-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VLjA6Yx4EXxNVIe8neBWs/9Y+YIzAuRay4cjXI57m6rDgfcSxDllkzCCmOiQqmLJ 4vP2akaZCyeIBQDWQ+vvMg== 0000898430-99-003562.txt : 19990915 0000898430-99-003562.hdr.sgml : 19990915 ACCESSION NUMBER: 0000898430-99-003562 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990801 FILED AS OF DATE: 19990914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEMTECH CORP CENTRAL INDEX KEY: 0000088941 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 952119684 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06395 FILM NUMBER: 99711422 BUSINESS ADDRESS: STREET 1: 652 MITCHELL RD CITY: NEWBURY PARK STATE: CA ZIP: 91320 BUSINESS PHONE: 8054982111 MAIL ADDRESS: STREET 1: 652 MITCHELL ROAD STREET 2: 652 MITCHELL ROAD CITY: NEWBURY PARK STATE: CA ZIP: 91320 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ____________ For Quarter Ended August 1, 1999 Commission File Number 1-6395 -------------- ------ SEMTECH CORPORATION --------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-2119684 -------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 652 Mitchell Road, Newbury Park, California 91320 ---------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (805) 498-2111 ---------------------- N/A - ------------------------------------------------------------------------------ (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 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 August 1, 1999: 15,405,204. ---------- 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 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 August 1, 1999, and the results of their operations and their cash flows for the three months and six months then ended. 2 SEMTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (in thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended --------------------- --------------------- August 1, August 2, August 1, August 2, 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------- Net sales $38,253 $25,539 $71,297 $55,073 Cost of sales 18,609 14,882 35,054 29,942 ------- ------- ------- ------- Gross profit 19,644 10,657 36,243 25,131 ------- ------- ------- ------- Operating costs and expenses - Selling, general and administrative 6,067 4,948 11,709 9,581 Product development and engineering 4,527 3,320 8,644 6,265 One-time charges - 1,330 - 1,585 ------- ------- ------- ------- Total operating costs and expenses 10,594 9,598 20,353 17,431 ------- ------- ------- ------- Operating income 9,050 1,059 15,890 7,700 Interest and other income, net 231 199 485 370 ------- ------- ------- ------- Income before taxes 9,281 1,258 16,375 8,070 Provision for taxes 3,063 420 5,404 2,695 ------- ------- ------- ------- Net income $ 6,218 $ 838 $10,971 $ 5,375 ======= ======= ======= ======= Earnings per share: Basic $0.41 $0.06 $0.73 $0.37 Diluted $0.36 $0.05 $0.65 $0.34 Weighted average number of shares: Basic 15,233 14,557 15,132 14,500 Diluted 17,306 15,499 16,986 15,592
3 SEMTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except share data)
August 1, January 31, 1999 1999 (Unaudited) (Audited) - ------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 40,955 $41,035 Temporary investments 2,340 1,648 Receivables, less allowances 22,080 15,414 Income taxes refundable 203 258 Inventories 21,891 16,803 Other current assets 2,404 1,275 Deferred income taxes 2,442 2,139 -------- ------- Total current assets 92,315 78,572 -------- ------- Property, plant and equipment, net 15,179 13,417 Other assets 78 89 Deferred income taxes 441 478 -------- ------- TOTAL ASSETS $108,013 $92,556 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,496 $ 5,296 Accrued liabilities 4,868 5,102 Income taxes payable 478 - Other current liabilities 1,986 2,330 -------- ------- Total current liabilities 17,828 12,728 -------- ------- Other long-term liabilities 63 57 -------- ------- Commitments and contingencies Shareholders' equity: Common stock, $0.01 par value, 40,000,000 authorized Issued and outstanding 153 152 Additional paid-in capital 37,257 30,461 Retained earnings 56,433 49,411 Treasury shares, at cost (3,380) - Accumulated other comprehensive income (341) (253) -------- ------- Total shareholders' equity 90,122 79,771 -------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $108,013 $92,556 ======== =======
4 SEMTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
For the Six Months Ended ----------------------------------------------- August 1, August 2, 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities - Net income $10,971 $ 5,375 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,996 1,827 Deferred income taxes (266) (356) Loss on disposition of assets - 569 Non-cash portion of restructuring charge - 2,366 Changes in assets and liabilities: Receivables (6,666) (1,139) Income taxes refundable 55 - Inventories (5,088) (3,767) Other assets (1,118) (208) Accounts payable and accrued liabilities 4,966 (774) Income taxes payable 5,321 1,141 Other current liabilities (344) (208) ------- ------- Net cash provided by operating activities 9,827 4,826 ------- ------- Cash flows from investing activities - Temporary cash investments (692) 457 Additions to property, plant and equipment (3,758) (3,157) ------- ------- Net cash used by investing activities (4,450) (2,700) ------- ------- Cash flows from financing activities - Repayment of debt - (244) Exercise of stock options 4,623 1,082 Stock repurchase (9,998) - Other long-term liabilities 6 50 Other - 817 ------- ------- Net cash provided (used) by financing activities (5,369) 1,705 ------- ------- Effect of exchange rate changes on cash (88) 13 Net increase (decrease) in cash and cash equivalents (80) 3,844 Cash and cash equivalents at beginning of period 41,035 18,808 ------- ------- Cash and cash equivalents at end of period $40,955 $22,652 ======= =======
