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EX-32.1 - SECTION 906 CERTIFICATION OF CEO - SEMTECH CORPd198668dex321.htm
EX-32.2 - SECTION 906 CERTIFICATION OF CFO - SEMTECH CORPd198668dex322.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - SEMTECH CORPd198668dex312.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - SEMTECH CORPd198668dex311.htm
EX-10.1 - SEMTECH NONQUALIFIED EXECUTIVE COMPENSATION PLAN ADOPTION AGREEMENT AND PLAN - SEMTECH CORPd198668dex101.htm
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 July 31, 2011

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  x    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 September 1, 2011: 66,284,462

 

 

 


Table of Contents

SEMTECH CORPORATION

INDEX TO FORM 10-Q

FOR THE QUARTER ENDED JULY 31, 2011

 

PART I - FINANCIAL INFORMATION

     3   

ITEM 1. Financial Statements

     3   

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

     19   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     28   

ITEM 4. Controls and Procedures

     28   

PART II – OTHER INFORMATION

     30   

ITEM 1. Legal Proceedings

     30   

ITEM 1A. Risk Factors

     30   

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

     31   

ITEM 3. Defaults Upon Senior Securities

     31   

ITEM 4. (Removed and Reserved)

     31   

ITEM 5. Other Information

     31   

ITEM 6. Exhibits

     32   

 

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      Six Months Ended  
     July 31,
2011
    August 1,
2010
     July 31,
2011
    August 1,
2010
 

Net sales

   $ 130,254      $ 113,227       $ 252,625      $ 215,107   

Cost of sales

     51,534        45,795         100,051        90,628   
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     78,720        67,432         152,574        124,479   

Operating costs and expenses:

         

Selling, general and administrative

     22,481        24,915         49,186        51,266   

Product development and engineering

     22,228        17,404         40,753        32,707   

Intangible amortization

     2,103        2,405         4,205        4,810   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating costs and expenses

     46,812        44,724         94,144        88,783   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     31,908        22,708         58,430        35,696   

Interest and other (expense) income, net

     (117     308         (557     505   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before taxes

     31,791        23,016         57,873        36,201   

Provision for taxes

     4,653        3,354         8,153        5,737   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income

   $ 27,138      $ 19,662       $ 49,720      $ 30,464   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per share:

         

Basic

   $ 0.41      $ 0.32       $ 0.76      $ 0.49   

Diluted

   $ 0.40      $ 0.31       $ 0.74      $ 0.48   

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

         

Basic

     65,547        61,933         65,050        61,679   

Diluted

     68,186        63,552         67,638        63,264   

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

 

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Table of Contents

SEMTECH CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except share data)

 

     July 31,
2011
    January 30,
2011
 
     (unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 140,589      $ 119,019   

Temporary investments

     141,937        112,237   

Accounts receivables, less allowances of $4,780 at July 31, 2011 and $4,597 at January 30, 2011

     51,303        50,610   

Inventories

     49,203        47,719   

Deferred tax assets

     13,369        13,369   

Other current assets

     10,527        10,744   
  

 

 

   

 

 

 

Total current assets

     406,928        353,698   

Non-current assets:

    

Property, plant and equipment, net of accumulated depreciation of $81,748 at July 31, 2011 and $77,243 at January 30, 2011

     68,096        56,778   

Investments, maturities in excess of 1 year

     31,082        27,086   

Goodwill

     129,651        129,651   

Other intangibles, net

     70,618        74,823   

Other assets

     23,514        17,907   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 729,889      $ 659,943   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 34,088      $ 29,629   

Accrued liabilities

     27,303        55,842   

Deferred revenue

     5,702        5,020   

Deferred tax liabilities

     3,334        3,334   
  

 

 

   

 

 

 

Total current liabilities

     70,427        93,825   

Non-current liabilities:

    

Deferred tax liabilities

     15,262        11,120   

Other long-term liabilities

     26,069        26,383   

Stockholders’ equity:

    

Common stock, $0.01 par value, 250,000,000 shares authorized, 78,136,144 issued and 65,882,908 outstanding on July 31, 2011 and 78,136,144 issued and 63,927,740 outstanding on January 30, 2011

     785        785   

Treasury stock, at cost, 12,253,236 shares as of July 31, 2011 and 14,208,404 shares as of January 30, 2011

     (198,763     (232,267

Additional paid-in capital

     358,471        352,078   

Retained earnings

     456,996        407,276   

Accumulated other comprehensive income

     642        743   
  

 

 

   

 

 

 

Total stockholders’ equity

     618,131        528,615   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 729,889      $ 659,943   
  

 

 

   

 

 

 

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)

 

     Six Months Ended  
     July 31
2011
    August 1,
2010
 

Cash flows from operating activities:

    

Net income

   $ 49,720      $ 30,464   

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

    

Depreciation and amortization

     8,811        7,855   

Deferred income taxes

     6,239        1,572   

Stock-based compensation

     12,108        15,506   

Excess tax benefits on stock based compensation

     (1,719     (233

Loss on disposition of property, plant and equipment

     7        63   

Changes in assets and liabilities:

    

Receivables, net

     (693     (17,846

Inventories

     (1,526     (3,079

Prepaid expenses and other assets

     (7,409     (8,762

Accounts payable

     4,459        9,303   

Accrued liabilities

     (30,869     (283

Deferred revenue

     682        660   

Income taxes payable and prepaid taxes

     341        (844

Other liabilities

     435        652   
  

 

 

   

 

 

 

Net cash provided by operations

     40,586        35,028   

Cash flows from investing activities:

    

Purchase of available-for-sale investments

     (83,830     (81,895

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

     50,004        48,268   

Proceeds from sale of property, plant and equipment

     5        51   

Purchases of property, plant and equipment

     (15,259     (10,342
  

 

 

   

 

 

 

Net cash used in investing activities

     (49,080     (43,918

Cash flows from financing activities:

    

Excess tax benefits on stock based compensation

     1,719        233   

Proceeds from issuance of common stock

     28,896        7,379   

Repurchase of outstanding common stock

     (551     (1,402
  

 

 

   

 

 

 

Net cash provided by financing activities

     30,064        6,210   

Net increase (decrease) in cash and cash equivalents

     21,570        (2,680

Cash and cash equivalents at beginning of period

     119,019        80,598   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 140,589      $ 77,918   
  

 

 

   

 

 

 

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: Organization and Basis of Presentation

Semtech Corporation (together with its subsidiaries, the “Company”) is a global supplier of analog and mixed-signal semiconductor products. The end-customers for the Company’s products are primarily original equipment manufacturers (“OEM’s”) that produce and sell electronics.

