UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the quarterly period ended April 29, 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 number 1-6395
SEMTECH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-2119684
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) identification No.)
652 Mitchell Road, Newbury Park, California, 91320
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (805) 498-2111
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 has required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes X No ______
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Number of shares of Common Stock, $0.01 par value, outstanding at April 29,
2001: 69,088,471
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PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, these unaudited statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of Semtech Corporation and subsidiaries as
of April 29, 2001, and the results of their operations and their cash flows for
the three months then ended.
2
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three Months Ended
------------------
April 29, April 30,
2001 2000
- ------------------------------------------------------------------------------
Net sales $60,528 $57,412
Cost of sales 25,442 26,220
------- -------
Gross profit 35,086 31,192
------- -------
Operating costs and expenses -
Selling, general and administrative 9,922 8,220
Product development and engineering 8,048 7,045
One time costs 951 -
------- -------
Total operating costs and expenses 18,921 15,265
------- -------
Operating income 16,165 15,927
Interest and other income, net 2,451 1,329
------- -------
Income before taxes 18,616 17,256
Provision for taxes 5,399 5,177
------- -------
Net income $13,217 $12,079
======= =======
Earnings per share:
Basic $ 0.19 $ 0.19
Diluted $ 0.17 $ 0.16
Weighted average number of shares:
Basic 68,467 64,682
Diluted 77,120 74,764
3
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share data)
April 29, January 28,
2001 2001
(Unaudited) (Audited)
- --------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $113,045 $323,182
Temporary investments 246,459 148,582
Receivables, less allowances 33,456 37,935
Inventories 36,287 31,595
Deferred income taxes 19,993 19,993
Other current assets 4,966 4,381
-------- --------
Total current assets 454,206 565,668
Property, plant and equipment, net 41,021 40,064
Long-term investments 171,905 59,215
Deferred income taxes 9,364 936
Other assets 11,121 11,405
-------- --------
TOTAL ASSETS $687,617 $677,288
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,959 $ 12,934
Accrued liabilities 12,802 18,925
Deferred revenue 2,049 2,049
Income taxes payable 2,854 756
Other current liabilities 748 37
-------- --------
Total current liabilities 27,412 34,701
Other long-term liabilities 95 230
Convertible Subordinated Debentures 397,338 400,000
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 250,000,000 authorized,
69,023,462 and 68,116,382 outstanding, respectively 690 682
Treasury stock, 120,000 and 42,500 at cost, respectively (3,182) (1,018)
Additional paid-in capital 126,984 111,303
Retained earnings 138,691 131,718
Accumulated other comprehensive loss (411) (328)
-------- --------
Total stockholders' equity 262,772 242,357
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $687,617 $677,288
======== ========
4
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
------------------
April 29, April 30,
2001 2000
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 13,217 $ 12,079
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,981 1,164
Deferred income taxes (8,428) (4,322)
Tax benefit of stock option exercises 11,317 11,550
Gain on repurchase of long-term debt (372) -
Changes in assets and liabilities, net of acquisition:
Receivables 4,479 (5,745)
Inventories (4,692) (3,317)
Other assets (473) (668)
Accounts payable and accrued liabilities (10,098) 3,450
Income taxes payable 2,098 (1,867)
Other liabilities 576 (1,971)
--------- ---------
Net cash provided by operating activities 9,605 10,353
--------- ---------
Cash flows from investing activities:
Temporary investments, net (97,877) (153,286)
Purchase of long-term investments (112,690) (55,156)
Proceeds on sale of assets 1,174 -
Additions to property, plant and equipment (3,940) (1,552)
--------- ---------
Net cash used in investing activities (213,333) (209,994)
--------- ---------
Cash flows from financing activities:
Exercise of stock options 4,373 3,899
Proceeds (cost) from issuance (buyback) of debentures (2,290) 388,898
Reissuance of treasury stock 1,283 -
Stock repurchase (9,692) -
Other - 37
--------- ---------
Net cash provided by (used in) financing activities (6,326) 392,834
--------- ---------
Effect of exchange rate changes on cash (83) 52
Net increase (decrease) in cash and cash equivalents (210,137) 193,245
Cash and cash equivalents at beginning of period 323,182 45,225
--------- ---------
Cash and cash equivalents at end of period $ 113,045 $ 238,470
========= =========
5
SEMTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Earnings Per Share
Basic earnings per common share are computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share incorporate the incremental shares issuable upon the assumed
exercise of stock options. The weighted average number of shares used to compute
basic earnings per share for the first quarters of fiscal years 2002 and 2001
were 68,467,000 and 64,682,000, respectively. Diluted earnings per share is
computed by dividing net income for the period by the weighted average number of
common shares outstanding plus the dilutive effect of our outstanding stock
options ("common stock equivalents"), or 77,120,000 and 74,764,000 in the first
quarters of fiscal years 2002 and 2001, respectively.
