
Capacity utilization is a reflection of product demand trends. Most of our internal product lines continue to operate near full capacity, particularly in our front-end (fabrication) operations. Our back-end (assembly and testing) operations are running at approximately 85% to 90% of capacity. We have taken and will continue to take necessary steps to increase our capacity to accommodate increased demand. These steps have included removing production bottlenecks in our fabrication facilities and securing additional equipment to expand our backend operations. Our efforts to increase our capacity are yielding results, and lead times are decreasing, but this has also allowed our customers to be more conservative in their ordering. Our capital expenditure budget has increased substantially as a result of our expansion program. For the full year 2004, capital expenditures were almost double the prior year’s investment. Capital expenditures at the Itzehoe facility were approximately $9 million and $2 million in 2004 and 2003, respectively. Capital expenditures for the Company as a whole are expected to be approximately $40 million for 2005, which primarily consists of expenditures to increase capacity, particularly front-end capacity at the Itzehoe facility. Our present plans anticipate capital expenditures of $20 million in each of the next three years at the Itzehoe facility, to add 8-inch silicon wafer manufacturing capabilities. We expect to be eligible to receive the benefits of grants from the government of the German state of Schleswig Holstein related to our additional investments at the Itzehoe facility. Except for any grant monies received, this significant increase in capital expenditures required to support our expansion program is expected to be funded entirely by cash flows from operations.
The use of subcontractors is part of our manufacturing strategy of supplying approximately 80% of customer demand from internal capacity, with reliance on foundries and assembly and testing subcontractors to meet the remaining 20% of the demand. For the years ended December 31, 2004 and 2003, our use of subcontractors was higher than our 20% guideline due to high customer demand. Our strategy of outsourcing a portion of our manufacturing requirements enables us to deal effectively with the fluctuating cycles of the semiconductor industry. Additionally, these capacity constraints also result in us having some ability to focus on higher-margin products in periods of high demand.
Subcontractor fees from independent foundries for the years ended December 31, 2004, 2003 and 2002 were $61.9 million, $39.1 million, and $35.6 million, respectively. Subcontractor fees from independent assembly and testing subcontractors for the years ended December 31, 2004, 2003 and 2002 were $20.7 million, $16.0 million, and $17.4 million, respectively. Subcontractor fees from Vishay affiliates for assembly and testing for the years ended December 31, 2004, 2003, and 2002 were approximately $13.5 million, $8.9 million and $5.0 million, respectively.
As described in the Overview and also in Note 1 to the combined consolidated financial statements, subcontract services from our affiliate VSIG of $33.2 million, $28.7 million, and $23.8 million in 2004, 2003, and 2002, respectively, have been eliminated subsequent to our acquisition of VSIG and its inclusion in the combined consolidated financial statements of Siliconix as a merger of entities under common control in a manner similar to a pooling of interests.
-17-
We do not anticipate immediate increases in sales as a result of our expanded internal production, as products made using the additional capacity replace products previously manufactured by subcontractors. We expect, however, that our expanded internal capacity will allow us to shorten our lead time and response to our customer demand, which should increase future sales during periods of increased demand. Additionally, our expanded internal capacity should result in some improvement in gross margin in periods of increased demand.
We maintain long-term foundry agreements with subcontractors to ensure access to external front-end capacity.
We entered into a long-term foundry agreement for semiconductor manufacturing with Tower Semiconductor in May 2004, pursuant to which we will purchase semiconductor wafers from and transfer certain technology to Tower Semiconductor. We will place orders valued at approximately $200 million for the purchase of semiconductor wafers to be manufactured in Tower’s Fab 1 facility over a seven to ten year period. The agreement specifies minimum quantities per month and a fixed quantity for the term of the agreement. We must pay for any short-fall in minimum order quantities specified under the agreement. The technology transfer from Siliconix to Tower has started and is estimated to be completed by the second quarter of 2005, at which time Siliconix will begin receiving wafers.
Also in 2004, we entered into a five-year foundry agreement for semiconductor manufacturing with a subcontractor in Japan. This agreement was a continuation and expansion of a previous technology transfer and business agreement for the manufacture of silicon wafers. The agreement calls for Siliconix to provide a rolling twelve month forecast of estimated requirements. The first six months of this forecast are fixed as to quantity, and the subsequent six months are guaranteed not to be less than a quantity stated in the agreement. Thereafter, the monthly quantity may vary based on market demand. Under the agreement, Siliconix must guarantee that its business with this subcontractor represents a minimum percentage of wafer requirements and is required to make its best efforts not to reduce the average monthly demand rate below a specified threshold.
Cost Management
Our cost reduction programs are designed to make better use of our existing assets and employees and include a wide range of manufacturing process efficiencies designed to reduce the unit cost of manufacturing our maturing products. These efficiencies are gained through increased automation and changes in technology. Additionally, we have achieved better capacity utilization from eliminating or reducing production bottlenecks, and also through the use of a smaller die to incorporate more units per silicon wafer, thus reducing raw material usage. Further, we continue to benefit from the economies of scale obtained through our agreements, transactions and relationships with Vishay, resulting in administrative and operating efficiencies. Silicon