UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 28, 2002
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.)
200 Flynn Road, Camarillo, California, 93012-8790
(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 April 30,
2002: 73,039,368.
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1
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
April 28, 2002, and the results of their operations and their cash flows for the
three months then ended.
2
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three Months Ended
------------------
April 28, April 29,
2002 2001
--------------------------------------------------------------------------
Net sales $49,188 $60,528
Cost of sales 21,108 25,442
------- -------
Gross profit 28,080 35,086
------- -------
Operating costs and expenses -
Selling, general and administrative 8,412 9,922
Product development and engineering 7,524 8,048
One-time costs - 951
------- -------
Total operating costs and expenses 15,936 18,921
------- -------
Operating income 12,144 16,165
Interest and other income, net 1,179 2,451
------- -------
Income before provision for taxes 13,323 18,616
Provision for taxes 3,331 5,399
------- -------
Net income $ 9,992 $13,217
======= =======
Earnings per share:
Earnings per share -
Basic $ 0.14 $ 0.19
Diluted $ 0.13 $ 0.17
Weighted average number of shares -
Basic 72,681 68,467
Diluted 78,997 77,120
3
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share data)
April 28, January 27,
2002 2002
(Unaudited)
- -------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 55,869 $ 46,300
Temporary investments 360,956 324,870
Receivables, less allowances 25,575 19,181
Inventories 20,854 22,728
Income taxes refundable - 2,019
Deferred income taxes 11,878 11,786
Other current assets 4,018 3,372
-------- --------
Total current assets 479,150 430,256
Property, plant and equipment, net 50,793 51,516
Investments with maturities in excess of 1 year 125,704 172,332
Deferred income taxes 26,755 27,659
Other assets 8,023 8,638
-------- --------
TOTAL ASSETS $690,425 $690,401
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,001 $7,341
Accrued liabilities 11,042 16,845
Deferred revenue 1,690 1,936
Income taxes payable 1,241 1,099
Other current liabilities 74 65
-------- --------
Total current liabilities 22,048 27,286
Convertible subordinated notes 354,170 364,320
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 250,000,000 authorized,
73,039,993 issued and outstanding on April 28, 2002 and 72,148,573
issued and outstanding on January 27, 2002 731 722
Additional paid-in capital 170,341 162,856
Retained earnings 141,451 131,459
Accumulated other comprehensive income 1,684 3,758
-------- --------
Total stockholders' equity 314,207 298,795
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $690,425 $690,401
======== ========
4
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
------------------
April 28, April 29,
2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 9,992 $ 13,217
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,825 1,981
Deferred income taxes 812 (8,428)
Tax benefit of stock option exercises 1,997 11,317
Loss (gain) on repurchase of long-term debt 50 (372)
Loss on disposition of property, plant and equipment 324 -
Changes in assets and liabilities, net of acquisition:
Receivables (6,394) 4,479
Inventories 1,874 (4,692)
Other assets (592) (473)
Accounts payable and accrued liabilities (5,143) (10,098)
Deferred revenue (246) -
Income taxes refundable/payable 2,161 2,098
Other liabilities 9 576
-------- ---------
Net cash provided by operating activities 7,669 9,605
-------- ---------
Cash flows from investing activities:
Temporary investments, net (37,537) (97,877)
Purchase of long-term investments 46,008 (112,690)
Proceeds on sale of assets - 1,174
Additions to property, plant and equipment (2,084) (3,940)
-------- ---------
Net cash provided (used) in investing activities 6,387 (213,333)
-------- ---------
Cash flows from financing activities:
Exercise of stock options 5,497 4,373
Cost of buyback of convertible subordinated notes (9,981) (2,290)
Reissuance of treasury stock - 1,283
Stock repurchase - (9,692)
-------- ---------
Net cash used in financing activities (4,484) (6,326)
-------- ---------
Effect of exchange rate changes on cash and cash equivalents (3) (83)
Net increase (decrease) in cash and cash equivalents 9,569 (210,137)
Cash and cash equivalents at beginning of period 46,300 323,182
-------- ---------
Cash and cash equivalents at end of period $ 55,869 $ 113,045
======== =========
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 incorporates the incremental shares issuable upon the assumed
exercise of stock options. The weighted average number of shares used to compute
basic earnings per share in the first quarters of fiscal years 2003 and 2002
were 72,681,000 and 68,467,000, 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 its outstanding stock
options ("common stock equivalents"), or 78,997,000 and 77,120,000 in the first
quarters of fiscal years 2003 and 2002, respectively.
