Future amortization expense of finite-lived intangible assets is expected as follows:
The Company’s effective tax rate differs from the statutory federal income tax rate of 21% primarily due to the regional mix of income, and a true up related to the impact of finalized regulationsreturn-to-provision adjustments, excess tax benefits from share-based compensation, withholding taxes on the mandatory deemed repatriation ofcertain foreign earnings ("U.S. Transition Tax").and research and development tax credits.
The Company uses a two-step approach to recognize and measure uncertain tax positions ("UTP"). The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained onin audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
| | | | | |
(in thousands) | |
Balance at January 26, 2020 | $ | 25,466 | |
Additions/(decreases) based on tax positions related to the current fiscal year | 278 | |
Additions/(decreases) based on tax positions related to the prior fiscal years | 1,240 | |
| |
Balance at October 25, 2020 | $ | 26,984 | |
Included in the balance of gross unrecognized tax benefits at October 27, 201925, 2020 and January 27, 201926, 2020 are $9.6$9.9 million and $4.5$8.6 million, respectively, of net tax benefits (after the federal impact of state items), that, if recognized, would impact the effective tax rate, prior to consideration of any required valuation allowance.
The liability for UTP is reflected in the Balance Sheets as follows:
|
| | | | | | | |
(in thousands) | October 27, 2019 | | January 27, 2019 |
Deferred tax assets - non-current | $ | 12,608 |
| | $ | 12,492 |
|
Other long-term liabilities | 9,550 |
| | 4,479 |
|
Total accrued taxes | $ | 22,158 |
| | $ | 16,971 |
|
| | | | | | | | | | | |
(in thousands) | October 25, 2020 | | January 26, 2020 |
Deferred tax assets - non-current | $ | 15,736 | | | $ | 15,575 | |
Other long-term liabilities | 9,903 | | | 8,555 | |
Total accrued taxes | $ | 25,639 | | | $ | 24,130 | |
The Company’s policy is to include net interest and penalties related to unrecognized tax benefits in the "Provision for income taxes" in the Statements of Income.
Tax years prior to 2013 (the Company’s fiscal year 2014) are generally not subject to examination by the U.S. Internal Revenue Service ("IRS") except for items involving tax attributes that have been carried forward to tax years whose statute of limitations remains open. For state returns, the Company is generally not subject to income tax examinations for calendar years prior to 2012 (the Company’s fiscal year 2013). The Company has a significant tax presence in Switzerland for which Swiss tax filings have been examined through fiscal year 2018.2019. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates. The Company believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with the Company's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
The Company’s regional income (loss) from continuing operations before taxes and equity in net (gains) lossesgains of equity method investments was as follows:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
(in thousands) | October 27, 2019 | | October 28, 2018 | | October 27, 2019 | | October 28, 2018 | (in thousands) | October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
Domestic | $ | 2,212 |
| | $ | (1,647 | ) | | $ | (12,682 | ) | | $ | (12,871 | ) | Domestic | $ | (2,054) | | | $ | (1,845) | | | $ | (19,065) | | | $ | (20,907) | |
Foreign | 18,414 |
| | 12,341 |
| | 58,865 |
| | 49,746 |
| Foreign | 21,957 | | | 18,183 | | | 65,813 | | | 58,373 | |
Total | $ | 20,626 |
| | $ | 10,694 |
| | $ | 46,183 |
| | $ | 36,875 |
| Total | $ | 19,903 | | | $ | 16,338 | | | $ | 46,748 | | | $ | 37,466 | |
Note 10: Leases
The Company has operating leases for real estate, vehicles, and office equipment. Real estate leases are used to secure office space for the Company's administrative, engineering, production support and manufacturing activities. The Company's leases have remaining lease terms of 1up to 7approximately 10 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.