The Company designs, develops and markets a wide range of products for commercial applications, the majority of which are sold into the computing, communications, high-end consumer and industrial end-markets.

Computing: desktops, notebooks, servers, graphic boards, printers, and other computer peripherals

Communications: base stations, optical networks, switches and routers, wireless LAN, and other communication infrastructure equipment

High-end consumer: handheld products, tablet computers, set-top boxes, digital televisions, digital video recorders and other consumer equipment

Industrial: automated meter reading, military and aerospace, medical, security systems, automotive, industrial and home automation, and other industrial equipment

Principles of Consolidation

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.

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.

Fiscal Year

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 second quarter of fiscal years 2012 and 2011 each consisted of 13 weeks.

Segment Information

The Company operates and accounts for its results in one reportable segment. The Company designs, develops, manufactures and markets high performance analog and mixed signal integrated circuits. The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by guidance regarding segment disclosures.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

6


Table of Contents

Reclassification

Certain amounts disclosed in the notes to the consolidated financial statements for the six months ended August 1, 2010, were reclassified to conform to the presentation used for the six months ended July 31, 2011.

Subsequent to the issuance of its October 31, 2010 unaudited consolidated financial statements, the Company determined that certain time deposits with original maturities ranging from six, nine, and twelve months should have been classified as Temporary Investments instead of Cash and Cash Equivalents on the Company’s Balance Sheets. As of August 1, 2010, the reclassification between these two current balance sheet captions totaled $28 million.

As reported in the Company’s Form 10-K for the year ended January 30, 2011, the Company did not include the cash flows from the purchase and maturities of these time deposits under the “cash flows from investing activities” section of the statement of cash flows. Reporting purchases and maturities on a gross basis, after reclassification, the Company’s purchases of available-for-sale investments increased from $54 million to $82 million for the six-months ended August 1, 2010. There were no maturities during this interim period. Overall, the reclassification caused net cash used in investing activities to increase from $16 million to $44 million for the six-month period ended August 1, 2010.

The reclassification did not have any impact on the Company’s income for the interim periods within fiscal year 2011 or the trend of earnings. Cash flows from operating activities and cash flows used by financing activities for the six-months ended August 1, 2010 are unaffected by the reclassification. Also, the reclassification has no effect on balance sheet subtotals such as current assets and total assets at August 1, 2010. Taking into consideration both quantitative and qualitative factors, the Company determined that the reclassification is not material to the Company’s balance sheet and statement of cash flows for the respective prior interim periods and therefore the Company has not restated previously issued interim financial statements.

Note 2: Comprehensive Income

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

 

      Three Months Ended      Six Months Ended  
(in thousands)    July 31,
2011
    August 1,
2010
     July 31,
2011
    August 1,
2010
 

Net income

   $ 27,138      $ 19,662       $ 49,720      $ 30,464   

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

     (64     94         (101     26   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income

   $ 27,074      $ 19,756       $ 49,619      $ 30,490   
  

 

 

   

 

 

    

 

 

   

 

 

 

Gain (loss) realized upon reclassification from Comprehensive Income

   $ —        $ —         $ —        $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Note 3: Earnings per Share

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

 

      Three Months Ended      Six Months Ended  
(in thousands, except per share amounts)    July 31,
2011
     August 1,
2010
     July 31,
2011
     August 1,
2010
 

Net income

   $ 27,138       $ 19,662       $ 49,720       $ 30,464   

Weighted average shares outstanding - basic

     65,547         61,933         65,050         61,679   

Dilutive effect of employee equity incentive plans

     2,639         1,619         2,588         1,585   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding - diluted

     68,186         63,552         67,638         63,264   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.41       $ 0.32       $ 0.76       $ 0.49   

Diluted earnings per common share

   $ 0.40       $ 0.31       $ 0.74       $ 0.48   

Anti-dilutive shares not included in the above calculations

     492         3,529         666         3,745   

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.

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. Recovery of costs associated with product design and engineering services are recognized during the period in which services are performed when a substantive milestone is achieved. The product design and engineering recovery, when recognized, will be reported as a reduction to product development and engineering expense. Historically, these recoveries have not exceeded the cost of the related development efforts.

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

Financial Statement Effects and Presentation. The following table shows total pre-tax, stock-based compensation expense included in the consolidated condensed statements of operations for the three and six month periods ended July 31, 2011 and August 1, 2010, respectively.

 

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Table of Contents

Allocation of Stock-based Compensation

 

     Three Months Ended      Six Months Ended  
(in thousands)    July 31,
2011
     August 1,
2010
     July 31,
2011
    August 1,
2010
 

Cost of sales

   $ 195       $ 646       $ 474      $ 1,172   

Selling, general and administrative

     2,666         4,702         8,284        10,306   

Product development and engineering

     1,760         1,858         3,350        4,028   
  

 

 

    

 

 

    

 

 

   

 

 

 

Stock-based compensation, pre-tax

   $ 4,621       $ 7,206       $ 12,108      $ 15,506   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net change in stock-based compensation capitalized into inventory

   $ 42       $ 61       $ (42   $ (89
  

 

 

    

 

 

    

 

 

   

 

 

 

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 forms of stock-based compensation. As of July 31, 2011, the Company has granted stock options (“Options”) and restricted stock under the Plans and has also issued 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 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’s or director’s requisite service period. Expected volatilities are based on historical volatility using daily and monthly stock price observations.

 

      Three Months Ended   Six Months Ended
     July 31,
2011
  August 1,
2010
  July 31,
2011
  August 1,
2010

Expected lives, in years

   4.4 - 4.7   5.0   4.4 - 4.7   5.0

Estimated volatility

   41%   40%   40% - 41%   40%

Dividend yield

   —     —     —     —  

Risk-free interest rate

   1.6% - 1.65%   1.8% - 2.1%   1.6% - 1.8%   1.8% - 2.3%

Weighted average fair value on grant date

   $10.09   $6.46   $8.54   $6.39

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 2012 and prior years are classified as liabilities rather than equity. For awards classified as liabilities, the value of these awards was re-measured on July 31, 2011.

