SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For Quarter Ended May 3, 1998 Commission File Number 1-6395
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SEMTECH CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 95-2119684
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
652 Mitchell Road, Newbury Park, California 91320
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (805) 498-2111
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N/A
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(Former name, former address and former fiscal year, if changed since last
report.)
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 was 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 May 3, 1998:
14,515,520.
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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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 generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It
is suggested that these condensed financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K.
In the opinion of the Company, these unaudited statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of Semtech Corporation and subsidiaries as
of May 3, 1998, 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 FOR SHARE FIGURES)
(Unaudited)
THREE MONTHS ENDED
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May 3, April 27,
1998 1997
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NET SALES $29,534 $23,175
Cost of Sales 15,060 12,478
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Gross Profit 14,474 10,697
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Operating costs and expenses:
Selling, general and administrative 4,633 3,974
Product development and engineering 2,945 1,906
Acquisition costs 255 -
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Total operating costs and expenses 7,833 5,880
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Operating Income 6,641 4,817
Interest and other income, net 171 41
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Income before taxes 6,812 4,858
Provision for taxes 2,275 1,628
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NET INCOME $ 4,537 $ 3,230
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Earnings per share:
Net income per share-
Basic $ 0.31 $ 0.24
Diluted $ 0.29 $ 0.22
Weighted average number of shares -
Basic 14,446 13,741
Diluted 15,744 14,545
3
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR PER SHARE FIGURE)
May 3, February 1,
1998 1998
(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $23,116 $18,808
Temporary investments 1,852 1,852
Receivables, less allowances 14,865 13,722
Inventories 18,630 17,020
Other current assets 1,242 956
Deferred income taxes 1,395 1,395
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Total current assets 61,100 53,753
Property, plant and equipment, net 12,935 12,805
Other assets 250 157
Deferred income taxes 417 420
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TOTAL ASSETS $74,702 $67,135
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 244 $ -
Accounts payable 5,472 5,241
Accrued liabilities 4,027 4,459
Income taxes payable 1,955 1,020
Other current liabilities 1,513 1,721
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Total current liabilities 13,211 12,441
Other long-term liabilities 37 33
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value, 40,000,000
shares authorized 145 142
Additional paid-in capital 20,318 18,406
Retained earnings 41,136 36,332
Accumulated other comprehensive income (145) (219)
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Total shareholders' equity 61,454 54,661
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $74,702 $67,135
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4
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
For the Three Months Ended
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May 3, April 27,
1998 1997
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Cash flows from operating activities -
Net income $ 4,537 $ 3,547
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 878 576
Deferred income taxes 3 16
Changes in assets and liabilities:
Receivables (1,143) (832)
Income taxes refundable - 2
Inventories (1,610) (760)
Other assets (379) 691
Accounts payable and accrued liabilities (201) (821)
Income taxes payable 2,138 779
Other current liabilities (208) 208
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Net cash provided by operating activities 4,015 3,406
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Cash flows from investing activities -
Temporary cash investments - 102
Additions to property, plant and equipment (1,008) (1,894)
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Net cash used by investing activities (1,008) (1,792)
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Cash flows from financing activities -
Repayment of debt - (46)
Exercise of stock options 650 224
Other long-term liabilities 4 63
Other 573 -
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Net cash provided by financing activities 1,227 241
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Effect of exchange rate changes on cash 74 62
Net increase in cash and cash equivalents 4,308 1,917
Cash and cash equivalents at beginning of period 18,808 9,440
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Cash and cash equivalents at end of period $23,116 $11,357
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5
SEMTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BUSINESS COMBINATIONS
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On April 27, 1998, the Company signed a merger agreement with Acapella Limited
(Acapella), a company located in the United Kingdom, to be accounted for as a
pooling of interests. Under the terms of the agreement, Acapella shareholders
received approximately 176,000 shares of Semtech common stock for all
outstanding shares of Acapella stock. The Company acquired Acapella to
strengthen its ability to serve high-end communication applications.
The acquisition of Acapella was accounted for as a pooling of interests in
accordance with APB Opinion No. 16 and related Securities and Exchange
Commission pronouncements. Acapella's financial position and results of
operations prior to the three months ended May 3, 1998 were immaterial in
relation to Semtech's overall results. Therefore, the effect of the merger prior
to February 1, 1998 has been adjusted to retained earnings. The consolidated
balance sheet at May 3, 1998 as well as the consolidated statement of income and
cash flow for the first quarter ended May 3, 1998 include the results of
Acapella.
The following table shows the effect of Acapella's results of operations on the
combined companies for the three months ended May 3, 1998. Merger related costs
of $255,000 associated with the Company's acquisition of Acapella are reflected
in Semtech's net income.