Options to purchase approximately 257,000 shares were not included in the
computation of the first quarter of fiscal year 2002 diluted net income per
share, because such options were considered anti-dilutive. There were no anti-
dilutive options to purchase shares for the first quarter of fiscal year 2001.
Shares associated with the Company's outstanding convertible subordinated
debentures are not included in the computation of net income per share as they
are anti-dilutive.
2. Business Segments and Concentrations of Risk
The Company operates in three reportable segments: Standard Semiconductor
Products, Rectifier and Assembly Products, and Other Products. Included in the
Standard Semiconductor Products segment are the power management, protection,
high-performance, advanced communications and human interface/system management
product lines. The Rectifier and Assembly Products segment includes the
Company's line of assembly and rectifier products. The Other Products segment is
made up of other custom IC and foundry sales.
The Company evaluates segment performance based on net sales and operating
income of each segment. Management does not track segment data or evaluate
segment performance on additional financial information. As such, there are no
separately identifiable segment assets nor is there any separately identifiable
statements of income data (below operating income).
The Company does not track or assign assets to individual reportable
segments. Likewise, depreciation expense and capital additions are also not
tracked by reportable segments.
Three Months Ended
Net Sales April 29, April 30,
--------- 2001 2000
---------------------------
Standard Semiconductor Products..... $54,300 $51,436
Rectifier and Assembly Products..... 3,313 3,879
Other Products...................... 2,915 2,097
------- -------
Total Net Sales................... $60,528 $57,412
======= =======
Three Months Ended
Operating Income April 29, April 30,
---------------- 2001 2000
---------------------------
Standard Semiconductor Products..... $15,462 $14,718
Rectifier and Assembly Products..... 1,090 693
Other Products...................... 564 516
One-time costs...................... (951) -
------- -------
Total Operating Income............ $16,165 $15,927
======= =======
6
Operating income for the first quarter of fiscal year 2002 includes one-
time costs of $951,000 for the reduction in workforce at the Company's Santa
Clara, California wafer fab and the consolidation of the Company's New York, New
York location into the Newbury Park, California location.
For the first quarters ending April 29, 2001 and April 30, 2000, the
Company had no customer that accounted for more than 10 percent of net sales.
During the first quarter of fiscal year 2002, a group of customers that included
one of the Company's automated test equipment customers, their suppliers and
their sub-contractors, did account for greater than 10 percent of net sales. A
summary of net external sales by region follows. The Company does not track
customer sales by region for each individual reporting segment.
Three Months Ended
Net Sales April 29, April 30,
--------- 2001 2000
---------------------------
Domestic................... $29,538 $25,261
Asia-Pacific............... 24,211 25,835
European................... 6,779 6,316
------- -------
Total Net Sales.......... $60,528 $57,412
======= =======
Long lived assets located outside the United States as of the end of the
first quarter of fiscal years 2002 and 2001 were approximately $6.5 million and
$1.5 million, respectively.
The Company relies on a limited number of outside subcontractors and
suppliers for silicon wafers, packaging and certain other tasks. Disruption or
termination of supply sources or subcontractors could delay shipments and could
have a material adverse effect on the Company. Several of the Company's outside
subcontractors and suppliers, including third-party foundries that supply
silicon wafers, are located in foreign countries, including China, Malaysia, the
Philippines and Germany.
3. Temporary and Long-Term Investments
Temporary and long-term investments consist of government, bank and
corporate obligations. Temporary investments have original maturities in excess
of three months, but mature within twelve months of the balance sheet date.
