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 October 28, 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 October 28,
2001: 70,447,973
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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 of normal recurring adjustments) necessary to present
fairly the financial position of Semtech Corporation and subsidiaries as of
October 28, 2001, and the results of their operations and their cash flows for
the three and nine months then ended.
2
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine months Ended
------------------------------ ------------------------------
October 28, October 29, October 28, October 29,
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
Net sales $43,745 $69,012 $144,805 $187,070
Cost of sales 19,616 29,553 77,595 82,779
------- ------- -------- --------
Gross profit 24,129 39,459 67,210 104,291
------- ------- -------- --------
Operating costs and expenses -
Selling, general and administrative 7,982 9,546 25,912 26,404
Product development and engineering 7,150 8,615 22,517 23,381
One time costs - - 2,727 -
------- ------- -------- --------
Total operating costs and expenses 15,132 18,161 51,156 49,785
------- ------- -------- --------
Operating income 8,997 21,298 16,054 54,506
Interest and other income, net 1,718 2,758 5,636 6,398
------- ------- -------- --------
Income before provision for taxes and
extraordinary gain 10,715 24,056 21,690 60,904
Provision for taxes 3,000 7,216 6,073 18,271
------- ------- -------- --------
Income before extraordinary gain 7,715 16,840 15,617 42,633
Extraordinary gain on extinguishment of debt, 1,405 - 1,644 -
net of tax ------- ------- -------- --------
Net income $ 9,120 $16,840 $ 17,261 $ 42,633
======= ======= ======== ========
Earnings per share:
Basic earnings per share -
Income before extraordinary gain $ 0.11 $ 0.25 $ 0.22 $ 0.64
Extraordinary gain $ 0.02 $ - $ 0.02 $ -
Net income $ 0.13 $ 0.25 $ 0.25 $ 0.64
Diluted earnings per share -
Income before extraordinary gain $ 0.10 $ 0.22 $ 0.20 $ 0.56
Extraordinary gain $ 0.02 $ - $ 0.02 $ -
Net income $ 0.12 $ 0.22 $ 0.22 $ 0.56
Weighted average number of shares:
Basic 70,605 66,923 69,505 66,120
Diluted 78,338 77,114 77,559 76,585
3
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share data)
October 28, January 28,
2001 2001
(Unaudited)
- --------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 72,216 $323,182
Temporary investments 333,207 148,582
Receivables, less allowances 20,816 37,935
Inventories 23,825 31,595
Deferred income taxes 15,261 19,993
Other current assets 4,436 4,381
-------- --------
Total current assets 469,761 565,668
Property, plant and equipment, net 44,405 40,064
Long-term investments 110,041 59,215
Deferred income taxes 30,876 936
Other assets 9,389 11,405
-------- --------
TOTAL ASSETS $664,472 $677,288
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,624 $ 12,934
Accrued liabilities 13,099 18,925
Deferred revenue 1,974 2,049
Income taxes payable 2,464 756
Other current liabilities 68 267
-------- --------
Total current liabilities 23,229 34,931
Convertible subordinated debentures 364,354 400,000
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 250,000,000 authorized,
70,447,973 and 68,116,382 outstanding, respectively 704 682
Treasury stock, 580,000 and 42,500 at cost, respectively (16,104) (1,018)
Additional paid-in capital 156,803 111,303
Retained earnings 135,699 131,718
Accumulated other comprehensive loss (213) (328)
-------- --------
Total stockholders' equity 276,889 242,357
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $664,472 $677,288
======== ========
4
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine months Ended
--------------------------------
October 28, October 29,
2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 17,261 $ 42,633
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 6,048 3,672
Deferred income taxes (25,208) (18,016)
Tax benefit of stock option exercises 29,818 35,731
Gain on repurchase of long-term debt (2,283) (506)
Changes in assets and liabilities, net of acquisition:
Receivables 17,119 (15,712)
Inventories 7,770 (4,291)
Other assets 1,171 (3,497)
Accounts payable and accrued liabilities (13,136) 5,098
Income taxes payable 1,708 559
Other liabilities (274) (1,289)
--------- ---------
Net cash provided by operating activities 39,994 44,382
--------- ---------
Cash flows from investing activities:
Temporary investments, net (184,625) (231,546)
Purchase of long-term investments (50,826) (68,074)
Proceeds on sale of assets 1,174 -
Additions to property, plant and equipment (11,563) (7,835)
--------- ---------
Net cash used in investing activities (245,840) (307,455)
--------- ---------
Cash flows from financing activities:
Exercise of stock options 19,559 12,765
Proceeds (cost) from issuance (buyback) of debentures (32,573) 389,498
Stock repurchase (32,221) -
--------- ---------
Net cash provided by (used in) financing activities (45,235) 402,263
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 115 (4)
Net increase (decrease) in cash and cash equivalents (250,966) 139,186
Cash and cash equivalents at beginning of period 323,182 45,225
--------- ---------
Cash and cash equivalents at end of period $ 72,216 $ 184,411
========= =========
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 third quarters of fiscal years 2002 and 2001
were 70,605,000 and 66,923,000, respectively. The weighted average number of
shares used to compute basic earnings per share for the first three quarters of
fiscal years 2002 and 2001 were 69,505,000 and 66,120,000, 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 78,338,000 and
77,114,000 in the third quarters of fiscal years 2002 and 2001, respectively.
