June 15, 1998
APPLIED MICRO CIRCUITS CORP (AMCC)
Annual Report (SEC form 10-K)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Item 1. BusinessFactors That May Affect Future Results". Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward- looking statements.
OVERVIEW
AMCC designs, develops, manufactures and markets high-performance, high- bandwidth silicon solutions for the world's communications infrastructure. The Company tailors solutions to customer and market requirements by using a combination of high-frequency; mixed-signal design expertise; system-level knowledge and multiple silicon process technologies. AMCC believes that its internal bipolar and BiCMOS processes, complemented by advanced CMOS processes from external foundries, enable the Company to offer high-performance, high- speed solutions optimized for specific applications and customer requirements. The Company further believes that its products provide significant cost, power, performance and reliability advantages for systems OEMs in addition to accelerating time-to-market. The Company also leverages its technology to provide products for the automated test equipment (ATE), high-speed computing and military markets.
In fiscal 1997, the Company substantially reorganized its management team and increased its focus on becoming the leading supplier of high-performance, high-bandwidth connectivity ICs for the world's communications infrastructure. Accordingly, the Company accelerated the pace of development of new products for high-performance telecommunications and data communications markets. Following the reorganization of the Company's management team in fiscal 1997 and its renewed focus on ASSP's for the telecommunications and data communications markets, the Company returned to profitability after two years of incurring net losses. The Company's revenues have increased in each of the last eight fiscal quarters. In addition, as a result primarily of the $21.5 million of net income generated in fiscal 1997 and 1998, the Company transitioned from accumulated deficit of $15.4 million at March 31, 1996 to retained earnings of $5.7 million at March 31, 1998.
In December 1997, the Company completed the initial public offering (IPO) of its common stock, which raised net proceeds to the Company of approximately $25.1 million. In March 1998, the Company completed a secondary public offering, which raised net proceeds to the Company of approximately $26.9 million.
RESULTS OF OPERATIONS
The following table sets forth certain selected consolidated statements of operations data in dollars and as a percentage of revenues for the periods indicated:
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------
1996 1997 1998
-------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
$ % $ % $ %
------- ----- ------- ----- ------- -----
Net revenues.................. $50,264 100.0 % $57,468 100.0 % $76,618 100.0%
Cost of revenues.............. 34,169 68.0 30,057 52.3 34,321 44.8
------- ----- ------- ----- ------- -----
Gross profit.................. 16,095 32.0 27,411 47.7 42,297 55.2
Operating expenses:
Research and development.... 8,283 16.5 7,870 13.7 13,268 17.3
Selling, general and
administrative............. 11,232 22.3 12,537 21.8 14,278 18.6
------- ----- ------- ----- ------- -----
Total operating expenses.. 19,515 38.8 20,407 35.5 27,546 35.9
------- ----- ------- ----- ------- -----
Operating income (loss)....... (3,420) (6.8) 7,004 12.2 14,751 19.3
Interest income (expense),
net.......................... (242) (0.5) (29) (0.1) 871 1.1
------- ----- ------- ----- ------- -----
Income (loss) before provision
for income taxes............. (3,662) (7.3) 6,975 12.1 15,622 20.4
Provision for income taxes.... 32 0.0 659 1.1 406 0.5
------- ----- ------- ----- ------- -----
Net income (loss)............. $(3,694) (7.3)% $ 6,316 11.0 % $15,216 19.9%
======= ===== ======= ===== ======= =====
Diluted earnings (loss) per
share:
Earnings (loss) per share... $ (0.21) $ 0.35 $ 0.75
Shares used in calculating
earnings (loss) per share.. 17,394 17,907 20,294
COMPARISON OF THE YEAR ENDED MARCH 31, 1998 TO THE YEAR ENDED MARCH 31, 1997
Net Revenues. Net revenues for the year ended March 31, 1998 were approximately $76.6 million, representing an increase of 33% over net revenues of approximately $57.5 million for the year ended March 31, 1997. Revenues from sales of communications products increased from 44% of net revenues for the year ended March 31, 1997 to 48% of net revenues for the year ended March 31, 1998, reflecting unit growth in shipments of existing products, as well as the introduction of new products for these markets. Revenues from sales of products to other markets, consisting of the ATE, high-speed computing and military markets, decreased from 56% of net revenues for the year ended March 31, 1997, to 52% of net revenues for the year ended March 31, 1998, although revenues from sales to these other markets increased in absolute dollars. The increase in absolute dollars in revenues attributed to these other markets was primarily due to an increase in shipments of PCI bus products for high-speed computing applications and to increased shipments of products to the ATE market. Sales to Nortel accounted for 21% and 20% of net revenues for the years ended March 31, 1998 and 1997, respectively. In the year ended March 31, 1998, one other customer, Insight Electronics, Inc., the Company's domestic distributor, accounted for 11% of net revenues. Sales outside of North America accounted for 23% and 21% of net revenues for the years ended March 31, 1998 and 1997, respectively. Although less than six percent of the Company's revenues were attributable to sales in Asia for the year ended March 31, 1998, the recent economic instability in certain Asian countries could adversely affect the Company's business, financial condition and operating results, particularly to the extent that this instability impacts the sales of products manufactured by the Company's customers. See "Item 1. BusinessFactors That May Affect Future ResultsInternational Sales."
