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 3, 1997 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 3, 1997: 6,265,578. ----------
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 3, 1997, and the results of their operations and their cash flows for the three and six months then ended. 2
SEMTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT FOR PER SHARE FIGURES) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ----------------- AUGUST 3, JULY 28, AUGUST 3, JULY 28, 1997 1996 1997 1996 ---------- ---------- ---------- -------- <S> <C> <C> <C> <C> NET SALES $21,634 $13,424 $42,009 $28,901 Cost of sales 11,750 8,117 23,020 17,112 ------- ------- ------- ------- Gross profit 9,884 5,307 18,989 11,789 Operating expenses 5,213 3,451 10,101 7,144 ------- ------- ------- ------- Operating income 4,671 1,856 8,888 4,645 Interest and other(income)expense (76) 1 (110) (14) ------- ------- ------- ------- Income before taxes 4,747 1,855 8,998 4,659 Provision for taxes 1,567 612 2,970 1,533 ------- ------- ------- ------- NET INCOME $ 3,180 $ 1,243 $ 6,028 $ 3,126 ======= ======= ======= ======= NET INCOME PER SHARE: Primary $ 0.45 $ 0.20 $ 0.87 $ 0.50 ======= ======= ======= ======= Fully diluted $ 0.45 $ 0.20 $ 0.85 $ 0.50 ======= ======= ======= ======= </TABLE> 3
SEMTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR PER SHARE FIGURE) <TABLE> <CAPTION> (UNAUDITED) AUGUST 3, JANUARY 26, 1997 1997 ----------- ----------- <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $11,984 $ 8,346 Temporary investments 725 757 Receivables, net 10,093 8,465 Income taxes refundable - 68 Inventories 15,497 13,598 Other current assets 751 853 Deferred income taxes 592 588 ------- ------- TOTAL CURRENT ASSETS 39,642 32,675 ------- ------- PROPERTY, PLANT AND EQUIPMENT, NET 10,362 8,470 OTHER ASSETS 230 198 DEFERRED INCOME TAXES 40 302 ------- ------- TOTAL ASSETS $50,274 $41,645 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 299 $ 193 Accounts payable 4,316 4,660 Accrued liabilities 2,887 2,305 Income taxes payable 840 821 Other current liabilities 578 660 ------- ------- TOTAL CURRENT LIABILITIES 8,920 8,639 ------- ------- LONG-TERM DEBT, LESS CURRENT MATURITIES 671 1,237 OTHER LONG-TERM LIABILITIES 351 287 SHAREHOLDERS' EQUITY: Common Stock, $0.01 par value, 40,000 authorized 77 76 Additional paid-in capital 13,782 11,012 Retained earnings 26,701 20,673 Cumulative translation adjustment (228) (279) ------- ------- TOTAL SHAREHOLDERS' EQUITY 40,332 31,482 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $50,274 $41,645 ======= ======= </TABLE> 4
SEMTECH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED ---------------- AUGUST 3, JULY 28, 1997 1996 --------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES - Net income $ 6,028 $ 3,126 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,125 876 Deferred income taxes 258 (141) Tax benefit from stock option transactions 1,438 137 Changes in assets and liabilities: Receivables (1,628) 224 Income taxes refundable 68 (16) Inventories (1,899) (1,826) Other assets 70 48 Accounts payable and accrued liabilities 238 (1,675) Income taxes payable 19 33 Other current liabilities (82) (149) ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,635 637 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES - Temporary cash investments 32 (1) Additions to property, plant and equipment (3,017) (1,477) ------- ------- NET CASH USED BY INVESTING ACTIVITIES (2,985) (1,478) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES - Additions to debt - 809 Repayment of debt (460) (218) Stock options exercised 1,333 120 Other long-term liabilities 64 (180) Other - (145) ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 937 386 ------- ------- Effect of exchange rate changes on cash 51 20 Net increase (decrease) in cash and cash equivalents 3,638 (435) Cash and cash equivalents at beginning of period 8,346 6,034 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $11,984 $ 5,599 ======= ======= </TABLE> 5
SEMTECH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. INCOME TAXES - The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109. Under SFAS No. 109, deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax bases of assets and liabilities using the statutory marginal income tax rate in effect for the years in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. The income tax provision for the six months ended August 3, 1997 consisted of income tax expense of $2,762,000 on the income of the Company's U.S. operations and income tax expense of $208,000 on the income from the Company's foreign operation. In the prior year six month period ended July 28, 1996, the Company incurred income tax expense of $1,484,000 on the income of the Company's U.S. operations and income tax expense of $49,000 on income from the Company's foreign operation. 2. INCOME PER SHARE - Primary and fully diluted net income per share of common stock has been computed based on the weighted average number of common and common equivalent shares outstanding, as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED --------------------- ---------------------- AUGUST 3, JULY 28, AUGUST 3, JULY 28, 1997 1996 1997 1996 --------- --------- ---------- --------- <S> <C> <C> <C> <C> PRIMARY......... 7,026,000 6,266,000 6,956,000 6,262,000 ========= ========= ========= ========= FULLY DILUTED... 7,125,000 6,266,000 7,099,000 6,262,000 ========= ========= ========= ========= </TABLE> In February 1997, the Financial Accounting Standards Board introduced SFAS No. 128 "Earnings per Share" and SFAS No. 129 "Disclosure of Information About Capital Structure". SFAS No. 128 revises and simplifies the computation of earnings per share and requires certain additional disclosures. SFAS No. 129 requires additional disclosure regarding the Company's capital structure. Both standards will be adopted in the fourth quarter of fiscal year 1998. Management does not expect the adoption of SFAS No. 129 to have material effect on the Company's financial position or results of operations. The Company has not yet evaluated the impact of adopting SFAS No. 128 on earnings per share. 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. 6
