Form 10-Q
Table of Contents

 

 

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 May 2, 2010

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 of

incorporation or organization)

 

(I.R.S. Employer

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 was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x   Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

  Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x

Number of shares of Common Stock, $0.01 par value per share, outstanding at June 1, 2010: 62,103,285

 

 

 


Table of Contents

SEMTECH CORPORATION

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MAY 2, 2010

 

PART I - FINANCIAL INFORMATION

   3

ITEM 1. Financial Statements

   3

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   15

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

   23

ITEM 4. Controls and Procedures

   24

PART II – OTHER INFORMATION

   24

ITEM 1. Legal Proceedings

   24

ITEM 1A. Risk Factors

   24

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

   25

ITEM 3. Defaults Upon Senior Securities

   25

ITEM 4. (Removed and Reserved)

   25

ITEM 5. Other Information

   25

ITEM 6. Exhibits

   26

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

SEMTECH CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

     Three Months Ended
     May 2,
2010
   April 26,
2009

Net Sales

   $ 101,880    $ 60,077

Cost of Sales

     44,833      27,345
             

Gross Profit

     57,047      32,732

Operating costs and expenses:

     

Selling, general and administrative

     26,351      17,455

Product development and engineering

     15,303      10,085

Intangible amortization

     2,405      303
             

Total operating costs and expenses

     44,059      27,843
             

Operating income

     12,988      4,889

Interest and other income, net

     197      1,290
             

Income before taxes

     13,185      6,179

Provision for taxes

     2,383      1,236
             

NET INCOME

   $ 10,802    $ 4,943
             

Earnings per share:

     

Basic

   $ 0.18    $ 0.08

Diluted

   $ 0.17    $ 0.08

Weighted average number of shares used in computing earnings per share:

     

Basic

     61,420      60,321

Diluted

     63,181      60,593

See accompanying notes. The accompanying notes are an integral part of these statements.

 

3


Table of Contents

SEMTECH CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except share data)

 

     May 2,
2010
    January 31,
2010
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 82,367      $ 80,598   

Temporary investments

     57,134        55,462   

Receivables, less allowances of $1,252 at May 2, 2010 and $1,302 at January 31, 2010

     39,844        31,163   

Inventories

     33,203        33,819   

Deferred income taxes

     11,808        11,808   

Other current assets

     8,471        6,616   
                

Total current assets

     232,827        219,466   

Non-current assets:

    

Property, plant and equipment, net of accumulated depreciation of $72,216 at May 2, 2010 and $70,805 at January 31, 2010

     41,192        38,063   

Investments, maturities in excess of 1 year

     31,294        26,163   

Deferred income taxes

     7,179        7,153   

Goodwill

     129,651        129,651   

Other intangibles, net

     81,938        84,343   

Other assets

     9,802        9,455   
                

Total non-current assets

     301,056        294,828   
                

TOTAL ASSETS

   $ 533,883      $ 514,294   
                

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 29,077      $ 23,643   

Accrued liabilities

     30,219        34,008   

Income taxes payable

     605        8,512   

Deferred revenue

     3,453        3,276   

Accrued taxes

     2,609        2,609   

Deferred income taxes

     1,332        1,332   
                

Total current liabilities

     67,295        73,380   

Non-current liabilities:

    

Deferred income taxes

     16,505        16,505   

Accrued taxes

     9,497        9,497   

Other long-term liabilities

     11,436        9,171   

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $0.01 par value, 250,000,000 shares authorized, 78,136,144 issued and 61,747,161 outstanding on May 2, 2010 and 78,136,144 issued and 61,261,015 outstanding on January 31, 2010

     785        784   

Treasury stock, at cost, 16,388,983 shares as of May 2, 2010 and 16,868,879 shares as of January 31, 2010

     (270,308     (279,306

Additional paid-in capital

     352,416        348,741   

Retained earnings

     345,506        334,704   

Accumulated other comprehensive income

     751        818   
                

Total stockholders’ equity

     429,150        405,741   
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 533,883      $ 514,294   
                

See accompanying notes. The accompanying notes are an integral part of these statements.

 

4


Table of Contents

SEMTECH CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Three Months Ended  
     May 2,
2010
    April 26,
2009
 

Cash flows from operating activities:

    

Net income

   $ 10,802      $ 4,943   

Adjustments to reconcile net income to net cash provided by operations:

    

Depreciation and amortization

     3,870        1,934   

Deferred income taxes

     —          (362

Stock-based compensation

     8,300        4,767   

Tax benefit on stock based compensation

     760        385   

Excess tax benefits on stock based compensation

     (257     (20

Loss on disposition of property, plant and equipment

     75        8   

Changes in assets and liabilities:

    

Receivables, net

     (8,681     3,071   

Inventories

     466        1,842   

Prepaid expenses and other assets

     (2,387     (616

Accounts payable

     5,434        2,700   

Accrued liabilities

     (3,789     (4,153

Deferred revenue

     177        (94

Income taxes payable

     (7,907     1,125   

Other liabilities

     1,337        246   
                

Net cash provided by operations

     8,200        15,776   

Cash flows from investing activities:

    

Purchase of available-for-sale investments

     (31,732     (62,702

Proceeds from sales and maturities of available-for-sale investments

     24,835        65,818   

Proceeds from sale of property, plant and equipment

     2        4   

Purchases of property, plant and equipment

     (4,486     (1,404

Purchases of intangibles

     —          (2,300
                

Net cash used in investing activities

     (11,381     (584

Cash flows from financing activities:

    

Excess tax benefits on stock based compensation

     257        20   

Exercise of stock options

     5,069        1,360   

Repurchase of outstanding common stock

     (376     (1,694
                

Net cash provided by (used in) financing activities

     4,950        (314

Effect of exchange rate changes on cash and cash equivalents

     —          (3
                

Net increase in cash and cash equivalents

     1,769        14,875   

Cash and cash equivalents at beginning of period

     80,598        147,666   
                

Cash and cash equivalents at end of period

   $ 82,367      $ 162,541   
                

See accompanying notes. The accompanying notes are an integral part of these statements.

 

5


Table of Contents

SEMTECH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Basis of Presentation

The accompanying interim consolidated condensed financial statements of Semtech Corporation and its subsidiaries (the “Company”) have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company, these unaudited statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, the financial position of Semtech Corporation and its subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the included disclosures are adequate to make the information presented not misleading.

The Company reports on the basis of 52 and 53 week periods and ends its fiscal year on the last Sunday in January. The other quarters generally end on the last Sunday of April, July, and October. All quarters consist of 13 weeks except for one 14-week period in 53-week years. The first quarter of fiscal years 2011 and 2010 each consisted of 13 weeks.