The components of lease expense for the three and nine months ended October 27, 2019 were as follows:
| | | | | | | | Three Months Ended | | Nine Months Ended |
(in thousands) | Three Months Ended | | Nine Months Ended | (in thousands) | October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
Operating lease cost | $ | 1,183 |
| | $ | 3,610 |
| Operating lease cost | $ | 1,178 | | | $ | 1,183 | | | $ | 3,533 | | | $ | 3,610 | |
Short-term lease cost | 81 |
| | 242 |
| Short-term lease cost | 0 | | | 81 | | | 0 | | | 242 | |
| Sublease income | (33 | ) | | (98 | ) | Sublease income | (35) | | | (33) | | | (102) | | | (98) | |
Total lease cost | $ | 1,231 |
| | $ | 3,754 |
| Total lease cost | $ | 1,143 | | | $ | 1,231 | | | $ | 3,431 | | | $ | 3,754 | |
Supplemental cash flow information
for the nine months ended October 27, 2019 related to leases was as follows: |
| | | |
(in thousands) | |
Cash paid for amounts included in the measurement of lease liabilities | $ | 3,874 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 149 |
|
|
| | |
Weighted-average remaining lease term - operating leases | 4 years |
|
Weighted-average discount rate - operating leases | 6.7 | % |
Supplemental balance sheet information as of October 27, 2019 related to leases was as follows:
| | | | | | | | | | | |
| Nine Months Ended |
(in thousands) | October 25, 2020 | | October 27, 2019 |
Cash paid for amounts included in the measurement of lease liabilities | $ | 3,546 | | | $ | 3,874 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 4,119 | | | $ | 149 | |
| | | |
|
| | | |
(in thousands) | |
Operating lease right-of-use assets (1) (2) | $ | 10,049 |
|
| |
Other current liabilities (1) | $ | 3,833 |
|
Operating lease liabilities (1) | 6,849 |
|
Total operating lease liabilities | $ | 10,682 |
|
| | | | | | | | | | | |
| October 25, 2020 | | |
Weighted-average remaining lease term–operating leases | 4.53 years | | |
Weighted-average discount rate on remaining lease payments–operating leases | 6.8 | % | | |
| | | |
| | | |
(1) Operating lease right-of-use 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.Supplemental balance sheet information related to leases was as follows:
(2) The difference between the ROU assets and lease liabilities primarily represents the existing deferred rent liabilities balance, resulting from historical straight-lining of operating leases, which was effectively reclassified upon adoption to reduce the measurement of the ROU assets. | | | | | | | | | | | |
| Balance as of |
(in thousands) | October 25, 2020 | | January 26, 2020 |
Operating lease right-of-use assets in "Other assets" | $ | 12,159 | | | $ | 10,958 | |
| | | |
Operating lease liabilities in "Accrued liabilities" | $ | 3,643 | | | $ | 3,273 | |
Operating lease liabilities in "Other long-term liabilities" | 9,114 | | | 8,185 | |
Total operating lease liabilities | $ | 12,757 | | | $ | 11,458 | |
Maturities of lease liabilities as of October 27, 201925, 2020 are as follows:
| | | | | |
(in thousands) | |
Fiscal Year Ending: | |
2021 (remaining three months) | $ | 1,241 | |
2022 | 4,078 | |
2023 | 2,639 | |
2024 | 2,231 | |
2025 | 2,103 | |
Thereafter | 2,611 | |
Total lease payments | 14,903 | |
Less: imputed interest | (2,146) | |
Total | $ | 12,757 | |
|
| | | |
(in thousands) | |
Fiscal Year Ending: | |
2020 (remaining three months) | $ | 1,271 |
|
2021 | 3,939 |
|
2022 | 2,492 |
|
2023 | 1,461 |
|
2024 | 1,191 |
|
2025 | 1,022 |
|
Thereafter | 874 |
|
Total lease payments | 12,250 |
|
Less: imputed interest | (1,568 | ) |
Total | $ | 10,682 |
|
As of October 27, 2019, the Company has an25, 2020, we have entered into 2 additional operating leases with a total of $4.5 million lease primarily for office space,liabilities that it has yet to occupy for a valuehave not been recorded on our consolidated financial statements because the leases had not commenced as of approximately $3.2 million. The operating lease will commence at the end of the third quarter of fiscal year 2021. Subsequent to October 25, 2020, with aboth leases have commenced and have lease termterms of 710 years.