(in thousands) Semtech Acapella Combined
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For the three months ended
May 3, 1998:
Revenues $28,945 $589 $29,534
Net Income $ 4,474 $ 63 $ 4,537
2. EARNINGS PER SHARE
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The consolidated condensed financial statements are presented in accordance with
Statement of Financial Accounting Standard (SFAS) No. 128, "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 include the incremental shares issuable upon the assumed exercise of stock
options.
Three Months Ended
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May 3, April 27,
1998 1997
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Basic 14,446,000 13,741,000
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Diluted 15,744,000 14,545,000
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3. SEGMENT REPORTING
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In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information".
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This Statement, which is effective for all reporting periods beginning in fiscal
1999, redefines the way publicly held companies report information about
segments. The Company is currently in the process of determining the appropriate
business unit structure for reporting in accordance with SFAS No. 131.
4. COMPREHENSIVE INCOME
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On February 2, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". For year-end financial statements, SFAS No. 130 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 standard encourages companies to display the components of
other comprehensive income below the total for net income. Comprehensive income
(in thousands) for the three months ended May 3, 1998 and April 27, 1997 are
presented below.
May 3, April 27,
1998 1997
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Net Income $4,537 $3,230
Change in foreign currency translation 74 62
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Comprehensive Income $4,611 $3,292
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5. TEMPORARY INVESTMENTS
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Temporary investments consist of commercial paper and government and corporate
obligations with original maturities in excess of three months and are carried
at cost, which approximates market.
6. INVENTORIES
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The commercial semiconductor industry and the markets in which the Company's
products are used are characterized by rapid changes and short product life
cycles. Consistent with the industry, the Company has experienced declines in
average selling prices over the life of its product lines. The Company has
generally reserved inventory which is considered obsolete or estimated to be in
excess of 18 months demand, and has provided reserves for declines in selling
price below cost. Inventories consisted of the following:
Raw Work in Finished
(thousands) Materials Process Materials Total
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MAY 3, 1998
Gross inventories $2,346 $11,877 $ 8,423 $22,646
Total reserves (329) (1,069) (2,618) (4,016)
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Net inventories $2,017 $10,808 $ 5,805 $18,630
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FEBRUARY 1, 1998
Gross inventories $2,639 $11,261 $ 6,894 $20,794
Total reserves (329) (1,069) (2,376) (3,774)
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Net inventories $2,310 $10,192 $ 4,518 $17,020
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7
7. LONG-TERM DEBT
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Long-term debt at May 3, 1998 is made up solely of a $244,000 note payable,
related to Acapella Limited.
8. LINE OF CREDIT
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The Company maintains a credit arrangement with a financial institution for a
line of credit for up to $7,500,000 at an interest rate of 30 day commercial
paper plus 2.5 percent that extends through September 1998. The line of credit
is made up of two parts, the first part being a $4,000,000 line for working
capital needs and the second part being a $3,500,000 line for equipment
acquisitions. The arrangement is collateralized by the Company's domestic
assets and contains provisions regarding current ratios, debt to worth, and net
worth. As of May 3, 1998, the Company had no borrowings outstanding under this
credit facility.
9. SIGNIFICANT CUSTOMERS
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For the three months ended May 3, 1998 and April 27, 1997, no one customer
accounted for 10% or more of the Company's net sales.
10. LEGAL MATTERS
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The Company is involved in certain legal matters, which are routine to the
nature of its business. In one specific case, the Company is a defendant in a
complaint filed by a competitor regarding the recruitment of personnel.
Management is of the opinion that the ultimate resolution of all these matters
will not have a material adverse effect on its financial position or results of
operations.
Item 2. Management's Discussion and Analysis of Financial Conditions and
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Results of Operations
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(l) Material Changes in Financial Condition
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On May 3, 1998, Semtech Corporation (the Company) had working capital of
$47,889,000, compared with $41,312,000 at February 1, 1998 - an increase for the
quarter of $6,577,000. The ratio of current assets to current liabilities at May
3, 1998, was 4.6 to 1, compared to 4.3 to 1 at February 1, 1998. The increase
was primarily due to the Company's profitability during the first quarter of
fiscal year 1999.
In the first three months of fiscal year 1999, the Company generated $4,308,000
of cash and cash equivalents. The increase in cash and cash equivalents was due
to the Company's profitability during the period and was only partially offset
by cash outlays for inventory, capital equipment, increased accounts receivable
and year-end supplemental compensation relating to the prior fiscal year.
Operating cash flow for the first three months of the year was a positive
$4,015,000. During the first three months of fiscal
8
1999, the Company used cash of $1,008,000 to pay for capital equipment
purchases.