5 SEMTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Earnings Per Share - --------------------- Earnings per share 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 Six Months Ended August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998 - ----------------------------------------------------------------------------------------------------------- Basic 15,233,000 14,557,000 15,132,000 14,500,000 ========== ========== ========== ========== Diluted 17,306,000 15,499,000 16,986,000 15,592,000 ========== ========== ========== ==========
Options to purchase 14,000 and 1,918,500 shares were not included in the computation of three months diluted net income per share for fiscal 2000 and fiscal 1999, respectively, because such options were considered anti-dilutive. For the six months diluted net income per share for fiscal 2000 and fiscal 1999, 44,500 and 808,500 shares, respectively, were not included in the computation because such options were considered anti-dilutive. 2. Segment Reporting - -------------------- 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, automated test equipment (ATE), transient voltage suppressors (TVS) and advanced communication IC 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 accounting policies of the segments are the same as the Company's accounting policies for financial reporting purposes. The Company evaluates segment performance based on net sales and operating income of each segment. Management does not track segment data or evaluate segment performance on additional financial information. As such, there are no separately identifiable segment assets nor is there any separately identifiable statements of income data (below operating income). The Company does not track or assign assets to individual reportable segments. Likewise, depreciation expense and capital additions are also not tracked by reportable segments.
Three Months Ended Six Months Ended ------------------------------------- ------------------------------------- Net Sales (in thousands) August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998 - -------------------------------------------------------------------------------------------------------------------------------- Standard Semiconductor Products $33,017 $19,020 $60,647 $41,838 Rectifier and Assembly Products 3,071 3,779 6,337 7,437 Other Products 2,165 2,740 4,313 5,798 ------- ------- ------- ------- Total Net Sales $38,253 $25,539 $71,297 $55,073 ======= ======= ======= =======
6
Three Months Ended Six Months Ended ------------------------------------- ------------------------------------- Operating Income (in thousands) August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998 - -------------------------------------------------------------------------------------------------------------------------------- Standard Semiconductor Products $8,416 $ 676 $14,802 $5,804 Rectifier and Assembly Products 270 235 414 761 Other Products 364 148 674 1,135 ------ ------ ------- ------ Total Net Sales $9,050 $1,059 $15,890 $7,700 ====== ====== ======= ======
For the three months and six months ended August 1, 1999 and August 2, 1998, no one customer accounted for 10% or more of the Company's net sales. A summary of net external sales by region follows. The Company does not track customer sales by region for each individual reporting segment.
Three Months Ended Six Months Ended ------------------------------------- ------------------------------------- Net Sales (in thousands) August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998 - -------------------------------------------------------------------------------------------------------------------------------- Domestic $12,623 $12,770 $25,345 $29,013 Asia-Pacific 20,083 9,704 36,208 18,860 European 5,547 3,065 9,744 7,200 ------- ------- ------- ------- Total Net Sales $38,253 $25,539 $71,297 $55,073 ======= ======= ======= =======
Long lived assets located outside the United States at August 1, 1999 amount to $3,441,444. 3. Temporary Investments - ------------------------ 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. 4. Inventories - -------------- 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 Total (thousands) Materials Process Goods - ------------------------------------------------------------------------------ August 1, 1999 Gross inventories $1,411 $14,762 $10,153 $26,327 Total reserves (426) (1,599) (2,411) (4,436) ------ ------- ------- ------- Net inventories $ 985 $13,163 $ 7,743 $21,891 ====== ======= ======= ======= January 31, 1999 Gross inventories $1,879 $ 9,906 $ 9,016 $20,801 Total reserves (426) (1,329) (2,243) (3,998) ------ ------- ------- ------- Net inventories $1,453 $ 8,577 $ 6,773 $16,803 ====== ======= ======= =======
7 5. Comprehensive Income - ----------------------- 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.
