Semtech Corporation — Form 10-Q
Business context and period. Semiconductor supplier Semtech reported its second quarter of fiscal 2021, ended July 26, 2020, and the six months then ended. It reports one segment, the Semiconductor Products Group, across Signal Integrity, Wireless and Sensing, and Protection. Financial figures below are in U.S. dollars; amounts are millions unless noted.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $143.7 | $137.1 | $276.4 | $268.5 |
| Gross profit / margin | $88.3 / 61.4% | $84.9 / 61.9% | $169.0 / 61.2% | $166.2 / 61.9% |
| Operating income / margin | $18.8 / 13.1% | $11.8 / 8.6% | $34.5 / 12.5% | $23.9 / 8.9% |
| Net income attributable to common stockholders | $16.1 | $2.2 | $25.8 | $14.9 |
| Diluted EPS | $0.24 | $0.03 | $0.39 | $0.22 |
| Operating cash flow | Not presented quarterly | $63.3 | $40.1 |
- Revenue mix: Q2 Signal Integrity sales rose to $71.6 million from $55.1 million; Wireless and Sensing fell to $38.8 million from $41.7 million; Protection fell to $33.2 million from $40.4 million. Infrastructure demand, particularly data centers, cloud and hyperscale providers, wireless infrastructure and 10G PON, drove growth. High-end consumer and industrial sales declined.
- Cash, debt and liquidity: Cash and cash equivalents were $281.5 million at quarter-end, down from $293.3 million at January 26, 2020. Long-term debt, net of issuance costs, was $187.0 million; gross revolving borrowings were $189.0 million, with $411.0 million undrawn under the $600 million facility. The company reported compliance with credit covenants and said it expected resources to meet needs for at least 12 months.
- Cash flows and capital returns: Six-month investing cash use was $21.0 million, including $14.6 million of capital expenditures and $6.7 million of investment purchases. Financing cash use was $54.2 million, including $42.4 million of share repurchases. Cash decreased by $11.9 million over the six months. The repurchase program had $68.2 million of authorization remaining.
Material changes versus prior period
- Q2 sales grew 4.7%; six-month sales grew 2.9%. Gross margin declined 0.5 percentage points for the quarter and 0.7 points for the half year, primarily due to product mix.
- Operating income improved as lower SG&A and amortization more than offset higher product development and engineering costs. Q2 SG&A declined 12% year over year; engineering expense increased 13%.
- Reported net income rose sharply, but comparisons reflect unusual tax outcomes: Q2 FY2021 included a $0.4 million tax benefit versus $8.4 million tax expense in Q2 FY2020. The prior-year comparative statements were corrected for immaterial share-based compensation errors; corrected Q2 and six-month FY2020 net income was $2.2 million and $14.9 million, respectively.
- Investment impairments and credit loss reserves were $1.5 million in Q2 and $5.1 million in the six-month period; no such charges were reported in the comparable prior-year periods. Six-month results included $2.4 million of increased credit loss reserves and $2.9 million of impairments on equity investments.
- Interest expense declined to $1.3 million in Q2 and $2.8 million for six months, mainly from lower interest rates and debt. A swap fixed the rate on $150 million of borrowings at 1.9775% for its term.
Outlook, commentary and risks
- Guidance: Management estimated Q3 FY2021 net sales of $145 million to $155 million and gross margin of 60.5% to 61.5%. It cited continued uncertainty from macroeconomic conditions and COVID-19. No full-year revenue or earnings guidance is provided in the filing text.
- COVID-19: Management said the pandemic had reduced high-end consumer and industrial sales, disrupted company and supplier operations, and contributed to investment charges. It expected adverse effects to continue during the remainder of FY2021 and potentially to be greater than those reflected in first-half results. Bookings were described as strong.
- Export controls: Huawei accounted for less than 10% of Q2 sales. The August 17, 2020 expansion of U.S. foreign-product restrictions was expected to further affect shipments to Huawei and some customers whose products are sold to Huawei; the magnitude and duration were uncertain.
- Concentration and operations: Asia-Pacific represented 80% of Q2 sales, and China including Hong Kong represented 63%. Four named customers/distributors each accounted for at least 10% of Q2 sales. Semtech relies on a limited number of overseas foundries, suppliers and subcontractors; disruption could delay production or shipments. Distributor sales were 81% of Q2 revenue.
- Other items: The company continued remediation of a former California facility; the probable loss range was $6.4 million to $8.0 million, with $1.3 million accrued at quarter-end. Management did not expect current legal matters, individually or in aggregate, to materially affect the consolidated financial statements. No goodwill impairment was recorded in the first half.
Important facts for investors to verify
- Whether Q3 sales and margin guidance is achieved, and how much of the reported growth reflects sustained infrastructure demand versus weakness in consumer and industrial markets.
- Subsequent effects of COVID-19 and expanded Huawei export restrictions on bookings, customer demand, production, shipments and investment valuations.
- Customer, distributor and geographic concentration, including exposure to China and reliance on third-party foundries and contractors.
- Cash generation and capital allocation, including ongoing repurchases, debt levels, and covenant compliance.
- Potential additional investment credit losses, environmental remediation costs, and tax-audit outcomes; gross unrecognized tax benefits were $27.0 million at quarter-end.