Stock Option Awards. The Company has historically granted stock option awards to both employees and non-employee directors. The grant date for these awards is equal to the measurement date. These awards were valued as of the measurement date and are amortized over the requisite vesting period (typically 3-4 years). A summary of the activity for stock option awards during the first six months of fiscal year 2012 is presented below:

 

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Table of Contents

Information regarding outstanding stock option awards

 

(in thousands, except per share amounts)    Shares     Weighted
average
exercise
price
(per share)
     Weighted
average grant
date fair
value
(per share)
     Aggregate
intrinsic
value
     Aggregate
unrecognized
compensation
     Number of
shares
exercisable
     Weighted average
contractual term
(years)
 

Outstanding as of January 30, 2011

     6,622      $ 16.84          $ 35,492       $ 7,067         5,160      

Granted

     257        24.12       $  8.54               

Exercised

     (1,744     17.14                  

Cancelled/forfeited

     (86     24.04                  
  

 

 

                  

Outstanding as of July 31, 2011

     5,049      $ 16.99          $ 33,367       $ 6,865         3,721      
  

 

 

                  

Exercisable as of July 31, 2011

     3,721      $ 16.93          $ 25,023               2.54   

Restricted Stock. The Company has not granted any restricted stock to employees since fiscal year 2009. The grant date for these awards is equal to the measurement date. These awards are valued as of the measurement date and recognized as compensation expense over the requisite vesting period (typically 3-4 years). A summary of the activity for restricted stock awards for the first six months of fiscal year 2012 is presented below:

 

(in thousands, except for per share amounts)    Number of
Shares
    Weighted Average
Grant Date
Fair Value
(per share)
     Aggregate
Intrinsic
Value (1)
     Aggregate
Unrecognized
Compensation
     Weighted Average
Period Over
Which Expected
to be Recognized
(in years)
 

January 30, 2011

     135      $ 14.44          $ 984         0.8   

Granted

     —                

Vested

     (71     13.82       $ 1,725         

Forfeited

     (6     15.78            
  

 

 

            

July 31, 2011

     58      $ 15.06          $ 431         0.5   

 

(1) Represents the value of Semtech stock on the date that the restricted stock vested.

Performance Unit Awards. The Company grants performance vested RSUs to select employees. These awards have a performance condition in addition to a service condition. The performance condition generally relates to the Company’s revenue and operating income measured against internal goals. Under the terms of these awards, assuming the highest level of performance with no cancellations due to forfeitures, the maximum number of shares that can be earned in the aggregate is 960,400. In this scenario, the maximum number of shares that could be issued thereunder would be 527,700 and the Company would have a liability accrued in the Consolidated Balance Sheet equal to the value of 432,700 shares on the settlement date, which would be settled in cash. At July 31, 2011, the performance metrics associated with the awards issued in fiscal years 2012, 2011 and 2010 are expected to be met at a level which would result in a grant at 100%, 200%, and 200% of target, respectively. The following table summarizes performance unit award activity during the first six months of fiscal year 2012:

 

           Subject to
Share Settlement
    Subject to
Cash Settlement
     Weighted Average
Grant Date

Fair Value
(per share)
     Aggregate
Unrecognized
Compensation
     Weighted Average
Period Over
Which Expected

to be Recognized
(in years)
 
(in thousands, except for per share amount)    Total
Units
    Units     Units     Recorded
Liability
          

January 30, 2011

     556        326        230      $ 3,924.9       $ 14.26       $ 7,971         1.0   

Granted

     117        59        58           23.33         

Vested

     (123     (62     (61        13.15         

Cancelled/forfeited

     (22     (11     (11        13.15         

Change in liability

           310.3            
  

 

 

   

 

 

   

 

 

   

 

 

          

July 31, 2011

     528        312        216      $ 4,235.2       $ 16.57       $ 8,191         1.3   
  

 

 

   

 

 

   

 

 

   

 

 

          

Stock Unit Awards, Employees. The Company issues stock unit awards to employees which are expected to be settled with stock. The grant date for these awards is equal to the measurement date. These awards are valued as of the measurement date and amortized over the requisite vesting period (typically 4 years). The following table summarizes stock unit award activity for the first six months of fiscal year 2012:

 

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(in thousands, except per share price)    Number of
Units
    Weighted Average
Grant Date
Fair Value
(per unit)
     Aggregate
Intrinsic
Value (1)
     Aggregate
Unrecognized
Compensation
     Weighted Average
Period Over
Which Expected
to be Recognized
(in years)
 

January 30, 2011

     2,058      $ 16.70          $ 29,763         2.7   

Granted

     324        24.45            

Vested

     (205     15.66       $  5,099         

Forfeited

     (43     17.39            
  

 

 

            

July 31, 2011

     2,134      $ 17.96          $ 31,281         2.4   
  

 

 

            

 

(1) Reflects the value of Semtech stock on the date that the stock unit vested.

Stock Unit Awards, Non-Employee Directors. The Company grants stock unit awards to non-employee directors. These RSUs are accounted for as liabilities and accrued in the consolidated balance sheets because they are cash settled. The value of these awards is re-measured at each reporting period until settlement, which typically occurs upon the director’s separation from service. Vested awards and the pro-rata vested portion of unvested awards are recognized as a liability. These awards vest after one year of service. The following table summarizes stock unit award activity for the first six months of fiscal year 2012:

 

(in thousands, except per share price)    Number of
Units
    Recorded
Liability
    Weighted Average
Grant Date
Fair Value
(per unit)
     Aggregate
Unrecognized
Compensation
     Period Over
Which Expected
to be Recognized
(in years)
 

January 30, 2011

     30      $ 3,324.4      $ 16.43       $ 140         0.2   

Granted

     18        $ 27.60         

Vested

     (30     $ 16.43         

Forfeited

     —               

Change in Liability

       (320.8        
  

 

 

   

 

 

         

July 31, 2011

     18      $ 3,003.6      $ 27.60       $ 379         0.9   
  

 

 

   

 

 

         

Note 6: Investments

Certain investments that have original maturities of three months or less are accounted for as cash equivalents. This includes money market funds, time deposits and U.S. government obligations. Temporary and long-term investments consist of government, bank and corporate obligations, and bank time deposits with original maturity dates in excess of 90 days. Temporary investments have original 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.

 

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The following table summarizes the Company’s investments as of July 31, 2011 and January 30, 2011:

 

     July 31, 2011      January 30, 2011  
(in thousands)    Market Value      Adjusted
Cost Basis
     Unrealized
Gain
     Market Value      Adjusted
Cost Basis
     Unrealized
Gain
 

Agency securities

   $ 53,363       $ 53,302       $ 61       $ 54,747       $ 54,658       $ 89   

Corporate issues

     13,656         13,536         120         16,576         16,354         222   

Bank time deposits

     106,000         106,000         —           68,000         68,000         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 173,019       $ 172,838       $ 181       $ 139,323       $ 139,012       $ 311   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agency securities are specific securities that are issued by United States government agencies such as Ginnie Mae, Fannie Mae, Freddie Mac or the Federal Home Loan Banks. Due to the expectation of federal backing, these securities usually hold the highest credit rating possible.