Three Months Ended Six Months Ended ---------------------------------------- --------------------------------------- August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998 - ---------------------------------------------------------------------------------------------------------------------- Net Income $ 6,218 $ 838 $ 10,971 $ 5,375 Change in foreign currency translation (18) (61) (88) 13 ------- ----- -------- ------- Comprehensive Income $ 6,200 $ 777 $ 10,883 $ 5,388 ======= ===== ======== =======
6. Stock Repurchase - ------------------- Just prior to the end of the second quarter of fiscal year 2000, the Company announced that it had completed the $10 million stock repurchase that was originally announced on February 2, 1999. The Company also announced that its Board of Directors has approved the repurchase of an additional $10 million of its common stock. Of the 295,500 shares repurchased as of August 1, 1999, the Company had reissued 226,460 shares to cover the exercise of employee stock options. 7. Lines of Credit - ------------------ In August of 1998, the Company agreed to a new credit arrangement with a financial institution for borrowings up to $20,000,000 at an interest rate of 30 day commercial paper plus 2.2 percent that is available through August 2000. The line of credit consists of two parts. The first facility is a $10,000,000 line of credit for working capital needs and the second facility is a reducing revolver loan for equipment acquisitions. The available amount under the reducing revolver loan declines in equal increments over 84 months. As of August 1, 1999, the Company had $8,928,570 available under the reducing revolver portion. The arrangement is collateralized by the Company's domestic assets and provides for financial and non-financial covenants. As of August 1, 1999, the Company had no borrowings outstanding under this credit facility. Through its foreign subsidiary, the Company also maintains an overdraft credit line in the amount of 300,000 pounds sterling. 8. Subsequent Events - -------------------- On August 24, 1999, the Company announced a two-for-one stock split in the form of a 100 percent stock dividend. Shareholders of record on August 30, 1999, will be issued a certificate representing one additional share of common stock for each share of common stock held on the record date. The additional shares will be mailed or delivered on or about September 14, 1999, by the Company's transfer agent. In response to the planned August 1999 two-for-one stock split and likely future needs, the Company is asking shareholders to approve an amendment to the Company's Certificate of Incorporation, increasing the number of shares of Common Stock which the Company is authorized to issue from 40,000,000 to 100,000,000. The Special Meeting of Shareholders associated with this request 8 will be held at the Company's offices located at 652 Mitchell Road, Newbury Park, California 91320 on September 27, 1999 at 12:00 p.m. local time. On September 9, 1999, the Company announced that it had completed the acquisition of Practical Sciences, Inc., a high-speed communications design firm located in California. The acquisition will be accounted for as a purchase. Under the terms of the agreement, Practical Sciences, Inc. shareholders will receive 5,000 shares of Semtech common stock. The Company's acquisition of Practical Sciences is not expected to have a material impact on Semtech's near- term operating results. Item 2. Management's Discussion and Analysis of Financial Conditions and ---------------------------------------------------------------- Results of Operations --------------------- (l) Material Changes in Financial Condition --------------------------------------- On August 1, 1999, Semtech Corporation (the Company) had working capital of $74,487,000, compared with $65,844,000 at January 31, 1999. The ratio of current assets to current liabilities at August 1, 1999, was 5.2 to 1, compared to 6.2 to 1 at January 31, 1999. The decline was primarily due to the Company's use of cash to repurchase stock. In the first six months of fiscal year 2000, the Company used $80,000 of cash and cash equivalents. The decline in cash and cash equivalents was due to cash outlays for inventory, capital equipment, increased accounts receivable, year- end supplemental compensation relating to the prior fiscal year and the repurchase of 295,500 shares of the Company's common stock. Operating cash flow for the first six months of the year was a positive $9,827,000. During the first six months of fiscal 2000, the Company used cash of $3,758,000 to pay for capital equipment purchases. Efforts by the Company over the past several years to increase Standard Semiconductor Product segment sales have been effective. New products have been introduced for use in a wide variety of computer, test and communications systems. In order to develop, design and manufacture new products, the Company had to make significant expenditures during the past four years. Such investments aimed at developing new products, including the hiring of many 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 expenditures, particularly the addition of design engineers, do not generate significant payback in the short-term. The Company plans to finance these expenditures with cash generated by operations and cash on-hand. (2) Material Changes in Results of Operations ----------------------------------------- The following information is provided to further explain certain financial information shown in the Consolidated Condensed Statements of Income for the three month and six month periods ended August 1, 1999 and August 2, 1998. THREE MONTH AND SIX MONTH PERIODS ENDED AUGUST 1, 1999 COMPARED WITH THE THREE - ------------------------------------------------------------------------------ MONTH SIX MONTH PERIODS ENDED AUGUST 2, 1998: - --------------------------------------------- INDUSTRY TRENDS AND OUTLOOK As a result of industry-wide trends to lower operating voltages, sub-micron IC process technology and higher bandwidths, there has been growth in the need for complex power management, protection, interface and communication solutions. The Company has been successful in meeting the needs of customers requiring high-performance analog and mixed-signal solutions. However, with the increased demand for these solutions has come added competition. 