UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 July 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
----- -----
Number of shares of Common Stock, $0.01 par value, outstanding at July 31, 2001:
70,330,449
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PART I - FINANCIAL INFORMATION
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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 of normal recurring adjustments) necessary to present
fairly the financial position of Semtech Corporation and subsidiaries as of July
29, 2001, and the results of their operations and their cash flows for the three
and six months then ended.
2
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
July 29, 2001 July 30, 2000 July 29, 2001 July 30, 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $40,532 $60,646 $101,060 $118,058
Cost of sales 32,537 27,006 57,979 53,226
------- ------- -------- --------
Gross profit 7,995 33,640 43,081 64,832
------- ------- -------- --------
Operating costs and expenses -
Selling, general and administrative 8,008 8,638 17,930 16,858
Product development and engineering 7,319 7,721 15,367 14,766
One time costs 1,776 - 2,727 -
------- ------- -------- --------
Total operating costs and expenses 17,103 16,359 36,024 31,624
------- ------- -------- --------
Operating income (loss) (9,108) 17,281 7,057 33,208
Interest and other income, net 1,799 2,311 4,250 3,640
------- ------- -------- --------
Income (loss) before taxes (7,309) 19,592 11,307 36,848
Provision (benefit) for taxes (2,232) 5,878 3,166 11,055
------- ------- -------- --------
Net income (loss) $(5,077) $13,714 $ 8,141 $ 25,793
======= ======= ======== ========
Earnings (loss) per share:
Basic $(0.07) $0.21 $0.12 $0.40
Diluted $(0.07) $0.18 $0.11 $0.34
Weighted average number of shares:
Basic 69,446 65,820 68,956 65,250
Diluted 69,446 75,828 77,244 75,470
3
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share data)
July 29, January 28,
2001 2001
(Unaudited) (Audited)
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $139,289 $323,182
Temporary investments 250,555 148,582
Receivables, less allowances 18,425 37,935
Inventories 25,511 31,595
Deferred income taxes 10,860 19,993
Other current assets 4,709 4,381
-------- --------
Total current assets 449,349 565,668
Property, plant and equipment, net 41,455 40,064
Long-term investments 162,919 59,215
Deferred income taxes 33,971 936
Other assets 10,773 11,405
-------- --------
TOTAL ASSETS $698,467 $677,288
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,029 $ 12,934
Accrued liabilities 17,588 18,925
Deferred revenue 2,049 2,049
Income taxes payable 2,411 756
Other current liabilities 4 37
-------- --------
Total current liabilities 27,081 34,701
Other long-term liabilities 88 230
Convertible subordinated debentures 397,338 400,000
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 250,000,000 authorized,
70,453,449 and 68,116,382 outstanding, respectively 705 682
Treasury stock, 355,000 and 42,500 at cost, respectively (9,601) (1,018)
Additional paid-in capital 149,351 111,303
Retained earnings 133,614 131,718
Accumulated other comprehensive loss (109) (328)
-------- --------
Total stockholders' equity 273,960 242,357
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $698,467 $677,288
======== ========
4
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
----------------
July 29, 2001 July 30, 2000
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 8,141 $ 25,793
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,984 2,386
Deferred income taxes (23,902) (40,515)
Tax benefit of stock option exercises 26,040 25,692
Gain on repurchase of long-term debt (372) -
Changes in assets and liabilities, net of acquisition:
Receivables 19,510 (12,492)
Inventories 6,084 (4,462)
Other assets 304 (1,895)
Accounts payable and accrued liabilities (9,242) 7,426
Income taxes payable 1,655 26,071
Other liabilities (175) (1,970)
--------- ---------
Net cash provided by operating activities 32,027 26,034
--------- ---------
Cash flows from investing activities:
Temporary investments, net (101,973) (204,236)
Purchase of long-term investments (103,704) (60,207)
Proceeds on sale of assets 1,174 -
Additions to property, plant and equipment (6,549) (3,875)
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Net cash used in investing activities (211,052) (268,318)
--------- ---------
Cash flows from financing activities:
Exercise of stock options 12,033 9,043
Proceeds (cost) from issuance (buyback) of debentures (2,290) 389,164
Reissuance of treasury stock 1,283 -
Stock repurchase (16,113) -
--------- ---------
Net cash provided by (used in) financing activities (5,087) 398,207
--------- ---------
Effect of exchange rate changes on cash 219 (9)
Net increase (decrease) in cash and cash equivalents (183,893) 155,914
Cash and cash equivalents at beginning of period 323,182 45,225
--------- ---------
Cash and cash equivalents at end of period $ 139,289 $ 201,139
========= =========
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 second quarters of fiscal years 2002 and 2001
were 69,446,000 and 65,820,000, respectively. The weighted average number of
shares used to compute basic earnings per share for the first half of fiscal
years 2002 and 2001 were 68,956,000 and 65,250,000, 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 69,446,000 and
75,828,000 in the second quarters of fiscal years 2002 and 2001, respectively.