These consolidated condensed financial statements should 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. The results reported in these consolidated condensed financial statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year.

Certain amounts for prior periods have been reclassified to conform to the current presentation. These reclassifications were not significant and had no effect on previously reported consolidated operating income, net income, net earnings or stockholder’s equity.

Note 2: Comprehensive Income

The components of comprehensive income, net of tax, were as follows:

 

     Three Months Ended  
(in thousands)    May 2,
2010
    April 26,
2009
 

Net income

   $ 10,802      $ 4,943   

Change in net unrealized holding loss on available-for-sale investments

     (68     (98

Gain on translation adjustment

     —          10   
                

Total comprehensive income

   $ 10,734      $ 4,855   
                

 

6


Table of Contents

Note 3: Earnings Per Share

The computation of basic and diluted earnings per common share was as follows:

 

     Three Months Ended

(in thousands, except per share amounts)

   May 2,
2010
   April 26,
2009

Net income

   $ 10,802    $ 4,943

Weighted average common shares outstanding—basic

     61,420      60,321

Dilutive effect of employee equity incentive plans

     1,761      272
             

Weighted average common shares outstanding—diluted

     63,181      60,593
             

Basic earnings per common share

   $ 0.18    $ 0.08

Basic earnings per common share is computed using the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share incorporates the incremental shares issuable, calculated using the treasury stock method, upon the assumed exercise of stock options and the vesting of restricted stock.

For the first quarter of fiscal years 2011 and 2010, options to purchase approximately 5.2 million and 9.5 million shares, respectively, were not included in the computation of diluted net income per share because the options were considered anti-dilutive.

Note 4: Revenue Recognition

The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. Product design and engineering revenue is recognized during the period in which services are performed.

The Company defers revenue recognition on shipment of products to certain customers, principally distributors, under agreements which provide for limited pricing credits or return privileges, until these products are sold through to end-users or the return privileges lapse. For sales subject to certain pricing credits or return privileges, the amount of future pricing credits or inventory returns cannot be reasonably estimated given the relatively long period in which a particular product may be held by the customer. Therefore, the Company has concluded that sales to customers under these agreements are not fixed and determinable at the date of the sale and revenue recognition has been deferred.

The estimated deferred gross margins on these sales, where there are no outstanding receivables, are recorded on the consolidated condensed balance sheets under the heading of “Deferred revenue.” The Company records a provision for estimated sales returns in the same period as the related revenues are recorded. The Company bases these estimates on historical sales returns and other known factors. Actual returns could be different from Company estimates and current provisions for sales returns and allowances, resulting in future charges to earnings.

Note 5: Stock-Based Compensation

Share-based Payment Arrangements. The Company has various equity award plans (the “Plans”) that provide for granting stock based awards to employees and non-employee directors of the Company. The Plans provide for the granting of several available forms of stock compensation. As of May 2, 2010, the Company has granted stock options (“Options”) and restricted stock under the Plans and has also issued some stock-based compensation outside of the Plans, including Options and restricted stock issued as inducements to join the Company.

Grant Date Fair Values and Underlying Assumptions; Contractual Terms. The Company uses the Black-Scholes pricing model to value Options. For awards classified as equity, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as an expense over the

 

7


Table of Contents

employee’s or director’s requisite service period. For awards classified as liabilities, stock-based compensation cost is measured at fair value at each reporting date until the date of settlement, and is recognized as an expense over the employee or director’s requisite service period. Expected volatilities are based on historical volatility using daily and monthly stock price observations.

Assumptions in Determining Fair Value of Options

 

(period average, except fair value on grant date)    Three Months Ended  
   May 2,
2010
    April 26,
2009
 

Expected lives, in years

     5.0        5.0   

Estimated volatility

     40     40

Dividend yield

     —          —     

Risk-free interest rate

     2.3     1.9

Weighted-average fair value on grant date

   $ 6.37      $ 4.22   

The estimated fair value of restricted stock was calculated based on the market price of the Company’s common stock on the date of grant. Some of the restricted stock awarded in fiscal year 2010 and prior years are classified as liabilities rather than equity. For awards classified as liabilities, the value of these awards was re-measured on May 2, 2010.

Financial Statement Effects and Presentation. The following tables show total pre-tax, stock-based compensation expense included in the consolidated condensed statements of operations for the first quarter of fiscal years 2011 and 2010, respectively.

Allocation of Stock-based Compensation

 

(in thousands)    Three Months Ended
   May 2,
2010
    April 26,
2009

Cost of sales

   $ 526      $ 314

Selling, general and administrative

     5,604        3,590

Product development and engineering

     2,170        863
              

Stock-based compensation, pre-tax

     8,300        4,767

Net change in stock-based compensation capitalized into inventory

     (150     5
              

Total stock-based compensation

   $ 8,150      $ 4,772
              

Impact of Stock-based Compensation

 

(in thousands)    Three Months Ended  
   May 2,
2010
    April 26,
2009
 

Stock-based compensation

   $ 8,300      $ 4,767   

Associated tax effect

     (1,845     (1,122
                

Net effect on net income

   $ 6,455      $ 3,645   
                

Effect on earnings per share

    

Basic

   $ 0.11      $ 0.06   

Diluted

   $ 0.10      $ 0.06   

Weighted average number of shares

    

Basic

     61,420        60,321   

Diluted

     63,181        60,593   

 

8


Table of Contents

Note 6: Investments

Certain investments that mature within three months of the balance sheet date, including money market funds, time deposits and U.S. government obligations, are accounted for as cash equivalents. Temporary and long-term investments consist of government, bank and corporate obligations. Temporary investments have maturities in excess of three months, but mature within twelve months of the balance sheet date. Long-term investments mature in excess of one year from the balance sheet date. The Company determines the cost of securities sold based on the specific identification method. Realized gains or losses are reported in “Interest and other income, net” on the consolidated condensed statements of operations.

The Company classifies its investments as “available for sale” because it may sell some securities prior to maturity. The Company’s investments are subject to market risk, primarily interest rate and credit risks. The Company’s investments are managed by a limited number of outside professional managers that operate within investment guidelines set by the Company. These guidelines include specified permissible investments, minimum credit quality ratings and maximum average duration restrictions and are intended to limit market risk by restricting the Company’s investments to high quality debt instruments with relatively short-term maturities.