The following table summarizes the maturities of the Company’s investments at July 31, 2011 and January 30, 2011:

 

     July 31, 2011      January 30, 2011  
(in thousands)    Market Value      Adjusted
Cost Basis
     Market Value      Adjusted
Cost Basis
 

Within 1 year

   $ 141,937       $ 141,760       $ 112,237       $ 112,077   

After 1 year through 5 years

     31,082         31,078         27,086         26,935   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 173,019       $ 172,838       $ 139,323       $ 139,012   
  

 

 

    

 

 

    

 

 

    

 

 

 

Unrealized gains (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 following table summarizes unrealized gains (losses) in addition to the tax associated with these comprehensive income items:

 

      Three months ended      Six months ended  
(in thousands)    July 31,
2011
    August 1,
2010
     July 31,
2011
    August 1,
2010
 

Unrealized (loss) gain, net of tax

   $ (64   $ 94       $ (101   $ 26   

Increase (decrease) to deferred tax liability

     (19     20         (29     (5

The following table summarizes interest income generated from investments and cash and cash equivalents:

 

      Three months ended      Six months ended  
(in thousands)    July 31,
2011
     August 1,
2010
     July 31,
2011
     August 1,
2010
 

Interest income

   $ 277       $ 279       $ 581       $ 503   

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.

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 is significant to the measurement of fair value of assets or liabilities.

 

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Available-for-sale securities included in Level 1 are valued using closing price for identical instruments that are traded on active exchanges. Available-for-sale securities included in Level 2 are valued utilizing inputs obtained from an independent service (the “Service”), which uses quoted market prices for identical or comparable instruments rather than direct observations of quoted prices in active markets. The Service gathers observable inputs for all of our fixed income securities from a variety of industry data providers, for example, large custodial institutions and other third-party sources. Once the observable inputs are gathered by the Service, all data points are considered and an average price is determined. The Service’s providers utilize a variety of inputs to determine their quoted prices. Substantially all of our available-for-sale investments are valued utilizing inputs obtained from the Service and accordingly are categorized as Level 2. We do not adjust the prices obtained from the Service.

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 2 inputs and consisted of the following:

 

      Fair Value as of July 31, 2011      Fair Value as of January 30, 2011  
(in thousands)    Total      Quoted Prices in
Active Markets
for Identical
(Level 1)
     Observable
Inputs Other
than Level 1
(Level 2)
     Total      Quoted Prices in
Active Markets
for Identical
(Level 1)
     Observable
Inputs Other
than Level 1
(Level 2)
 

Agency securities

   $ 53,363          $ 53,363       $ 54,747          $ 54,747   

Corporate issues

     13,656            13,656         16,576            16,576   

Bank time deposits

     106,000         —           106,000         68,000         —           68,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 173,019       $ —         $ 173,019       $ 139,323       $ —         $ 139,323   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The investment in bank time deposits and corporate commercial papers during the second quarter of fiscal year 2012 resulted in $173 million in financial assets measured at fair value on a recurring basis using Level 2 inputs.

The Company’s fixed income available-for-sale security portfolio generally consists of high quality, investment grade securities from diverse issuers with a minimum credit rating of A/A2. The Company previously classified these investments as Level 1 because it did not make adjustments to the prices obtained from the Service. Since the Company values these securities based on pricing from the Service, whose sources may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value, the Company began classifying all of its fixed income available-for-sale securities as Level 2 in the second quarter of fiscal year 2012. See Note 6 for more information regarding the Company’s available-for-sale investments.

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)    July 31,
2011
     January 30,
2011
 

Raw materials

   $ 5,757       $ 5,070   

Work in process

     28,024         27,763   

Finished goods

     15,422         14,886   
  

 

 

    

 

 

 
   $ 49,203       $ 47,719   
  

 

 

    

 

 

 

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 fair value of goodwill is tested for impairment on a non-recurring basis in the accompanying consolidated financial statements using Level 3 inputs. The Company concluded that there were no indicators of impairment as of July 31, 2011.

 

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There were no changes to goodwill during the first six months of fiscal year 2012.

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 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)

   Estimated
Useful Life
     Gross Carrying Amount      Accumulated Amortization     Net Book Value  
      July 31,
2011
     January 30,
2011
     July 31,
2011
    January 30,
2011
    July 31,
2011
     January 30,
2011
 

Core technologies

     2-10 years       $ 65,900       $ 65,900       $ (17,532   $ (14,006   $ 48,368       $ 51,894   

In-process research and development

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

Customer relationships

     8-10 years         12,130         12,130         (2,250     (1,571     9,880         10,559   
     

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total other intangibles

      $ 90,400       $ 90,400       $ (19,782   $ (15,577   $ 70,618       $ 74,823   
     

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Core technologies include $59.9 million of definite lived intangible assets from the December 9, 2009 acquisition of Sierra Monolithics, Inc. (“SMI”). These developed technology intangibles include current optical products, wireless products and microwave products. The Company concluded that the intangibles classified as core technologies were identifiable intangible assets, separate from goodwill, since they were capable of being separated from SMI and sold, transferred or licensed, regardless of whether the Company intended to do so. The fair value of these core technologies was determined using the multi-period excess earnings method. Each product technology was valued separately since each was determined to have a different remaining useful life.

Amortization expense related to intangible assets is reported as “Intangible amortization” in the consolidated condensed statements of operations.

For the three month periods ended July 31, 2011 and August 1, 2010, amortization expense related to intangible assets was $2.1 million and $2.4 million, respectively. Amortization expense related to intangible assets for the six-month periods ended July 31, 2011 and August 1, 2010 was $4.2 million and $4.8 million, respectively.

Note 10: Taxes

The Company’s effective tax rate differs from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside of the U.S.

The gross unrecognized tax benefits (before federal impact of state items) were $17.0 million at July 31, 2011 and January 30, 2011. Included in the balances of unrecognized tax benefits at July 31, 2011 and January 30, 2011, are $14.7 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 is reflected on the consolidated condensed balance sheets as follows:

 

(in thousands)    July 31,
2011
     January 30,
2011
 

Accrued liabilities

   $ 4,191       $ 4,191   

Other long-term liabilities

     10,548         10,548   
  

 

 

    

 

 

 

Total accrued taxes

   $ 14,739       $ 14,739   
  

 

 

    

 

 

 

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 $293,000 of net interest and penalties accrued at July 31, 2011 and January 30, 2011.

 

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As of July 31, 2011, it was reasonably possible that the total amounts of unrecognized tax benefits would decrease by up to $4.5 million within twelve months as a result of statutes of limitations for the taxing authority to challenge the position expiring. If recognized, this decrease will impact the effective tax rate.