For the first six months of fiscal years 2002 and 2001, diluted shares were
77,244,000 and 75,470,000, respectively.
Options to purchase approximately 16.0 million and 293,000 shares were not
included in the computation of the second quarter and first six months 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
second quarter or first six months 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 Six Months Ended
Net Sales July 29, July 30, July 29, July 30,
--------- 2001 2000 2001 2000
------------------------------------------------------------
Standard Semiconductor Products.......... $36,983 $54,713 $ 91,283 $106,149
Rectifier and Assembly Products.......... 2,590 3,918 5,903 7,797
Other Products........................... 959 2,015 3,874 4,112
------- ------- -------- --------
Total Net Sales........................ $40,532 $60,646 $101,060 $118,058
======= ======= ======== ========
Three Months Ended Six Months Ended
Operating Income July 29, July 30, July 29, July 30,
---------------- 2001 2000 2001 2000
--------------------------------------------------------------
Standard Semiconductor Products......... $(7,789) $16,154 $ 7,673 $30,872
Rectifier and Assembly Products......... 441 791 1,531 1,484
Other Products.......................... 16 336 580 852
Non-segment specific one-time costs..... (1,776) - (2,727) -
------- ------- ------- -------
Total Operating Income (Loss)......... $(9,108) $17,281 $ 7,057 $33,208
======= ======= ======= =======
6
Operating income for fiscal year 2002 includes one-time costs of $14.0
million for the write-down of inventory and discontinuation of certain products;
one-time costs of $2.0 million associated with headcount reductions; and one-
time costs of $765,000 associated with a pending Superfund settlement.
Of the $14.0 million write-down of inventory and discontinuation of certain
products, $13.5 million was associated with the Standard Products segment,
$400,000 with the Rectifier and Assembly Products segment and $150,000 with the
Other Products segment.
For the first six months ending July 29, 2001 and July 30, 2000, the Company
had no customers that accounted for more than 10 percent of net sales. During
the first half 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 Six Months Ended
Net Sales July 29, July 30, July 29, July 30,
--------- 2001 2000 2001 2000
------------------------------------------------------------
Domestic........................ $17,591 $27,169 $ 47,129 $ 52,431
Asia-Pacific.................... 18,604 25,229 42,815 51,007
European........................ 4,337 8,248 11,116 14,620
------- ------- -------- --------
Total Net Sales............... $40,532 $60,646 $101,060 $118,058
======= ======= ======== ========
Long lived assets located outside the United States as of the end of the
second 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 July 29, 2001, all of the Company's
investments mature on various dates through fiscal year 2003. The Company
realized interest income of $6.6 million and $7.0 million during the second
quarters of fiscal years 2002 and 2001, respectively.