9 The Company has grown significantly over the past five years due to new product developments, good relationships with strategic customers, focus on fast growing market segments and overall favorable industry conditions. Future growth by the Company will remain dependent on market conditions, economic factors, the ability to introduce new products and increase operating efficiencies. The overall health of the electronic components industry and the end-markets for electronic systems have a large influence on the Company's success. Significant weakness in the industry, end-markets or economic conditions will adversely affect the Company's financial performance. Increased competition and a continued move to short lead times within the components industry will continue to affect the Company's performance on a quarterly basis. The Company has experienced declines in customer lead times as manufacturers move to "just-in-time" inventory systems. Likewise, Semtech generally has only 60-90 days visibility of future period shipments. With the increased success and growth in demand for analog and mixed-signal 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. RESULT OF OPERATIONS Net Sales Net sales for the second quarter ended August 1, 1999 were $38,253,000, which compared to $25,539,000 in the second quarter ended August 2, 1998, an increase of 50%. Net sales for the six months ended August 1, 1999 were $71,297,000 compared to $55,073,000 for the six months ended August 2, 1998, a 30% increase. The increase in net sales for the second quarter and first half of fiscal year 2000 as compared to the prior year was due to continued improvement in the Company's ability to market and produce its products used in targeted end-market applications. The Company has also benefited from favorable market conditions in the overall components industry. End-market applications for the Company's products sold during the second quarter of fiscal 2000 are estimated to be 40% computer, 30% communications, 23% industrial (which includes ATE), and 7% for all other applications, including military/aerospace and foundry sales. End-market applications for the six months ended August 1, 1999 where 40% computer, 29% communications, 23% industrial and 8% for all other applications. End-market applications for the prior year's second quarter were estimated to be 44% computer, 17% communications, 21% industrial and 18% for all other applications. For the comparable six month period of last year, sales were estimated to be 43% computer, 16% communications, 24% industrial, 17% for all other. The Company expects to derive more net sales from the communications market as specific product development and marketing efforts are made in this market. Geographically, sales for the second quarter of fiscal 2000 were approximately 33% domestic, 53% Asian and 14% European. For the first six months of fiscal year 2000, sales were approximately 35% domestic, 51% Asian and 14% to European customers. For the second quarter and first six months of last fiscal year, domestic sales were 50% and 53% of net sales, Asia was 38% and 34%, and Europe was 12% and 13%, respectively. The increase in sales to Asia reflects the increased use of foreign-based subsidiaries and subcontractors by original 10 equipment manufacturers (OEMs) for assembling their finished products. Due to this trend, the Company estimates that two-thirds of all shipments made into Asia are eventually exported out of the region in finished products. New orders New orders received during the second quarter and first half of fiscal year 2000 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 periods last year where both below 1 to 1. New orders received in the second quarter and first half of this year reflected the general strength in all the major end-markets and the demand from manufacturers supplying these markets. Demand for the Company's Standard Semiconductor Product segment represented a majority of the new order activity during the second quarter and the six month period ended August 1, 1999. Orders from ATE customers and the communications market showed the strongest relative strength within the second quarter of fiscal year 2000. For the second quarter of last fiscal year, the Company experienced a severe decline in new orders, due largely to weakness in the ATE and computer markets. While order rates are subject to seasonal factors, overall industry trends have a more profound effect on orders for each respective quarter. Due to the significance of computer and computer peripheral markets to the Company, order rates have been stronger during the third and fourth quarters of the past three fiscal years. While certain industry trends can potentially outweigh seasonal factors, order rates are subject to fluctuations. COSTS AND EXPENSES Cost of Sales Gross profit margin as a percentage of net sales was 51% in the second quarter and first half of fiscal 2000. This compared