Long-term investments have maturities in excess of one year from the date of the
balance sheet. All investments are classified as "held to maturity", thus no
unrealized holding gains or losses were reported in the accompanying
consolidated financial statements. As of April 29, 2001, all of the Company's
investments mature on various dates through fiscal year 2003. The Company
realized interest income of $9.6 million and 5.4 million during the first
quarters of fiscal years 2002 and 2001, respectively.
4. Inventories
Inventories consisted of the following:
Three Months Ended
April 29, January 28,
2001 2001
------------------------------
Raw materials................. $ 4,403 $ 2,144
Work in process............... 21,183 20,563
Finished goods................ 10,701 8,888
------- -------
Total inventories........... $36,287 $31,595
======= =======
5. Stock Repurchase Programs
In fiscal year 2000, the Company repurchased 1,402,000 shares under two
separate stock repurchase programs for approximately $13.9 million. All of the
1,402,000 repurchased shares were reissued to cover the exercise of
7
employee stock options and the acquisition of Practical Sciences (see Note 2).
On December 3, 1999, the Company discontinued any additional repurchases under
these stock repurchase programs.
On January 4, 2001, the Company announced that its Board of Directors had
approved a program to repurchase up to $50.0 million of its common stock and
registered convertible subordinated notes. As of April 29, 2001, the Company had
repurchased 415,000 shares at a cost $10.7 million under this program. As of
April 29,2001, all but 120,000 of the repurchased shares had been reissued as a
result of stock options exercises. During the first quarter of fiscal year 2001,
the Company repurchased 2,680 convertible subordinated debentures (face value of
$1,000 each) at a cost of $2.3 million in open market transactions. The Company
plans to retire these repurchased debentures.
6. One-Time Costs
Operating income for the first quarter of fiscal year 2002 includes one-
time costs of $951,000 for the reduction in workforce at the Company's Santa
Clara, California wafer fab and the consolidation of the Company's New York, New
York location into the Newbury Park, California location. Total headcount was
reduced by 17 percent in the first quarter of fiscal year 2002, including the
reduction of employees associated with the Company's sale of the Santa Clara,
California wafer fab. The sale was completed on April 24, 2001. As of April 29,
2001, a majority of the one-time costs have not yet been paid out in cash.
7. Disposition of Assets
On April 23, 2001, the Company sold its Santa Clara, California wafer fab
facility to STI Foundry, Inc. In exchange for approximately $1.5 of assets
associated with the facility, the Company received $1.0 million in cash and
approximately a $1.4 million receivable for either future inventory or cash from
the new owners. As the Company realizes the $1.4 million in additional
consideration, a gain of approximately $900,000 on the sale of the wafer fab
will be recognized. The sale of the Santa Clara wafer fab is consistent with the
Company's long-term strategy to utilize already installed process technologies
at third party foundries.
8. Convertible Subordinated Debentures
On February 14, 2000, the Company completed a private offering of $400.0
million principal amount of convertible subordinated debentures that pay
interest semiannually at a rate of 4 1/2 percent and are convertible into common
stock at a conversion price of $42.23 per share. The notes are due in seven
years from the date of issuance and callable by the Company after three years.
In connection with these convertible subordinated debentures, the Company
incurred $11.5 million in underwriter fees and other costs, which are amortized
as interest expense using the effective interest method. The Company has used
the net proceeds of the offering for general corporate purposes, including
working capital, expansion of sales, marketing and customer service
capabilities, and product development. In addition, the Company may use a
portion of the net proceeds to acquire or invest in complementary businesses,
technologies, services or products.
For the three months ended April 29, 2001 and April 30, 2000, the Company
incurred $4.9 million and $4.1 million, respectively, in interest expense
associated with these convertible subordinated debentures included in the
accompanying consolidated statements of income. As of April 29, 2001, $397.3
million of the convertible subordinated debentures were still outstanding,
reflecting the Company's repurchase of 2,680 debentures (face value of $1,000
each) at a cost of $2.3 million in open market transactions.
