34
Operating cash flows for the first ninesix months of fiscal year 20202021 were unfavorablyfavorably impacted by a $79.2 million reduction2.9% increase in net sales, compared to the first ninesix months of fiscal year 2019, excluding the $21.5 million net sales offset impact of the Warrant Shares in fiscal year 2019.2020. Operating cash flows for the first ninesix months of fiscal year 2020 were alsoadversely impacted by a $6.4$9.3 million increase in net inventory. Operating cash flows for the first nine months of fiscal year 2019 werecash-settled equity payments and favorably impacted by higher$1.0 million of proceeds received from the settlement of the HiLight lawsuit of $6.7 million in the first nine months of fiscal year 2019, compared to $1.0 million received in the first nine months of fiscal year 2020.lawsuit.
Investing Activities
Net cash used in investing activities iswas primarily attributable to capital expenditures and purchases of investments, net of proceeds from sales of property, plant and equipment and proceeds from sales of investments. Investing activities are also impacted by acquisitions, net of any cash received.
Capital expenditures were $20.4$14.6 million for the first ninesix months of fiscal year 2020,2021, compared to $12.9$16.9 million for the first ninesix months of fiscal year 2019.
2020. In the first ninesix months of fiscal year 2020, we made significant investments to update and expand our production capabilities including the $4.0 million purchase of a facility in Colorado.
During the remainder of fiscal year 2020, we expect to significantly reduce our investments in property, plant and equipment, but continue to invest in companies that are enabling the LoRa®- and LoRaWANTM-based ecosystem. In the first ninesix months of fiscal year 2020,2021, we made $9.6paid $6.7 million offor strategic investments, including investments in companies that are enabling the LoRa®-LoRa and LoRaWANTMLoRaWAN®-based ecosystem.
On May 2, 2018, we acquired substantially allecosystem, compared to $7.7 million of investments in the assets of IC Interconnect, Inc., a privately-held, U.S.-based company for approximately $7.4 million. We funded the purchase price using cash on hand. On August 17, 2018, we, through our subsidiary Semtech (International) AG, a Swiss corporation, entered into a share purchase agreement to purchase all of the outstanding equity interests of Trackio International AG, a Swiss corporation, and its subsidiaries (collectively, "TrackNet"), for an aggregate purchase price of approximately $8.5 million. The acquisition of TrackNet was accrued for during the third quarterfirst six months of fiscal year 2019 and paid for during the fourth quarter of fiscal year 2019.2020.
Financing Activities
Net cash used in financing activities is primarily attributable to repurchases of outstanding common stock, payments related to employee share-based compensation payroll taxes and principal payments related to our long-term debt, offset by proceeds from stock option exercises.
In the first ninesix months of fiscal year 2019, we settled the AptoVision earn-out for the performance period ended July 29, 2018. Of the total earn-out distribution for this performance period, $8.5 million was attributable to the original acquisition fair value and therefore presented as a financing activity.
In the first nine months of fiscal year 2020,2021, we paid $20.5$6.8 million for employee share-based compensation payroll taxes and received $4.4$3.0 million in proceeds from the exercise of stock options, compared to payments of $17.8$13.4 million for employee share-based compensation payroll taxes and proceeds of $10.4$3.0 million from the exercise of stock options in the first ninesix months of fiscal year 2019.2020. 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 option awards. Such proceeds are difficult to forecast, resulting from several factors that are outside our control. We believe that such proceeds will remain a nominal source of cash in the future.
Stock Repurchase Program
We currently have in effect a stock repurchase program that was initially approved by our Board of Directors in March 2008. On May 24, 2018, our Board of Directors increased the authorization by $250.0 million. This program represents one of our principal efforts to return value to our stockholders. We repurchased 925,7431,087,913 shares under this program in the first ninesix months of fiscal year 2021 for $42.4 million. In the first six months of fiscal year 2020, for $42.6 million. In the first nine months of fiscal year 2019, we repurchased 1,677,433448,481 shares under this program for $79.7$20.1 million. As of October 27, 2019,July 26, 2020, the remaining authorization under this program was $138.2$68.2 million.