The following table summarizes the Company’s investments as of May 2, 2010 and January 31, 2010:

Investments

 

      May 2, 2010    January 31, 2010
(in thousands)    Market Value    Cost Basis    Unrealized
Gain
   Market Value    Cost Basis    Unrealized
Gain

U.S. government issues

   $ 69,449    $ 69,380    $ 69    $ 62,555    $ 62,435    $ 120

Corporate issues

     18,979      18,714      265      19,070      18,762      308
                                         

Total investments

   $ 88,428    $ 88,094    $ 334    $ 81,625    $ 81,197    $ 428
                                         

The following table summarizes the maturities of the Company’s investments at May 2, 2010 and January 31, 2010:

Investment maturities

 

(in thousands)    May 2, 2010    January 31, 2010
   Market Value    Cost Basis    Market Value    Cost Basis

Within 1 year

   $ 57,134    $ 57,093    $ 55,462    $ 55,376

After 1 year through 5 years

     31,294      31,001      26,163      25,821
                           

Total investments

   $ 88,428    $ 88,094    $ 81,625    $ 81,197
                           

In the first quarter of fiscal years 2011 and 2010, the Company incurred $68,000 and $98,000, respectively, of unrealized loss (net of tax) on investments. These unrealized losses are the result of fluctuations in the market value of the Company’s investments and are included in “Accumulated other comprehensive income” on the consolidated condensed balance sheets. The tax associated with these comprehensive income items for the first quarter of fiscal years 2011 and 2010 was a reduction to the deferred tax liability of $26,000 and $3,000, respectively.

Investments and cash and cash equivalents generated interest income of $224,000 and $706,000 in the first quarter of fiscal years 2011 and 2010, respectively.

Note 7: Fair Value

When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. The Company uses a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Three levels of inputs are used to measure fair value:

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

9


Table of Contents

Level 2—Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.

All items recorded or measured at fair value on a recurring basis in the accompanying consolidated condensed financial statements were based on the use of Level 1 inputs and consisted of the following items as of May 2, 2010:

 

(in thousands)    Total     Quoted Prices in
Active Markets for
Identical Instruments
(Level 1)
 

Assets

    

Temporary investments

   $ 57,134      $ 57,134   

Investments, maturities in excess of 1 year

     31,294        31,294   

Other investments-deferred compensation

     5,917        5,917   
                
   $ 94,345      $ 94,345   
                

Liabilities

    

Deferred compensation

   $ (8,605   $ (8,605
                

Note 8: Inventories

Inventories, consisting of material, labor, and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market and consisted of the following:

Inventories:

 

(in thousands)    May 2,
2010
   January 31,
2010

Raw materials

   $ 5,334    $ 3,445

Work in process

     16,897      17,488

Finished goods

     10,972      12,886
             
   $ 33,203    $ 33,819
             

Note 9: Intangible Assets

Goodwill - Goodwill is not amortized, but is tested for impairment using a two-step method on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair market value of the reporting unit. The Company concluded that there were no indicators of impairment as of May 2, 2010.

There were no changes to goodwill during the first three months of fiscal year 2011.

Purchased Intangibles – Purchased intangibles are amortized on a straight-line basis over their estimated useful lives. In-process research and development is recorded at fair value as an indefinite-lived intangible

 

10


Table of Contents

asset until the completion or abandonment of the associated research and development efforts. Upon completion of development, acquired in-process research and development assets are transferred to finite-lived assets and amortized over their useful lives.

Intangible assets consisted of the following:

 

(in thousands)

        Gross Carrying Amount    Accumulated Amortization     Net Book Value
   Estimated
Useful Life
   May 2,
2010
   January 31,
2010
   May 2,
2010
    January 31,
2010
    May 2,
2010
   January 31,
2010

Core technologies

   2-10 years    $ 65,900    $ 65,900    $ (7,989   $ (5,953   $ 57,911    $ 59,947

In-process research and development

   Indefinite      12,370      12,370      —          —          12,370      12,370

Customer relationships

   8-10 years      12,130      12,130      (553     (214     11,577      11,916

Other Intangibles

   2 years      230      230      (150     (120     80      110
                                              

Total other intangibles

      $ 90,630    $ 90,630    $ (8,692   $ (6,287   $ 81,938    $ 84,343
                                              

Amortization expense related to intangible assets was $2.4 million and $303,000 as of May 2, 2010 and April 26, 2009, respectively.

Note 10: Taxes

The effective tax rate differs from the 35 percent statutory corporate tax rate in part due to the impact of lower foreign tax rates.

The gross unrecognized tax benefits (before federal impact of state items) were $13.8 million at May 2, 2010 and January 31, 2010, respectively. Included in the balances of unrecognized tax benefits at May 2, 2010 and January 31, 2010, are $12.1 million of net tax benefits (after federal impact of state items) that, if recognized, would impact the effective tax rate. The liability for uncertain tax positions was $12.1 million as of May 2, 2010 and January 31, 2010. This liability is reflected on the consolidated condensed balance sheets as “Accrued taxes.” The Company’s policy is to include net interest and penalties related to unrecognized tax benefits within the provision for taxes. The Company had approximately $193,000 of net interest and penalties accrued at May 2, 2010 and January 31, 2010.

Tax years prior to 2006 (fiscal year 2007) are generally not subject to examination by the Internal Revenue Service except for items with tax attributes that could impact open tax years.

For state returns, the Company is generally not subject to income tax examinations for years prior to 2005 (fiscal year 2006). The Company’s significant foreign tax presence is in Switzerland. The Company’s material Swiss tax filings have been examined through fiscal year 2009. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates.

As of May 2, 2010, it was reasonably possible that the total amounts of unrecognized tax benefits would decrease by up to $90,000 within twelve months due to the resolution of a foreign tax audit. Such resolution will result in tax payments by the Company if its positions are not sustained and will result in decreases in the liability for uncertain tax positions and a reduction to the tax provision if the Company’s positions are sustained.

Note 11: Commitments and Contingencies

Legal Matters

From time to time in the ordinary course of its business, the Company is involved in various claims, litigation, and other legal actions that are normal to the nature of its business, including with respect to intellectual property, contract, product liability, employment, and environmental matters.

The Company records any amounts recovered in these matters when collection is certain. Liabilities for claims against the Company are accrued when it is probable that a liability has been incurred and the amount can reasonably be estimated. Any amounts recorded are based on periodic reviews by outside

 

11


Table of Contents

counsel, in-house counsel and management and are adjusted as additional information becomes available or assessments change.

While some insurance coverage is maintained for such matters, there can be no assurance that the Company has a sufficient amount of insurance coverage, that asserted claims will be within the scope of coverage of the insurance, or that the Company will have sufficient resources to satisfy any amount due not covered by insurance.

The Company’s management is of the opinion that the ultimate resolution of such matters now pending will not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows. However, the outcome of legal proceedings cannot be predicted with any degree of certainty.

Refer to the discussion in Note 11 to the consolidated financial statements in Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2010 filed with the SEC on April 1, 2010. All proceedings discussed in the Form 10-K remain outstanding.