to 42% in the second quarter of last year and 46% of net sales for the first six months of last year. The improvement in gross margin is attributed to increased operating efficiencies associated with higher shipment levels, higher revenue contribution from products introduced in the last year, and a favorable shift in product mix towards higher margin product lines. Gross profit margin was unfavorably impacted in the second quarter of last year by poor market conditions that resulted in a sequential decline in net sales and the write-down of inventory. As net sales derived from the Standard Semiconductor Product segment increase in future periods, gross profit margin as a percentage of net sales is expected to increase. Standard Semiconductor Products as a whole sell at higher gross margins than the overall corporate average. Future trends that will effect the Company's gross margin include price changes over the life of the products, higher gross margins expected from new products and improved production efficiencies as a result of increased utilization. The Company has focused its efforts on increasing the number of new products introduced, particularly those which are proprietary or limited source in nature. The Company expects that prices for existing products will continue to decrease over their respective life cycles. The Company does believe it can further improve its consolidated gross margin to above 51% of net sales over the next twelve months. Such an expansion in gross margin assumes continued revenue growth, increased contribution from new products and additional manufacturing efficiencies. Operating Expenses Operating costs and expenses, as a percentage of net sales, were at 28% and 29% of net sales in the second quarter and first six months of fiscal 2000, respectively. Operating costs and expenses for the second quarter of fiscal year 1999 were 38% of net sales and 32% of net sales for the first half of 11 fiscal year 1999. Included in the operating expenses for the six months ended August 2, 1998, are one-time costs of $255,000 associated with the acquisition of Acapella Limited and $1,330,000 related to restructuring and the write-down of long-lived assets. Operating expenses, as a percentage of net sales, for the first six months of fiscal year 2000 are lower than prior year levels due to higher shipment rates and better efficiencies. Increased spending in the areas of research and development, strategic marketing, and to a lesser degree in general and administrative functions caused operating expenses as a percentage of net sales to be higher than historical averages in both fiscal years 2000 and 1999. The Company continues to invest heavily in areas deemed critical for developing and marketing new products. While the Company anticipates that spending on research and development and other operating functions will continue to increase over time, operating expenses as a percentage of net sales should remain in the range of 27-30% if revenue growth objectives are achieved. Interest and Other Income Interest and other income of $231,000 and $485,000, respectively, was realized in the three and six month periods ended August 1, 1999. For the three and six month periods ended August 2, 1998, interest and other income was $199,000 and $370,000, respectively. Other income and expenses for all periods is primarily interest income. Provision for Taxes The effective tax rate for the first three and six months of fiscal years 2000 and 1999 remained constant at 33%. Inflation Inflationary factors have not had a significant effect on the Company's performance over the past three fiscal years. A significant increase in inflation would affect the Company's future performance. Recently Issued Accounting Standards In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective in fiscal year 2001 and management does not expect adoption of this standard to have a material impact on the Company's financial reporting or results of operations. YEAR 2000 COMPLIANCE A significant percentage of the software that runs most of the computers in the United States relies on two-digit date codes to perform a number of computation and decision making functions. Commencing on January 1, 2000 these computer programs may fail from an inability to interpret date codes properly, misreading "00" for the year 1900 instead of the year 2000. Semtech has completed a comprehensive program intended to identify, evaluate and address issues associated with the ability of its information technology and non-information technology systems to properly recognize the Year 2000 in order to avoid interruption of the operation of these systems and a material adverse effect on Semtech's operations as a result of the century change. Each of the information technology software programs that the Company currently uses has either been certified by its respective vendor as Year 2000 compliant or will be replaced with software that is so certified prior to December 1999. Semtech's computer system interfaces with the computers and technology of different companies, including those of foreign companies. The Company considers the Year 2000 readiness of its foreign customers and vendors of particular importance given the general concern that the computer systems abroad may not be as prepared as those in domestic operations to handle the century change. As part of its Year 2000 compliance program, Semtech has 12 contacted its significant vendors and customers to ascertain whether the systems used by such third parties are Year 2000 compliant. The Company plans to have all Year 2000 compliance testing and any necessary conversions completed by December 