Credit Facility
On November 15, 2016 (the "Closing Date"),7, 2019, we, with certain of our domestic subsidiaries as guarantors, entered into an amended and restated credit agreement ("Credit(the "Credit Agreement") with the lenders party thereto (the "Lenders") and HSBC Bank USA, National Association, as administrative agent, swing line lender and letter of credit issuer ("Administrative Agent"). Pursuant to the Credit Agreement, the Lenders provided us with senior secured first lien credit facilities in an aggregate principal amount of $400.0 million (the "Credit Facility"), consisting of term loans in an aggregate principal amount of $150.0 million (the "Term Loans") and revolving commitments in an aggregate principal amount of $250.0 million (the "Revolving Loans"). Up to $40.0 million of the Revolving Loans may be used to obtain letters of credit, up to $25.0 million of the Revolving Loans may be used to obtain swing line loans, and up to $40.0 million of the Revolving Loans may be used to obtain
revolving loans and letters of credit in certain currencies other than U.S. Dollars ("Alternative Currencies"). The Credit Facility was scheduled to mature on November 12, 2021. As of October 27, 2019, we had $101.3 million of outstanding borrowings under our Term Loans and $97.0 million of outstanding borrowings under our Revolving Loans, which had $153.0 million of undrawn capacity.
On November 7, 2019, the Credit Agreement was amendedorder to provide a more flexible borrowing structure by expanding the borrowing capacity of the Revolving Loansrevolving loans under the senior secured first lien credit facility (the "Credit Facility") to $600.0 million, eliminating the Term Loansterm loans under the prior facility and extending the maturity to November 7, 2024. Up
In the first six months of fiscal year 2021, we made payments that totaled $8.0 million on our Credit Facility, compared to $40.0payments on our previous term loans that totaled $9.4 million in the first six months of fiscal year 2020. As of July 26, 2020, we had $189.0 million of the Revolving Loans may be used to obtain letters of credit, up to $25.0outstanding borrowings on our Credit Facility, which had $411.0 million of undrawn capacity.
In the Revolving Loans may be usedfirst quarter of fiscal year 2021, we entered into an interest rate swap agreement with a three-year term to obtain swing line loans, and up to $40.0hedge the variability of interest payments on the first $150.0 million of the Revolving Loans may be used to obtain revolving loans and lettersdebt outstanding under our Credit Facility. Interest payments on $150.0 million of credit in certain currencies other than U.S. Dollars ("Alternative Currencies"). The proceeds of the Revolving Loans may be used by us for capital expenditures, permitted acquisitions, permitted dividends, working capital and general corporate purposes.
The Credit Agreement provides that, subject to certain customary conditions, including obtaining commitments with respect thereto, we may request the establishment of one or more term loan facilities and/or increases to the Revolving Loans in a principal amount not to exceed (a) $300.0 million, plus (b) an unlimited amount, so long as our consolidateddebt are now fixed at 1.9775%, based on our current leverage ratio, determined on a pro forma basis, does not exceed 3.00 to 1.00. However, the lenders are not required to provide such increase upon our request.
Interest on loans made under the Credit Facility in U.S. Dollars accrues, at our option, at a rate per annum equal to (1) the Base Rate (as defined below) plus a margin ranging from 0.25% to 1.25% depending upon our consolidated leverage ratio or (2) LIBOR (determined with respect to deposits in U.S. Dollars) for an interest period to be selected by us plus a margin ranging from 1.25% to 2.25% depending upon our consolidated leverage ratio (such margin, the "Applicable Margin"). The "Base Rate" is equal to a fluctuating rate equal to the highest of (a) the prime rate of the Administrative Agent, (b) 0.50% above the federal funds effective rate published by the Federal Reserve Bank of New York and (c) one-month LIBOR (determined with respect to deposits in U.S. Dollars), plus 1.00%.
Interest on loans made under the Credit Facility in Alternative Currencies accrues at a rate per annum equal to LIBOR (determined with respect to deposits in the applicable Alternative Currency) (other than loans made in Canadian Dollars, for which a special reference rate for Canadian Dollars applies) for an interest period to be selected by us plus the Applicable Margin.ratio.
No amortization is required with respect to the Revolving Loansrevolving loans and we may voluntarily prepay borrowings at any time and from time to time, without premium or penalty, other than customary "breakage costs" and fees for LIBOR-based loans.