In the first quarter of fiscal year 2012, the Internal Revenue Service initiated an examination of the Company’s 2009 Federal tax return (fiscal year 2010) which is currently ongoing. Tax years prior to 2007 (fiscal year 2008) 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 2006 (fiscal year 2007).

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 a global organization, the Company may be subject to a variety of transfer pricing or permanent establishment challenges by taxing authorities in various jurisdictions. In the second quarter of fiscal year 2011, Korean tax authorities completed an audit of the Company’s branch activities in Korea for tax years 2006 through 2010. The impact of this audit did not have a significant impact of the Company’s tax provision.

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 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 12 to the consolidated financial statements in Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2011 filed with the SEC on March 31, 2011. Except as discussed below, all proceedings discussed in the Form 10-K remains outstanding.

 

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Class Action Lawsuit. In Re: Semtech Corporation Securities Litigation, United States District Court, Central District of California, Case No. 2:07-CV-07114-CAS, two separate purported class action lawsuits were filed against the Company and certain current and former officers in August and October 2007, on behalf of persons who purchased or acquired Company securities from dates in 2002 to July 2006. The cases alleged violations of Federal securities laws in connection with the Company’s past stock option practices. In February 2008, the Mississippi Public Employees’ Retirement System (“MPERS”) filed a motion in the United States District Court for the Central District of California for consolidation of the cases described above, appointment of MPERS as lead plaintiff, and approval of selection of counsel. The MPERS motion was granted in late March 2008, and a Consolidated Amended Class Action Complaint was filed in May 2008, initiating the consolidated action with MPERS as the lead plaintiff. In August, 2010, the Court issued its class certification order, certifying the plaintiff class as persons who acquired common stock of the Company between August 27, 2002 and July 19, 2006 (inclusive).

At a mediation meeting held on December 5, 2010, an agreement in principle to settle the class action litigation was reached. The Company agreed to pay $20 million to settle all claims in the litigation. As a result of this agreement, the Company recorded an additional charge of $10 million in fiscal year 2011 to increase its total accrued liability for this matter to $20 million. Payment in full of the $20 million settlement amount was made on April 14, 2011 into the applicable escrow account associated with the proposed settlement and preliminary Court approval of same was issued on April 11, 2011.

Final approval of the proposed settlement was issued by the Court on June 27, 2011, per the Court’s Final Judgment and Order of Dismissal (the “Final Judgment”). No class member opted out of or otherwise presented any objection to the proposed settlement prior to entry of the Final Judgment The Final Judgment fully resolves all claims against the Company, all current officers and directors of the Company named in the lawsuit, and certain former officers and directors of the Company named in the lawsuit. No parties admit any wrongdoing in connection with the entry of the Final Judgment. All claims asserted against the Company and the named defendants in connection with the subject litigation have been released and dismissed with prejudice as part of the Final Judgment. All related civil legal proceedings, including separate appellate proceedings (that had been stayed pending settlement discussions) involving certain matters relating to prospective evidentiary matters impacting trial proceedings, have also now been dismissed with prejudice.

Indemnification

The Company has entered into agreements with its current executive officers and directors indemnifying them against certain liabilities incurred in connection with the performance of their duties. The Company’s Certificate of Incorporation and Bylaws contain comparable indemnification obligations with respect to the Company’s current directors and employees. Additionally, comparable indemnification agreements and obligations under the Certificate of Incorporation and Bylaws remain in effect for certain former executive officers and directors of the Company, rights under which are being claimed by certain former executives and former directors in relation to the Government Inquiries discussed in our Annual Report on Form 10-K for the fiscal year ended January 30, 2011 and the Class Action Lawsuit discussed above. As a result of the settlement of the Class Action Lawsuit, and dismissal of the lawsuit per the Final Judgment and Order of Dismissal issued by the Court on June 27, 2011, the Company’s indemnification obligations and expenses in relation to the Class Action Lawsuit are now ended. Obligations in relation to the Government Inquiries will remain pending.

 

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Table of Contents

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. As a result of lower than anticipated field failures and a revised estimate of anticipated warranty claims, the Company reduced its warranty accrual with a corresponding offset to cost of sales. The table below summarizes changes in product warranty allowances included in accrued liabilities.

 

(in thousands)       

Balance at January 30, 2011

   $ 607   

Current accruals

     65   

Accrual reversals

     (444

Settlements made (in cash or in kind) during period

     —     
  

 

 

 

Balance at July 31, 2011

   $ 228   
  

 

 

 

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

 

     Three Months Ended     Six Months Ended  
(percentage of net sales)    July 31
2011
    August 1,
2010
    July 31
2011
    August 1,
2010
 

North America

     25     24     26     25

Asia-Pacific

     62     60     61     59

Europe

     13     16     13     16
  

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     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:

 

     Three Months Ended     Six Months Ended  
(percentage of total sales)    July 31,
2011
    August 1,
2010
    July 31,
2011
    August 1,
2010
 

United States

     22     22     23     23

China (including Hong Kong)

     39     32     37     31

South Korea

       12       12

Sales to South Korea did not exceed 10% in either interim period of fiscal year 2012.

Income (loss) from continuing operations before income taxes is as follows:

 

     Three Months Ended      Six Months Ended  
(in thousands)    July 31
2011
     August 1,
2010
     July 31
2011
     August 1,
2010
 

Domestic

   $ 5,426       $ 3,557       $ 10,975       $ (334

Foreign

     26,365         19,459         46,898         36,535   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 31,791       $ 23,016       $ 57,873       $ 36,201   
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic income (loss) from continuing operations include amortization of acquired intangible assets, litigation expenses and higher levels of stock-based compensation compared to foreign operations.

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.

 

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Table of Contents

Concentration of Net Sales - Significant Customers

 

     Three Months Ended     Six Months Ended  
(percentage of net sales)    July 31,
2011
    August 1,
2010
    July 31,
2011
    August 1,
2010
 

Samsung Electronics (and affiliates)

     12     12     12     13

Frontek Technology Corp

     11     12     11     12

Concentration of Accounts Receivable - Significant Customers

 

     Balance as of  
(percentage of accounts receivable)    July 31,
2011
    January 30
2011
 

Samsung Electronics (and affiliates)

     11     12

Frontek Technology Corp

     13     12

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 such as the recent earthquake and Tsunami in Japan 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, Japan, 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 China, Malaysia, Thailand and the Philippines.

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. 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. See Note 11 for additional information regarding indemnification.

In the second quarter of fiscal years 2012 and 2011, respectively, approximately $55,000 and $1.1 million of legal expenses and liability accruals were recorded in relation to these matters.