Gross Margin. Gross margin was 55.2% for the year ended March 31, 1998, as compared to 47.7% for the year ended March 31, 1997. The significant increase in gross margin resulted from increased utilization of the Company's wafer fabrication facility, as well as improved manufacturing yields. The Company's gross margin is primarily impacted by factory utilization, wafer yields, product mix and the Company's timing of depreciation expense and other costs associated with expanding its manufacturing capacity. Although AMCC does not expect its gross margin to continue to increase at the rate reflected above, its strategy is to maximize factory utilization whenever possible, maintain or improve its manufacturing yields, and focus on the development and sales of high-performance products that can have higher gross margins. There can be no assurance, however, that the Company will be successful in achieving these objectives. In addition, these factors can vary significantly from quarter to quarter, which would likely result in fluctuations in quarterly gross margin and net income. See "Item 1. BusinessFactors That May Affect Future Operating ResultsFluctuations in Operating Results."
Research and Development. Research and development (R&D) expenses increased 69% to approximately $13.3 million, or 17.3% of net revenues, for the year ended March 31, 1998, from approximately $7.9 million, or 13.7% of net revenues, for the year ended March 31, 1997. The substantial increase in R&D expenses was due to accelerated new product and process development efforts. The Company believes that a continued commitment to R&D is vital to maintain a leadership position with innovative communications products. Accordingly, the Company expects R&D expenses to increase in absolute dollars and possibly as a percentage of net revenues in the future. Currently, R&D expenses are primarily focused on the development of products and processes for the telecommunications and data communications markets, and the Company expects to continue this focus.
Selling, General and Administrative. Selling, general and administrative ("SG&A") expenses were approximately $14.3 million, or 18.6% of net revenues, for the year ended March 31, 1998, as compared to approximately $12.5 million, or 21.8% of net revenues, for the year ended March 31, 1997. The increase in SG&A expenses for the year ended March 31, 1998 was primarily due to increased compensation costs and increased commissions earned by third-party sales representatives. The decrease in SG&A expenses as a percentage of net revenues for the year ended March 31, 1998 was a result of net revenues increasing more rapidly than SG&A expenses. The Company expects SG&A expenses to increase in the future due principally to additional staffing in its sales and marketing departments and additional expenses related to being a public company.
Operating Margin. The Company's operating margin increased to 19.3% of net revenues for the year ended March 31, 1998, compared to 12.2% for the year ended March 31, 1997, principally as a result of the increase in gross margin and decrease in SG&A expenses as a percentage of net revenues, partially offset by the increase in R&D expenses as a percentage of net revenues.
Net Interest Income. Net interest income increased to $871,000 for the year ended March 31, 1998 from a net interest expense of $29,000 for the year ended March 31, 1997. This increase was due principally to higher interest income from larger cash and short-term investment balances generated by the proceeds from the Company's public offerings completed the year ended March 31, 1998, as well as a decrease in interest expense associated with outstanding capital lease and debt obligations.