Note 11: Commitments and Contingencies
In accordance with ASC 450-20, Loss Contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated. The Company also discloses the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for its consolidated financial statements not to be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued, and makes adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount. The Company may be unable to estimate a possible loss or range of possible loss due to various reasons, including, among others: (i) if the damages sought are indeterminate; (ii) if the proceedings are in early stages, (iii) if there is uncertainty as to the outcome of pending appeals, motions or settlements, (iv) if there are significant factual issues to be determined or resolved, and (v) if there are novel or unsettled legal theories presented. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a possible eventual loss, if any.
Because the outcomes of litigation and other legal matters are inherently unpredictable, the Company’s evaluation of legal matters or proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. While the consequences of certain unresolved matters and proceedings are not presently determinable, and an estimate of the probable and reasonably possible loss or range of loss in excess of amounts accrued for such proceedings cannot be reasonably made, an adverse outcome from such proceedings could have a material adverse effect on the Company’s earnings in any given reporting period. However, in the opinion of management, after consulting with legal counsel, any ultimate liability related to current outstanding claims and lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on the Company’s consolidated financial statements, as a whole. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company’s control.
As such, even though the Company intends to vigorously defend itself with respect to its legal matters, there can be no assurance that the final outcome of these matters will not materially and adversely affect the Company’s business, financial condition, operating results, or cash flows.
From time to time, 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 IP,intellectual property, contract, product liability, employment, and environmental matters. In the opinion of management, after consulting with legal counsel, any ultimate liability related to current outstanding claims and lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on the Company’s consolidated financial statements, as a whole.
Settlement
On August 1, 2018, the Company announced the settlement of a lawsuit filed against HiLight Semiconductor Limited and related individual defendants in accordance with which the Company was paid approximately $9.0 million to cover damages for claims, costs and attorneys' fees. The Company recorded gains of $8.0 million during fiscal year 2019 and $1.0 million in the first quarter of fiscal year 2020 for recoveries related to this settlement. All recoveries were presented in "Selling, general and administrative" ("SG&A") expense in the Statements of Income in the respective periods in which the cash was received.
The Company’s currently pending legal matters of note are discussed below:
Environmental Matters
The Company vacated a former facility in Newbury Park, California in 2002, but continues to address groundwater and soil contamination at the site. The Company’s efforts to address site conditions have been at the direction of the Los Angeles Regional Water Quality Control Board (“RWQCB”). In October 2013, an order was issued including a scope of proposed additional site work, monitoring, and proposed remediation activities. The Company has been complying with RWQCB orders and direction, and has implementedcontinues to implement an approved remedial action plan addressing the soil, groundwater, and soil vapor at the site.
The Company has accrued liabilities where it is probable that a loss will be incurred and the cost or amount of loss can be reasonably estimated. Based on the latest determinations by the RWQCB and the most recent actions taken pursuant to the remedial action plan, the Company estimates the range of probable loss between $5.9$6.4 million and $7.5$8.0 million. To date, the Company has made $4.3$5.2 million in payments towards the remedial action plan and, as of October 27, 2019,25, 2020, has a remaining accrual of $1.6$1.2 million related to this matter. Given the uncertainties associated with environmental assessment and the remediation activities, the Company is unable to determine a best estimate within the range of loss. Therefore, the Company has recorded the minimum amount of probable loss. These estimates could change as a result of changes in planned remedial actions, further actions from the regulatory agency, remediation technology, and other factors.
Indemnification
The Company has entered into agreements with its current and former executives 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.
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 or additional warranty terms, including indemnification provisions.
The product warranty accrual reflects the Company’s best estimate of probable liability under its product warranties. The Company accrues for known warranty issues if a loss is probable and can be reasonably estimated, and accrues for estimated incurred but unidentified issues based on historical experience. Historically, warranty expense and the related accrual has been immaterial to the Company’s consolidated financial statements.