The Credit Agreement contains customary covenants, including limitations on our ability to, among other things, incur indebtedness, create liens on assets, engage in certain fundamental corporate changes, make investments, repurchase stock, pay dividends or make similar distributions, engage in certain affiliate transactions, or enter into agreements that restrict our ability to create liens, pay dividends or make loan repayments. In connectionaddition, we must comply with financial covenants, including maintaining a maximum consolidated leverage ratio, determined as of the amendmentlast day of each fiscal quarter, of 3.50 to 1.00 or less, provided that, such maximum consolidated leverage ratio may be increased to 4.00 to 1.00 for the four consecutive fiscal quarters ending on or after the date of consummation of a permitted acquisition that constitutes a "Material Acquisition" under
the Credit Agreement, insubject to the fourth quartersatisfaction of fiscal yearcertain conditions. As of July 26, 2020, we drew $201.0 millionwere in new Revolving Loanscompliance with the financial covenants in our Credit Agreement.
The Credit Agreement also contains customary provisions pertaining to pay offevents of default. If any event of default occurs, the outstanding principal onobligations under the Term LoansCredit Agreement may be declared due and payable, terminated upon written notice to us and existing letters of approximately $101.3 million and Revolving Loans of $97.0 million, leaving $399.0 million of capacity remaining on the new Credit Facility. Relatedcredit may be required to this extinguishment of debt, we expect to write off $0.5 million of charges related to unamortized discounts and loan costs, which will be included in "Interest Expense" within the Statements of Income in the fourth quarter of fiscal year 2020.cash collateralized.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as those arrangements are defined by the SEC,U.S. Securities and Exchange Commission ("SEC"), that are reasonably likely to have a material effect on our financial condition, revenues or expenses, operating results, 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 condensed consolidated financial statements.
Contractual Obligations
There were no material changes in our contractual obligations during the first ninesix months of fiscal year 20202021 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 27, 201926, 2020 filed with the U.S. Securities and Exchange CommissionSEC on March 21, 201920, 2020 (our "Annual Report"). As discussed above, subsequent to October 27, 2019, we amended the Credit Agreement to provide a more flexible borrowing structure by expanding the borrowing capacity of the Revolving Loans to $600.0 million, eliminating the Term Loans and extending the maturity to November 7, 2024. In connection with the amendment of the Credit Agreement, we drew $201.0 million in new Revolving Loans to pay off the outstanding principal on the Term Loans of approximately $101.3 million and Revolving Loans of $97.0 million, leaving $399.0 million of capacity remaining on the new Credit Facility.
Critical Accounting Policies and Estimates
Our critical accounting policies are disclosed in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of our Annual Report. There have been no significant changes to our policies during the ninesix months ended October 27, 2019, except as discussed below related to our adoption of the new leasing standard.July 26, 2020. For a discussion of recent accounting pronouncements, see Note 1 to our interim unaudited condensed consolidated financial statements.
Leases
We have contracts where we are the lessee for real estate, vehicles, and office equipment. We do not have any material leases in which we are considered the lessor. Our leases have remaining lease terms of 1 year to 7 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.
We determine whether an arrangement is a lease at inception if we are both able to identify an asset and can conclude we have the right to control the identified asset for a period of time. Leases are recorded as right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities. ROU assets are included in "Other assets", other current liabilities are included in "Accrued liabilities" and operating lease liabilities are included in "Other long-term liabilities" in the Balance Sheets. Leases with an initial term of 12 months or less are not recorded in the Balance Sheets.
ROU assets represent our right to control an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Our leases typically do not include any residual value guarantees, bargain purchase options, or asset retirement obligations.
Our lease terms are only for periods in which we have enforceable rights. A lease is no longer enforceable when both the lessee and the lessor each have the right to terminate the lease without permission from the other party with no more than an insignificant penalty. Our lease terms are impacted by options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
We have lease agreements with lease and non-lease components, which are generally accounted for as a single lease component. To the extent that our agreements have variable lease payments, we include variable lease payments that depend on an index or a rate and exclude those which depend on facts or circumstances occurring after the commencement date, other than the passage of time.
We concluded a lease exists when the asset is specifically identifiable, substantially all the economic benefit of the asset is obtained, and the right to direct the use of the asset exists during the term of the lease. Most of our leases do not contain an implicit interest rate; therefore, judgment was required in determining a rate that reflects what we would pay to borrow, on a collateralized basis and over a similar term, for our lease obligations. We determined our incremental borrowing rate based on discussions with lenders and other information available at commencement date. We use the portfolio approach when applying the discount rate selected based on the dollar amount and term of the obligation.
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 (the "Exchange Act"), or 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 |
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. 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.