Income Taxes. The Company's annual effective tax rate for the year ended March 31, 1998 was 2.6%. This was due primarily to the reduction of a valuation allowance recorded against deferred tax assets for net operating loss carryforwards and credits in the prior two years. This reduction results from sufficient levels of income for fiscal 1998, which makes the realization of these deferred tax assets more likely than not. The effective tax rate of 9.5% for the year ended March 31, 1997 was attributable primarily to alternative minimum taxes ("AMT"). The Company expects its effective tax rate to approximate statutory rates in fiscal 1999.
Diluted Earnings per share. Diluted earnings per share increased 114% to $0.75 in the year ended March 31, 1998, compared to $0.35 for the year ended March 31, 1997.
Deferred Compensation. In connection with the grant of certain stock options to employees during the six months ended September 30, 1997, the Company recorded aggregate deferred compensation of $599,000, representing the difference between the fair value of the Common Stock at the date of grant for accounting purposes and the option exercise price of such options. Such amount is presented as a reduction of stockholders' equity and amortized ratably over the vesting period of the applicable options. Amortization of deferred compensation recorded for the year ended March 31, 1998 was $127,000. The Company currently expects to record amortization of deferred compensation with respect to these option grants of approximately $159,000, $159,000, $129,000 and $25,000 during the fiscal years ended March 31, 1999, 2000, 2001 and 2002, respectively.
Backlog. The Company's sales are made primarily pursuant to standard purchase orders for delivery of products. Quantities of the Company's products to be delivered and delivery schedules are frequently revised to reflect changes in customer needs, and customer orders can be canceled or rescheduled without significant penalty to the customer. For these reasons, the Company's backlog as of any particular date is not representative of actual sales for any succeeding period, and the Company therefore believes that backlog is not a good indicator of future revenue. The Company's backlog for products requested to be shipped and nonrecurring engineering services to be completed in the next six months was $30.1 million on March 31, 1998, compared to $20.4 million on March 31, 1997. See "Item 1. BusinessFactors That May Affect Future ResultsFluctuations in Operating Results."
Recently Issued Accounting Standards. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Company does not believe that comprehensive income or loss under SFAS No. 130 has been materially different than net income or loss. The Company believes it operates in one business and operating segment and does not believe adoption of SFAS No. 131 will have a material impact on the Company's financial statements.
Year 2000 Compliance. Certain of the Company's internal computer systems are not Year 2000 compliant and the Company utilizes third-party equipment and software that may not be Year 2000 compliant. The Company has commenced taking actions to correct such internal systems and is in the early stages of conducting an audit of its third-party suppliers as to the Year 2000 compliance of their systems. The Company does not believe that the cost of these actions will have a material adverse affect on the Company's business, financial
condition or operating results. However, there can be no assurance that a failure of the Company's internal computer systems or of third-party equipment or software used by the Company, or of systems maintained by the Company's suppliers, to be Year 2000 compliant will not have a material adverse effect on the Company's business, financial condition or operating results. In addition, there can be no assurance that adverse changes in the purchasing patterns of the Company's customers or potential customers as a result of Year 2000 issues affecting such customers will not have a material adverse effect on the Company's business, financial condition or results of operations. See "Item 1. BusinessFactors That May Affect Future ResultsYear 2000 Compliance."
COMPARISON OF THE YEAR ENDED MARCH 31, 1997 TO THE YEAR ENDED MARCH 31, 1996
Net Revenues. Net revenues for the year ended March 31, 1997 increased to approximately $57.5 million from approximately $50.3 million for the year ended March 31, 1996. Revenues from sales of communications products increased from 41% of net revenues for the year ended March 31, 1996 to 44% of net revenues for the year ended March 31, 1997, reflecting unit growth in shipments of existing products, as well as the introduction of new products for the communications market. Revenues from sales of products to other markets decreased from 59% of net revenues for the year ended March 31, 1996 to 56% of net revenues for the year ended March 31, 1997. In the years ended March 31, 1997 and 1996, sales to Nortel accounted for 20% of net revenues in each year. Sales to customers outside of North America accounted for 21% and 24% of net revenues in the years ended March 31, 1997 and 1996, respectively, reflecting an increase in revenues from sales to such customers, but a decreased percentage of net revenues.