Deferred Compensation
The Company maintains a deferred compensation plan for certain officers and key executives that allowallows participants to defer a portion of their compensation for future distribution at various times permitted by the plan. This plan provides for a discretionary Company match up to a defined portion of the employee's deferral, with any match subject to a vesting period.
The Company's liability for the deferred compensation plan is presented below:
|
| | | | | | | |
(in thousands) | October 27, 2019 | | January 27, 2019 |
Accrued liabilities | $ | 1,141 |
| | $ | 2,203 |
|
Other long-term liabilities | 32,027 |
| | 27,251 |
|
Total deferred compensation liabilities under this plan | $ | 33,168 |
| | $ | 29,454 |
|
| | | | | | | | | | | |
(in thousands) | October 25, 2020 | | January 26, 2020 |
Accrued liabilities | $ | 5,353 | | | $ | 1,365 | |
Other long-term liabilities | 36,279 | | | 35,243 | |
Total deferred compensation liabilities under this plan | $ | 41,632 | | | $ | 36,608 | |
The Company has purchased whole life insurance on the lives of certain current deferred compensation plan participants. This Company-owned life insurance is held in a grantor trust and is intended to cover a majority of the Company's costs of the deferred compensation plan. The cash surrender value of the Company-owned life insurance was $22.5$25.8 million and $20.4$24.3 million as of October 27, 201925, 2020 and January 27, 2019,26, 2020, respectively, and is included in "Other assets" in the Balance Sheets.
Earn-out Liability
Pursuant to the terms of an amended earn-out arrangement ("Cycleo Earn-out") with the former shareholders of Cycleo SAS ("Cycleo Earn-out Beneficiaries"), which the Company acquired in March 2012, as of October 27, 2019, the Company potentially maymust make payments totaling up to approximately $11.3 million based on the achievement of a combination of certain sales and operating income milestones over a definedthe period ("Cycleo Defined Earn-out Period"). To date, the Company has made $7.7 million in payments related to the Cycleo Earn-out. The Cycleo Defined Earn-out Period covers the periodof April 27, 2015 to April 26, 2020. For certainNo payments have been made during the first nine months of fiscal year 2021 for the Cycleo Earn-out Beneficiaries,remaining earn-out milestone. Any payment offor the earn-out liability is contingent upon continued employment and is accounted for as post-acquisition compensation expense over the service period. The portion of the earn-out liability that is not dependent on continued employment is not considered as compensation expense. Based on historic and projected performance, the Company has recorded a liability for the Cycleo Earn-out of $2.2 million and $4.5 million as of October 27, 2019 and January 27, 2019, respectively.
Pursuantexpected to the terms of an earn-out arrangement ("AptoVision Earn-out") with the former shareholders of AptoVision, which the Company acquired in July 2017, as of October 27, 2019, the Company potentially may make payments totaling up to approximately $35.3 million based on the achievement of a combination of certain net sales, adjusted earnings and product development targets measured from the acquisition date through July 26, 2020. The Company fully released its liability for the AptoVision Earn-out during the nine months ended October 27, 2019 based on the Company's assessment of performance.
A summary of earn-out liabilities, included in "Accrued liabilities" and "Other long-term liabilities" in the Balance Sheets, by classification follows: |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balance at October 27, 2019 | | Balance at January 27, 2019 |
(in thousands) | Cycleo | | AptoVision | | Total | | Cycleo | | AptoVision | | Total |
Compensation expense | $ | 1,922 |
| | $ | — |
| | $ | 1,922 |
| | $ | 4,052 |
| | $ | — |
| | $ | 4,052 |
|
Not conditional upon continued employment | 310 |
| | — |
| | 310 |
| | 462 |
| | 2,161 |
| | 2,623 |
|
Total liability | $ | 2,232 |
| | $ | — |
| | $ | 2,232 |
| | $ | 4,514 |
| | $ | 2,161 |
| | $ | 6,675 |
|
| | | | | | | | | | | |
Amount expected to be settled within twelve months | $ | 2,232 |
| | $ | — |
| | $ | 2,232 |
| | | | | | |
be material.Restructuring
From time to time, the Company takes steps to realign the business to focus on high-growth areas, provide customer value and make the Company more efficient. As a result, the Company has re-aligned resources and infrastructure predominantly related to its wireless charging business, which resulted in restructuring expense of 0 and $2.1 million in the three and nine months ended October 27, 2019, respectively, and 0 and $0.4 millionwhich were included in SG&A expenses in the Statements of Income. The Company did not have any restructuring expense during the three and nine months ended October 28, 2018, respectively, which were included in "Selling, general and administrative" within the Statements of Income. The Company does not expect a material amount of expenses related to this restructuring in future periods.
