<PAGE>
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
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SEMTECH CORPORATION
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(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
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(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.
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<PAGE>
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
<PAGE>
SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
August 1, August 2, August 1, August 2,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
3
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SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
August 1, January 31,
1999 1999
(Unaudited) (Audited)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
======== =======
</TABLE>
4
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SEMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
-----------------------------------------------
August 1, August 2,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
======= =======
</TABLE>
5
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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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------- -------------------------------------
Net Sales (in thousands) August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------- -------------------------------------
Operating Income (in thousands) August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
====== ====== ======= ======
</TABLE>
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------- -------------------------------------
Net Sales (in thousands) August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
Raw Work in Finished Total
(thousands) Materials Process Goods
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
====== ======= ======= =======
</TABLE>
7
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------------- ---------------------------------------
August 1, 1999 August 2, 1998 August 1, 1999 August 2, 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======= ===== ======== =======
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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