Gross Margin. Gross margin was 47.7% for the year ended March 31, 1997, compared to 32.0% for the year ended March 31, 1996. The substantial increase in gross margin in fiscal 1997 resulted primarily from a significant reduction in charges related to excess inventory, as well as from increased utilization of the Company's wafer fabrication facility. See "Item 1. BusinessFactors That May Affect Future ResultsFluctuations in Operating Results."
Research and Development. R&D expenses were approximately $7.9 million, or 13.7% of net revenues, for the year ended March 31, 1997, as compared to approximately $8.3 million, or 16.5% of net revenues, for the year ended March 31, 1996. The decrease in R&D expense for the year ended March 31, 1997 was primarily due to a decrease in prototyping costs.
Selling, General and Administrative. SG&A expenses were approximately $12.5 million, or 21.8% of net revenues, for the year ended March 31, 1997, as compared to approximately $11.2 million, or 22.3% of net revenues, for the year ended March 31, 1996. SG&A expenses increased in the year ended March 31, 1997 due primarily to increased compensation expense and an increase in product promotion expenses.
Net Interest Expense. Net interest expense was $29,000 in the year ended March 31, 1997, as compared to $242,000 in the year ended March 31, 1996. The decrease in net interest expense was attributable primarily to decreasing levels of capital lease and debt obligations and to increases in interest income as a result of increasing levels of cash, cash equivalents and short- term investments.
Income Taxes. The Company's effective tax rate for the year ended March 31, 1997 was 9.5%, which was comprised primarily of alternative minimum tax and reflected tax at the statutory rate, reduced by net operating loss and research and development tax credits. The tax benefit for the year ended March 31, 1996 was not material due to loss incurred during that fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity as of March 31, 1998 consisted of $67.9 million in cash, cash equivalents and short-term investments. Working capital as of March 31, 1998 was $77.4 million, compared to $19.4 million as of March 31, 1997. This increase in working capital was primarily due to $52.0 million in net proceeds from the Company's initial and secondary public offerings, and cash provided by operating activities,
offset by the purchase of property and equipment and by the repurchase of certain shares of the Company's Preferred Stock. During the fiscal years ended March 31, 1997 and 1996 the Company financed its operations primarily through cash provided by operations and equipment lease financing.
For the years ended March 31, 1998, 1997 and 1996, net cash provided by operating activities was $16.9 million, $11.7 million and $6.7 million, respectively. Net cash provided by operating activities in fiscal 1998 primarily reflected net income before depreciation and amortization expense plus increases in accounts payable and accrued liabilities less increases in accounts receivable and deferred income taxes. Net cash provided by operating activities in fiscal 1997 primarily reflected net income before depreciation and amortization expense. Net cash provided by operating activities in fiscal 1996 differed from the net loss primarily due to adjustments for depreciation and amortization expense, a reduction in inventory levels and an increase in accounts payable and accrued liabilities.
Capital expenditures totaled $11.6 million, $4.1 million and $2.6 million for the years ended March 31, 1998, 1997 and 1996, respectively, of which $3.6 million, $1.2 million and $1.2 million for the years ended March 31, 1998, 1997 and 1996, respectively, were financed using debt or capital leases. The Company intends to increase its capital expenditures for manufacturing equipment, test equipment and computer hardware and software. The Company has tentative plans to expand the cleanroom in its existing wafer fabrication facility to accommodate new equipment that would expand capacity and would be used for process development, however the Company is also evaluating other alternatives to provide for additional capacity and process development. The Company also plans to initiate construction of a new six-inch wafer fabrication facility during 1999 and to complete the physical plant during 2000. The Company believes the new facility will not begin commercial production prior to late 2000. The Company currently expects to spend approximately $18.0 million on capital expenditures in fiscal 1999, of which approximately $6.0 million is currently estimated to be related to the potential expansion of its existing wafer fabrication facility and approximately $6.0 million will relate to the initial site acquisition and construction of its new wafer fabrication facility. In the course of acquiring land and financing for this new facility, the Company may be required to expend additional funds and to provide marketable securities as collateral. The Company estimates that the total cost of the new wafer fabrication facility will be at least $80.0 million, of which at least $30.0 million relates to the purchase of land and construction of the facility and at least $50.0 million relates to capital equipment purchases. The Company plans to finance the new wafer fabrication facility through a combination of available cash, cash equivalents and short term investments, cash from operations, debt and lease financing and approximately $24.0 million of the net proceeds of its initial and secondary public offerings. The Company is also exploring other alternatives for the expansion of its manufacturing capacity, including purchasing a wafer fabrication facility and entering into strategic relationships to obtain additional capacity. Although the Company believes that it will be able to obtain financing for a significant portion of the planned capital expenditures at competitive rates and terms from its existing and new financing sources, there can be no assurance that the Company will be successful in these efforts or that the new facility will be completed and in volume production within its current budget or within the period currently scheduled by the Company. Furthermore, there can be no assurance that other alternatives to constructing a new wafer fabrication facility will be available on a timely basis or at all. See "Item 1. BusinessFactors That May Affect Future Results-Manufacturing Capacity Limitations; New Production Facility," "Dependence on Third-Party Manufacturing and Supply Relationships" and "Need For Additional Capital."