25, 2020.
Note 12: Concentration of Risk
The following significant customers accounted for at least 10% of net sales in one or more of the periods indicated: | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
(percentage of net sales) | October 27, 2019 | | October 28, 2018 | | October 27, 2019 | | October 28, 2018 | (percentage of net sales) | October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
Trend-tek Technology Ltd. (and affiliates) | 13 | % | | 14 | % | | 13 | % | | 13 | % | Trend-tek Technology Ltd. (and affiliates) | 16 | % | | 13 | % | | 17 | % | | 13 | % |
Frontek Technology Corporation (and affiliates) | 12 | % | | 13 | % | | 11 | % | | 11 | % | Frontek Technology Corporation (and affiliates) | 16 | % | | 12 | % | | 14 | % | | 11 | % |
CEAC International Limited | | CEAC International Limited | 10 | % | | 10 | % | | 11 | % | | 7 | % |
Arrow Electronics (and affiliates) | 10 | % | | 11 | % | | 9 | % | | 11 | % | Arrow Electronics (and affiliates) | 9 | % | | 10 | % | | 9 | % | | 9 | % |
CEAC International Ltd. (and affiliates) | 10 | % | | 7 | % | | 7 | % | | 7 | % | |
Premier Technical Sales Korea, Inc. (and affiliates) (1) | | Premier Technical Sales Korea, Inc. (and affiliates) (1) | 6 | % | | 8 | % | | 6 | % | | 7 | % |
Samsung Electronics (and affiliates)(1) | 4 | % | | 8 | % | | 5 | % | | 8 | % | 3 | % | | 4 | % | | 2 | % | | 5 | % |
Premier Technical Sales Korea, Inc. (and affiliates) (1) | 8 | % | | 3 | % | | 7 | % | | 4 | % | |
|
(1) Premier is a distributor with a concentration of sales to Samsung. The above percentages represent the Company's estimate of the sales activity related to Samsung that is passing through this distributor.
The following table shows the customers that havehad an outstanding receivable balance that representsrepresented at least 10% of total net receivables as of one or more of the dates indicated:
|
| | | | | |
| Balance as of |
(percentage of net sales) | October 27, 2019 | | January 27, 2019 |
Frontek Technology Corporation (and affiliates) | 11 | % | | 10 | % |
Trend-tek Technology Ltd. (and affiliates) | 11 | % | | 11 | % |
| | | | | | | | | | | |
| Balance as of |
(percentage of net receivables) | October 25, 2020 | | January 26, 2020 |
Trend-tek Technology Ltd (and affiliates) | 16 | % | | 13 | % |
CEAC International Limited | 11 | % | | 11 | % |
| | | |
Frontek Technology Corporation (and affiliates) | 10 | % | | 11 | % |
Outside Subcontractors and Suppliers
The Company relies on a limited number of third-party subcontractors and suppliers for the production of silicon wafers, packaging and certain other tasks. Disruption or termination of supply sources or subcontractors, including due to the COVID-19 pandemic or natural disasters such as an earthquake or other causes, have delayed and 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 third-party subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Israel and Taiwan.South Korea. A significant amount of the Company’s assembly and test operations are conducted by third-party contractors in China, Malaysia, Taiwan, Thailand, South Korea and the Philippines. During the three months ended October 25, 2020 and October 27, 2019, approximately 15% and 30%, respectively, of the Company’s silicon in terms of cost of wafers was supplied by a third-party foundry in China, and approximately 4% and 10%, respectively, of the Company’s silicon in terms of cost of wafers was supplied by a third-party foundry in Israel. During the nine months ended October 25, 2020 and October 27, 2019, approximately 30%18% and 23%, respectively, of the Company’s silicon in terms of cost of wafers was supplied by a third-party foundry in China, and approximately 10%7% and 12%, respectively, of the Company’s silicon in terms of cost of wafers was supplied by a third-party foundry in Israel. During the three and nine months ended October 28, 2018, approximately 15% and 16%, respectively, of the Company’s silicon in terms of cost of wafers was supplied by a third-party foundry in China, and approximately 9% and 11%, respectively, of the Company’s silicon in terms of cost of wafers was supplied by a third-party foundry in Israel. These percentages could be higher in future periods.