9. Commitments and Contingencies
On February 7, 2000, the Company was notified by the United States
Environmental Protection Agency with respect to the Casmalia Disposal Site in
Santa Barbara, California. The Company has been included in the Superfund
program to clean up this disposal site for its involvement in utilizing this
site for waste disposal. As of April 29, 2001, the Company provided
approximately $245,000 for potential settlement under this program,
8
however, the ultimate resolution and timing of the resolution is unknown at this
time. The Company believes the amount provided is sufficient to cover any
liability existing based on the currently available information.
Certain contaminants have been found in the ground water at the Company's
Newbury Park facility. The Company has data showing that the contaminants are
from an adjacent facility. The contaminants in question have never been used by
the Company at the Newbury Park facility. To protect its interests, the Company
utilizes an environmental firm, specializing in hydrogeology, to perform
periodic monitoring. It is currently not possible to determine the ultimate
amount of possible future clean-up costs, if any, that may be required of the
Company at this site. Accordingly, no reserves for clean-up have been provided
by the Company at this time.
Effective June 11, 1998, the Company's Board of Directors approved a
Stockholder Protection Agreement to issue a Right for each share of common stock
outstanding on July 31, 1998 and each share issued thereafter (subject to
certain limitations). These Rights, if not cancelled by the Board of Directors,
can be exercised into a certain number of Series X Junior Participating
Preferred Stock after a person or group of affiliated persons acquire 25 percent
or more of the Company's common stock and subsequently allow the holder to
receive certain additional Company or acquirer common stock if the Company is
acquired in a hostile takeover.
From time to time, the Company is a defendant in lawsuits involving matters
which are routine to the nature of its business. Management is of the opinion
that the ultimate resolution of all such matters will not have a material
adverse effect on the accompanying consolidated financial statements.
10. Stock Split
On September 26, 2000, the Company effected a two-for-one stock split in
the form of a 100 percent stock dividend which was payable to shareholders of
record as of September 5, 2000. On September 14, 1999, the Company effected a
two-for-one stock split in the form of a 100 percent stock dividend which was
payable to shareholders of record as of August 30, 1999. All shares, per share
data, common stock, and stock option amounts herein have been retroactively
restated to reflect the effect of these splits.
11. Recently Issued Accounting Standards
In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Investments and Hedging
Activities," and SFAS No. 137, which delayed the effective date of SFAS No. 133.
In June 2000, the FASB issued SFAS No. 138, which provides additional guidance
for the application of SFAS No. 133 for certain transactions. The Company
adopted the statement in February 2001 and the adoption of this statement did
not have a material impact on its financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," and as amended. SAB 101 summarizes certain of the SEC's views in
applying accounting principles generally accepted in the United States to
revenue recognition in financial statements. The Company has applied the
provisions of SAB 101 in the consolidated financial statements. The adoption of
SAB 101 did not have a material impact on the Company's financial condition or
results of operations.
In March 2000, the FASB issued interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB No. 25 for certain
issues, including the definition of an employee, the treatment of the
acceleration of stock options and the accounting treatment for options assumed
in business combinations. FIN 44 became effective on July 1, 2000, but is
applicable for certain transactions dating back to December 1998. The adoption
of FIN 44 did not have a significant impact on the Company's financial position
or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
9
You should read the following discussion of our financial condition and
results of operations together with the condensed financial statements and the
notes to condensed financial statements included elsewhere in this Form 10-Q.
This discussion contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about us and our industry.
These forward-looking statements involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, as more fully described in the
"Forward Looking Statements" section of this Form 10-Q and the "Risk Factors"
section of the Company's annual report on Form 10-K for the year ended January
28, 2001. We undertake no obligation to update any forward-looking statements
for any reason, even if new information becomes available or other events occur
in the future.
Overview
We design, develop, manufacture and market a wide range of analog and
mixed-signal semiconductors for commercial and military applications. Our
products are sold principally to customers in the computer, communications and
industrial markets. Computer market applications include desktop computers,
servers, workstations, laptop computers, personal digital assistants (PDAs) and
computer add-on cards. Products within the communications market include local
area networks, wide area networks, cellular phones and base-stations. Industrial
applications include automated test equipment (ATE), medical devices and factory
automation systems. Our focus on these commercial applications over the past
several years represents a substantial transition from our historical business,
which was predominantly military and aerospace applications.