With the exception of the approximately $52.0 million in net proceeds from the initial and secondary public offerings, the Company has not raised financing from sales of equity (other than option exercises under employee stock plans) since September 1987, and as a financing strategy has used cash flow from operating activities and equipment debt and lease financing. In June 1997, the Company repurchased 172,300 shares of Preferred Stock (convertible into 2,119,435 shares of Common Stock) for approximately $3.9 million.
The Company believes that its available cash, cash equivalents and short- term investments, and cash generated from operations, will be sufficient to meet the Company's capital requirements for the next 12 months, although the Company could be required, or could elect, to seek to raise additional capital during such period. The Company expects that it will need to raise additional debt or equity financing in the future. There can be no
assurance that such additional debt or equity financing will be available on commercially reasonable terms or at all. See "Item 1. BusinessFactors That May Affect Future Operating ResultsNeed for Additional Capital."
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's results of operations have varied significantly in the past and may continue to do so in the future. These variations have been, and may in the future be, due to a number of factors, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. These factors include, but are not limited to: the rescheduling or cancellation of orders by customers; fluctuations in the timing and amount of customer requests for product shipments; fluctuations in manufacturing yields and inventory levels; changes in product mix; the Company's ability to introduce new products and technologies on a timely basis; the introduction of products and technologies by the Company's competitors; the availability of external foundry capacity, purchased parts and raw materials; competitive pressures on selling prices; the timing of investments in research and development; market acceptance of the Company's and its customers' products; the timing of depreciation and other expenses to be incurred by the Company in connection with the increase of capacity for its existing manufacturing facility and in connection with its proposed new manufacturing facility; the timing and amount of recruiting and relocation expenses, prototyping costs and product promotional expenses; costs associated with future litigation, if any, including without limitation, litigation relating to the use or ownership of intellectual property; costs associated with compliance with applicable environmental regulations; general semiconductor industry conditions; and general economic conditions, including, but not limited to, economic conditions in Asia. Historically, average selling prices in the semiconductor industry have decreased over the life of a product, and as a result, the average selling prices of the Company's products may be subject to significant pricing pressures in the future. Because the Company is continuing to increase its operating expenses for personnel and new product development, and because the Company is limited in its availability to reduce expenses quickly in response to any revenue short falls, the Company's business, financial condition and operating results would be adversely affected if increased sales are not achieved. In addition, the Company's operating results may be below the expectations of public market analysts or investors, which could have a material adverse effect on the market price of the Common Stock. See "Item 1. BusinessFactors That May Affect Future ResultsFluctuations in Operating Results," "Manufacturing Yields," " Increasing Dependence on Telecommunications and Data Communications Markets and Increasing Dependence on Application-Specific Standard Products," " Dependence on High-Speed Computing Market," "Rapid Technological Change; Necessity to Develop and Introduce New Products," "Manufacturing Capacity Limitations; New Production Facility," "Transition to New Process Technologies," "Customer Concentration," "Intense Competition," " Management of Growth," and "International Sales."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Refer to the Index on Page F-l of the Financial Report included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
--------------------------------------------------------------------------------
Recent Filings: Feb 1998 (Qtrly Rpt) | Jun 1998 (Annual Rpt)
More filings for AMCC available from EDGAR Online
--------------------------------------------------------------------------------
|