For the three and nine months ended October 27, 2019, authorized distributors accounted for approximately 76% and 70%, respectively, of the Company’s net sales, compared to approximately 69% and 68%, respectively, for the three and nine months ended October 28, 2018. Generally, the Company does not have long-term contracts with its distributors and most can terminate their agreement with little or no notice. For the third quarter of fiscal year 2020, the Company's two largest distributors were based in Asia.
Note 13: Segment Information
The Company’s CEO functions as the chief operating decision maker ("CODM"). The CODM makes operating decisions and assesses performance based on the Company's major product lines, which represent its operating segments. The Company has 3 operating segments—Protection, Signal Integrity, and Wireless and Sensing—Sensing, and Protection—that have similar economic characteristics and have been aggregated into 1 reportable segment identified as the "Semiconductor Products Group."
The Company’s assets are commingled among the variousthree operating segments and the CODM does not use asset information in making operating decisions or assessing performance. Therefore, the Company has not included asset information by segment in the segment disclosures below.
Net sales by segment were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | October 27, 2019 | | October 28, 2018 | | October 27, 2019 | | October 28, 2018 |
Semiconductor Products Group | $ | 141,011 |
| | $ | 173,550 |
| | $ | 409,511 |
| | $ | 467,190 |
|
Total | $ | 141,011 |
| | $ | 173,550 |
| | $ | 409,511 |
| | $ | 467,190 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
Semiconductor Products Group | $ | 154,082 | | | $ | 141,011 | | | $ | 430,444 | | | $ | 409,511 | |
| | | | | | | |
Total | $ | 154,082 | | | $ | 141,011 | | | $ | 430,444 | | | $ | 409,511 | |
The following table presents a reconciliation of operating income by segment to consolidated income before taxes. Historical amounts have been adjusted to conform to the current presentation:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | October 27, 2019 | | October 28, 2018 | | October 27, 2019 | | October 28, 2018 |
Semiconductor Products Group | $ | 33,904 |
| | $ | 52,738 |
| | $ | 94,037 |
| | $ | 140,660 |
|
Operating income by segment | 33,904 |
| | 52,738 |
| | 94,037 |
| | 140,660 |
|
Items to reconcile segment operating income to consolidated income before taxes: | | | | | | | |
Share-based compensation | 8,767 |
| | 11,466 |
| | 28,741 |
| | 60,947 |
|
Intangible amortization | 3,770 |
| | 6,480 |
| | 12,821 |
| | 19,921 |
|
Investment impairments | — |
| | 30,000 |
| | — |
| | 30,000 |
|
Changes in the fair value of contingent earn-out obligations | (152 | ) | | (8,519 | ) | | (2,313 | ) | | (9,419 | ) |
Restructuring and other reserves | — |
| | 86 |
| | 2,711 |
| | 518 |
|
Litigation cost, net of recoveries | 205 |
| | (264 | ) | | 930 |
| | (5,562 | ) |
Transaction and integration related | (851 | ) | | 1,622 |
| | 617 |
| | 2,549 |
|
Interest expense | 2,183 |
| | 2,355 |
| | 7,247 |
| | 6,745 |
|
Non-operating income, net | (644 | ) | | (1,182 | ) | | (2,900 | ) | | (1,914 | ) |
Income before taxes | $ | 20,626 |
| | $ | 10,694 |
| | $ | 46,183 |
| | $ | 36,875 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
Semiconductor Products Group | $ | 37,668 | | | $ | 33,904 | | | $ | 100,584 | | | $ | 94,037 | |
| | | | | | | |
Operating income by segment | 37,668 | | | 33,904 | | | 100,584 | | | 94,037 | |