Options to purchase approximately 76,000 and 257,000 shares, respectively,
were not included in the computation of first quarter of fiscal years 2003 and
2002 diluted net income per share because such options were considered
anti-dilutive. Shares associated with the Company's outstanding convertible
subordinated notes 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, 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 integrated circuit (IC) and foundry sales.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in the Form 10-K for the year
ended January 27, 2002. The Company evaluates segment performance based on net
sales and operating income of each segment. Management does not track segment
data or evaluate segment performance on additional financial information. As
such, there are no separately identifiable segment assets nor is there any
separately identifiable statements of income data (below operating income).
The Company does not track or assign assets to individual reportable
segments. Likewise, depreciation expense and capital additions are also not
tracked by reportable segments.
Three Months Ended
Net Sales April 28, April 29,
--------- 2002 2001
--------------------------
Standard Semiconductor Products ...... $46,382 $54,300
Rectifier and Assembly Products ...... 2,603 3,313
Other Products ....................... 203 2,915
------- -------
Total Net Sales ................... $49,188 $60,528
======= =======
Three Months Ended
Operating Income April 28, April 29,
---------------- 2002 2001
---------------------------
Standard Semiconductor Products ...... $11,201 $15,462
Rectifier and Assembly Products ...... 827 1,090
Other Products ....................... 116 564
Non-segment specific one-time costs .. - (951)
------- -------
Total Operating Income ............ $12,144 $16,165
======= =======
6
Operating income for the first quarter of fiscal year 2002 includes
one-time costs of $951,000 for the reduction in workforce at the Company's Santa
Clara, California wafer fab and the consolidation of the Company's New York, New
York location into the Newbury Park, California location.
No end customer accounted for 10% or greater of net sales in the first
quarter of fiscal year 2003. In the first quarter of fiscal year 2003, one of
the Company's Asian distributors accounted for approximately 14% of net sales.
During the first quarter of fiscal year 2002, one automated test equipment (ATE)
end customer, including its subcontractors, accounted for greater than 10% of
net sales.
A summary of net external sales by region follows. The Company does not
track customer sales by region for each individual reporting segment.
Three Months Ended
Net Sales April 28, April 29,
--------- 2002 2001
-------------------------
Domestic ......................... $14,461 $29,538
Asia-Pacific ..................... 29,808 24,211
European ......................... 4,919 6,779
------- -------
Total Net Sales ............... $49,188 $60,528
======= =======
Long lived assets located outside the United States as of the end of the
first quarter of fiscal years 2003 and 2002 were approximately $8.1 million and
$6.3 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.
The Company changed its method of classifying investments from "held to
maturity" to "available for sale" in the fourth quarter of fiscal year 2002,
because it expects to sell some securities prior to maturity. The Company
includes any unrealized gain or loss, net of tax, in the comprehensive income
portion of the equity section.
The Company realized interest income of $5.7 million and $9.6 million
during the first quarters of fiscal years 2003 and 2002, respectively.