For the first six months of fiscal years 2012 and 2011, respectively, approximately $186,000 and $2.7 million of legal expenses and liability accruals were recorded in relation to these matters.

All activity related to these matters is charged to “Selling, general and administrative” on the consolidated condensed statements of operations.

Note 14: 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. On August 24, 2011 the Company announced a $36 million expansion of the 2008 Program. Refer to Exhibit 99.1 of our current report on Form 8-K filed with the SEC on August 24, 2011 for the complete announcement.

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

 

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Table of Contents

Summary of Repurchase and Withholding Activity

 

     Three Months Ended      Six Months Ended  
(in thousands, except share data)    July 31,
2011
     August 1,
2010
     July 31,
2011
     August 1,
2010
 
     Shares      Value      Shares      Value      Shares      Value      Shares      Value  

Repurchases under the 2008 Program

     —         $ —           —         $ —           —         $ —           —         $ —     

Shares withheld from vested restricted shares

     3,583         101         58,709         1,026         22,513         551         82,087         1,402   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total activity

     3,583       $ 101         58,709       $ 1,026         22,513       $ 551         82,087       $ 1,402   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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 30, 2011 filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2011. 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 Part I, Item 1 of this Quarterly Report.

Overview

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

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 high-end consumer, computer, data-communications, telecommunications and industrial applications.

 

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Advanced Communication and Sensing Products. We design, develop and market a portfolio of proprietary advanced wired communication, wireless communication, sensing integrated circuits (“ICs”) and ultra-high speed Serializer/Deserializer (“SerDes”) products for transport communication. 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 and 40Gbps and 100Gbps chips and transceivers for short reach, metro and long haul applications and high performance transceivers for datacenter 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 industrial, scientific and medical (“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.

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.

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.

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 second quarter of fiscal years 2012 and 2011 represented 31% and 40% of net sales, respectively. Sales made directly to customers during the second quarter of fiscal years 2012 and 2011 were 53% and 53% of net sales, respectively. The remaining 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, United Kingdom, Hong Kong, Malaysia, Germany, Israel and Canada. For the second quarter of fiscal year 2012, approximately 58% of our silicon, in terms of cost of wafers purchased, was manufactured in China.

Foreign sales during the second quarter of fiscal year 2012 constituted approximately 78% of our net sales. Approximately 62% of sales during the second quarter of fiscal year 2012 were to customers located in the Asia-Pacific region. The remaining foreign sales were primarily to customers in Europe, Canada, and Mexico.

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 30, 2011 filed with the SEC on March 31, 2011.

 

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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. 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.

Recovery of costs associated with product design and engineering services are recognized during the period in which services are performed when a substantive milestone is achieved. The product design and engineering recovery, when recognized, will be reported as a reduction to product development and engineering expense. Historically, these recoveries have not exceeded the cost of the related development efforts.

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 - 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 products using current standard costs. The deferred gross margin does not include any adjustments for sales returns. 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 2011 or the first six months of fiscal year 2012.

The following table summarizes the deferred net revenue balance:

 

Deferred net revenue             
(in thousands)    July 31,
2011
    January 30,
2011
 

Deferred revenues

   $ 5,784      $ 6,369   

Less: Deferred cost of revenues

     (1,467     (1,560
  

 

 

   

 

 

 

Deferred revenues, net

   $ 4,317      $ 4,809   

Deferred product design and engineering recoveries

     1,385        211   
  

 

 

   

 

 

 

Total deferred revenue

   $ 5,702      $ 5,020   
  

 

 

   

 

 

 

Gross Profit

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.

Operating Costs

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.

 

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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     Six Months Ended  
     July 31,
2011
    August 1,
2010
    July 31,
2011
    August 1,
2010
 

Net Sales

     100.0     100.0     100.0     100.0

Cost of Sales

     39.6     40.4     39.6     42.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     60.4     59.6     60.4     57.9

Operating costs and expenses:

        

Selling, general & administrative

     17.3     22.0     19.5     23.8

Product development & engineering

     17.1     15.4     16.1     15.2

Intangible amortization

     1.6     2.1     1.7     2.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     35.9     39.5     37.3     41.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     24.5     20.1     23.1     16.6

Interest and other income, net

     (0.1 %)      0.3     (0.2 %)      0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     24.4     20.3     22.9     16.8

Provision for taxes

     3.6     3.0     3.2     2.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     20.8     17.4     19.7     14.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Percentages may not add precisely due to rounding.

Our regional mix of income (loss) from continuing operations before income taxes is as follows:

 

     Three Months Ended      Six Months Ended  
(in thousands)    July 31,
2011
     August 1,
2010
     July 31,
2011
     August 1,
2010
 

Domestic

   $ 5,426       $ 3,557       $ 10,975       $ (334

Foreign

     26,365         19,459         46,898         36,535   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 31,791       $ 23,016       $ 57,873       $ 36,201   
  

 

 

    

 

 

    

 

 

    

 

 

 

Domestic income (loss) from continuing operations include amortization of acquired intangible assets, litigation expenses and higher levels of stock-based compensation compared to foreign operations.

Comparison of the Three Months Ended July 31, 2011 and August 1, 2010

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 second quarter of fiscal years 2012 and 2011 were both 13-week periods.

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

 

 

     Three Months Ended  
(dollars in thousands; % of net sales)    July 31,
2011
    August 1,
2010
 

Computing

   $ 11,094         8   $ 11,086         10

Communications

     50,769         39     40,941         36

High-end Consumer (1)

     45,287         35     38,020         34

Industrial

     23,104         18     23,180         20
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 130,254         100   $ 113,227         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Approximately $5.0 million and $4.9 million of our total sales to Samsung Electronics (and affiliates), one of our significant customers, in the second quarter of fiscal years 2012 and 2011, respectively, were for products that target the handheld market (which includes mobile phones). This activity is included in the high-end consumer end-market category.

 

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Net Sales. Net sales for the second quarter of fiscal year 2012 were $130.3 million, an increase of 15% compared to $113.2 million for the second quarter of fiscal year 2011. The higher revenue in the current quarter resulted primarily from higher demand for products in the communications and high-end consumer end-markets.

Gross Profit. During the second quarter of fiscal year 2012, gross profit increased to $78.7 million from $67.4 million in the second quarter of fiscal year 2011. Gross profit margins increased to 60.4% in the second quarter of fiscal year 2012 from 59.6% in the second quarter of fiscal year 2011. This increase in gross profit reflects the impact of substantially higher sales and the benefit of higher manufacturing volumes. Also contributing to the higher margins was the impact of the transition away from lower margin computing products within our Power Management business and the impact of lower stock-based compensation expense.