We do not engageconsidered the historical trends in foreign currency exchange rates and determined that it is reasonably possible that adverse changes in foreign exchange rates of 10% for all currencies could be experienced in the tradingnear-term. These reasonably possible adverse changes were applied to our total monetary assets and liabilities denominated in currencies other than our functional currency as of derivative financial instrumentsthe second quarter of fiscal year 2021. The adverse impact these changes would have had (after taking into account balance sheet hedges only) on our income before taxes is $1.3 million.
We are subject to interest rate risk in connection with the outstanding debt under our Credit Facility, which bears interest at variable rates as of July 26, 2020. In the first quarter of fiscal year 2021, we entered into an interest rate swap agreement with a three-year term to hedge the variability of interest payments on the first $150.0 million of debt outstanding under our Credit Facility. Interest payments on $150.0 million of our debt are now fixed at a rate of 1.9775% based on our current leverage ratio. As of July 26, 2020, a one percentage point increase in LIBOR would not have a material impact on our interest expense as only $39.0 million of our outstanding debt balance remains subject to a floating rate.
The Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rate, or LIBOR, has announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of
LIBOR after 2021. That announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Moreover, it is possible that LIBOR will be discontinued or modified prior to 2021. Our Credit Facility provides that, if it is publicly announced that the administrator of LIBOR has ceased or will cease to provide LIBOR, if it is publicly announced by the applicable regulatory supervisor that LIBOR is no longer representative, or if either the administrative agent or lenders holding 50% of the aggregate principal amount of our revolving commitments and term loans elect, we and the administrative agent may amend our Credit Agreement to replace LIBOR with an alternate benchmark rate. This alternative benchmark rate may include a forward-looking term rate that is based on the secured overnight financing rate, also known as SOFR, published by the Federal Reserve Bank of New York.
Interest rates also affect our return on excess cash and investments. As of July 26, 2020, we had $281.5 million of cash and cash equivalents. A majority of our cash and cash equivalents generate interest income based on prevailing interest rates. Investments and cash and cash equivalents generated interest income of $0.2 million in the normal coursesecond quarter of business to mitigate our risk related to interest rates. In the eventfiscal year 2021. A significant change in interest rates were to increase 100 basis points and holding all other variables constant, annual net income and cash flows for the following year would decrease by approximately $1.9 million as a result of our variable-rate debt. The effect of the 100 basis points increase would not be expected to significantly impact the fairamount of interest income generated from our cash and investments. It would also impact the market value of our variable-rate debt.investments.
Our investments are primarily subject to credit risk. Our investments are managed by a limited number of outside professional managers following investment guidelines set by us. Such guidelines prescribe credit quality, permissible investments, diversification, and duration restrictions. These restrictions are intended to limit risk by restricting our investments to high quality debt instruments with relatively short-term durations. Our investment strategy limits investment of new funds and maturing securities to U.S. Treasury, Federal agency securities, high quality money market funds and time deposits with our principal commercial banks.
We considered the historical trends in foreign currency exchange rates and determined that it is reasonably possible that adverse changes in foreign exchange rates of 10% for all currencies could be experienced in the near-term. These reasonably possible adverse changes were applied to our total monetary assets and liabilities denominated in currencies other than our functional currency as of the third quarter of fiscal year 2020. The adverse impact these changes would have had (after taking into account balance sheet hedges only) on our income before taxes is $1.1 million.
| |
ITEM 4. | Controls and Procedures |
ITEM 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,Act), which are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on that evaluation, our CEO and CFO concluded that, our disclosure controls and procedures were effective as of October 27, 2019.July 26, 2020.
Changes in Internal Controls
As of October 27, 2019,July 26, 2020, there were no changes to our internal control over financial reporting that occurred during the fiscal quarter then ended that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1.Legal Proceedings
Information about legal proceedings is set forth in Note 11 to the interim unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report.
ITEM 1A.Risk Factors
Please carefully consider and evaluate all of the information in this Quarterly Report and the risk factors set forth in our Annual Report. 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.
The risk factors associated with our business have not materially changed, as compared to the risk factors disclosed in our Annual Report except for the following updated risk factors below.
We are subject to export restrictions and laws affecting trade and investments.investments, which may limit our ability to sell to certain customers.