4. Inventories
Inventories consisted of the following:
April 28, January 27,
2002 2002
-----------------------------
Raw materials ............. $ 627 $ 854
Work in process ........... 14,222 14,648
Finished goods ............ 6,005 7,226
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Total inventories ...... $20,854 $22,728
======= =======
7
5. Comprehensive Income
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", requires that net income and all other non-owner changes
in equity be displayed in a financial statement with the same prominence as
other consolidated financial statements. In addition, the statement requires
companies to display the components of comprehensive loss, which were as follows
(in thousands):
Three Months Ended
--------------------------------
April 28, 2002 April 29, 2001
--------------------------------
Unrealized losses on investments $ $
(2,071) -
Translation adjustment (3) (83)
-
Comprehensive Income $ (2,074) $ (83)
======== ==========
6. Stock and Convertible Subordinated Debt 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 April 28, 2002, the Company had repurchased 1,230,000 shares of
its common stock at a cost $33.2 million under this program. Repurchased shares
of common stock have been reissued as a result of stock options exercises. As of
April 28, 2002, the Company had repurchased 45,830 of its convertible
subordinated notes (face value of $1,000 each) at a cost of $42.6 million in
open market transactions and recognized a net gain on the repurchase of these
convertible subordinated notes of $2.2 million. The Company has retired these
repurchased notes.
7. One-Time Costs
Operating results in the first quarter of fiscal year 2003 include two
one-time items. First, $229,000 of product that had been previously written down
were included in net sales, therefore, there was no cost of goods sold
associated with these shipments. Second, one-time costs of $247,000 were
recorded for the write-off of certain excess test capacity and other assets at
the Company's former Newbury Park and New York facilities. The net impact of
these two one-time items on first quarter results was costs of approximately
$18,000.
Operating income for the first quarter of fiscal year 2002 includes
one-time costs of $951,000 for the reduction in workforce at the Company's Santa
Clara, California wafer fab and the consolidation of the Company's New York, New
York location into the Newbury Park, California location. Total headcount was
reduced by 17 percent in the first quarter of fiscal year 2002, including the
reduction of employees associated with the Company's sale of the Santa Clara,
California wafer fab. The sale was completed on April 24, 2001 and a majority of
the one-time costs have been paid out in cash.
8. 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 April 28, 2002,
$486,000 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
9. Convertible Subordinated Notes
On February 14, 2000, the Company completed a private offering of $400.0
million principal amount of convertible subordinated notes 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 notes, the Company incurred $11.5 million in
underwriter fees and other costs, which are amortized as interest expense using
the effective interest method. The Company has used the net proceeds of the
offering for general corporate purposes, including working capital, expansion of
sales, marketing and customer service capabilities, and product development. In
addition, the Company may use a portion of the net proceeds to acquire or invest
in complementary businesses, technologies, services or products.
For the three months ended April 28, 2002 and April 29, 2001, the Company
incurred $4.4 million and $4.9 million, respectively, in interest expense
associated with these convertible subordinated notes included in the
accompanying consolidated statements of income. As of April 28, 2002, $354.2
million of the convertible subordinated notes were still outstanding, reflecting
the Company's repurchase of 45,830 notes (face value of $1,000 each) at a cost
of $42.6 million in open market transactions and recognized a net gain on the
repurchase of these convertible subordinated notes of $2.2 million.
10. 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
previously 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 the Company 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% 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.
In December 2000, the Company purchased a parcel of land in San Diego,
California for approximately $7.9 million and began exploring plans to build a
facility to support its High Performance product line. The Company deferred the
project due to the significant downturn in the product line's business. Early in
calendar year 2002, the staff of the San Diego Unified Public School District
recommend to the Board of Education that a school be built on
9
the Company's parcel. In April 2002, the Board of Education rejected that
proposal and selected another site for the school.
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.
11. Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 a material 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 Accounting Principles
Board (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 No. 144 also resolves significant
implementation issues related to SFAS No. 121. The Company adopted these
standards effective with the fiscal year beginning January 28, 2002. The Company
is currently reviewing these standards to determine the impact on its results of
operations and financial position, however, for the first quarter ended April
28, 2002, the adoption of these standards has not had a material impact.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This statement is effective for fiscal years beginning after May
15, 2002. For certain provisions, including the rescission of Statement No. 4,
early application is encouraged. The Company has applied this statement to the
three months ended April 28, 2002, and the impact of its application was the
reclassification of the gains or losses on the extinguishment of debt from an
extraordinary item to other income.