Sales to customers are made on the basis of individual customer purchase
orders. Many large commercial customers include terms in their purchase orders
which provide liberal cancellation provisions. Trends within the industry toward
shorter lead-times and "just-in-time" deliveries have resulted in our reduced
ability to predict future shipments. As a result, we rely heavy on turns-fill
business (orders received and shipped within the same quarter) and short-term
orders to achieve quarter sales forecasts..
With a portion of our sales emanating from retail computer and computer
related applications, our past results have reflected some seasonality, with
demand levels being higher in computer segments during the third and fourth
quarters of the year in comparison to the first and third quarters.
We derive a portion of our business from customers in the automated test
equipment (ATE) market. The ATE market has historically been a cyclical market.
As a result, our shipments into the ATE market are greatly affected by both up
and down cycles within the test marketplace.
One of our strategies is to expand our business through strategic
acquisitions. Over the past three years, we have made several small acquisitions
in order to increase our pool of skilled technical personnel and penetrate new
market segments such as high performance, advanced communications and system
management devices. These acquisitions include: USAR Systems Incorporated;
Practical Sciences, Inc.; Acapella Limited and Edge Semiconductor. The
acquisitions of USAR, Acapella and Edge were accounted for as poolings of
interests.
Market Update
The semiconductor and electronics industries have experienced extremely
weak market conditions so far in calendar year 2001. Excess inventory levels and
slowing end-market demand have adversely affected macro conditions within the
semiconductor industry. Industry sources have forecasted that worldwide year-
over-year sales of semiconductors could be down significantly in calendar year
2001. Many of our customers and competitors have forecasted their results will
be down dramatically in calendar year 2001 in comparison to the prior year.
Since the beginning of our fiscal year 2002, our customer order rates have
slowed, further reducing our visibility. The communications market remained weak
throughout the first quarter of fiscal year 2002. Demand from our automated test
equipment (ATE) customers dropped late in the first quarter and continued to
decline during the first three weeks of the second quarter. Our shipments tied
to desktop computers
10
and servers grew sequentially in the first quarter, but are expected to drop in
the second quarter before picking up in the second half of the year. Sales to
manufacturers of cellular phones, notebook computers, handheld PCs and other
portable devices will be seasonally lower in the second quarter, but should
improve in subsequent quarters.
Results for the first quarter of fiscal year 2002 and our outlook for the
second quarter reflect unprecedented weakness in the overall semiconductor
industry caused by excess inventories and a drop in end-market demand. As a
result, we expect to conduct a thorough review of our inventories, product line
strategies and new product roadmaps during the second quarter. This review may
result in the write-down of inventory, the discontinuation of certain products,
liquidation of certain non-strategic inventory and changes in new product design
priorities that may affect second quarter results. We also anticipate reducing
headcount in the second quarter by an additional 12 to 14 percent. The second
quarter costs associated with this headcount reduction are likely to be in a
range of $1.4 million to $1.6 million.
Ultimately, we believe our new product developments and strategic focus
should allow us to remain well positioned within the marketplace once macro
conditions improve.
RESULTS OF OPERATIONS
Comparison Of The Three Months Ended April 29, 2001 And April 30, 2000
Net Sales. We generally recognized product revenue when persuasive evidence
of an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collectibility is probable. Net sales for the first quarter of
fiscal year 2002 were $60.5 million, compared to $57.4 million for the first
quarter of fiscal year 2000, a 5.4 percent increase. This increase was due in
part to growth in sales into all strategic end markets.
Gross Profit. Gross profit is equal to our net sales less our cost of
sales. Our cost of sales includes materials, direct labor and overhead. Cost of
inventory is determined by the first-in, first-out method. Gross profit for the
first quarter of fiscal year 2002 was $35.1 million, compared to $31.2 million
for the comparable period in the prior year, a 12.5 percent increase. Our gross
margins (defined as gross profit as a percentage of net sales) are generally
affected by price changes over the life of the products and the overall mix of
products sold. Higher gross margins are generally expected from new products and
improved production efficiencies as a result of increased utilization.