In order to develop, design and manufacture new products, the Company had to
make significant investments over the past several years. Such investments
aimed at developing additional new products, including the addition of design
and applications engineers and related equipment, will continue. Semtech fully
intends to continue to invest in those areas that have shown potential for
viable and profitable market opportunities. Certain of these investments,
particularly additional design engineers, will probably not generate significant
results in the short-term. The Company plans to finance these investments with
cash generated by operations and cash on-hand.
(2) Material Changes in Results of Operations
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The following information is provided to further explain certain financial
information shown in the Consolidated Condensed Statements of Income for the
three month periods ended May 3, 1998 and April 27, 1997.
THREE MONTH PERIOD ENDED MAY 3, 1998 COMPARED WITH THE THREE MONTH PERIOD ENDED
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APRIL 27, 1997:
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INDUSTRY TRENDS AND OUTLOOK -
Semtech experienced cautious market conditions in the first quarter of fiscal
year 1999 due to industry-wide concern over excess inventory levels and the
Asian region's economic condition. In the past, short-term adverse industry
trends have had the most impact on foundry sales, test systems, personal
computers and other consumer electronics.
Lower operating voltages in newer electronic systems, demand for increased
bandwidth in communicating, and the overall need for certain analog-based
functions have benefited the Company. In addition to technical factors, unit
demand increases for electronics in general have benefited the sales of all
products. Future growth by the Company will remain dependent on market
conditions, economic factors, the ability to introduce new products and
increased operating efficiencies.
The semiconductor equipment market, which includes automated test equipment
(ATE), is very cyclical. The Company did witness slowing demand during the
quarter from its ATE customers. The Company believes that this decrease is due
in part to slowing demand by end customers of automated test systems. The
Company has not determined the extent to which a slowdown in the ATE market, and
the related duration of such a slowdown, might effect sales of the Company's ATE
product line. The Company's ATE business unit has introduced many new products
specially designed for certain test applications, and in doing so has gained
market share from other competitors.
The Company has historically experienced some seasonality in order rates from
manufacturers of personal computers. Demand from this market segment in prior
years has declined following the holiday season through first half of the year.
This year's seasonality has been impacted by the Asian economic situation. Due
to increased sales to other computer segments, such as servers, laptops and
peripheral devices, the effect of computer seasonality on quarterly results has
been reduced, but not eliminated. Ongoing efforts are
9
being made to further diversify revenue sources and likewise reduce the effects
of seasonality.
Increased competition and a continued move to shorter lead-times within the
components industry will continue to affect the Company's performance on a
quarterly bases. Semtech generally has only 60-90 days visibility of future
period shipments. Turns-fill orders (orders received and shipped in the same
quarter) increased to 35% of net sales in the first quarter from approximately
33% of net sales in the fourth quarter. The Company has witnessed a continued
move towards a "build-to-order" model at many of its OEM customers. As a
result, the Company increasingly relies on turns business in each quarter in
order to achieve revenue objectives.
With the increased success and growth in demand for semiconductors, the Company
has seen new competitors enter the market. In addition, existing competitors
have become more aggressive in protecting market share and customer
relationships. Typical of the semiconductor industry, the Company has
experienced declines in average selling prices over the life of its product
lines. Efforts to offset this decline include increasing units shipped, finding
new applications for existing products and introduction of new products.
Management will continue to take steps to offset the impact of declines in
average selling prices, however, there is no assurance that these efforts will
be successful.
REVENUES -
Revenues for the first quarter ended May 3, 1998 were $29,534,000 compared to
$23,175,000 in the first quarter ended April 27, 1997, an increase of 27%.
Included in first quarter fiscal 1999 revenues is $589,000 of sales generated by
Acapella. The increase in revenues for first quarter compared to the prior year
period was due to continued improvement in the Company's ability to market and
produce its products used in targeted end-market applications.
End-market applications for the Company's products sold during the first quarter
of fiscal 1999 are estimated to be 42% computer, 15% communications, 26%
industrial (which includes ATE), 11% military/aerospace and 6% foundry sales.
For the prior year's first quarter, end-market applications were estimated to be
40% computer, 11% communications, 28% industrial, 11% military/aerospace and 10%
foundry.
Geographically, sales for the first three months of fiscal 1999 were
approximately 55% domestic, 31% to Asian-Pacific and 14% to European customers.
For the first three months of last fiscal year, domestic sales were 54% of net
sales, Asia was 33% and Europe was 13%. While the Company estimates that two-
thirds of all shipments made into Asia are eventually exported out of the region
in finished products, the Company's sales to Asian customers have been effected
by the region's currency crisis and economic downturn, especially in Taiwan,
Japan and Korea.