Items to reconcile segment operating income to consolidated income before taxes: | | | | | | | |
Share-based compensation | 13,538 | | | 13,055 | | | 36,103 | | | 37,458 | |
Intangible amortization | 1,798 | | | 3,770 | | | 6,658 | | | 12,821 | |
Investment impairments and credit loss reserves | 335 | | | 0 | | | 5,450 | | | 0 | |
Changes in the fair value of contingent earn-out obligations | 0 | | | (152) | | | (33) | | | (2,313) | |
Restructuring and other reserves | 0 | | | 0 | | | 502 | | | 2,711 | |
Litigation cost, net of recoveries | 558 | | | 205 | | | 809 | | | 930 | |
Transaction and integration related | 292 | | | (851) | | | 539 | | | 617 | |
Interest expense | 1,008 | | | 2,183 | | | 3,819 | | | 7,247 | |
Non-operating expense (income), net | 236 | | | (644) | | | (11) | | | (2,900) | |
Income before taxes and equity in net gains of equity method investments | $ | 19,903 | | | $ | 16,338 | | | $ | 46,748 | | | $ | 37,466 | |
Information by Product Line
The Company operates exclusively in the semiconductor industry and primarily within the analog and mixed-signal sector.
The table below provides net sales activity by product line on a comparative basis: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands, except percentages) | October 27, 2019 | | October 28, 2018 | | October 27, 2019 | | October 28, 2018 |
Signal Integrity | $ | 58,563 |
| | 42 | % | | $ | 69,981 |
| | 40 | % | | $ | 163,913 |
| | 40 | % | | $ | 204,381 |
| | 44 | % |
Wireless and Sensing | 42,287 |
| | 30 | % | | 50,484 |
| | 29 | % | | 126,190 |
| | 31 | % | | 144,435 |
| | 31 | % |
Protection | 40,161 |
| | 28 | % | | 53,085 |
| | 31 | % | | 119,408 |
| | 29 | % | | 139,875 |
| | 30 | % |
Other: Warrant Shares (1) | — |
| | — | % | | — |
| | — | % | | — |
| | — | % | | (21,501 | ) | | (5 | )% |
Total net sales | $ | 141,011 |
| | 100 | % | | $ | 173,550 |
| | 100 | % | | $ | 409,511 |
| | 100 | % | | $ | 467,190 |
| | 100 | % |
(1)For the nine-month period ended October 28, 2018, the net sales offset reflects the cost associated with the Warrant Shares of $21.5 million, including $15.9 million related to the Acceleration Event (see Note 3 for discussion regarding Share-Based Compensation).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands, except percentages) | October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
Signal Integrity | $ | 61,553 | | | 40 | % | | $ | 58,563 | | | 42 | % | | $ | 193,127 | | | 44 | % | | $ | 163,913 | | | 40 | % |
Wireless and Sensing | 51,145 | | | 33 | % | | 42,287 | | | 30 | % | | 122,933 | | | 29 | % | | 126,190 | | | 31 | % |
Protection | 41,384 | | | 27 | % | | 40,161 | | | 28 | % | | 114,384 | | | 27 | % | | 119,408 | | | 29 | % |
Total net sales | $ | 154,082 | | | 100 | % | | $ | 141,011 | | | 100 | % | | $ | 430,444 | | | 100 | % | | $ | 409,511 | | | 100 | % |
Information by Sales Channel
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except percentages) | Three Months Ended | | Nine Months Ended |
| October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
Distributor | $ | 125,610 | | | 82 | % | | $ | 107,383 | | | 76 | % | | $ | 346,103 | | | 80 | % | | $ | 287,642 | | | 70 | % |
Direct | 28,472 | | | 18 | % | | 33,628 | | | 24 | % | | 84,341 | | | 20 | % | | 121,869 | | | 30 | % |
Total net sales | $ | 154,082 | | | 100 | % | | $ | 141,011 | | | 100 | % | | $ | 430,444 | | | 100 | % | | $ | 409,511 | | | 100 | % |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | October 27, 2019 | | October 28, 2018 | | October 27, 2019 | | October 28, 2018 |
Distributor | $ | 107,383 |
| | $ | 120,009 |