Operating Costs and Expenses.

 

     Three Months Ended        
(dollars in thousands)    July 31,
2011
    August 1,
2010
    Change  

Selling, general and administrative

   $ 22,481         48   $ 24,915         56     -10

Product development and engineering

     22,228         47     17,404         39     28

Intangible amortization

     2,103         5     2,405         5     -13
  

 

 

    

 

 

   

 

 

    

 

 

   

Total operating costs and expenses

   $ 46,812         100   $ 44,724         100     5
  

 

 

    

 

 

   

 

 

    

 

 

   

Selling, General and Administrative Expenses.

Selling, general and administrative (“SG&A”) expenses in the second quarter of fiscal year 2012 were lower than the second quarter of fiscal year 2011 driven primarily by lower stock-based compensation expense.

SG&A expenses for the second quarter of fiscal years 2012 and 2011 include approximately $55,000 and $1.1 million, respectively, for legal and other professional services incurred in connection with matters related to our historical stock option practices, including 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 condensed 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

The increase in product development and engineering expenses was principally driven by the timing of recoveries from non-recurring engineering services, investments in new product and process development expenses and higher salary costs associated with an overall increase in personnel.

The levels of product development and engineering expenses reported in a fiscal period can be significantly impacted, and therefore experience period over period volatility, by the number of new product tape-outs and by the timing of recoveries from non-recurring engineering services which are typically milestone based and recorded as a reduction product development and engineering expense.

Intangible Amortization

Intangible amortization reflects amortization costs associated with acquired intangibles, was $2.1 million and $2.4 million in the second quarter of fiscal years 2012 and 2011, respectively. The decrease reflects the impact of certain intangibles that have been fully amortized.

Interest and Other, Net

Interest and other netted to an expense of $117,000 in the second quarter of fiscal year 2012 compared to income of $308,000 in the second quarter of fiscal year 2011. The decrease resulted from higher losses related to foreign currency transactions due to the weakening of the U.S dollars in the second quarter of fiscal year 2012.

 

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Provision for Taxes

Provision for income taxes was $4.7 million for the second quarter of fiscal year 2012, compared to $3.4 million in the second quarter of fiscal year 2011. The effective tax rates for the second quarter of fiscal years 2012 and 2011 were 15%. Our effective tax rates for these periods differ from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside of the U.S.

As a global organization, we are subject to audit by taxing authorities in various jurisdictions. To the extent that an audit, or the closure of a statute of limitations, results in our adjusting our reserves for uncertain tax positions, our effective tax rate could experience extreme volatility since any adjustment would be recorded as a discrete item in the period of adjustment.

In the second quarter of fiscal year 2012, a discrete item was recorded to reflect additional income tax liability resulting from a foreign audit which was initiated and closed this quarter. This amount did not materially impact the provision for income taxes.

Comparison of the Six Months Ended July 31, 2011 and August 1, 2010

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 six months of fiscal years 2012 and 2011 were both 26-week periods.

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

 

 

     Six Months Ended  
(dollars in thousands; % of net sales)    July 31,
2011
    August 1,
2010
 

Computing

   $ 21,366         8   $ 22,319         10

Communications

     100,661         40     75,437         35

High-end Consumer (1)

     85,669         34     72,600         34

Industrial

     44,929         18     44,751         21
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 252,625         100   $ 215,107         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(2) Approximately $8.4 million and $9.9 million of our total sales to Samsung Electronics (and affiliates), one of our significant customers, in the first six months of fiscal years 2012 and 2011, respectively, were for products that target the handheld market (which includes mobile phones). This activity is included in the high-end consumer end-market category.

Net Sales. Net sales for the first six months of fiscal year 2012 were $252.6 million, an increase of 17% compared to $215.1 million for the first six months of fiscal year 2011. The higher revenue in the current quarter resulted primarily from higher demand for products in the communications and high-end consumer end-markets.

Gross Profit. During the first six months of fiscal year 2012, gross profit increased to $152.6 million from $124.5 million in the first six months of fiscal year 2011. Gross profit margins increased to 60.4% in the first six months of fiscal year 2012 from 57.9% in the first six months of fiscal year 2011. 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 volumes. Also contributing to the higher margins was the impact of the transition away from lower margin computing products within our Power Management business and the impact of lower stock-based compensation expense.

 

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Operating Costs and Expenses.

 

     Six Months Ended        
(dollars in thousands)    July 31,
2011
    August 1,
2010
    Change  

Selling, general and administrative

   $ 49,186         52   $ 51,266         58     -4

Product development and engineering

     40,753         43     32,707         37     25

Intangible amortization

     4,205         5     4,810         5     -13
  

 

 

    

 

 

   

 

 

    

 

 

   

Total operating costs and expenses

   $ 94,144         100   $ 88,783         100     6
  

 

 

    

 

 

   

 

 

    

 

 

   

Selling, General and Administrative Expenses.

Selling, general and administrative (“SG&A”) expenses in the first six months of fiscal year 2012 were lower than the first six months of fiscal year 2011 driven primarily by lower stock-based compensation expense.

SG&A expenses for the first six months of fiscal years 2012 and 2011 include approximately $186,000 and $2.7 million, respectively, for legal and other professional services incurred in connection with matters related to our historical stock option practices, including 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 condensed 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

The increase in product development and engineering expenses was principally driven by the timing of recoveries from non-recurring engineering services, investments in new product and process development expenses and higher salary costs associated with an overall increase in personnel.

The levels of product development and engineering expenses reported in a fiscal period can be significantly impacted, and therefore experience period over period volatility, by the number of new product tape-outs and by the timing of recoveries from non-recurring engineering services which are typically milestone based and recorded as a reduction to product development and engineering expense.

Intangible Amortization

Intangible amortization reflects amortization costs associated with acquired intangibles, was $4.2 million and $4.8 million in the first six months of fiscal years 2012 and 2011, respectively. The decrease reflects the impact of certain intangibles that have been fully amortized.

Interest and Other, Net

Interest and other netted to an expense of $557,000 in the first six months of fiscal year 2012 compared to income of $505,000 in the first six months of fiscal year 2011. This decrease is attributable to a $1.1 million foreign currency loss in the first six months of fiscal year 2012, compared to a nominal gain in the first six months of fiscal year 2011.

Provision for Taxes

Provision for income taxes was $8.2 million for the first six months of fiscal year 2012, compared to $5.7 million for the first six months of fiscal year 2011. The effective tax rates for the first six months of fiscal years 2012 and 2011 were 14% and 16%, respectively. Our effective tax rates for these periods differ from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside of the U.S.