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 fully reserved inventory which is obsolete or in excess of one year's demand, and has provided reserves for declines in selling price below cost. Inventories consisted of the following: <TABLE> <CAPTION> Raw Work in Finished (thousands) Materials process goods Total - -------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> AUGUST 3, 1997 Gross inventory $2,207 $10,499 $ 6,446 $19,152 Total reserves (724) $ (805) (2,126) (3,655) ------ ------- ------- ------- Net inventory $1,483 $ 9,694 $ 4,320 $15,497 ====== ======= ======= ======= JANUARY 26, 1997 Gross inventory $2,895 $ 9,173 $ 3,842 $15,910 Total reserves (702) $ (460) (1,150) (2,312) ------ ------- ------- ------- Net inventory $2,193 $ 8,713 $ 2,692 $13,598 ====== ======= ======= ======= </TABLE> 5. LONG-TERM DEBT - Long-term debt at August 3, 1997 is made up solely of a single note payable. The note payable consists of a variable rate loan totaling $970,000 used for the acquisition of equipment. 6. LINE OF CREDIT - In August 1992, and amended in September 1996, the Company entered into a credit arrangement with a financial institution for a line of credit for up to $7,500,000 at an interest rate of 30 day commercial paper plus 2.5 percent. The line of credit is made up of two parts, the first part being a $4,000,000 line for working capital needs and the second part being a $3,500,000 line for equipment acquisition. Both portions of the line of credit extend through September 1998. The arrangement is collateralized by the Company's domestic assets and contains provisions regarding current ratios, debt to worth, and net worth. As of August 3, 1997, the Company had no borrowings outstanding under this credit facility. 7. SIGNIFICANT CUSTOMERS - For the six months ended August 3, 1997, a group of affiliated companies and their subcontractors represented approximately 10% of the Company's net sales. For the comparable six month period last year, one customer accounted for 11% of the Company's net sales. 7
Item 2. Management's Discussion and Analysis of Financial Conditions and ---------------------------------------------------------------- Results of Operations --------------------- (l) Material Changes in Financial Condition --------------------------------------- At August 3, 1997, Semtech Corporation (the "Company") had working capital of $30,722,000, compared with $24,036,000 at January 26, 1997 - an increase of $6,686,000 or 28%. The increase was primarily due to the Company's profitability during the six month period and the addition of paid in capital generated from the exercise of employee stock options. The Company built $3,638,000 of cash and cash equivalents during the first two quarters of the fiscal year. The increase in cash and cash equivalents was mostly due to the Company's profitability during the period and was only partially offset by cash outlays for inventory, capital equipment, and year-end supplemental compensation relating to the prior fiscal year. Operating cash flow for the first six months of the year was a positive $5,635,000. Major factors effecting operating cash flows include profitability, increased inventory levels, increased accounts receivable and the tax benefits of employee stock options exercised. Because the Company has historically had relatively low depreciation expense, operating cash flow is largely driven by the ability to generate net income. During the first half of fiscal year 1998, the Company used cash of $3,017,000 to pay for capital equipment purchases and $460,000 to repay outstanding debt. The ratio of current assets to current liabilities at August 3, 1997, was 4.4 to 1, compared to 3.8 to 1 at January 26, 1997. The following leverage ratios indicate the extent to which the Company has been financed with debt: <TABLE> <CAPTION> AUGUST 3, JANUARY 26, 1997 1997 ---------- ------------ <S> <C> <C> Long-term debt as a % of total capitalization* 1.6% 3.8% Total debt to total capitalization* 2.4% 4.4% </TABLE> *Total capitalization is defined as the sum of long-term debt and shareholders' equity. Efforts by the Company over the past several years to increase commercial product sales have been effective. In order to develop, design and manufacture new products, the Company has had to make significant investments over the past several years. Such investments aimed at developing additional new products, including the addition 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 investments, particularly the addition of design engineers, will probably not generate significant payback in the short-term. The Company plans to finance these investments with cash generated by operations and cash on-hand. (2) Material Changes in Results of Operations ----------------------------------------- The following information is provided to further explain certain financial information shown in the Consolidated Condensed Statements of Income for the three and six month periods ended August 3, 1997 and July 28, 1996. 8