As a global company headquartered in the U.S.,United States, we are subject to U.S. laws and regulations that limit and restrict the export of some of our products and services and may restrict our transactions with certain customers, business partners and other persons, including, in certain cases, dealings with or between our U.S. employees and subsidiaries. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services and technologies, and in other circumstances we may be required to obtain an export license or other authorization before exporting theentering into a transaction or transferring a controlled item. Compliance with these laws has not significantly limited our operations or our sales in the recent past, but could significantly limit them in the future. We maintain an economics sanction and export compliance program but there are risks that the compliance controls could be circumvented, exposing us to legal liabilities. We must also comply with export restrictions and laws imposed by other countries affecting trade and investments. Although theseThese restrictions and laws have not significantly restricted our operations in the recent past there is a risk that they couldand may continue to do so in the future.
For example, on March 8, 2016, the U.S. Department of Commerce published a final rule in the Federal Register that amended the Export Administration Regulations ("EAR") by adding ZTE Corporation ("ZTE") and three of its affiliates to the “Entity List” for actions contrary to the national security and foreign policy interests of the U.S. This rule imposed new export licensing requirements on exports, re-exports, and in-country transfers of all U.S.-regulated products, software and technology to the designated ZTE entities, which prevented sales of our U.S. regulated products to ZTE since license requests were subject to a general policy of denial. On March 24, 2016, the U.S. Department of Commerce issued a temporary general license authorizing most exports to ZTE and one of its designated affiliates through June 30, 2016, thereby enabling us to resume sales to ZTE. The temporary license was repeatedly extended until the Bureau of Industry and Security removed ZTE from the Entity List on March 29, 2017, after ZTE entered a guilty plea and agreed to pay a combined penalty of up to $1.19 billion to settle civil and criminal allegations against it. However, part of this plea deal included the imposition of a Denial Order against ZTE and one of its affiliates, which was initially suspended, but later imposed on April 15, 2018, leading to restrictions on export, re-export or transfer of any items subject to U.S. regulations to ZTE and the listed affiliate. This again impacted our ability to sell certain items to ZTE until the Denial Order was terminated on July 13, 2018. ZTE is still subject to the terms of its settlement agreement that includes the potential for re-imposition of the Denial Order.
In addition, on May 16, 2019, the U.S. Department of Commerce amended the Export Administration RegulationsEAR by adding Huawei Technologies Co., Ltd. ("Huawei"), which was recently indicted by the U.S. government for violating U.S. sanctions and bank and wire fraud, among other charges, and 68 of its affiliates to the "Entity List" for actions contrary to the national security and foreign policy interests of the U.S.United States. On August 19, 2019, another 46 of Huawei’s non-U.S. affiliates were added to the “Entity List.” As with ZTE, this rule imposes new export licensing requirements on exports, re-exports, and in-country transfers of all U.S.- regulatedU.S.-regulated products, software and technology to the designated Huawei entities. As noted above, license requests are subject to a general policy of denial and, therefore, we will not be able to sell most of our U.S. regulated products to Huawei. Sales of our products to Huawei accounted for less than 10% of our net sales during the thirdsecond quarter of fiscal year 2021 and fiscal year 2020. Although the U.S. Department of Commerce granted certain temporary exemptions to Huawei on May 20, 2019 in the form of a temporary 90 day general license for specific activities, which was further extended for another 90 days on August 19, 2019 and again on November 18, 2019, on February 13, 2020, on March 10, 2020, and most recently on May 15, 2020, these exemptions areexpired on August 13, 2020 and were in any event limited in scope and generally dodid not apply to the sale of our U.S. regulated products to Huawei. In addition, on May 15, 2020, the U.S. Department of Commerce amended the EAR to expand the controls on certain foreign products based on U.S. technology and sold to Huawei and certain other companies on the Entity List and on August 17, 2020, the U.S. Department of Commerce expanded the scope of the foreign product rule as applied to products sold to or for Huawei, which we expect will further impact our ability to ship to Huawei, as well as certain other customers who we believe incorporate our products into their products sold to Huawei. As of the date of this report, we
are unable to predict the magnitude of the impact or the duration of the export restrictions imposed on Huawei and the corresponding future effects on our business.
These actions by the U.S. Department of Commerce or future regulatory activity may materially interfere with our ability to make sales to ZTE, Huawei or other foreign customers. ZTE, Huawei orand other foreign customers affected by future U.S. government export control measures or sanctions or threats of export control measures or sanctions may respond by developing their own solutions to replace our products or by adopting our foreign competitors’ solutions. In addition, our association with customers that are or become subject to U.S.
regulatory scrutiny or export restrictions could subject us to actual or perceived reputational harm among current or prospective investors, suppliers or customers, customers of our customers, other parties doing business with us, or the general public. Any such reputational harm could result in the loss of investors, suppliers or customers, which could harm our business, financial condition, operating results or prospects.