Conversely, prices for existing products generally will continue to decrease
over their respective life cycles. Our gross margin was 58.0 percent for the
first quarter of fiscal year 2002. This compared to a gross margin of 54.3
percent for the first quarter of fiscal year 2001. The improvement is attributed
to increased operating efficiencies associated with higher shipment levels,
higher revenue contribution from new products and a favorable shift in product
mix toward higher margin product lines.
Operating Costs and Expenses. Operating costs and expenses generally
consist of selling, general and administrative (SG&A), product development and
engineering costs (R&D), costs associated with acquisitions, and other operating
related charges. Operating costs and expenses were $18.9 million, or 31.3
percent of net sales, for the first quarter ended April 29, 2001. Operating
costs and expenses for the prior year first quarter were $15.3 million, or 26.6
percent of net sales. Operating costs and expenses for the first quarter of
fiscal year 2002 include one-time costs of $951,000 to cover the expense of
reducing headcount at our Santa Clara, California wafer fab and relocating our
New York, New York office to our Newbury Park, California office. Before one-
time costs, current year operating costs and expenses, as a percentage of net
sales, are lower than previous levels due to higher shipment rates and greater
efficiencies.
SG&A expenses for the first quarter of fiscal year 2002 were $9.9 million,
or 16.4 percent of net sales, compared to $8.2 million, or 14.3 percent of net
sales for the prior year first quarter. The increase in expenditures was due
primarily to the overall growth of our business and related investments in
sales, general and administrative areas. R&D expense was $8.0 million, or 13.3
percent of net sales for the first quarter of fiscal year 2002, compared to $7.0
million, or 12.3 percent of net sales, for the first quarter of fiscal year
2001. We continue to invest heavily in areas deemed critical for developing and
marketing new products, which are generally targeted at broadening our customer
base, product lines and end-product applications.
11
Operating income for the first quarter of fiscal year 2002 includes one-
time costs of $951,000 for the reduction in workforce at our Santa Clara,
California wafer fab and the consolidation of our New York, New York location
into our Newbury Park, California location. Total headcount was reduced by 17
percent in the first quarter of fiscal year 2002, including the reduction of
employees associated with our sale of the Santa Clara, California wafer fab. The
sale was completed on April 23, 2001. As of April 29, 2001, a majority of the
one-time costs have not yet been paid out in cash.
Interest and Other Income. Net interest and other income of $2.5 million
was realized in the first quarter of fiscal year 2002. For the first quarter of
fiscal year 2001, interest and other income was $1.3 million. Other income and
expenses for the first quarter of fiscal year 2002 is primarily interest income
from investments and interest expense associated with the outstanding
convertible subordinated debentures. For the prior year first quarter, interest
and other income is primarily interest income and interest expense for the
debentures. The significant increase in interest and other income is largely
attributable to cash provided by the February 2000 issuance of convertible
subordinated debentures.
Provision for Taxes. Expense for income taxes was $5.4 million in the first
quarter of fiscal year 2002, compared to $5.2 million in the first quarter of
fiscal year 2001. The effective tax rate for the first quarter of fiscal year
2002 was 29 percent and for the comparable quarter of fiscal year 2001 was 30
percent. The decline is due to increased sales through foreign-based
subsidiaries that are in lower tax jurisdictions.
Liquidity and Capital Resources
On February 14, 2000, we completed a private offering of $400.0 million
principal amount of convertible subordinated debentures that pay an interest
rate of 4 1/2 percent and are convertible into our common stock at a conversion
price of $42.23 per share. The notes are due in seven years. We have used the
net proceeds of the offering for general corporate purposes, including working
capital, expansion of sales, marketing and customer service capabilities, and
product development. In addition, we may use a portion of the net proceeds to
acquire or invest in complementary businesses, technologies, services or
products.
On April 29, 2001, we had working capital of $426.8 million, compared with
$531.0 million at January 28, 2001. The ratio of current assets to current
liabilities at April 29, 2001 was 16.6 to 1, compared to 16.3 to 1 at January
28, 2001. The drop in working capital as of April 29, 2001 was mostly the result
of an increase in investments with maturities greater than one year.
