Semtech Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2011, ended October 31, 2010. Comparative periods ended October 25, 2009. Semtech designs and markets analog and mixed-signal semiconductors across power management, protection, communications and sensing, and microwave and high-reliability products.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Net sales | $123.1 million | $75.1 million | $338.2 million | $201.5 million |
| Gross profit / margin | $73.8 million / 60.0% | $41.4 million / 55.1% | $198.3 million / 58.6% | $110.3 million / 54.7% |
| Operating income / margin | $17.5 million / 14.2% | $12.1 million / 16.1% | $53.2 million / 15.7% | $25.5 million / 12.6% |
| Net income (loss) | $16.1 million | $(20.9) million | $46.6 million | $(8.5) million |
| Diluted EPS | $0.25 | $(0.34) | $0.73 | $(0.14) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $64.6 million | $58.3 million |
Quarterly revenue increased 64% year over year; nine-month revenue increased 68%. Management attributed growth to demand across end markets and $26.8 million of quarterly sales from the Sierra Monolithics acquisition (SMI); SMI contributed $60.8 million during the nine-month period. Higher volumes, product mix, and SMI products lifted gross margin. Operating expenses rose substantially, including acquisition-related costs and amortization; quarterly operating margin declined despite higher operating income.
At October 31, cash and cash equivalents were $142.2 million, short-term investments $42.7 million, and investments maturing after one year $43.8 million. Current assets were $310.7 million and current liabilities $100.9 million. The company reported no outstanding debt and stated it had resources to meet business requirements for the next 12 months. Nine-month capital expenditures were $18.0 million; management expected approximately $10 million of capital expenditures in Q4 FY2011.
Nine-month cash from operations increased to $64.6 million from $58.3 million. Working capital absorbed cash, notably a $27.7 million increase in receivables and $9.5 million increase in inventory. Cash and cash equivalents rose by $61.6 million to $142.2 million over the nine months. Stock-based compensation was $22.9 million for the period.
Changes, unusual items, and outlook
- The $20.0 million proposed settlement of the historical stock-option class action was agreed in principle on December 5, 2010, subject to court approval. The company reflected the subsequent event in these statements, increasing its estimated liability from $10.0 million to $20.0 million and recording an additional $10.0 million Q3 SG&A expense. Management said it expected court approval no earlier than Q2 FY2012 and had sufficient resources to fund the settlement.
- Q3 income tax provision was $1.4 million, an 8% effective rate; the nine-month provision was $7.1 million, a 13% rate. California tax-law changes and the anticipated settlement deduction prompted a $932,000 valuation allowance and a $627,000 reduction in certain state deferred tax assets. The prior-year comparative tax provision was unusually high, including a $39.2 million charge related to a change in assertions about foreign earnings in connection with the SMI acquisition.
- Following implementation of new stock-compensation software, Semtech identified a change in estimate and errors in previously issued periods. It reported the prior-period errors as immaterial; the nine-month FY2011 statements include an $868,000 tax-benefit adjustment, or $0.01 per diluted share. Management concluded disclosure controls were effective and said the software change was not made in response to an identified material weakness.
- Q4 FY2011 outlook, announced December 1, 2010: revenue expected to decline approximately 6%–11% sequentially, attributed to normal seasonality; diluted EPS expected at $0.28–$0.32.
Risks and investor verification points
- Revenue visibility is limited: customer orders may be cancellable, and 31% of Q3 sales were orders received and shipped in the same quarter. Asia-Pacific represented 62% of quarterly sales; China, including Hong Kong, represented 36%.
- Customer concentration remained significant: Samsung represented 12% of Q3 sales; Frontek and Huawei each represented 10%. The largest silicon-wafer source was a foundry in China, and significant assembly and test work also relies on third-party contractors in Asia.
- Verify the final court-approved settlement amount, timing, and related cash impact; the proposed $20 million settlement was not yet final at filing.
- Verify that Q4 revenue and EPS guidance was achieved, and assess whether the reported margin improvement persists as demand, product mix, and acquisition contributions change.
- Monitor receivables, inventory, customer concentration, foreign-held liquidity, and exposure to supplier disruption and commodity prices, particularly gold. The company reported no formal commodity hedging.
- Review the stock-compensation accounting corrections and tax judgments, including the uncertain-tax-position liability of $12.2 million and the status of the California tax examination and other tax matters.