Product Warranties

The Company’s general warranty policy provides for repair or replacement of defective parts. In some cases, a refund of the purchase price is offered. In certain instances the Company has agreed to other warranty terms, including some indemnification provisions. The table below summarizes changes in product warranty allowances in accrued liabilities.

 

(in thousands)       

Balance at January 25, 2009

   $ 50   

Accruals acquired as part of acquisition

     2,780   

Settlements made (in cash or in kind) during period

     (580
        

Balance at January 31, 2010

     2,250   

Current accruals

     61   

Settlements made (in cash or in kind) during period

     (317
        

Balance at May 2, 2010

   $ 1,994   
        

Note 12: Geographic Information and Concentration of Risk

The Company operates exclusively in the semiconductor industry and primarily within the analog and mixed-signal sector.

Net sales activity by geographic region is as follows:

Sales by Region

 

(percentage of net sales)    Three Months Ended  
     May 2,
2010
    April 26,
2009
 

North America

   26   27

Asia-Pacific

   58   51

Europe

   16   22
            
   100   100
            

The Company generally attributes sales to a country based on the ship-to address. The table below summarizes sales activity to countries that represented greater than 10% of total sales:

 

     May 2,     April 26,  
(percentage of total sales)    2010     2009  

United States

   23   22

China (including Hong Kong)

   31   21

South Korea

   15   22
            

Total net sales

   69   65
            

 

12


Table of Contents

Income from continuing operations before income taxes is as follows:

 

(in thousands)    May 2,
2010
    April 26,
2009
 

Domestic

   $ (3,890   $ (1,269

Foreign

     17,075        7,448   
                

Total

   $ 13,185      $ 6,179   
                

Sales to the Company’s customers are generally made on open account, subject to credit limits the Company may impose, and the receivables are subject to the risk of being uncollectible.

Concentration of Net Sales - Significant Customers

 

(percentage of net sales)    Three Months Ended  
     May 2,
2010
    April 26,
2009
 

Samsung Electronics (and affiliates)

   13   20

Frontek Technology Corp

   12   10
Concentration of Accounts Receivable - Significant Customers   
(percentage of accounts receivable)    Balance as of  
     May 2,
2010
    April 26,
2009
 

Samsung Electronics (and affiliates)

   14   16

Frontek Technology Corp

   14   7

Outside Subcontractors and Suppliers

The Company relies on a limited number of outside subcontractors and suppliers for the production of silicon wafers, packaging and certain other tasks. Disruption or termination of supply sources or subcontractors, due to natural disasters or other causes, could delay shipments and could have a material adverse effect on the Company. Although there are generally alternate sources for these materials and services, qualification of the alternate sources could cause delays sufficient to 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, Taiwan, Singapore, Thailand, Malaysia, the Philippines, Germany, Israel and Canada. The Company’s largest source of silicon wafers is an outside foundry located in China and a significant amount of the Company’s assembly and test operations are conducted by third-party contractors in Malaysia, the Philippines and China.

Note 13: Matters Related to Historical Stock Option Practices

Since May 2006, the Company has incurred substantial expenses for legal, accounting, tax and other professional services in connection with matters associated with or stemming from its historical stock option practices. In the first quarter of fiscal years 2011 and 2010, the Company incurred expenses of $1.6 million and $409,000, respectively, in support of these matters. All activity related to these matters is charged to “Selling, general and administrative” on the consolidated condensed statements of operations.

The Company expects to continue to incur significant expense in connection with the on-going government inquires and class action litigation. These expenses include claims for advancement of legal expenses to current and former directors, officers and executives under pre-existing indemnification agreements and to other current and former employees under the California Labor Code and a resolution of the Board of Directors authorizing such advances.

 

13


Table of Contents

Note 14: Restructuring Costs

During fiscal years 2009 and 2010, the Company initiated restructuring plans to reorganize certain Company operations, consolidate research and development activities and reduce its workforce. The following table summarizes the restructuring charge and liability balance included in “Accrued liabilities” and “Other long-term liabilities” on the consolidated condensed balance sheet as of May 2, 2010.

Lease termination costs

 

(in thousands)    Restructuring at
January  31, 2010
   Additional
Restructuring
   Cash Payments  /
Other
    Restructuring at
May 2,  2010
   $ 484    $ —      $ (106   $ 378

The outstanding liability for restructuring costs is classified on the Company’s consolidated condensed balance sheet as of May 2, 2010 as follows:

 

(in thousands)     

Accrued liabilities

   $ 167

Other long-term liabilities

     211
      
   $ 378
      

Note 15: Stock Repurchase Program; Treasury Shares

In the first quarter of fiscal year 2009, the Company announced that its Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock from time to time through negotiated or open market transactions (the “2008 Program”). The 2008 Program does not have an expiration date.

In addition to repurchase activity under the 2008 Program, the Company typically withholds shares from vested restricted stock to pay employee payroll and income tax withholding liabilities.

Summary of Repurchase and Withholding Activity

 

(in thousands, except share data)    Three Months Ended
     May 2,
2010
   April 26,
2009
     Shares    Value    Shares    Value

Repurchases under the 2008 Program

      $    104,528    $ 1,388

Shares withheld from vested restricted shares

   23,378      376    25,609      305
                       

Total activity

   23,378    $ 376    130,137    $ 1,693
                       

The Company currently intends to hold the repurchased and withheld shares as treasury stock. The Company typically reissues treasury shares to settle stock option exercises and restricted share grants.

Note 16: Recent Accounting Pronouncements

FASB ASC 105-10, “Generally Accepted Accounting Principles” (formerly FASB Statement No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles (“the Codification”))—In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Codification, which became effective on July 1, 2009. The Codification became the single source of authoritative non-governmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. The Codification eliminates the U.S. GAAP hierarchy previously provided and establishes one level of authoritative U.S. GAAP. All other literature is considered non-authoritative. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company’s disclosures have been updated to be consistent with the Codification.

FASB ASU 2010-06, “Fair Value Measurements and Disclosures Topic 820 – Improving Disclosures about Fair Value Measurements”—In January 2010, the FASB issued guidance to improve the disclosures for Level 1, Level 2 and Level 3 fair value measurements. This standard requires new disclosures for significant transfers in and out of Level 1 and level 2 fair value measurements, and separate report information about purchases, sales issuances and settlements of Level 3 fair value measurements. This

 

14


Table of Contents

standard is effective for interim and annual periods beginning with the Company’s fiscal quarter ended May 2, 2010. This statement will not impact the Company’s consolidated results, but could result in additional disclosures in future periods.