ChangesThe COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, and those of our customers, distributors, suppliers, third-party foundries and subcontractors thereby adversely affecting our business, financial condition and results of operations.
The COVID-19 pandemic has significantly affected health and economic conditions throughout the United States and the rest of the world including Asia, where a significant percentage of our customers, suppliers, third party foundries and subcontractors are located. Consumer fear about becoming ill with the virus and recommendations and/or mandates from authorities to avoid large gatherings of people or self-quarantine have been imposed. Although some of these measures have since been lifted or scaled back, a recent resurgence of COVID-19 in government trade policies couldthe United States and in some parts of Asia has resulted in the reimposition of certain restrictions and may lead to other restrictions being reimplemented in response to efforts to reduce the spread of COVID-19.
As a result of the pandemic, certain of our facilities and the third-party foundries and assembly and test contractors which we outsource our manufacturing functions to, have had to periodically reduce or suspend operations. The disruption experienced during such closures has resulted in reduced production of our products, delays for delivery of our products to our customers and reduced ability to receive supplies, which have had and may continue to have an adverse effect on our results. For example, in the first quarter of fiscal year 2021, certain shipments of our products were delayed due to COVID-19 related shutdowns of the plant in Reynosa, Mexico, as well as certain subcontractors in Malaysia. Our customers have experienced, and may continue to or again experience, reductions or closures of their manufacturing facilities or inability to obtain other components, either of which could negatively impact demand for our products, which are incorporated into our customers' devices and solutions. We cannot assure you that such facilities will not have to reduce or suspend operations again, and such reductions or closures could extend for a longer term than the prior shutdown of such facilities, thereby causing a disruption to the manufacturing and shipping of our products.
The COVID-19 pandemic has negatively impacted our financial results by decreasing sales in the high-end consumer and industrial end markets and increasing impairments for the first half of fiscal year 2021. We expect it to continue to negatively impact our financial results, including having a potentially larger impact on our results of operations than which has been reflected in our results for our first six months of fiscal year 2021. While we cannot predict the ultimate impact of the COVID-19 virus on our business at this time, the pandemic and related efforts to mitigate the pandemic could impact our business in a number of ways, including but not limited to:
•decreasing demand and pricing for our products as a result of the economic impact of the pandemic;
•disrupting our manufacturing processes, as has already occurred with the temporary reductions or closures of our facilities, third-party foundries and contractors, and the delay of supplies being received;
•disrupting freight infrastructure, thereby delaying shipment from vendors to assembly and test sites and shipments of our final product to customers;
•adversely impacting the business of our customers, which may materially adversely affect our business operations, sales or gross margins.
The U.S. government has recently made statements and taken certain actions that have led to, and may lead to, further changes to U.S. and international trade policies, including recently imposed tariffs affecting certain products exported by a number of U.S. trading partners, including China. In response, many U.S. trading partners, including China, have imposed or proposed new or higher tariffs on U.S. products. The tariffs imposed by the U.S. on products imported from China include parts and materials used in semiconductor manufacturing and could have the effect of increasing the cost of materials we use to manufacture certain products,suppliers, which could result in, lower margins. In addition,among other things, price increases and delays for delivery of raw materials and components needed for the geopolitical headwinds driven by export restrictionsproduction of our products;
•impacting our ability to maintain our workforce during this uncertain time;
•increasing employee absenteeism due to recommendations and/or mandates from authorities, infection or the fear of infection;
•possible lawsuits or additional regulatory actions due to COVID-19 spread in the workplace and tariffs imposed by the U.S. government may weaken demand for our products. For example, during the first nine months of fiscal year 2020,potential increases in costs to implement health safety measures;
•suffering from reputational risk if we experienced a decrease of 12.3%experience COVID-19 spread in our net sales compared toworkplace; and
•adversely impacting the same period last year primarily due to a declineproductivity of management and our employees that are working remotely.
Any or all of these items may occur, which individually or in China-based demand for our products.
We cannot predict what further actions may ultimately be taken with respect to tariffs or trade relations between the U.S. and other countries, what products may be subject to such actions, or what actions may be taken by the other countries in retaliation. Accordingly, it is difficult to predict exactly how, and to what extent, such actions may impact our business, or the business of our customers, partners or vendors. Any unfavorable government policies on international trade, such as capital controls or tariffs, may further affect the demand for our products, increase the cost of components, delay production, impact the competitive position of our products or prevent us from being able to sell products in certain countries, andaggregate, may have a material adverse effect on our business, financial condition and results of operations. These risks could accelerate or intensify depending on the severity and length of the pandemic. In addition, other countries as well as the United States are currently experiencing a resurgence of the COVID-19 virus and if the rate of infections continues to rise, these factors will be exacerbated.