4. Inventories
Inventories consisted of the following:
July 29, January 28,
2001 2001
----------------------------------
Raw materials........... $ 2,419 $ 2,144
Work in process......... 13,363 20,563
Finished goods.......... 9,729 8,888
------- -------
Total inventories..... $25,511 $31,595
======= =======
7
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 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 July 29, 2001, the Company had
repurchased 650,000 shares at a cost $17.1 million under this program. As of
July 29,2001, all but 355,000 of the repurchased shares had been reissued as a
result of stock options exercises. During the first six months of fiscal year
2002, 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 second quarter of fiscal year 2002 include one-time
costs of $14.0 million for the write-down of inventory and discontinuation of
certain products; one-time costs of $1.0 million associated with headcount
reductions made in the second quarter; and one-time costs of $765,000 associated
with a pending Superfund settlement.
Operating income for the first six months of fiscal year 2002 include one-
time costs of $14.0 million for the write-down of inventory and discontinuation
of certain products; one-time costs of $2.0 million associated with headcount
reductions; and one-time costs of $765,000 associated with a pending Superfund
settlement.
The write-down of inventory and discontinuation of certain products was the
result of a critical review we conducted during the second quarter. A severe
industry downturn and a related drop in demand from end customers made certain
inventories excess and obsolete, and certain product lines non-strategic. Of
the $14.0 million write-down of inventory and discontinuation of certain
products, $13.5 million was associated with the Standard Products segment,
$400,000 with the Rectifier and Assembly Products segment and $150,000 with the
Other Products segment.
Headcount reductions so far in fiscal year 2002 were associated with the
sale of our Santa Clara, California wafer fabrication facility and general
reductions in response to lower sales levels. A summary of one-time costs for
headcount reductions that have been paid out in cash follows.
As of
July 29, 2001
-----------------
One-time costs associated
with headcount reduction......... $ 1,962
Amounts paid out in cash......... (1,513)
-------
Provision balance............ $ 449
=======
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 million 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
8
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 July 29, 2001 and July 30, 2000, the Company
incurred $4.8 million and $4.9 million, respectively, in interest expense
associated with these convertible subordinated debentures included in the
accompanying consolidated statements of operations. As of July 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 because it used this site for waste
disposal. During the second quarter of fiscal year 2002, the Company recorded
one-time a cost of $765,000 for the pending settlement to this matter.
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
9
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.
The FASB recently approved two statements: SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets," which
provide guidance on the accounting for business combinations, requires all
future business combinations to be accounted for using the purchase method,
discontinues amortization of goodwill, defines when and how intangible assets
are amortized, and requires an annual impairment test for goodwill. The Company
plans to adopt these statements effective January 28, 2002. The Company is
currently reviewing these standards to determine the impact on its results of
operations and financial position, however, the Company does not expect the
adoption of these statements to have a material impact.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
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 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,
10
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.
Most 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 second 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 several 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 will be down significantly in calendar year
2001. Many of our customers and competitors have forecasted that 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 communication infrastructure and
automated test equipment (ATE) markets have been very weak so far in fiscal year
2002. As a result of normal season trends, shipments tied to the computer
market declined sequentially in the second quarter, but are expected to increase
in the second half of the year.
Results for the first half of fiscal year 2002 reflect unprecedented weakness
in the overall semiconductor industry caused by excess inventories and a drop in
demand. We conducted a thorough review of our inventories, product line
strategies and new product roadmaps during the second quarter. This review
resulted in one-time costs of $14.0 million for the write-down of inventory and
the discontinuation of certain products. We also further reduced headcount in
the second quarter and as a result recorded one-time costs of $1.0 million in
the period.
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 July 29, 2001 And July 30, 2000
11
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 second quarter of fiscal year
2002 were $40.5 million, compared to $60.6 million for the second quarter of
fiscal year 2001, a 33.2 percent decline. The decline was due to a severe
industry downturn caused by excess inventories and weak economic conditions.
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
second quarter of fiscal year 2002 was $8.0 million, compared to $33.6 million
for the comparable period in the prior year. The significant decline in gross
profit is due to lower sales levels and one-time cost of $14.0 million for the
write-down of inventory and discontinuation of certain products. 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 19.7 percent for the
second quarter of fiscal year 2002. This compared to a gross margin of 55.5
percent for the second quarter of fiscal year 2001. The major decline is
attributed to the lower sales in all product segments and one-time costs.