For the first nine months of fiscal years 2002 and 2001, diluted shares were
77,559,000 and 76,585,000, respectively.
Options to purchase approximately 76,000 and 214,956 shares were not
included in the computation of the third quarter and first nine 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
third quarter or first nine 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 Nine months Ended
Net Sales October 28, October 29, October 28, October 29,
--------- 2001 2000 2001 2000
------------------------------------------------------------
Standard Semiconductor Products........... $40,915 $62,970 $132,198 $169,119
Rectifier and Assembly Products........... 2,579 3,852 8,482 11,649
Other Products............................ 251 2,190 4,125 6,302
------- ------- -------- --------
Total Net Sales......................... $43,745 $69,012 $144,805 $187,070
======= ======= ======== ========
Three Months Ended Nine months Ended
Operating Income October 28, October 29, October 28, October 29,
---------------- 2001 2000 2001 2000
------------------------------------------------------------
Standard Semiconductor Products........... $7,924 $19,545 $15,597 $50,418
Rectifier and Assembly Products........... 1,108 1,261 2,639 2,745
Other Products............................ (35) 492 546 1,343
Non-segment specific one-time costs....... - - (2,728) -
------ ------- ------- -------
Total Operating Income.................. $8,997 $21,298 $16,054 $54,506
====== ======= ======= =======
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 nine months ending October 28, 2001 and October 29, 2000, the
Company had no customers that accounted for more than 10 percent of net sales.
During the three quarters 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 Nine months Ended
Net Sales October 28, October 29, October 28, October 29,
--------- 2001 2000 2001 2000
---------------------------------------------------------
Domestic............................ $14,742 $32,781 $ 61,871 $ 85,211
Asia-Pacific........................ 26,116 27,743 68,931 78,750
European............................ 2,887 8,488 14,003 23,109
------- ------- -------- --------
Total Net Sales................... $43,745 $69,012 $144,805 $187,070
======= ======= ======== ========
Long lived assets located outside the United States as of the end of the
third quarter of fiscal years 2002 and 2001 were approximately $6.3 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 October 28, 2001, all of the Company's
investments mature on various dates through fiscal year 2003. The Company
realized interest income of $6.5 million and $7.6 million during the third
quarters of fiscal years 2002 and 2001, respectively.
4. Inventories
Inventories consisted of the following:
October 28, January 28,
2001 2001
----------------------------
Raw materials................... $ 1,209 $ 2,144
Work in process................. 13,862 20,563
Finished goods.................. 8,754 8,888
------- -------
Total inventories............. $23,825 $31,595
======= =======
7
5. Stock and Convertible Subordinated Debt 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. 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. On September 20, 2001, the Company
indicated that its Board had authorized an additional $50.0 million in buybacks,
increasing the total amount authorized under the buyback program to $100.0
million. As of October 28, 2001, the Company had repurchased 1,230,000 shares of
its common stock at a cost $33.2 million under this program. As of October
28,2001, all but 580,000 of the repurchased shares of its common stock had been
reissued as a result of stock options exercises. During the first nine months of
fiscal year 2002, the Company repurchased 35,680 convertible subordinated
debentures (face value of $1,000 each) at a cost of $32.6 million in open market
transactions and recognized an extraordinary gain on the repurchase of these
convertible subordinated debentures of $2.3 million with associated taxes of
$639,000. The Company has retired these repurchased debentures.
6. One-Time Costs
Operating income for the first nine months of 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.
The write-down of inventory and discontinuation of certain products was the
result of a critical review 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
October 28,
2001
-----------
One-time costs associated
with headcount reduction............... $ 1,962
Amounts paid out in cash............... (1,652)
-------
Provision balance................. $ 310
=======
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. The Company expects to eventually recognize a gain of
approximately $900,000 on the sale of the wafer fab. As of October 28, 2001,
$711,000 of the gain was still unrecognized. 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
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
February 1, 2007 and callable by the Company on or after February 6, 2003. 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 October 28, 2001 and October 29, 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 income. As of October 28, 2001,
$364.4 million of the convertible subordinated debentures were still
outstanding, reflecting the Company's repurchase of 35,680 debentures (face
value of $1,000 each) at a cost of $32.6 million in open market transactions and
recognized an extraordinary gain on the repurchase of these convertible
subordinated debentures of $2.3 million with associated taxes of $639,000.
