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. ----------- 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) <TABLE> <CAPTION> Three Months Ended ------------------ April 28, April 29, 2002 2001 -------------------------------------------------------------------------- <S> <C> <C> 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 </TABLE> 3
SEMTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except share data) <TABLE> <CAPTION> April 28, January 27, 2002 2002 (Unaudited) - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> 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 ======== ======== </TABLE> 4
SEMTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) <TABLE> <CAPTION> Three Months Ended ------------------ April 28, April 29, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> 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 ======== ========= </TABLE> 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. <TABLE> <CAPTION> Three Months Ended Net Sales April 28, April 29, --------- 2002 2001 -------------------------- <S> <C> <C> 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 ======= ======= </TABLE> <TABLE> <CAPTION> Three Months Ended Operating Income April 28, April 29, ---------------- 2002 2001 --------------------------- <S> <C> <C> 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 ======= ======= </TABLE> 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 ------- ------- 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): <TABLE> <CAPTION> Three Months Ended -------------------------------- April 28, 2002 April 29, 2001 -------------------------------- <S> <C> <C> Unrealized losses on investments $ $ (2,071) - Translation adjustment (3) (83) - Comprehensive Income $ (2,074) $ (83) ======== ========== </TABLE> 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 15
. 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. 16
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 17
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