1999. Semtech estimates the costs to reprogram, replace and test its information and non-information technology systems for Year 2000 compliance will be between $100,000 and $150,000 over the life of the project. However, such expenditures could increase materially following testing of non-information technology systems and the evaluation of the Year 2000 compliance status of integral third party vendors and customers. Costs incurred in connection with Year 2000 compliance efforts will be expensed as incurred. Semtech currently anticipates that its information technology and non- information technology systems will be Year 2000 compliant by December 1999, though no assurances can be given that compliance testing will not detect unanticipated problems. The Company has evaluated the Year 2000 compliance status of its top 25 third party suppliers. Based on these evaluations, the Company can only approximate the likelihood of third party system failures. A system failure by any of Semtech's significant customers or vendors could have a material adverse effect on the Company's operations. The Company believes that the most likely worst case scenario resulting from the century change could be the inability to produce and ship products at current rates for an indeterminable period of time, which could have a material adverse effect on the results of operations and liquidity. Semtech has developed contingency plans to handle a Year 2000 system failure of its information and non-information technology systems and to handle necessary interactions with the computers and technology of any integral non-complying third party. 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, but not limited to, the Company's ability to introduce new products, support existing and new customers, achieve manufacturing efficiencies, penetrate new markets and additional end-product applications, and the ability to use equity incentives to recruit and retain technical talent. In addition, external factors of risk include the overall health of the electronics industry, certain end-market applications (including personal computers and test systems), exposure to regional economic and political conditions and exposure to overall global economic conditions. As a result of these factors and other items of risk outlined in this Form 10-Q, the Company's future development efforts involve a high degree of uncertainty. GIVEN THESE UNCERTAINTIES, THE SHAREHOLDERS OF THE COMPANY ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. ITEM 7A. Quantitative And Qualitative Disclosures About Market Risks Foreign Currency Risk. As a global enterprise, the Company faces exposure to adverse movements in foreign currency exchange rates. The Company's foreign currency exposures may change over time as the level of activity in foreign 13 markets grows and could have an adverse impact upon the Company's financial results. Certain of the Company's 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 the Company's 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, the Company does not employ hedging techniques designed to mitigate foreign currency exposures. Likewise, the Company could experience unanticipated currency gains or losses. Interest Rate Risk. The Company has a line of credit with a financial institution at an interest rate of 30 day commercial paper plus 2.2 percent. At any time, a sharp rise in interest rates could have a material adverse impact upon the Company's cost of working capital and the interest expense. The Company does not currently hedge this potential interest rate exposure. As of August 1, 1999 the Company had no long-term debt outstanding. 14 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ----------------- The Company is involved in certain legal matters, which are routine to the nature of its business. Management is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations. Item 2. Changes in Securities --------------------- Not applicable. Item 3. Defaults upon Senior Securities ------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- (a) The 1999 Annual Meeting of Shareholders of the Company was duly held on June 10, 1999. (b) Inapplicable, as (i) proxies for the meeting were solicited pursuant to Regulation 14 under the Act; (ii) there was no solicitation in opposition to the management's nominees as listed in the Proxy Statement; and (iii) all of such nominees were duly elected. (c) Not applicable. (d) Not applicable. Item 5. Other Information ----------------- Not applicable. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 11.1 -Computation of per share earnings - See Note 1 of Notes to Unaudited Consolidated Condensed Financial Statements. 27 -Financial Data Schedule, Article 5 (b) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended August 1, 1999. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SEMTECH CORPORATION ------------------- Registrant Date: September 14, 1999 /s/ John D. Poe -------------------------------- John D. Poe Chairman of the Board and Chief Executive Officer Date: September 14, 1999 /s/ David G. Franz, Jr. -------------------------------- David G. Franz, Jr. Vice President Finance, Chief Financial Officer, and Secretary 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED AUGUST 1, 1999, WHICH ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE FORM 10-Q FILING AND FORM 10-K FOR THE YEAR ENDED JANUARY 31, 1999. 1,000 3-MOS JAN-30-2000 MAY-03-1999 AUG-01-1999 40,955 2,340 22,080 0 21,891 92,315 15,179 0 108,013 17,828 0 0 0 154 89,968 108,013 38,253 38,253 18,609 9,050 (231) 0 0 9,281 3,063 6,218 0 0 0 6,218 0.41 0.36
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