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, due to factors including but not limited to those set forth in the
"Risk Factors and Forward Looking Statements" and "Quantitative and Qualitative
Disclosure About Market Risk" sections 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
27, 2002. We undertake no obligation to update any forward-looking statements
after the date of this Form 10-Q.
Overview
We design, produce and market a broad range of products that are sold
principally to customers in the computer, communications and industrial markets.
Our products are designed into a wide variety of end applications, including
notebook and desktop computers, computer gaming systems, personal digital
assistants
10
(PDAs), cellular phones, wireline networks, wireless base stations and automated
test equipment (ATE). Products within the communications market include products
for local area networks, metro and wide area networks, cellular phones and
base-stations. Industrial applications include ATE, medical devices and factory
automation systems. Our end customers are primarily original equipment
manufacturers and their suppliers, including Acer, Agilent, Cisco, Compaq, Dell,
First International, IBM, Intel, Microstar, Motorola, Samsung and Sony.
We recognize product revenue when persuasive evidence of an arrangement
exists, delivery has occurred, receipt by the customer has been confirmed, the
fee is fixed or determinable and collectibility is probable. Product design and
engineering revenue is recognized during the period in which services are
performed. We defer revenue recognition on shipment of certain products to
distributors where return privileges exist until the products are sold through
to end users. Gross profit is equal to our net sales less our cost of sales. Our
cost of sales includes materials, direct labor and overhead. We determine the
cost of inventory by the first-in, first-out method. Our 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.
Most of our 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
on orders received and shipped within the same quarter. Sales made directly to
original equipment manufacturers are approximately 60% of net sales. The
remaining 40% of net sales are through independent distributors.
We divide and operate our business based on three reportable segments:
Standard Semiconductor Products, Rectifier and Assembly Products, and Other
Products. We evaluate segment performance based on net sales and operating
income of each segment. We do not track segment data or evaluate segment
performance on additional financial information. As such, there are no
separately identifiable segment assets nor are there any separately identifiable
statements of income data (below operating income). The Standard Semiconductor
Products segment makes up the vast majority of overall sales and includes our
Power Management, Protection, High Performance, Advanced Communications and
Human Input/System Management product lines. The Rectifier and Assembly Products
segment includes our line of assembly and rectifier devices, which are the
remaining products from our original founding as a supplier into the military
and aerospace market. The Other Products segment is made up of other custom
integrated circuit (IC) and foundry sales.
Our business involves reliance on foreign-based entities. Several of
our outside subcontractors and suppliers, including third-party foundries that
supply silicon wafers, are located in foreign countries, including China,
Malaysia, the Philippines and Germany. For the fiscal year ended January 27,
2002, approximately 28% of our silicon was manufactured in China. Foreign sales
for the first quarter of fiscal year 2003 constitute approximately 71% of our
net sales. Approximately four-fifths of foreign sales are to customers located
in the Asia-Pacific region. The remaining are to customers in Europe.
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.
RESULTS OF OPERATIONS
Comparison Of The Three Months Ended April 28, 2002 And April 29, 2001
Net Sales. Net sales for the first quarter of fiscal year 2003 were
$49.2 million, compared to $60.5 million for the first quarter of fiscal year
2002, a 19% decrease. Standard Semiconductor Products (Standard Products)
declined by 15%. Rectifier and Assembly Products' sales declined 21% and our
Other Products segment declined 93% in the first quarter of fiscal year 2003.
The decline in sales was due in part to weakness in the overall semiconductor
11
industry caused by poor economic conditions and lower spending in the capital
equipment end-markets of communications infrastructure and test systems.
Standard Products represented about 94% of net sales in the first quarter
of fiscal year 2003, up from 90% in the prior year period. Standard Product
sales in the first quarter of fiscal year 2003 reflected year-over-year growth
in the Power Management product line, but that was more than offset by large
declines in the Protection and High Performance product lines.