FASB ASU 2010-09, “Subsequent Events Topic 855”—In February 2010, the FASB amended FASB ASC 855-110, “Subsequent Events” to provide that an entity that is a SEC filer is not required to disclose the date through which subsequent events have been evaluated. The Company’s disclosures have been updated to be consistent with this amendment.

Note 17: Subsequent Events

The Company has completed an evaluation of all subsequent events through the issuance date of these consolidated condensed financial statements. The Company has concluded that no subsequent events have occurred that required recognition or disclosure.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations together with the consolidated condensed financial statements and the notes to the consolidated condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”).

Forward Looking Statements

This Quarterly Report contains forward-looking statements. Forward-looking statements are statements other than historical information or statements of current condition and relate to matters such as our future financial performance, future operational performance and our plans, objectives and expectations. Some forward-looking statements may be identified by use of terms such as “expects,” “anticipates,” “intends,” “estimates,” “believes,” “projects,” “should,” “will,” “plans” and similar words. In light of the risks and uncertainties inherent in all such projected matters, forward-looking statements should not be regarded as a representation by us or any other person that our objectives or plans will be achieved or that any of our operating expectations or financial forecasts will be realized. Results could differ materially from those projected in forward-looking statements, due to factors including, but not limited to, those set forth in the “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk” sections of this Quarterly Report and the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended January 31, 2010 filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2010. We undertake no duty to update any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition to regarding forward-looking statements with caution, you should consider that the preparation of financial statements requires us to draw conclusions and make interpretations, judgments, assumptions and estimates with respect to factual, legal, and accounting matters. Different conclusions, interpretations, judgments, assumptions, or estimates could result in materially different results. See Note 1 to the consolidated condensed financial statements included in Item 1 of this Quarterly Report.

Overview

We design, develop, manufacture and market high-performance analog and mixed signal semiconductor products. We operate and account for results in one reportable segment. Our product lines include:

Power Management Products. Power management products control, alter, regulate and condition the power supplies within electronic systems. The highest volume product types within the power management product line are switching voltage regulators, combination switching and linear regulators, smart regulators and charge pumps. Our power management products feature highly integrated devices for the telecom industry and low-power, small form factor and high-efficiency products for mobile phones, notebook computers, computer peripherals and other portable devices. The primary application for these products is power regulation for computer, communications, high-end consumer and industrial systems.

 

15


Table of Contents

Protection Products. We design, develop and market high performance protection devices, which are often referred to as transient voltage suppressors (“TVS”). TVS devices provide protection for electronic systems where voltage spikes (called transients), such as electrostatic discharge generated by the human body, can permanently damage voltage-sensitive components. Our portfolio includes filter and termination devices that can be sold as a complement to TVS devices. Our protection products feature low capacitance, providing robust protection while preserving signal integrity in high-speed voice and video interfaces and are low leakage, thus increasing battery life in electronic devices. Our protection products can be found in a broad range of applications including computer, data-communications, telecommunications and industrial applications.

Advanced Communication and Sensing Products. We design, develop and market a portfolio of proprietary advanced wired communication, wireless communication and sensing integrated circuits (“ICs”). These ICs perform specialized timing and synchronization functions used in high-speed networks, specialized radio frequency (“RF”) functions used in a wide variety of industrial, medical and networking applications, and specialized sensing functions used in industrial and consumer applications. Our advanced communications products feature a leading integrated timing solution for packet based communications networks. Our wireless and sensing products feature industry leading and longest range ISM radio enabling low cost of ownership and increased reliability in all environments. Our unique sensing interface platforms can interface to any sensor and output digital data in any form. Our advanced communications and sensing products can be found in a broad range of applications including communications, industrial, medical and consumer applications.

Transport and Datacom Products. We design, develop and market ultra high speed Serializer/Deserializer (“SerDes”) products for transport communication, including 40Gbps and 100Gbps chips and transceivers for short reach, metro and long haul applications and high performance transceivers for datacenter applications. These products can be found primarily in communications applications.

Microwave and High-Reliability Products. We design, develop and market transceivers for wireless communications infrastructure, including 2G/3G/4G cellular repeaters, WiMAX CPE and base stations and defense and aerospace products, including satellite communication, ground to air beacons and unmanned air vehicles (“UAV”). This product segment also includes our line of high-reliability discrete semiconductor products comprised of rectifiers, assemblies (packaged discrete rectifiers) and other products. These products are typically used to convert alternating currents (“AC”) into direct currents (“DC”) and to protect circuits against very high voltage spikes or high current surges. Our microwave and high-reliability products can be found in a broad range of applications including industrial, military, medical and communications systems.

We operate our business in one enterprise-wide reportable segment. Most of our sales to customers are made on the basis of individual customer purchase orders. Many customers include liberal cancellation provisions in their purchase orders. 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 for a significant portion of our sales. Orders received and shipped in the first quarter of fiscal years 2011 and 2010, represented 43% and 41%% of net sales, respectively. Sales made directly to customers during the first quarter of fiscal year 2011 were 53% of net sales. The remaining 47% of net sales were made through independent distributors.

Our business involves reliance on foreign-based entities. Most of our outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Taiwan, Singapore, Thailand, Malaysia, the Philippines, Germany, Israel and Canada. For the first quarter of fiscal year 2011, approximately 52% of our silicon, in terms of cost of wafers purchased, was manufactured in China. Foreign sales during the first quarter of fiscal year 2011 constituted approximately 77% of our net sales. Approximately 58% of sales during the first quarter of fiscal year 2011 were to customers located in the Asia-Pacific region. The remaining foreign sales were primarily to customers in Europe, Canada, and Mexico.

 

16


Table of Contents

Critical Accounting Policies and Estimates

In addition to the discussion below, you should refer to the disclosures regarding our critical accounting policies in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2010 filed with the SEC on April 1, 2010.

Revenue and Cost of Sales

We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. Product design and engineering revenue is recognized during the period in which services are performed. We record a provision for estimated sales returns in the same period as the related revenues are recorded. We base these estimates on historical sales returns and other known factors. Actual returns could be different from our estimates and current provisions for sales returns and allowances, resulting in future charges to earnings.

We defer revenue recognition on shipment of products to certain customers, principally distributors, under agreements which provide for limited pricing credits or product return privileges, until these products are sold through to end-users or the return privileges lapse. For sales subject to certain pricing credits or return privileges, the amount of future pricing credits or inventory returns cannot be reasonably estimated given the relatively long period in which a particular product may be held by the customer. Therefore, we have concluded that sales to customers under these agreements are not fixed and determinable at the date of the sale and revenue recognition has been deferred. We estimate the deferred gross margin on these sales by applying an average gross profit margin to the actual gross sales. The average gross profit margin is calculated for each category of material using current standard costs. The estimated deferred gross margin on these sales, where there are no outstanding receivables, is recorded on the balance sheet under the heading of “Deferred revenue.” There were no significant impairments of deferred cost of sales in fiscal year 2010 or the first quarter of fiscal year 2011.