Cash provided by operating activities was $9.6 million for the first three
months of fiscal year 2002, compared to $10.4 million for the first three months
of fiscal year 2001. Net income for the first three months of fiscal year 2002
was reduced by non-cash charges for depreciation and amortization of $2.0
million. Net operating cash flows were favorably impacted by net income of $13.2
million compared to $12.1 million in the prior year period. Net cash provided by
operating activities for the first three months of fiscal year 2002 was
positively impacted by a decrease in receivables, tax benefit from stock option
exercises, income taxes payable and other items. These were partially offset by
increases in inventories, deferred income taxes, accounts payable, accrued
liabilities and other assets.
Cash provided by operating activities for the first three months of fiscal
year 2001 was favorably impacted by net income, non-cash charges for
depreciation and amortization of $1.2 million, tax benefit from stock option
exercises and increases in accounts payable, accrued liabilities and income
taxes payable. These items were partially offset by increases in receivables,
inventories and other assets. Net cash provided by operating activities for the
first three months of fiscal year 2001 was positively impacted by deferred
income taxes, an increase in accounts payable, accrued liabilities and income
tax liability. These items were partially offset by increases in deferred income
taxes, receivables, and inventories.
Investing activities used $213.3 million for the first three months of
fiscal year 2002 compared to $210.0 million used in the first three months of
fiscal year 2001. Investing activities for both periods consists of increases in
temporary investments, purchases of long-term investments, and capital
expenditures of $3.9 million and $1.6 million, respectively.
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Our financing activities used $6.3 million during the first three months of
fiscal year 2002 and added $392.8 million in the prior year first quarter.
Financing activities for the first quarter of fiscal year 2002 reflects the
proceeds from stock option exercises and other items, which were more than
offset by cash used to repurchase common stock and long-term debt. Financing
activities for the first three quarters of fiscal year 2001 reflect the
proceeds, net of related fees, from the issuance of $400.0 million of
convertible subordinated debentures and cash provided by stock option exercises
and other long term financing items.
We had a credit arrangement with a financial institution for borrowings up
to $20.0 million at an interest rate of the 30 day commercial paper plus 2.2
percent. Our credit arrangement expired in August 2000, and we did not extend or
renew this credit facility. Through our foreign subsidiary, we maintain an
overdraft credit line in the amount of 300,000 pounds sterling. As of April 29,
2001, we had no borrowings outstanding under any credit facility.
In order to develop, design and manufacture new products, we had to make
significant expenditures during the past five years. These investments aimed at
developing new products, including the hiring of many design and applications
engineers and related purchase of equipment, will continue. We fully intend to
continue to invest in those areas that have shown potential for viable and
profitable market opportunities. Certain of these expenditures, particularly the
addition of design engineers, do not generate significant payback in the short-
term. We plan to finance these expenditures with cash generated by operations
and cash on-hand.
Purchases of new capital equipment were made primarily to improve internal
computer systems and expand manufacturing capacity. Funding for these purchases
was made from our operating cash flows and cash reserves. We have made
significant investments in product and process technology. We believe that sales
generating cash flows, together with the proceeds of the debt offering, cash
reserves and existing credit facilities, are sufficient to fund operations and
capital expenditures for the foreseeable future.
Inflation
Inflationary factors have not had a significant effect on our performance
over the past several years. A significant increase in inflation would affect
our future performance.
Recently Issued Accounting Standards
In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Investments and Hedging Activities," and SFAS No. 137, which
delayed the effective date of SFAS No. 133. In June 2000, the FASB issued SFAS
No. 138, which provides additional guidance for the application of SFAS No. 133
for certain transactions. We adopted the statement in fiscal year 2002 and the
adoption of this statement did not have a material impact on our financial
position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," and as amended. SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. We have applied the provisions of SAB 101 in the
consolidated financial statements. The adoption of SAB 101 did not have a
material impact on our financial condition or results of operations.
In March 2000, the FASB issued interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB No. 25 for certain
issues, including the definition of an employee, the treatment of the
acceleration of stock options and the accounting treatment for options assumed
in business combinations. FIN 44 became effective on July 1, 2000, but is
applicable for certain transactions dating back to December 1998. The adoption
of FIN 44 did not have a significant impact on our financial position or results
of operations.