Given that the COVID-19 pandemic has caused a significant economic slowdown, it appears increasingly likely that it could cause a global recession, which could be of an unknown duration, and as a result, we expect sales of our products to be negatively impacted. If general economic conditions deteriorate further, we cannot predict the duration or strength of an economic recovery, either in the United States, Asia, Europe or in the other specific markets where we sell our products. Sales to our customers are generally made on open account, subject to credit limits we may impose, and the receivables are subject to the risk of being uncollectible. If credit conditions worsen in response to the COVID-19 pandemic, customers may ask for extension of payment terms and are more likely to default, thereby increasing the risk of receivables being uncollectible.
Our authorized distributors have also experienced disruptions to their operations, including temporary reductions or closures during which they have diminished ability or are unable to sell our products. Because a significant majority of our net sales is through authorized distributors, the financial health of our distributors is critical to our success. Some of our distributors are small organizations with limited working capital. The ability of our distributors to purchase our products may be materially impacted depending on the length and severity of the pandemic, including the impact on general economic conditions. If our distributors suffer material economic harm during the pandemic, the distributors may no longer be able to continue in business or may continue in a reduced capacity.
Our suppliers have also experienced temporary reductions or closures, thereby impacting our ability and the ability of our subcontractors to receive certain raw materials, including silicon wafers, which are essential to the manufacturing of our products. We may experience delays in production of our products if we or our subcontractors do not receive sufficient supplies of materials or if we are required to replace one or more suppliers, which could cause a decrease in products available for sale or an increase in our cost of sales, either of which would adversely affect our business, financial condition and results of operations.
As of July 26, 2020, we had $281.5 million of cash and cash equivalents and $411.0 million of undrawn capacity on our Credit Facility. Our cash position will depend on multiple factors, including our ability to continue operations and production of our products, the COVID-19 pandemic’s effects on our customers, the availability of sufficient amounts of financing, and our operating resultsperformance.
Much of our workforce has been able to work remotely during this time and financial condition.many may continue to work remotely for an indefinite period of time. Remote working arrangements could impact employees’ productivity. We expect our employees will return to their office and manufacturing locations in a phased approach, and we have continued to implement safety precautions, including enhanced and more frequent cleaning of our facilities, providing face masks to each employee, enforcing social distancing guidelines and screening employees for potential symptoms. These additional safety precautions may also impact the productivity and profitability at our facilities. In addition, we may experience higher levels of absenteeism during the pandemic due to the fear of becoming ill.
Additionally, there is an increased risk that we may experience cybersecurity-related events such as COVID-19 themed phishing attacks and other security challenges as a result of most of our employees and our service providers working remotely from non-corporate managed networks during the ongoing COVID-19 pandemic and potentially continuing working remotely even after the COVID-19 pandemic has subsided.
As a result of the COVID-19 pandemic, we continue to evaluate the impact on long-lived assets, such as goodwill and intangible assets for possible impairment. We did not record a goodwill impairment charge during the first six months of fiscal year 2021. However, depending on future events, we may be required to record future impairment charges related to our goodwill, intangible assets or other long-lived assets. In addition, depending on the ongoing impact of the pandemic, we may also be required to reserve for incremental expected credit losses on our minority investments. For example, we recorded a loss of $1.5 million and $5.1 million in investment impairments and credit loss reserves during the three and six months ended July 26, 2020, respectively, some of which were, in part, due to the impact of the COVID-19 pandemic on our investees. Any resulting trade wars couldmaterial increase in our impairments or allowances for credit losses would have a significantcorresponding effect on our results of operations and related cash flows.
The ultimate magnitude of the COVID-19 pandemic, including the extent of its impact on our financial condition and results of operations, which could be material, will depend on all of the factors noted above, including other factors that we may not be able to forecast at this time. While we expect the impacts of the COVID-19 pandemic to have an adverse effect on world trade and global economic conditions and could adversely impact our revenues, gross margins and business operations.