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 $17.1 million, or 42.2
percent of net sales, for the second quarter ended July 29, 2001. Operating
costs and expenses for the prior year second quarter were $16.4 million, or 27.0
percent of net sales.
Operating costs and expenses for the second quarter of fiscal year 2002
include one-time costs of $1.0 million associated with headcount reductions made
in the second quarter and one-time costs of $765,000 associated with a pending
Superfund settlement. Before one-time costs, current year operating costs and
expenses, as a percentage of net sales, were higher than the prior year due to
the significant decline in net sales. As of July 29, 2001, $500,000 of the one-
time headcount reduction costs have not yet been paid out in cash.
Interest and Other Income. Net interest and other income of $1.8 million was
realized in the second quarter of fiscal year 2002. For the second quarter of
fiscal year 2001, interest and other income was $2.3 million. Other income and
expenses for the second 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 second quarter, interest
and other income is primarily interest income and interest expense for the
outstanding convertible subordinated debentures. The decline in interest and
other income is largely attributable to lower rates of return on investments
purchased with excess operating cash and cash provided by the February 2000
issuance of convertible subordinated debentures.
Provision or Benefit for Taxes. Benefit for income taxes was $2.2 million in
the second quarter of fiscal year 2002, compared to expense of $5.9 million in
the second quarter of fiscal year 2001. The effective tax rate for the second
quarter of fiscal year 2002 was 30.5 percent and for the comparable quarter of
fiscal year 2001 was 30.0 percent. The increase was due to a decline in sales
through foreign-based subsidiaries that are in lower tax jurisdictions.
Comparison Of The Six Months Ended July 29, 2001 And July 30, 2000
Net Sales. Net sales for the first six months of fiscal year 2002 were $101.1
million, a decline of 14.4 percent compared to $118.1 million for the first to
quarters of fiscal year 2001. The decline was due to weak industry and economic
conditions.
Gross Profit. Gross profit for the first six months of fiscal year 2002 was
$43.1 million, compared to $64.8 million for the comparable period in the prior
year. The major decline in gross profit is due to lower sales levels and one-
time cost of $14.0 million for the write-down of inventory and discontinuation
of certain products. Our gross margin was 42.6 percent for the first half of
fiscal year 2002. This compared to a gross margin of 54.9 percent for
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the first half of fiscal year 2001. The decline is attributed to the lower sales
in all product segments and one-time costs.
Operating Costs and Expenses. Operating costs and expenses were $36.0
million, or 35.6 percent of net sales, for the six months ended July 29, 2001.
Operating costs and expenses for the prior year first half were $31.6 million,
or 26.8 percent of net sales.
Operating costs and expenses for the first half of fiscal year 2002 include
one-time costs of $2.0 million associated with an approximate 28 percent
reduction in headcount made in the first half of the year and one-time costs of
$765,000 associated with a pending Superfund settlement. Before one-time costs,
current year operating costs and expenses, as a percentage of net sales, were
higher than the prior year due to the decline in net sales. As of July 29, 2001,
$1.5 million of the one-time headcount reduction costs have been paid out in
cash.
Interest and Other Income. Net interest and other income of $4.3 million was
realized in the first half of fiscal year 2002. For the first half of fiscal
year 2001, interest and other income was $3.6 million. Other income and expenses
for the first half 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 half, interest and other
income is primarily interest income and interest expense for the outstanding
convertible debentures.
Provision for Taxes. Provision for income taxes was $3.2 million in the
first half of fiscal year 2002, compared to $11.1 million in the first half of
fiscal year 2001. The effective tax rate for the second quarter of fiscal year
2002 was 28.0 percent and for the comparable quarter of fiscal year 2001 was
30.0 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 2007. 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 July 29, 2001, we had working capital of $422.3 million, compared with
$531.0 million at January 28, 2001. The ratio of current assets to current
liabilities at July 29, 2001 was 16.6 to 1, compared to 16.3 to 1 at January 28,
2001. The drop in working capital as of July 29, 2001 was mostly the result of
an increase in investments with maturities greater than one year.
