Semtech Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2013, ended July 29, 2012. The quarter comprised 13 weeks. Semtech designs and sells analog and mixed-signal semiconductors; it reports one operating segment. Results include Gennum from its March 20 acquisition and Cycleo from March 7.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net sales | $150.7 million | $130.3 million | $267.3 million | $252.6 million |
| Gross profit / margin | $74.5 million / 49.5% | $78.7 million / 60.4% | $129.9 million / 48.6% | $152.6 million / 60.4% |
| Operating income (loss) | $2.7 million | $31.9 million | $(16.4) million | $58.4 million |
| Net income | $10.0 million | $27.1 million | $12.2 million | $49.7 million |
| Diluted EPS | $0.15 | $0.40 | $0.18 | $0.74 |
| Operating cash flow | Not separately stated | Not separately stated | $11.9 million | $40.6 million |
Q2 sales rose 16%, mainly reflecting $35.3 million of Gennum revenue and stronger enterprise computing and industrial demand; high-end consumer demand declined. Six-month sales rose 6%, with Gennum contributing $47.3 million. Q2 end-market sales were communications 35%, high-end consumer 26%, industrial and other 22%, and enterprise computing 17%.
Gross margin fell sharply, primarily because acquisition accounting charges for Gennum inventory were recorded in cost of sales: $17.7 million in Q2 and $30.6 million for the six-month period. Management expected approximately $11 million of the remaining inventory fair-value adjustment to be recognized in the second half of fiscal 2013.
Operating expenses increased with Gennum, acquisition and integration costs, and acquired-intangible amortization. Six-month SG&A included $20.4 million of acquisition-related costs; Q2 included $1.8 million of transaction and integration expenses. Q2 interest expense was $3.4 million, versus none in the prior-year quarter, following acquisition financing.
Cash, debt and liquidity
- At July 29, cash and cash equivalents were $165.9 million; long-term investments were $7.5 million. Current assets were $380.0 million and current liabilities $110.1 million.
- Total debt was approximately $341.6 million, comprising $21.8 million current and $319.8 million long-term. Net debt using cash alone was approximately $175.8 million.
- Six-month cash flow: operating activities provided $11.9 million; investing activities used $409.3 million, including $491.7 million for acquisitions, net of cash acquired; financing activities provided $336.4 million. Cash declined $61.2 million to $165.9 million.
- Semtech financed Gennum partly with $350 million of first-lien term loans, due March 20, 2017. Rates at quarter-end were 2.99% on Term A and 4.25% on Term B. A $175 million interest-rate cap limits one-month LIBOR exposure to 1.00% on the hedged amount. The company reported compliance with its financial covenants.
- Management said available resources were sufficient for business needs over the next 12 months. Approximately $102.9 million of cash was held by foreign subsidiaries; repatriation for domestic use could create additional tax liabilities.
Outlook, commentary and notable items
- No specific revenue or earnings guidance was provided. Management cited ongoing investment in product development and engineering and said future capital needs depend on business performance, new-product investment and potential acquisitions.
- Management estimated Q3 FY2013 interest expense at approximately $3.4 million and acquired-intangible amortization at approximately $8.2 million. It expected about $16.4 million of acquired finite-lived intangible amortization in the second half of fiscal 2013.
- The six-month tax benefit of $34.3 million included a one-time $23.4 million benefit from changing the assertion on foreign earnings to indefinitely reinvested offshore. A Canadian tax-law change caused a $3.4 million discrete charge in Q2. Because management could not reliably forecast a full-year effective tax rate, it used a year-to-date rate; the reported Q2 effective tax rate was unusually high at 861%.
- Gennum’s preliminary purchase-price allocation included $258.4 million of goodwill and $129.9 million of amortizable intangible assets. Gennum contributed $35.3 million of Q2 revenue but a reported $22.7 million net loss for the quarter. Cycleo’s potential earn-out payments could total up to approximately $16 million, depending on milestones and, for certain payments, continued employment.
- In August 2012, parties to Canadian and U.S. litigation involving Gennum and V Semiconductor agreed to a confidential settlement, subject to conditions and completion by September 30, 2012. If effective, claims were to be dismissed; otherwise proceedings could continue. The company said it could not estimate a reasonably possible loss for the U.S. case before settlement.
- Key operating risks include dependence on foreign markets and suppliers, short customer order lead times, and customer concentration. China accounted for 37% of Q2 sales; Samsung and Huawei each exceeded 10% of Q2 sales. The largest wafer source was a foundry in China. Management reported disclosure controls were effective, while integration and evaluation of Gennum’s internal controls remained underway.
Most important facts for investors to verify
- Whether post-acquisition sales and operating performance can offset Gennum’s reported losses, integration costs and acquisition-related accounting charges.
- How much of the remaining Gennum inventory step-up was recognized in the second half, and the resulting effect on gross margin and earnings.
- Recurring earnings and cash generation excluding the unusual tax benefit, acquisition costs and purchase-accounting effects.
- Debt repayment capacity, variable-rate exposure, covenant headroom and the use or availability of foreign-held cash.
- Completion of the V Semiconductor settlement conditions, and any subsequent developments in litigation or other contingencies.
- Progress integrating Gennum’s operations and internal controls, and exposure to major customers, China-based suppliers and foreign markets.