Semtech Corporation — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2011, ended August 1, 2010. Comparatives are the second quarter and first six months of fiscal 2010. Semtech designs and markets analog and mixed-signal semiconductors and reports one business segment.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Revenue | $113.2 million | $66.3 million | $215.1 million | $126.4 million |
| Gross profit / margin | $67.4 million / 59.6% | $36.2 million / 54.5% | $124.5 million / 57.9% | $68.9 million / 54.5% |
| Operating income | $22.7 million | $8.5 million | $35.7 million | $13.4 million |
| Net income | $19.7 million | $7.4 million | $30.5 million | $12.4 million |
| Diluted EPS | $0.31 | $0.12 | $0.48 | $0.20 |
| Operating cash flow | Not separately reported for the quarter | $35.0 million | $35.0 million |
- Revenue rose 71% in Q2 and 70% for the first half year over year. Management attributed the increase to stronger demand across end markets and the Sierra Monolithics acquisition, which contributed $20.8 million of Q2 sales and $34.1 million for the first half.
- Gross margin improved, reflecting higher manufacturing volumes and more favorable product mix; SMI contributed 130 basis points to Q2 gross margin. The shift away from lower-margin computing products also helped.
- Operating expenses increased, including R&D and SG&A, but declined as a share of sales. Intangible amortization rose substantially following the SMI acquisition.
- First-half operating cash flow was unchanged year over year despite higher earnings. Receivables, inventory, and prepaid and other assets used cash, partly offset by higher accounts payable.
Financial position and liquidity
- At August 1, 2010, cash and cash equivalents were $105.9 million, short-term investments $56.6 million, and long-term investments $30.7 million. Total cash and investments were approximately $193.2 million.
- Total assets were $575.5 million; current assets were $267.6 million and current liabilities $82.2 million. Stockholders’ equity was $455.9 million.
- The company reported no outstanding debt and said it expected available resources to meet business requirements for at least the next 12 months.
- First-half capital expenditures were $10.3 million, versus $3.4 million in the prior year. Management expected Q3 capital expenditures of approximately $9.0 million.
- Foreign subsidiaries held approximately $124.9 million of cash, cash equivalents, and short-term investments; repatriating funds for U.S. use could create additional tax liabilities.
Outlook, risks, and unusual items
- Q3 FY2011 outlook: Announced August 25, 2010: sequential revenue growth of 6%–10% and diluted EPS of approximately $0.33–$0.35. These are management expectations, not results.
- Stock-compensation accounting: A new compensation software system led the company to refine forfeiture estimates and identify prior-period errors. The company said the prior-period errors were not material; it recorded an $868,000 tax benefit and $0.01 per diluted share in Q2 and the first half to correct an error, alongside a $328,000 after-tax expense from a change in estimate. Management stated the adjustments were not expected to be material to the current-year annual statements. Disclosure controls were assessed as effective.
- Litigation: The company maintained a $10.0 million accrual for a pending settlement offer in a securities class action concerning historical stock-option practices. The court certified the plaintiff class on August 23, 2010; the company said the outcome could not be predicted. It expected continued significant legal and professional expenses.
- Tax matters: Unrecognized tax benefits were $13.8 million, including $12.1 million of net benefits that could affect the effective tax rate if recognized. A California tax examination covering 1998–2004 began during the quarter.
- Business risks: Foreign sales represented about 78% of Q2 revenue, with approximately 60% from Asia-Pacific. China represented 32% of Q2 sales; Samsung and Frontek each accounted for 12%. The company also relies on a limited number of outside suppliers and foundries, including a major wafer source in China. Commodity costs, particularly gold, and customer order cancellations or changing demand could pressure results.
- The company reported no material change in its previously disclosed risk factors and no material off-balance-sheet arrangements.
Investor verification priorities
- Compare the Q3 guidance with subsequently reported revenue and diluted EPS, and assess whether demand and margins remained strong.
- Review the full stock-compensation correction disclosures and confirm how the estimate change and prior-period error affected reported results and controls.
- Monitor the securities litigation, the $10.0 million accrual, and ongoing legal expenses for changes in exposure.
- Track working-capital trends, capital spending, and cash generation relative to reported earnings.
- Assess customer and supplier concentration, Asian-market exposure, and the potential tax cost of repatriating foreign-held funds.