Sales of our Rectifier and Assembly Products segment declined due to weak
industry conditions and a strategic focus on proprietary products. Other
Products declined as a result of a strategic de-emphasis of custom and foundry
services. We plan to eventually exit the custom and foundry product offerings.
In the first quarter of fiscal year 2002, favorable market conditions
benefited all three of our reportable segments. The Standard Products segment
was most benefited by strength in sales of our High Performance product line
used in test systems and Power Management products used in a wide variety of
applications. Our Protection product line saw a large decline in sales during
the first quarter of fiscal year 2002 as the communications end-market rapidly
deteriorated.
Gross Profit. Gross profit for the first quarter of fiscal year 2003 was
$28.1 million, compared to $35.1 million for the comparable period in the prior
year, a 20% decline. Our gross margin was 57% for the first quarter of fiscal
year 2003, down from 58% for the first quarter of fiscal year 2002. The decline
is due to lower utilization and weaker industry conditions, as reflected in our
year-over-year decline in net sales.
Operating Costs and Expenses. Operating costs and expenses were $15.9
million, or 32% of net sales, for the first quarter ended April 28, 2002.
Operating costs and expenses for the prior year first quarter were $18.9
million, or 31% of net sales.
Operating results in the first quarter of fiscal year 2003 include two
one-time items. First, $229,000 of products that had been previously written
down were included in net sales, therefore, there was no cost of goods sold
associated with these shipments. Second, one-time costs of $247,000 were
recorded for the write-off of certain excess test capacity and other assets at
the Company's former Newbury Park and New York facilities. The net impact of
these two one-time items on first quarter results was costs of approximately
$18,000.
Operating costs and expenses for the first quarter of fiscal year 2002
include one-time costs of $951,000 to cover the expense of reducing headcount at
our Santa Clara, California wafer fab and relocating our New York, New York
office to our Newbury Park, California office. Before one-time costs, operating
costs and expenses so far in fiscal year 2003, as a percentage of net sales, are
higher than previous levels due to lower shipment rates and lower efficiencies.
Absolute operating costs and expenses, before one-time items, is lower in the
first quarter of fiscal year 2003 compared to the prior year due to cost cutting
measures taken during the prior year.
Operating Income. Operating income was $12.1 million in the first quarter
of fiscal year 2003, down from operating income of $16.2 million in the first
quarter of fiscal year 2002. Operating income was impacted by a 19% decline in
net sales and the drop to a 57% gross margin. The drop in operating income was
partially offset by one-time costs of $951,000 that reduced fiscal year 2002
first quarter operating income.
We evaluate segment performance based on net sales and operating income of
each segment. Operating income for the Standard Semiconductor Products segment
declined 28% in the first quarter of fiscal year 2003. Operating income in the
Standard segment was hurt by a decline in all product lines, with the exception
of the Power Management product line, which had sales increases and an improved
profit margin. High Performance products, which have operating margins above our
corporate average, represented the largest product line decline compared to the
prior year period.
12
Operating income for the Rectifier and Assembly Products segment declined
by 24%, while the Other Products segment decreased 80% in first quarter of
fiscal year 2003. Both segments' operating margins were impacted by poor
efficiencies associated with a lower sales level.
Operating income for the Standard Semiconductor Products segment in the
first quarter of fiscal year 2002 was most benefited by a significant increase
in High Performance product line sales, which had above corporate average
operating margins. Operating income for the Rectifier and Assembly Products
segment for the first quarter of fiscal year 2002 increased due to a shift in
manufacturing to our lower-cost facility in Mexico and reduced overhead. Other
Products operating income decreased due to lower gross margins and underutilized
overhead.
Interest and Other Income. Net interest and other income of $1.2 million was
realized in the first quarter of fiscal year 2003. For the first quarter of
fiscal year 2002, interest and other income was $2.5 million. Other income and
expenses is primarily interest income from investments and interest expense
associated with our outstanding convertible subordinated notes. The decline in
interest and other income so far in fiscal year 2003 is mostly due to lower
rates of return on our investments as compared to the prior year.