The following table summarizes the deferred net revenue balance:

Deferred net revenue

 

(in thousands)    May 2,
2010
   January  31,
2010

Deferred revenues

   $ 4,119    $ 4,099

Deferred cost of revenues

     1,251      1,771
             

Deferred revenues, net

   $ 2,868    $ 2,328

Deferred product design and enginering revenue

     585      948
             

Total deferred revenue

   $ 3,453    $ 3,276
             

Gross profit is equal to our net sales less our cost of sales. Our cost of sales includes materials, depreciation on fixed assets used in the manufacturing process, shipping costs, 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, product development and engineering costs, costs associated with acquisitions, and other operating related charges.

 

17


Table of Contents

Results of Operations

The following table sets forth, for the periods indicated, our statements of operations data expressed as a percentage of revenues.

 

     Three Months Ended  
     May 2,
2010
    April 26,
2009
 

Net Sales

   100.0   100.0

Cost of Sales

   44.0   45.5
            

Gross Profit

   56.0   54.5

Operating costs and expenses:

    

Selling, general & administrative

   25.9   29.1

Product development & engineering

   15.0   16.8

Intangible amortization

   2.4   0.5
            

Total operating costs and expenses

   43.2   46.3
            

Operating income

   12.7   8.1

Interest and other income, net

   0.2   2.1
            

Income before taxes

   12.9   10.3

Provision for taxes

   2.3   2.1
            

Net income

   10.6   8.2
            

Percentages may not add precisely due to rounding.

Comparison of The Three Months Ended May 2, 2010 and April 26, 2009

We report on the basis of 52 and 53 week periods and end our fiscal year on the last Sunday in January. All quarters consist of 13 weeks, except for one 14-week quarter in 53-week years. The first quarter of fiscal years 2011 and 2010 were both 13 week periods.

Our estimates of sales by major end-market are detailed below:

End-Market

 

(in thousands; % of net sales)    Three Months Ended  
       May 2,
    2010
      April 26,
    2009
 

Computing

   $ 11,233    11   $ 8,577    14

Communications

     34,496    34     11,043    19

High-end Consumer (1)

     34,580    34     21,759    36

Industrial

     21,571    21     18,698    31
                          

Total

   $ 101,880    100   $ 60,077    100
                          

 

(1) For Samsung Electronics (and affiliates) which is a significant customer because net sales to Samsung accounted for more than 10% of our net sales in the first quarter of fiscal years 2011 and 2010, in the first quarter of fiscal years 2011 and 2010, approximately $5.0 million and $4.4 million, respectively, of the net sales into the High-end Consumer end-market, relate to products targeted for the handheld market (which includes mobile phones).

Net Sales. Net sales for the first quarter of fiscal year 2011 were $101.9 million, an increase of 70% compared to $60.1 million for the first quarter of fiscal year 2010. The higher revenue in the current quarter resulted from higher demand for products across all end-markets and the benefit of sales of new products resulting from our acquisition of Sierra Monolithics, Inc. (“SMI”) in the fourth quarter of fiscal year 2010.

Gross Profit. During the first quarter of fiscal year 2011, gross profit increased to $57.0 million from $32.7 million in the first quarter of fiscal year 2010. Gross profit margins increased to 56.0% from 54.5% in the first quarter of fiscal year 2010. This increase in gross profit reflects the impact of substantially higher sales and specifically a more favorable end-market product mix and the benefit of higher manufacturing

 

18


Table of Contents

volumes. Also contributing to the higher margins was the transition away from lower margin Computing products within Power Management.

Operating Costs and Expenses.

Operating Costs and Expenses

 

(in thousands)    Three Months Ended        
     May 2,
2010
    April 26,
2009
    Change  

Selling, general and administrative

   $ 26,351    60   $ 17,455    63   51

Product development and engineering

     15,303    35     10,085    36   52

Intangible amortization

     2,405    5     303    1   694
                            

Total operating costs and expenses

   $ 44,059    100   $ 27,843    100   58
                            

Selling, General and Administrative Expenses.

Selling, general and administrative (“SG&A”) expenses were $26.4 million and $17.5 million in the first quarter of fiscal years 2011 and 2010, respectively or an increase of 51%. This increase was driven by higher selling costs attributable to higher sales volumes and higher labor costs associated with an overall increase in personnel, including personnel added as a result of the SMI acquisition. SG&A expenses in the first quarter of fiscal year 2010 benefited from various short-term cost reduction initiatives. While expenses were higher in absolute dollars, SG&A expenses expressed as a percentage of sales dropped to 25.9% in the first quarter of fiscal year 2011 from 29.1% in the first quarter of fiscal year 2010, demonstrating enhanced leverage from the higher sales volumes.

Stock-based compensation expense was $5.6 million and $3.6 million in the first quarter of fiscal years 2011 and 2010, respectively. The increase is primarily attributable to inducement and replacement awards issued to employees that joined our company as a result of the acquisition of SMI, increased levels of awards granted to executives, increased projected performance vesting levels for equity awards with performance vesting metrics, and mark-to-market adjustments associated with liability based awards.

Selling, general and administrative expenses for the first quarter of fiscal years 2011 and 2010 include approximately $1.6 million and $409,000, respectively, for legal, accounting, tax and other professional services incurred in connection with matters related to our historical stock option practices, including the government inquiries, the related litigation, and other associated matters. These expenses also include claims for advancement of legal expenses to current and former directors, officers and employees. See Note 13 to our consolidated financial statements included in Item 1 of this Quarterly Report for additional information regarding expenses related to the class action lawsuit and historical stock option matters.

Product Development and Engineering Expenses

Product development and engineering expenses were $15.3 million and $10.1 million in the first quarter of fiscal years 2011 and 2010, respectively or an increase of 52%. The increase is principally driven by higher product development and engineering expenses across all product lines and incremental activity resulting from the acquisition of SMI. Additionally, stock-based compensation expense (which includes the impact of inducement and replacement awards issued to employees that joined our company as a result of the SMI acquisition) increased to $2.1 million in the first quarter of fiscal year 2011 from $860,000 in the first quarter of fiscal year 2010.

Intangible Amortization

Intangible amortization, which reflects amortization costs associated with acquired intangibles, was $2.4 million and $303,000 in the first quarter of fiscal years 2011 and 2010, respectively. The increase reflects the impact of the amortization of intangibles associated with our acquisition of SMI.