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 a
one-time cost of $765,000 for the pending settlement of this matter with
federal and state agencies.
On June 22, 2001, the Company was notified by the California Department of
Toxic Substances Control ("State") that it may have liability associated with
the clean up of the one-third acre Davis Chemical Company site in Los Angeles,
California. The Company has been included in the clean-up program because it is
one of the companies believed to have used the Davis Chemical Company site for
waste recycling and/or disposal between 1949 and 1990. Investigation into this
matter is in its early stages. At this time there is not a specific proposal or
budget with respect to the clean-up of the site. Thus, no reserve has been
established for this matter.
The Company uses an environmental consulting firm, specializing in
hydrogeology, to perform periodic monitoring of the groundwater at its leased
facility in Newbury Park, California. Certain contaminants have been found in
the groundwater. Monitoring results over a number of years indicate that
contaminants are coming from an adjacent facility. It is currently not possible
to determine the ultimate amount of possible future clean-up costs, if any, that
may be required of us at this site. Accordingly, no reserve for clean-up has
been provided 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.
9
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.
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.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company plans to adopt this statement
effective January 26, 2003. The Company does not expect that the adoption of
SFAS No. 143 will have any impact on its results of operations or financial
position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
of Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and the accounting and reporting provision of APB Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a business (as previously defined in that
Opinion). SFAS 144 also resolves significant implementation issues related to
Statement 121. The Company plans to adopt this statement effective January 28,
2002. The Company is currently reviewing this standard to determine the impact
on its results of operations and financial position, however, the Company does
not expect that the adoption of this statement to have material impact.
10
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, 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.
11
Since the beginning of our fiscal year 2002, our overall customer order
rates have slowed compared to the prior year, 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 increased in the third quarter and are
expected to increase in the fourth quarter as well.
Results so far in 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 have also reduced headcount during
the first three quarters of fiscal year 2002 and as a result recorded one-time
costs of $2.0 million in the current year.
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 October 28, 2001 And October 29, 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 third quarter of
fiscal year 2002 were $43.7 million, compared to $69.0 million for the third
quarter of fiscal year 2001, a 36.6 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
third quarter of fiscal year 2002 was $24.1 million, compared to $39.5 million
for the comparable period in the prior year. The significant decline in gross
profit is due to lower sales levels. 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 55.2 percent for the third quarter of fiscal year 2002. This
compared to a gross margin of 57.2 percent for the third quarter of fiscal year
2001. The major decline is attributed to the lower sales in all product segments
and under utilized overhead.
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 $15.1 million, or 34.6
percent of net sales, for the third quarter ended October 28, 2001. Operating
costs and expenses for the prior year third quarter were $18.2 million, or 26.3
percent of net sales.
Interest and Other Income. Net interest and other income of $1.7 million was
realized in the third quarter of fiscal year 2002. For the third quarter of
fiscal year 2001, interest and other income was $2.8 million. Other income and
expenses for the third quarters of fiscal year 2002 and 2001 is primarily
interest income from investments and interest expense associated with 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 for Taxes. Provision for income taxes income taxes was $3.0
million in the third quarter of fiscal year 2002, compared to $7.2 million in
the third quarter of fiscal year 2001. The effective tax rate for the third
quarter of fiscal year 2002 was 28.0 percent and for the comparable quarter of
fiscal year 2001 was 30.0 percent. The decline in the provision for taxes rate
ease was due to an increase of sales through foreign-based subsidiaries that are
in lower tax jurisdictions.
12
Extraordinary Gain. We reported an extraordinary gain on extinguishment of
$1.4 million in the third quarter. The gross amount of the gain was $2.0
million and the associated tax was $547,000. The gain was a result of our
repurchase of 33,000 of the Company's convertible subordinated debentures below
their stated par value. We had no extraordinary gain in the prior year third
quarter.
Comparison Of The Nine Months Ended October 28, 2001 And October 29, 2000
Net Sales. Net sales for the first nine months of fiscal year 2002 were
$144.8 million, a decline of 22.6 percent compared to $187.1 million for the
first three quarters of fiscal year 2001. The decline was due to weak industry
and economic conditions.
Gross Profit. Gross profit for the first nine months of fiscal year 2002 was
$67.2 million, compared to $104.3 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 during the second quarter. Our gross margin was 46.4
percent for the first three quarters of fiscal year 2002. This compared to a
gross margin of 55.7 percent for the first three quarters of fiscal year 2001.
Operating Costs and Expenses. Operating costs and expenses were $51.2
million, or 35.3 percent of net sales, for the nine months ended October 28,
2001. Operating costs and expenses for the prior year first nine months were
$49.8 million, or 26.6 percent of net sales.