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RISK FACTORS AND FORWARD LOOKING STATEMENTS
In addition to historical information, this Form 10-Q contains statements
relating to our future results. These statements include certain projections and
business trends which are "forward-looking" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
made only as of the date of this Form 10-Q. We do not undertake to update or
revise the forward-looking statements, whether as a result of new information,
future events or otherwise.
Actual results may differ materially from projected results as a result of
certain risks and uncertainties. These risks and uncertainties include, without
limitation, those described under "Risk Factors" in the Form 10-K for the year
ended January 28, 2001, as filed with the Securities and Exchange Commission,
and including those set forth below and those detailed from time to time in
press releases, conference calls and other filings with the SEC:
. cyclical nature of the semiconductor industry;
. adverse effects of economic downturn in our end-markets;
. successful development and timing of new products;
. ability to attract or retain specialized technical personnel;
. availability of manufacturing capacity, including from foreign-based
suppliers;
. fluctuation of quarterly operating results;
. our reliance on the communications infrastructure and automated test
equipment markets;
. fluctuations in interest rates effect our return on investments;
. loss of a significant customer or customer order;
. our ability to manage and integrate our expanding and more diverse
operations;
. our ability to integrate strategic acquisitions;
. our ability to compete against larger, more established entities;
. fluctuations in manufacturing yields and commitment of resources prior to
receipt of customer orders;
. our ability to protect our intellectual property rights;
. uncertainties of litigation; and
. other risks and uncertainties.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
-----------------------------------------------------------
Foreign Currency Risk
As a global enterprise, we face exposure to adverse movements in foreign
currency exchange rates. Our foreign currency exposures may change over time as
the level of activity in foreign markets grows and could have a adverse impact
upon financial results.
Certain of our assets, including certain bank accounts and accounts
receivable, exist in nondollar-denominated currencies, which are sensitive to
foreign currency exchange rate fluctuations. The nondollar-denominated
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currencies are principally German Deutschmarks, British Pounds Sterling and
French Francs. Additionally, certain of our current and long-term liabilities
are denominated principally in British Pounds Sterling currencies, which are
also sensitive to foreign currency exchange rate fluctuations.
Because of the relatively small size of each individual currency exposure,
we do not employ hedging techniques designed to mitigate foreign currency
exposures. Likewise, we could experience unanticipated currency gains or losses.
Interest Rate Risk
As of April 29, 2001, we had $397.3 million in long-term debt outstanding
at a fixed interest rate of 4 1/2 percent. We do not currently hedge any
potential interest rate exposure.
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PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company has periodically become subject to legal proceedings in the
ordinary course of our business. Other than the action detailed below, the
Company is not currently involved in any proceedings, which are believed to
have a material and adverse affect.
On February 7, 2000, the Company was notified by the United States
Environmental Protection Agency with respect to the Casmalia Disposal Site
in Santa Barbara, California. The Company has been included in the
Superfund program to clean up this disposal site for its involvement in
utilizing this site for waste disposal. As of April 29, 2001, the Company
has provided approximately $245,000 for potential settlement under this
program, however, the ultimate resolution and timing of the resolution is
unknown at this time. The Company believes the amount provided is
sufficient to cover any liability existing based on the currently available
information.
ITEM 2. CHANGES IN SECURITIES
---------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
(a) The Fiscal Year 2001 Annual Meeting of Shareholders of the Company was duly
held on May 31, 2001.
(b) Inapplicable, as (i) proxies for the meeting were solicited pursuant to
Regulation 14 under the Act; (ii) there was no solicitation in opposition
to the management's nominees as listed in the Proxy Statement; and (iii)
all of such nominees were duly elected.
(c) Not applicable.
(d) Not applicable.
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
11.1 -Computation of per share earnings - See Note 1 of Notes to Unaudited
Consolidated Condensed Financial Statements.
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K for the three month period ended
April 29, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SEMTECH CORPORATION
-------------------
Registrant
Date: June 12, 2001 /S/ John D. Poe
--------------------------------
John D. Poe
Chairman of the Board
and Chief Executive Officer
Date: June 12, 2001 /S/ David G. Franz, Jr.
--------------------------------
David G. Franz, Jr.
Vice President Finance, Chief
Financial Officer, and
Secretary
17