Interest and Other Income, Net.

Interest and other income was $0.2 million in the first quarter of fiscal year 2011, compared to $1.3 million in the first quarter of fiscal year 2010. This decrease is attributable to declining interest rates on lower cash

 

19


Table of Contents

and investment balances compared to the same period last year. Additionally, in the first quarter of fiscal year 2011 we recognized a negligible amount of foreign exchange transaction loss compared to the first quarter of fiscal year 2010, where we recognized $0.6 million of foreign exchange transaction gains.

Provision for Taxes.

Provision for income taxes was $2.4 million for the first quarter of fiscal year 2011, compared to $1.2 million in the first quarter of fiscal year 2010. The effective tax rate for the first quarter of fiscal years 2011 and 2010 was 18% and 20%, respectively. The decrease in rate is primarily attributable to a greater percentage of income in lower tax jurisdictions.

Business Outlook

On May 26, 2010, we announced our outlook for the second quarter of fiscal year 2011. At that time, we expected sequential revenue to be up 6% to 10% from the first quarter and we expected earnings per diluted share of approximately $0.25 to $0.27. Refer to Exhibit 99.1 of our Current Report on Form 8-K filed with the SEC on May 26, 2010 for the complete announcement.

 

20


Table of Contents

Liquidity and Capital Resources

Our capital requirements depend on a variety of factors, including but not limited to, the rate of increase or decrease in our existing business base; the success, timing and amount of investment required to bring new products to market; revenue growth or decline; and potential acquisitions. We believe that we have the financial resources necessary to meet business requirements for the next 12 months, including funds needed for working capital requirements. As of May 2, 2010, our total shareholders’ equity was $429.1 million. At that date we also had approximately $139.5 million in cash and short-term investments, as well as $31.3 million in long-term investments. We have no outstanding debt.

Our primary sources and uses of cash during the comparative fiscal quarters are presented below:

 

(in millions)    Three Months Ended  
     May 2,
2010
    April 26,
2009
 
Sources of Cash     

Operating activities, including changes in working capital

   $ 8.2      $ 15.8   

Proceeds from exercise of compensatory stock plans, including tax benefits

     5.3        1.4   

Net (increase) decrease in investments

     (6.9     3.1   
                
   $ 6.6      $ 20.3   
                
Uses of Cash     

Capital expenditures, net of sale proceeds

   $ (4.4   $ (1.4

Purchased intangibles

     —          (2.3

Repurchase of common stock

     (0.4     (1.7
                
   $ (4.8   $ (5.4
                

Net increase in cash and cash equivalents

   $ 1.8      $ 14.9   
                

We incur significant expenditures in order to fund the development, design, and manufacture of new products. We intend to continue to focus on those areas that have shown potential for viable and profitable market opportunities, which may require additional investment in equipment and will require continued, and perhaps additional investment in design and application engineers aimed at developing new products. 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 our existing cash balances.

A meaningful portion of our capital resources, and the liquidity they represent, are held by our foreign subsidiaries. As of May 2, 2010, our foreign subsidiaries held approximately $109.1 million of cash, cash equivalents and short-term investments, compared to $108.0 million at January 31, 2010. If we need these funds for investment in domestic operations, any repatriation, such as that which occurred in fiscal year 2010 to partially fund the acquisition of SMI, could result in increased tax liabilities.

One of our primary goals is to improve the cash flows from our existing business activities. Our cash, cash equivalents and investments, when combined with the lack of any outstanding debt obligations, give us the flexibility to use our free cash flow to return value to shareholders (in the form of stock repurchases) while also pursuing business improvement opportunities.

Additionally, we will continue to seek to maintain and improve our existing business performance with capital expenditures and, potentially, acquisitions that meet our rate of return requirements. Acquisitions might be made for either cash or stock consideration, or a combination of both. Alternatively, we could be willing to use debt to complete an acquisition.

Operating Activities

Net cash provided by operating activities is primarily due to net income adjusted for non-cash items plus fluctuations in operating assets and liabilities. Non-cash adjustments include deferred income taxes, stock-based compensation expense, depreciation, amortization of intangible assets, and tax benefits from stock-based awards.

 

21


Table of Contents

Depreciation and amortization expense was $3.9 million for the first quarter of fiscal year 2011, compared to $1.9 million in the first quarter of fiscal year 2010. The increase is primarily attributable to the increase in fixed and intangible assets resulting from the acquisition of SMI in the fourth quarter of fiscal year 2010.

Stock-based compensation was $8.3 million in the first quarter of fiscal year 2011, compared to $4.8 million in the first quarter of fiscal year 2010. The increase is primarily attributable to inducement and replacement awards issued to employees that joined our company as a result of the acquisition of SMI, increased levels of awards granted to executives, increased projected performance vesting levels for equity awards with performance vesting metrics, and mark-to-market adjustments associated with liability based awards.

Fluctuations in operating assets and liabilities generated cash in the first quarter of fiscal year 2011, driven primarily by the following:

 

   

Accounts receivable increased by $8.7 million due to higher sales

 

   

Prepaid expenses and other assets increased by $2.4 million primarily due to the payment of annual insurance premiums

 

   

Accounts payable increased by $5.4 million primarily due to higher level of operating expenditures resulting from the overall increase in sales and related business activities

 

   

Accrued liabilities decreased by $3.8 million primarily due to payments related to employee bonus programs

 

   

Income taxes payable decreased by $7.9 million primarily due to the payment of U.S. federal income taxes

Investing Activities

Cash used in investing activities is primarily attributable to capital expenditures and purchases and sales/maturities of investments.

Capital expenditures were $4.5 million for the first quarter of fiscal year 2011, compared to $1.4 million for the first quarter of fiscal year 2010. The increases in capital expenditures were made primarily to maintain and expand our test capacity and support engineering and manufacturing functions.

Financing Activities

Cash provided by financing activities is primarily attributable to the proceeds from stock option exercises, the payment of statutory tax withholding obligations related to the vesting of restricted stock, and stock repurchases, if any.

For the first quarter of fiscal year 2011, cash collected directly from the exercise of stock options was $5.1 million, compared to $1.4 million in the first quarter of fiscal year 2010. We do not directly control the timing of the exercise of vested stock options by our grantees. Such exercises are decisions made by those grantees and are influenced most directly by the level of our stock price. Such proceeds are difficult to forecast. The level of such cash inflows to us is subject to several factors which are not within our control. We believe that such proceeds will remain an important secondary source of cash after cash flow from operating activities.

We currently have in effect a stock repurchase program. This program represents one of our principal efforts to return value to our shareholders. In the first quarter of fiscal year 2011, we did not repurchase any shares under this program. In addition to the stock repurchase program, shares valued at $376,000 were withheld in connection with the vesting of restricted stock to cover statutory tax withholding obligations.