THREE AND SIX MONTH PERIODS ENDED AUGUST 3, 1997 COMPARED WITH THE THREE AND SIX - -------------------------------------------------------------------------------- MONTH PERIODS ENDED JULY 28, 1996: - ---------------------------------- INDUSTRY TRENDS AND OUTLOOK - Over the last three fiscal years, Semtech has experienced increased acceptance of its commercial product lines and significantly broadened its customer base. Efforts have been made to increase market share for existing products and to develop new products for serving primarily commercial markets. While the Company has been successful in growing, future growth and success is dependent on new products, market conditions and increased production efficiencies. Customers continue to order with short lead-times. As a result, the Company generally has only 90-120 days visibility of future period shipments. With a portion of the Company's sales coming from retail computer and computer related applications, the Company's results reflect some seasonality, with demand levels for this segment being higher in the third and fourth quarters of the year in comparison to the first and second quarters. While some seasonality was experienced during fiscal years 1996 and 1997, overall industry trends and Company specific conditions have greater effect on quarterly sales levels. New products introduced over the last twelve months are aimed at further diversifying the Company's product offering and penetrating new applications. Notebook computers, cellular handsets, communications and industrial applications are specific examples of new design efforts. While efforts are being made to increase the rate of new product introductions, enhancements are also being made to existing devices to reduce cost and maintain market share. Investment in design and applications are intended to further transition the Company's revenue sources away from foundry services and more towards standard, custom and proprietary products. With the increased success and growth in demand for semiconductors, the Company has seen new competitors enter the market. In addition, existing competitors have become more aggressive in protecting market share and customer relationships. Typical of the semiconductor industry, the Company has experienced declines in average selling prices over the life of its product lines. Efforts to offset this decline include increasing units shipped, finding new applications for existing products and introduction of new products. Management will continue to take steps to offset the impact of declines in average selling prices, however, there is no assurance that these efforts will be successful. REVENUES - Revenues for the second quarter ended August 3, 1997 were $21,634,000 compared to $13,424,000 in the second quarter ended July 28, 1996, an increase of 61%. Revenues for the six months ended August 3, 1997 were $42,009,000, which represented an increase of 45% over the $28,901,000 recorded in the six months ended July 28, 1996. The increase in revenues for the second quarter and first half of fiscal year 1998 was due to continued improvement in the Company's ability to market and produce its products used in computer, communications and other strategic end-market applications. While shipment levels for the first two quarters of fiscal year 1998 were at record levels, 9
statistical comparisons with prior year periods further reflects an industry wide slowdown that negatively affected the first two quarters of fiscal year 1997. The Company estimates that shipments made during the second quarter of fiscal 1998 were for use in the following end-market applications: 48% computer, 15% communications, 12% industrial, 14% military and aerospace and 11% for foundry services. While sales for computer related applications continues to represent the largest market segment, the Company has successfully diversified computer related applications and end customers. Sales to communications customers has increased due to demand for the Company's line of transient voltage suppressors (TVS) used in datacommunications and telecommunications applications. Efforts are underway to increase sales to communications customers beyond just TVS devices. Semtech has aggressively pursued opportunities in several markets designed to grow revenues and establish market share for power management and protection products. Some of the new products designed for use in the power management area are industry standard parts. Industry standard parts are comparable in function to other devices and have multiple manufactures of the part. Proprietary or limited sources products tend to have distinguishable features and one or limited manufacturing sources. Semtech estimates that approximately 25% of its net sales are derived from proprietary or limited source products. The TVS product line constitutes the largest percentage of the Company's proprietary parts. Ongoing design efforts are designed to increase the number of proprietary parts due to their resilient demand and generally higher margin contribution. Shipments to customers located in the Asia-Pacific region were 30% of the net sales for fiscal 1998's second quarter, which equaled the 30% of net sales the region represented in the comparable quarter of last year. Sales to European customers was 14% of total sales for the second quarter of both fiscal year 1998 and fiscal year 1997. New orders received during the second quarter were more than net shipments, resulting in a book-to-bill ratio of greater than 1 to 1. The book-to-bill ratio for the comparable three month period last year was less than 1 to 1 and reflected the slowdown that widely affected the semiconductor industry. Orders for the three and six months ended August 3, 1997 were benefited by strong