Provision for Taxes. Provision for income taxes for the first three months of
fiscal year 2003 was $3.3 million, compared to $5.4 million in the prior year
period. The effective tax rate so far in fiscal year 2003 is 25%, compared to
29% in the prior year period. The decline in the effective tax rate is due to
increased sales through foreign-based subsidiaries that are in lower tax
jurisdictions.
Liquidity and Capital Resources
We evaluate segment performance based on net sales and operating income of
each segment. We do not track segment data or evaluate segment performance on
additional financial information. As such, there are no separately identifiable
segment assets and liabilities.
On February 14, 2000, we completed a private offering of $400.0 million
principal amount of convertible subordinated notes that bear interest at the
rate of 4 1/2% per annum and are convertible into our common stock at a
conversion price of $42.23 per share. The notes are due in 2007 and redeemable
in 2003. We have used the net proceeds of the notes offering, in part, 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 from the notes offering to
acquire or invest in complementary businesses, technologies, services or
products.
As of April 28, 2002, we had working capital of $457.1 million, compared
with $403.0 million as of January 27, 2002. The ratio of current assets to
current liabilities as of April 28, 2002 was 21.7 to 1, compared to 15.8 to 1 as
of January 27, 2002. The increase in working capital as of April 28, 2002 was
mostly the result of an increase in cash and temporary investments.
Cash provided by operating activities was $7.9 million for the first
quarter of fiscal year 2003, compared to $9.6 million for the first quarter of
fiscal year 2002. Net operating cash flows were impacted by non-cash charges for
depreciation and amortization of $2.5 million and $2.0 million in the first
quarters of fiscal years 2003 and 2002, respectively.
Net operating cash flows in the first three months of fiscal year 2003 were
positively impacted by net income of $10.0 million and by a decrease in
inventories, tax benefit from stock option exercises, income taxes payable and
other assets. These were partially offset by increases in receivables, deferred
income taxes, accounts payable and accrued liabilities, and other assets and
liabilities.
Investing activities provided $8.5 million in the first quarter of fiscal
year 2003 compared to $213.3 million used in the prior year first quarter.
Investing activities for both periods consist of increases in temporary
investments, purchases and redemptions of long-term investments, and capital
expenditures. Investing activities for first quarter of fiscal year 2002
included proceeds of $1.2 million from the sale of assets.
Our financing activities used $4.7 million during the first three months of
fiscal year 2003 and $6.3 million in the prior year period. Financing activities
so far in fiscal year 2003 reflect the proceeds from stock option exercises,
13
which were more than offset by cash used to repurchase long-term debt. Financing
activities for the first quarter of fiscal year 2002 reflect the proceeds from
stock options exercises and the reissuance of treasury stock, more than offset
by cash used to repurchase long-term debt and common stock.
We do not have any off balance sheet financing activities and do not have
any special purpose entities. As of April 28, 2002, we have approximately $8.2
million in operating lease commitments that extend over a six year period. The
portion of these operating lease payments due during the coming fiscal year is
less than $1.3 million.
In order to develop, design and manufacture new products, we have incurred
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 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 investments.
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 notes offering and cash
reserves, 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.
Critical Accounting Policies
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policy," we identified the most critical
accounting policies upon which our financial status depends. We determined the
critical principles by considering accounting policies that involve the most
complex or objective decisions or assessments. We identified our most critical
accounting policies to be related to revenue recognition, inventory valuation
and use of estimates. We state these accounting policies in the notes to the
consolidated financials statements in our Form 10-K and at relevant sections in
this management's discussion and analysis.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 a material 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 Accounting Principles
Board (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 No. 144 also resolves significant
implementation issues related to Statement No. 121. We have adopted these
standards effective with the fiscal year beginning January 28, 2002. We are
currently reviewing these standards to determine the impact on our results of
operations and financial position, however, for the first quarter ended April
28, 2002, the adoption of these standards has not had a material impact.