 

22


Table of Contents

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as those arrangements are defined by the SEC, that are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

We do not have any unconsolidated subsidiaries or affiliated entities. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity or market or credit risk support, engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the financial statements.

Certain contractual obligations, representing various commitments we have associated with our business, such as lease commitments and open purchase obligations, are not recorded as liabilities on our balance sheet because we have not yet received the related goods or services as of May 2, 2010.

Contractual Obligations

There were no material changes in our contractual obligations during the first quarter of fiscal year 2011 from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2010 filed with the SEC on April 1, 2010.

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.

Available Information

General information about us can be found on our website at www.semtech.com. The information on our website is for informational purposes only and should not be relied on for investment purposes. The information on our website is not incorporated by reference into this Quarterly Report and should not be considered part of this or any other report filed with the SEC.

We make available free of charge, either by direct access on our website or by a link to the SEC website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available directly at the SEC’s website at www.sec.gov.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to a variety of market risks, including commodity risk as discussed below and the risks related to foreign currency, interest rates and market performance that are discussed in Item 7A of our Annual Report on Form 10-K for fiscal year 2010 that ended on January 31, 2010 filed with the SEC on April 1, 2010. Many of the factors that can have an impact on our market risk are external to us, and so we are unable to fully predict them.

Global Economic Conditions

Current global economic conditions pose a risk to the overall economy as consumers and businesses may continue to defer purchases in response to the uncertainty around tighter credit and negative financial news. These conditions could reduce demand for our products. Such demand could be different from our expectations due to many factors including changes in business and economic conditions, conditions in the credit market that affect consumer confidence, customer acceptance of our products, changes in customer order patterns, including order cancellations, and changes in the level of inventory held by vendors.

 

23


Table of Contents

Commodity Risk

We are subject to risk from fluctuating market prices of certain commodity raw materials, particularly gold, that are incorporated into our end products or used by our suppliers to process our end products. Increased commodity prices are passed on to us in the form of higher prices from our suppliers, either in the form of general price increases or a commodity surcharge. Although we generally deal with our suppliers on a purchase order basis rather than on a long-term contract basis, we generally attempt to obtain firm pricing for volumes consistent with planned production. Our gross margins may decline if we are not able to increase selling prices of our products or obtain manufacturing efficiencies to offset the increased cost. We do not enter into formal hedging arrangements to mitigate against commodity risk.

ITEM 4. Controls and Procedures

Disclosure Controls

We carried out, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective.

Changes in Internal Controls

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the fiscal quarter ended May 2, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. Legal Proceedings

Information about legal proceedings is set forth in Note 11 to the consolidated condensed financial statements included in Item 1 of this Quarterly Report.

ITEM 1A. Risk Factors

You should carefully consider and evaluate all of the information in this Quarterly Report and the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended January 31, 2010 filed with the SEC on April 1, 2010. The risks set forth in our Annual Report on Form 10-K are not the only ones we face. Additional risks not now known to us or that we currently deem immaterial may also impair our business operations. If any of these risks actually occur, our business could be materially harmed. If our business is harmed, the trading price of our common stock could decline.

The risk factors associated with our business have not materially changed, as compared to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended January 31, 2010 filed with the SEC on April 1, 2010. Also see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report for a discussion of certain factors that may affect our future performance.

 

24


Table of Contents

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

We did not make any sales of unregistered securities during the first quarter of fiscal year 2011.

Issuer Purchase of Equity Securities

This table provides information with respect to purchases by us of shares of our common stock during the first quarter of fiscal year 2011.

 

Fiscal Month/Year

   Total Number of
Shares Purchased
(2)
   Average Price
Paid per  Share
   Total Number of Shares
Purchased as Part of
Publicly Announced
Program
   Approximate Dollar Value  of
Shares That May Yet Be
Purchased Under The
Program (1)

February 2010

(02/01/10 - 02/28/10)

   —      $ —      —      $ 15.0 million
                       

March 2010

(03/01/10 - 03/28/10)

   —      $ —      —      $ 15.0 million
                       

April 2010

(03/29/10 - 05/2/10)

   —      $ —      —      $ 15.0 million
                       

Total first quarter

   —         —     
               

 

(1) On March 4, 2008, we announced that our Board of Directors authorized the repurchase of up to $50 million of our common stock from time to time through negotiated or open market transactions. This stock repurchase program does not have an expiration date.

 

(2) The table does not include shares surrendered to us in connection with the cashless exercise of stock options by employees and directors or shares surrendered to us to cover tax liabilities upon vesting of restricted stock.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. (Removed and Reserved)

ITEM 5. Other Information

None.

 

25


Table of Contents

ITEM 6. Exhibits

Documents that are not physically filed with this report are incorporated herein by reference to the location indicated.

 

Exhibit No.

 

Description

  

Location

2.1   Agreement and Plan of Merger, dated November 18, 2009, by and among Semtech Corporation, Sierra Monolithics, Inc., SMI Merger Corp. and Shareholder Representative Services    Exhibit 2.1 to our Current Report on Form 8-K filed December 15, 2009
2.2   First Amendment to Agreement and Plan of Merger, dated December 9, 2009, by and among Semtech Corporation, Sierra Monolithics, Inc., SMI Merger Corp. and Shareholder Representative Services    Exhibit 10.1 to our Current Report on Form 8-K filed December 15, 2009
3.1   Restated Certificate of Incorporation of Semtech Corporation    Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarterly period ended October 26, 2003
3.2   Bylaws of Semtech Corporation    Exhibit 3.2 to our Annual Report on Form 10-K for the year ended January 27, 2008
10.1   Restricted Stock Award Agreement dated March 29, 2010 with respect to time-based restricted stock award to Mohan Maheswaran pursuant to the Semtech Corporation 2008 Long-Term Equity Incentive Plan (such plan was filed as Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 27, 2008)    Exhibit 10.1 to our Current Report on Form 8-K filed April 1, 2010
31.1   Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended   
31.2   Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended   
32.1   Certification of the Chief Executive Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Exhibit 32.1 is being furnished and shall not be deemed “filed”)   
32.2   Certification of the Chief Financial Officer Pursuant 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Exhibit 32.2 is being furnished and shall not be deemed “filed”)   

 

26


Table of Contents

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, 2010  

/s/ Mohan R. Maheswaran

  Mohan R. Maheswaran
  Chief Executive Officer
Date: June 11, 2010  

/s/ Emeka N. Chukwu

  Emeka N. Chukwu
  Vice President Finance, Chief Financial Officer

 

27