demand for the Company's TVS product line and solid business conditions for power products and the Company's older base business. Customer demand and related trend of new orders improved throughout the second quarter. The final month of the second quarter represented the strongest of the three months in the quarter. For both the first and second quarters of fiscal 1998, orders for TVS products represent the strongest relative growth in comparison to the prior year. In addition to positive new order trends, the Company has seen increased design win activities associated with the introduction of new products. For the first six months of fiscal 1998, Semtech introduced twelve new product families and two custom products. Design wins and in some cases production orders for new products introduced in the last 180 days has continued to grow. New products have been focused at increasing the Company's market share and growing overall end market applications. 10
COSTS AND EXPENSES - COST OF GOODS SOLD - Gross profit margins as a percentage of net sales was 46% in the second quarter of fiscal 1998, compared to 40% in the same period last year. For the six months ended August 3, 1997 and July 28, 1996, gross margins were 45% and 41%, respectively. The improvement in gross margins is attributed to increased operating efficiencies associated with higher shipment levels and higher revenue contribution from higher margin new products. Decreases in the average selling of certain industry standard products experienced during the first half of fiscal 1998 have been partially offset by reduce manufacturing costs per unit. Continued efforts are being made to further reduce cost on existing products as well as to increase emphasis on new product sales that typically command much higher gross profit margins. Future gross margin performance will be affected by the above noted changes as well as shipment rates, product mix, productivity levels and price changes. Average selling prices, capacity utilization and shipment rates for new products will continue to have the most significant impact on margins. OPERATING EXPENSES - Operating costs and expenses were at 24% of net sales in the second quarter of fiscal 1998, which compared to the 26% in the second quarter of fiscal 1997. Operating expenses for the first half of fiscal 1998 were at 24% of net sales versus 25% in the first six months of fiscal 1997. While operating expenses improved as a percentage of net sales, absolute dollar spending did increase. The Company has added a significant number of key employees and related infrastructure over the last twelve months designed to support the long-term growth of the Company. In May 1996, the Company opened a design center at its Santa Clara, California facility. Since the opening of the design center, the Company has aggressively pursued additional design, applications and marketing talent needed to foster new product development. Added headcount and overall support of development will continue to result in higher research and development (R&D) spending levels. The Company hopes to offset some of the increased R&D expense with decreased expenses as a percentage of sales in general and administrative activities. Such a percentage decrease in operating expenses other than R&D will be dependent on the Company's ability to grow revenues. For the first six months of fiscal year 1998, the Company has added a significant amount of technical resources, including the addition of seven designers, seven field applications engineers and several key strategic marketing and operations individuals. Additional key personal hires are expected as the Company continues to support strategic objectives. OTHER - Interest and other income of $76,000 was realized in the quarter ended August 3, 1997, compared to interest and other expense of $1,000 in the prior year's second quarter. For the six month periods ended August 3, 1997 and July 28, 1996, $110,000 and $14,000 of interest and other income, respectively, was realized. Other income and expenses for all periods is primarily interest income and expense. 11
PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ----------------- The Company is involved in legal 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 condensed financial statements. 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 1997 Annual Meeting of Shareholders of the Company was duly held on June 5, 1997. (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) Other matters voted upon at the meeting (i) Amendment of the Company's 1994 Long-term Stock Incentive Plan in which there were 3,061,702 affirmative votes, 1,024,288 negative votes, and 28,448 abstaining votes (ii) Amendment to the Company's Certificate of Incorporation to (a) increase the number of authorized shares and (b) authorization of a new class of shares, in which there were 3,124,233 affirmative votes, 1,015,981 negative votes, and 15,640 abstaining votes and (iii) Amendment to the Company's Certificate of Incorporation to eliminate cumulative voting for the election of Directors in which there were 3,369,342 affirmative votes, 531,291 negative votes, and 213,805 abstaining votes. (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 2 of Notes to 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 six months ended August 3, 1997. 12
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 17, 1997 /s/ John D. Poe -------------------------------- John D. Poe President and Chief Executive Officer Date: September 17, 1997 /s/ David G. Franz, Jr. -------------------------------- David G. Franz, Jr. Vice President Finance, Chief Financial Officer, and Secretary 13