14
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This statement is effective for fiscal years beginning after May
15, 2002. For certain provisions, including the rescission of Statement 4, early
application is encouraged. We have applied this statement to the three months
ended April 28, 2002, and the impact of its application was the reclassification
of the gains or losses on the extinguishment of debt from an extraordinary item
to other income.
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 after the date of this Form 10-Q.
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 27, 2002, as filed with the Securities and Exchange Commission,
those set forth below and elsewhere in this Form 10-Q and those detailed from
time to time in press releases, conference calls and other filings with the SEC:
... Economic declines may have adverse consequences for our business
... The cyclical nature of the electronics and semiconductor industries may
limit our ability to maintain or increase revenue and profit levels during
industry downturns
... Fluctuations and seasonality in the personal computer industry and economic
downturns in our end-markets may have adverse consequences for our business
... Reductions in communications infrastructure investments could adversely
affect our business
... We may be unsuccessful in developing and selling new products required to
maintain or expand our business
... Our products may be found to be defective, product liability claims may be
asserted against us and we may not have sufficient liability insurance
... Our share price could be subject to extreme price fluctuations, and
shareholders could have difficulty trading shares
... We obtain certain essential components and materials and certain
manufacturing services from a limited number of suppliers and
subcontractors, including foreign-based entities
... We sell and trade with foreign customers, which subjects our business to
increased risks applicable to international sales
... 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
... Our future operating results may fluctuate, fail to match past performance
or fail to meet expectations
... We receive a significant portion of our revenues from a small number of
customers and the loss of any one of these customers could adversely affect
our operations
... We have acquired and may continue to acquire other companies and may be
unable to successfully integrate these companies into our operations
... We compete against larger, more established entities and our market share
may be reduced if we are unable to respond to our competitors effectively
... We must commit resources to product production prior to receipt of purchase
commitments and could lose some or all of the associated investment
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. The loss of any of our key personnel or the failure to attract or retain
the specialized technical and management personnel could impair our ability
to grow our business
. We are subject to environmental regulations, which may require us to incur
significant expenditures
. Major earthquakes may cause us significant losses
. Terrorist attacks, such as the attacks that occurred on September 11, 2001,
and other acts of violence or war may negatively affect our operations and
your investment
. We may be unable to adequately protect our intellectual property rights
. We could be required to register as an investment company and become
subject to substantial regulation that would interfere with our ability to
conduct our business
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. 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. Our foreign currency exposures may change over time as the
level of activity in foreign markets grows and could have an adverse impact upon
our 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 Euro and British Pounds Sterling. Additionally,
certain of our current and long-term liabilities are denominated principally in
British Pounds Sterling currency, which are also sensitive to foreign currency
exchange rate fluctuations.
Substantially all of our foreign sales are denominated in U.S. dollars.
Currency exchange fluctuations in countries where we do business could harm our
business by resulting in pricing that is not competitive with prices denominated
in local currencies.
Interest Rate Risk
As of April 28, 2002, we had $354.2 million in long-term debt outstanding
at a fixed interest rate of 4 1/2 % per annum. We do not currently hedge any
potential interest rate exposure. Interest rates affect our return on excess
cash and investments. A significant decline in interest rates would reduce the
amount of interest income generated from our excess cash and investments.
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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 with federal and state agencies.
On June 22, 2001, the Company was notified by the California
Department of Toxic Substances Control 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
10.1 - The Company's Long-Term Stock Incentive Plan, as Amended.
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 the following reports on Form 8-K during the
period covered by this report:
January 28, 2002 To file press release dated January 25,
2002 regarding expectations for the
fourth quarter
February 28, 2002 To report change of address of corporate
headquarters
April 24, 2002 To file press release dated April 24,
2002 regarding expectations for the
first quarter
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SEMTECH CORPORATION
-------------------
Registrant
Date: June 11, 2002 /S/ John D. Poe
--------------------------------
John D. Poe
Chairman of the Board
and Chief Executive Officer
Date: June 11, 2002 /S/ David G. Franz, Jr.
--------------------------------
David G. Franz, Jr.
Vice President Finance, Chief
Financial Officer, and
Secretary
18