New orders during the first quarter of fiscal year 1999 were more than net
shipments, resulting in a book-to-bill ratio of greater than 1 to 1. The book-
to-bill ratio for the comparable three month period last year also exceeded 1 to
1. New orders received in the first quarter of this year reflected the general
conditions of the major end-markets and the major manufacturers supplying these
markets. No single product line showed significant growth in terms of new
orders during the first three months of fiscal 1999.
10
COSTS AND EXPENSES -
COST OF GOODS SOLD -
Gross profit margin as a percentage of net sales was 49% in the first quarter of
fiscal 1999, compared to 46% in the same period last year. Gross profit of
$302,000 generated by Acapella is included in first quarter of fiscal 1999
results. The improvement in gross margin is attributed to increased operating
efficiencies associated with higher shipment levels and higher revenue
contribution from products introduced in the last year. Efforts continue to be
made to reduce per unit cost on exiting products as well as to increase emphasis
on new product sales that typically command higher gross margins.
Future gross margin performance will be affected by the above noted changes as
well as shipment rates, product mix, productivity levels and price changes.
Average selling prices, capacity utilization and shipment rates for new products
will continue to have the most significant impact on margins.
OPERATING EXPENSES -
Operating costs and expenses were at 27% of net sales in the first quarter of
fiscal 1999, which was higher than the 25% in the first quarter of fiscal 1998.
Included in the operating expenses for the first quarter ended May 3, 1998, are
one-time costs of $255,000 associated with the acquisition of Acapella Limited.
Although operating expenses (prior to one-time acquisition costs) grew only
slightly as a percentage of net sales, absolute dollar spending did increase.
During the first quarter of fiscal year 1998, the Company announced that it had
opened a remote design center in Raleigh, North Carolina. The Company now has
dedicated design centers in three locations, including Santa Clara, California,
and Glasgow, Scotland. The Company continued its investment in research and
development. The purpose for such investment is to further new product
development needed to grow revenues and increase gross margins. The Company
anticipates that spending on research and development will continue to increase
over time.
OTHER -
Interest and other income of $171,000 was realized in the quarter ended May 3,
1998, compared to interest and other income of $41,000 in the prior year's first
quarter. Other income and expenses for all periods is primarily interest income.
PROVISION FOR TAXES -
The effective tax rate for the first quarters of fiscal 1999 and 1998 was 33%.
FORWARD LOOKING STATEMENTS -
Some statements included in this filing which are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Legislation Act of 1995. Forward looking statements regarding the Company's
future performance and financial results are subject to certain risks and
uncertainties.
The Company cautions investors that there can be no assurance that actual
results or business conditions will not differ materially from those suggested
in such forward-looking statements as a result of various factors, including,
11
but not limited to, the company's ability to introduce new products, support
existing and new customers, achieve manufacturing efficiencies, and penetrate
new markets and additional end-product applications. as a result, the company's
future development efforts involve a high degree of risk. for further
information, refer to the more specific risks and uncertainties discussed
throughout this report and the company's most recent form 10-k filing with the
securities and exchange commission.
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PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
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The Company is involved in certain legal matters, which are routine to the
nature of its business. in one specific case, the Company is a defendant in a
complaint filed by a competitor regarding the recruitment of personnel.
Management is of the opinion that the ultimate resolution of all these matters
will not have a material adverse effect on its financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES
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Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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(a) The 1998 Annual Meeting of Shareholders of the Company was duly held on June
11, 1998.
(b) Inapplicable, as (i) proxies for the meeting were solicited pursuant to
Regulation 14 under the Act; (ii) there was no solicitation in opposition to
the management's nominees as listed in the Proxy Statement; and (iii) all of
such nominees were duly elected.
(c) One other matter voted upon at the meeting was for the adoption of a new
Long-Term Stock Incentive Plan in which there were 5,561,077 affirmative
votes, 4,143,637 negative votes, and 37,917 abstaining votes.
(d) Not applicable.
ITEM 5. OTHER INFORMATION
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Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
11.1 -Computation of per share earnings - See Note 2 of Notes to
Consolidated Condensed Financial Statements.
27 -Financial Data Schedule, Article 5
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on March 3, 1998 for the
registration of stock issued in connection with a stock split in the form of
a 100% stock dividend.
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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
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Registrant
Date: June 16, 1998 /S/ John D. Poe
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John D. Poe
Chairman of the Board, President
and Chief Executive Officer
Date: June 16, 1998 /S/ David G. Franz, Jr.
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David G. Franz, Jr.
Vice President Finance, Chief
Financial Officer, and
Secretary
14