Cash provided by operating activities was $32.0 million for the first six
months of fiscal year 2002, compared to $26.0 million for the first six months
of fiscal year 2001. Net income for the first six months of fiscal year 2002 was
reduced by non-cash charges for depreciation and amortization of $4.0 million.
Net operating cash flows were positively impacted by net income of $8.1 million
compared to $25.8 million in the prior year period. Net cash provided by
operating activities for the first six months of fiscal year 2002 was positively
impacted by a decrease in receivables and inventories, tax benefit from stock
option exercises, income taxes payable and other items. These were partially
offset by increases in deferred income taxes, accounts payable, accrued
liabilities and other assets.
Cash provided by operating activities for the first six months of fiscal year
2001 was favorably impacted by net income, non-cash charges for depreciation and
amortization of $2.4 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 six
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.
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Investing activities used $211.1 million for the first two quarters of
fiscal year 2002 compared to $268.3 million used in the first six 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 $6.5 million and $3.9 million, respectively. Investing
activities for the first six months of fiscal year 2002 included proceeds of
$1.2 million for the sale of assets.
Our financing activities used $5.1 million during the first six months of
fiscal year 2002 and added $398.2 million in the first half of the prior year.
Financing activities for the first half 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 six months 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 July 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.
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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.
The FASB recently approved two statements: SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets," which
provide guidance on the accounting for business combinations, requires all
future business combinations to be accounted for using the purchase method,
discontinues amortization of goodwill, defines when and how intangible assets
are amortized, and requires an annual impairment test for goodwill. We plan to
adopt these statements effective January 28, 2002. We are currently reviewing
these standards to determine the impact on our results of operations and
financial position, however, the Company does not expect the adoption of these
statements to have a material impact.
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;
15
. our ability to protect our intellectual property rights;
. uncertainties of litigation; and
. other risks and uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
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 July 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 periodically becomes subject to legal proceedings in the ordinary
course of our business. The Company is not currently involved in any
proceeding, which is reasonably expected to ultimately result in a material
and adverse effect on the Company's financial position.
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 because it used this site for waste
disposal. During the second quarter of fiscal year 2002, the Company recorded
one-time a cost of $765,000 for the pending settlement of this matter.
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) As contemplated by the Company's Definitive Proxy Statement filed with the
Securities and Exchange Commission on May 4, 2001 ("Proxy Statement"), an
Annual Meeting of Shareholders of the Company was held on May 31, 2001.
(b) Proxies for the meeting were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934; there was no solicitation in opposition to
the management's nominees as listed in the Proxy Statement; and all of such
nominees were duly elected.
(c) At the May 31, 2001 Annual Meeting, the shareholders of the Company voted on
two matters:
(1) The shareholders elected the following individuals to the Board of
Directors to serve until the next annual meeting of shareholders or until
their successors are elected and duly qualified:
Votes Cast For Votes Withheld
----------------------------------- -----------------------------------
James P. Burra 61,758,445 85,548
Rock N. Hankin 61,758,445 85,548
Allen H. Orbuch 61,754,075 89,918
John D. Poe 61,756,995 86,998
James T. Schraith 61,752,774 91,219
(2) The shareholders ratified the appointment of Arthur Andersen LLP as the
Company's independent public accountants. There were 61,658,361 votes for
the appointment, 181,285 votes against the appointment, and 4,347
abstentions.
(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 a Report on Form 8-K on June 26, 2001 in connection with
the announced write-down of inventory and discontinuation of certain
products.
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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: September 12, 2001 /S/ John D. Poe
--------------------------------
John D. Poe
Chairman of the Board
and Chief Executive Officer
Date: September 12, 2001 /S/ David G. Franz, Jr.
--------------------------------
David G. Franz, Jr.
Vice President Finance, Chief
Financial Officer, and
Secretary
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