Operating costs and expenses for the first three quarters 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. As of October
28, 2001, $1.7 million of the one-time headcount reduction costs has been paid
out in cash.
Interest and Other Income. Net interest and other income of $5.6 million was
realized in the first nine months of fiscal year 2002. For the first nine months
of fiscal year 2001, interest and other income was $6.4 million. Other income
and expenses for the first nine months 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 nine months,
interest and other income is primarily interest income and interest expense for
the outstanding convertible debentures.
Provision for Taxes. Provision for income taxes was $6.1 million in the
first three quarters of fiscal year 2002, compared to $18.3 million in the first
three quarters of fiscal year 2001. The effective tax rate for the first nine
months 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.
Extraordinary Gain. For the first nine months of fiscal year 2002, we
reported an extraordinary gain on extinguishment of debt in the amount of $1.6
million. The gross amount of the gain was $2.3 million and the associated tax
was $639,000. The gain was a result of our repurchase of 35,680 of the Company's
convertible subordinated debentures below their stated par value. We had no
extraordinary gain in the prior year's first nine months.
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.
13
On October 28, 2001, we had working capital of $446.6 million, compared with
$531.0 million at January 28, 2001. The ratio of current assets to current
liabilities at October 28, 2001 was 20.3 to 1, compared to 16.3 to 1 at January
28, 2001. The drop in working capital as of October 28, 2001 was mostly the
result of an increase in investments with maturities greater than one year.
Cash provided by operating activities was $40.2 million for the first nine
months of fiscal year 2002, compared to $44.4 million for the first nine months
of fiscal year 2001. Net income for the first nine months of fiscal year 2002
was reduced by non-cash charges for depreciation and amortization of $6.0
million. Net operating cash flows were positively impacted by net income of
$17.3 million compared to $42.6 million in the prior year period. Net cash
provided by operating activities for the first nine 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 assets.
These were partially offset by increases in deferred income taxes, accounts
payable and accrued liabilities.
Cash provided by operating activities for the first nine months of fiscal
year 2001 was favorably impacted by net income, non-cash charges for
depreciation and amortization of $3.7 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 nine 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 $245.8 million for the first three quarters of
fiscal year 2002 compared to $307.5 million used in the first nine months of
fiscal year 2001. Investing activities for both periods consists of increases in
temporary investments, purchases of long-term investments, and capital
expenditures. Investing activities for the first nine months of fiscal year 2002
included proceeds of $1.2 million for the sale of assets.
Our financing activities used $45.4 million during the first nine months of
fiscal year 2002 and added $402.2 million in the first three quarters of the
prior year. Financing activities for the first nine months of fiscal year 2002
reflects the proceeds from stock option exercises, which were more than offset
by cash used to repurchase common stock and our convertible subordinated
debentures. Financing activities for the first nine 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. As of October 28, 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.
14
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.
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, we do not expect the adoption of these statements
to have a material impact.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. We plan to adopt this statement effective
January 26, 2003. We do not expect that the adoption of SFAS No. 143 will have
any impact on our results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
of Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and the accounting and reporting provision of APB Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a business (as previously defined in that
Opinion). SFAS 144 also resolves significant implementation issues related to
Statement 121. We plan to adopt this statement effective January 28, 2002. We
are currently reviewing this standard to determine the impact on our results of
operations and financial position, however, we do not expect that the adoption
of this statement will 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
15
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;
. our ability to successfully develop new products and time their release to
customers;
. our ability to attract or retain specialized technical personnel,especially
design engineers;
. availability of manufacturing capacity, including from foreign-based
suppliers;
. our significant reliance on foreign-based entities for materials,
manufacturing, assembly, and logistics;
. 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 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 an 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
16
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 October 28, 2001, we had $364.4 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.
17
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 with federal and state agencies.
On June 22, 2001, the Company was notified by the California Department of
Toxic Substances Control ("State") that it may have liability associated
with the clean up of the one-third acre Davis Chemical Company site in Los
Angeles, California. The Company has been included in the clean-up program
because it is one of the companies believed to have used the Davis Chemical
Company site for waste recycling and/or disposal between 1949 and 1990.
Investigation into this matter is in its early stages. At this time there is
not a specific proposal or budget with respect to the clean-up of the site.
Thus, no reserve has been established for this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
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 September 21, 2001 in connection
its stock repurchase program and expectations for the third quarter.
18
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: December 11, 2001 /S/ John D. Poe
--------------------------------
John D. Poe
Chairman of the Board
and Chief Executive Officer
Date: December 11, 2001 /S/ David G. Franz, Jr.
--------------------------------
David G. Franz, Jr.
Vice President Finance, Chief
Financial Officer, and
Secretary
19