Moreover, U.S. government actions targeting exports of certain technologies to China are becoming more pervasive. For example, in 2018, the U.S. adopted new laws designed to address concerns about the export of emerging and foundational technologies to China. In addition, on May 15, 2019, President Trump issued an executive order that invoked national emergency economic powers to implement a framework to regulate the acquisition or transfer of information communications technology in transactions that imposed undue national security risks. The order would restrict the acquisition or use in the U.S. of information and communications technology or services designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction of foreign adversaries. These actions could lead to additional restrictions on the export of products that include or enable certain technologies, including products we provide to China-based customers, thereby further impacting our business, operatingfinancial condition and results and financial condition.of operations, we are unable to predict the extent of these impacts at this time.
| |
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Issuer Purchase of Equity Securities
This table provides information with respect to purchases by us of shares of our common stock during the thirdsecond quarter of fiscal year 2020.2021.
|
| | | | | | | | | | | | | | |
| Fiscal Month/Year | | Total Number of Shares Purchased | | 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) |
| August 2019 (07/29/19-08/25/19) | | — |
| | $ | — |
| | — |
| | $ | 160.7 | million |
| September 2019 (08/26/19-09/22/19) | | 242,495 |
| | 46.24 |
| | 242,495 |
| | $ | 149.5 | million |
| October 2019 (09/23/19-10/27/19) | | 234,767 |
| | 48.18 |
| | 234,767 |
| | $ | 138.2 | million |
| Total activity | | 477,262 |
| | $ | 47.20 |
| | 477,262 |
| | |
| |
(1) | The Company maintains an active stock repurchase program that was initially approved by our Board of Directors in March 2008. The stock repurchase program does not have an expiration date and our Board of Directors has authorized expansion of the program over the years. As of October 27, 2019, we have repurchased $310.2 million in shares of our common stock under the program since inception and the current remaining authorization under our stock repurchase program is $138.2 million. Under our stock repurchase program, we may repurchase our common stock at any time or from time to time, without prior notice, subject to |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Month/Year | | Total Number of
Shares Purchased | | 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 2020 (04/27/20-05/24/20) | | — | | | $ | — | | | — | | | $ | 80.6 | million |
| June 2020 (05/25/20-06/21/20) | | 232,871 | | | 53.19 | | | 232,871 | | | $ | 68.2 | million |
| July 2020 (06/22/20-07/26/20) | | — | | | — | | | — | | | $ | 68.2 | million |
| Total activity | | 232,871 | | | $ | 53.19 | | | 232,871 | | | |
(1)The Company maintains an active stock repurchase program that was initially approved by our Board of Directors in March 2008. The stock repurchase program does not have an expiration date and our Board of Directors has authorized expansion of the program over the years. As of July 26, 2020, we have repurchased $380.2 million in shares of our common stock under the program since inception and the current remaining authorization under our stock repurchase program is $68.2 million. Under our stock repurchase program, we may repurchase our common stock at any time or from time to time, without prior notice, subject to market conditions and other considerations. Our repurchases may be made through Rule 10b5-1 and/or Rule10b-18 or other trading plans, open market purchases, privately negotiated transactions, block purchases or other transactions. We intend to fund repurchases under the program from cash on hand. We have no obligation to repurchase any shares under the stock repurchase program and may suspend or discontinue it at any time.
| |
ITEM 3. | Defaults Upon Senior Securities |
ITEM 3.Defaults Upon Senior Securities
None.
| |
ITEM 4. | Mine Safety Disclosures |
ITEM 4.Mine Safety Disclosures
Not applicable.
ITEM 5.Other Information
None.
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 |
| | | | |
Exhibit No. | | Description | | Location |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
|
| | | | |
Exhibit No. | | Description | | Location |
| | | | |
| | | | | | | | | | | | | | |
101 | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| 101 | | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 27, 2019,July 26, 2020, formatted in Inline XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flow and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | | |
| | | | |
| 104 | | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 27, 2019,July 26, 2020, formatted in Inline XBRL (included as Exhibit 101). | | |
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 |
| | | SEMTECH CORPORATIONRegistrant |
| | | Registrant |
| Date: | August 26, 2020 | | |
Date: | December 4, 2019 | | /s/ Mohan R. Maheswaran |
| | | Mohan R. Maheswaran |
| | | President and Chief Executive Officer |
| | | |
| Date: | December 4, 2019August 26, 2020 | | /s/ Emeka N. Chukwu |
| | | Emeka N. Chukwu |
| | | Executive Vice President and |
| | | Chief Financial Officer |