As a global organization, we are subject to audit by taxing authorities in various jurisdictions. To the extent that an audit, or the closure of a statute of limitations, results in our adjusting our reserves for uncertain tax positions, our effective tax rate could experience extreme volatility since any adjustment would be recorded as a discrete item in the period of adjustment.

 

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In the second quarter of fiscal year 2012, a discrete item was recorded to reflect additional income tax liability resulting from a foreign audit which was initiated and closed this quarter. This amount did not materially impact the provision for income taxes.

Business Outlook

On August 24, 2011, we announced our outlook for the third quarter of fiscal year 2012. At that time, we expected sequential revenue to be down approximately 2% to 8% from the second quarter and we expected earnings per diluted share of approximately $0.34 to $0.38. Refer to Exhibit 99.1 of our Current Report on Form 8-K filed with the SEC on August 24, 2011 for the complete announcement.

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 July 31, 2011, our total shareholders’ equity was $618.1 million. At that date we also had approximately $282.5 million in cash and short-term investments, as well as $31.1 million in long-term investments. We have no outstanding debt.

Our primary sources and uses of cash during the prior fiscal year are presented below:

 

     Six Months Ended  
(in millions)    July 31,
2011
    August 1,
2010
 

Sources of Cash

    

Operating activities

   $ 40.6      $ 35.0   

Proceeds from exercise of stock options including tax benefits

     30.6        7.6   
  

 

 

   

 

 

 
   $ 71.2      $ 42.6   
  

 

 

   

 

 

 

Uses of Cash

    

Capital expenditures, net of sale proceeds

   $ (15.3   $ (10.3

Net increase in investments

     (33.8     (33.6

Repurchase of common stock

     (0.5     (1.4
  

 

 

   

 

 

 
   $ (49.6   $ (45.3
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

   $ 21.6      $ (2.7
  

 

 

   

 

 

 

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 the hiring of additional 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 our 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 July 31, 2011, our foreign subsidiaries held approximately $211.1 million of cash, cash equivalents, and short-term investments compared to $165.7 million at January 30, 2011. If we needed these funds for investment in domestic operations, any repatriation 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) and also pursue business improvement opportunities.

 

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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.

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.

Investing Activities

Cash used for investing activities is primarily attributable to capital expenditures, purchases of investments, offset by proceeds from the sales/maturities of investments. Our marketable securities investment portfolio is invested primarily in highly rated securities, generally with a minimum rating of A/A2 or equivalent.

Capital expenditures were $15.3 million for the first six months of fiscal year 2012 compared to $10.3 million for the first six months of fiscal year 2011. The increase in capital expenditures was primarily to maintain and expand our test capacity, support engineering and manufacturing functions, and improve our various facilities.

Financing Activities

Cash provided by financing activities is primarily attributable to the following: proceeds from the exercise of stock options offset by the repurchase of common stock under the Company’s stock repurchase program and the payment of statutory tax withholding obligations resulting from the vesting of restricted stock settled by withholding shares.

For the first six months of fiscal year 2012, cash proceeds from the exercise of stock options were $28.9 million compared to $7.4 million in fiscal year 2011.

We do not directly control the timing of the exercise of stock options. Such exercises are independent decisions made by grantees and are influenced most directly by the stock price and the expiration dates of stock awards. Such proceeds are difficult to forecast, resulting from several factors which are outside 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. No shares were repurchased in the first six months of fiscal year 2012 or 2011. On August 24, 2011 we announced a $36 million expansion of our existing stock repurchase program. Refer to Exhibit 99.1 of our current report on Form 8-K filed with the SEC on August 24, 2011 for the complete announcement.

 

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Table of Contents

In addition to the stock repurchase program, shares valued at $551,000 and $1.4 million were withheld in connection with the vesting of restricted stock to cover statutory tax withholding obligations in the first six months of fiscal years 2012 and 2011, respectively.

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. We do not 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 July 31, 2011.

Contractual Obligations

There were no material changes in our contractual obligations during the first six months of fiscal year 2012 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 30, 2011 filed with the SEC on March 31, 2011.

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 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 2011 that ended on January 30, 2011 filed with the SEC on March 31, 2011. 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.

 

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.

 

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Changes in Internal Controls

There was no change in our internal control over financial reporting during the fiscal quarter ended July 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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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 Part I, 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 30, 2011 filed with the SEC on March 31, 2011. 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.

Other than the addition of the risk factor below, 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 30, 2011 filed with the SEC on March 31, 2011. 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.

We may be subject to taxation in other jurisdictions which could negatively affect our operations

As a global organization, we may be subject to a variety of transfer pricing or permanent establishment challenges by taxing authorities in various jurisdictions. If certain of our non-U.S. activities were treated as carrying on business as a permanent establishment and therefore subject to income tax in such jurisdiction, our results of operations could be materially adversely affected.

 

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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 second quarter of fiscal year 2012.

Issuer Purchase of Equity Securities

This table provides information with respect to purchases by us of shares of our common stock during the second quarter of fiscal year 2012.

 

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)
 

May 2011 (05/02/11-05/29/11)

     —         $ —           —         $ 13.7 million   

June 2011 (05/30/11-06/26/11)

     —         $ —           —         $ 13.7 million   

July 2011 (06/27/11-07/31/11)

     —         $ —           —         $ 13.7 million   
  

 

 

       

 

 

    

Total activity

     —              —        
  

 

 

       

 

 

    

 

(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 (“2008 Program”). This stock repurchase program does not have an expiration date. On August 24, 2011 we announced a $36 million expansion of the 2008 Program. Refer to Exhibit 99.1 of our current report on Form 8-K filed with the SEC on August 24, 2011 for the complete announcement.
(2) The table does not include shares surrendered to us or withheld in connection with the cashless exercise of stock options by employees and directors or shares surrendered to us or withheld 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.

 

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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
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    Semtech Nonqualified Executive Compensation Plan Adoption Agreement and Plan Document, as amended and restated effective October 12, 2007    Filed herewith
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    Filed herewith
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    Filed herewith
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”)    Filed herewith
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”)    Filed herewith

XBRL Interactive Data File will be filed by amendment to this Form 10-Q within 30 days of the filing date of this Form 10-Q, as permitted by Rule 405(a)(2)(ii) of Regulation S-T.

 

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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: September 9, 2011      

/s/ Mohan R. Maheswaran

   

Mohan R. Maheswaran

Chief Executive Officer

Date: September 9, 2011      

/s/ Emeka N. Chukwu

   

Emeka N. Chukwu

Vice President Finance,
Chief Financial Officer

 

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