| | $ | 287,642 |
| | $ | 332,304 |
|
Direct | 33,628 |
| | 53,541 |
| | 121,869 |
| | 156,387 |
|
Other: Warrant Shares | — |
| | — |
| | — |
| | (21,501 | ) |
Total net sales | $ | 141,011 |
| | $ | 173,550 |
| | $ | 409,511 |
| | $ | 467,190 |
|
Generally, the Company does not have long-term contracts with its distributors and most can terminate their agreement with little or no notice. For the third quarter of fiscal year 2021, the Company's largest distributors were based in Asia.Geographic Information
The Company generates virtually all of its sales from its Semiconductor Products Group through sales of analog and mixed-signal devices.
Net sales activity by geographic region was as follows:
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 27, 2019 | | October 28, 2018 | | October 27, 2019 | | October 28, 2018 |
Asia-Pacific | 75 | % | | 77 | % | | 76 | % | | 74 | % |
North America | 16 | % | | 16 | % | | 15 | % | | 26 | % |
Europe | 9 | % | | 7 | % | | 9 | % | | 7 | % |
Other: Warrant Shares | — | % | | — | % | | — | % | | (7 | )% |
| 100 | % | | 100 | % | | 100 | % | | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(percentage of total net sales) | October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
Asia-Pacific | 80 | % | | 75 | % | | 80 | % | | 76 | % |
North America | 12 | % | | 16 | % | | 12 | % | | 15 | % |
Europe | 8 | % | | 9 | % | | 8 | % | | 9 | % |
| 100 | % | | 100 | % | | 100 | % | | 100 | % |
The Company 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 net sales for at least one of the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(percentage of total net sales) | October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
China (including Hong Kong) | 58 | % | | 50 | % | | 59 | % | | 52 | % |
United States | 10 | % | | 10 | % | | 10 | % | | 10 | % |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(percentage of total sales) | October 27, 2019 | | October 28, 2018 | | October 27, 2019 | | October 28, 2018 |
China (including Hong Kong) | 50 | % | | 55 | % | | 52 | % | | 54 | % |
United States | 10 | % | | 10 | % | | 10 | % | | 11 | % |
Although a large percentage of our products is shipped into the Asia-Pacific region, a significant number of the products produced by these customers and incorporating our semiconductor products are then sold outside this region.
Note 14: Stock Repurchase Program
The Company maintains a stock repurchase program that was initially approved by its Board of Directors in March 2008. The stock repurchase program does not have an expiration date and the Company’s Board of Directors has authorized expansion of the program over the years. The following table summarizes activity under the program for the presented periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
(in thousands, except number of shares) | Shares | | Amount Paid | | Shares | | Amount Paid | | Shares | | Price Paid | | Shares | | Price Paid |
Shares repurchased under the stock repurchase program | 439,921 | | | $ | 24,046 | | | 477,262 | | | $ | 22,526 | | | 1,527,834 | | | $ | 66,433 | | | 925,743 | | | $ | 42,636 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 27, 2019 | | October 28, 2018 | | October 27, 2019 | | October 28, 2018 |
(in thousands, except number of shares) | Shares | | Price Paid | | Shares | | Price Paid | | Shares | | Price Paid | | Shares | | Price Paid |
Shares repurchased under the stock repurchase program | 477,262 |
| | $ | 22,526 |
| | 536,680 |
| | $ | 30,000 |
| | 925,743 |
| | $ | 42,636 |
| | 1,677,433 |
| | $ | 79,738 |
|
On May 24, 2018, the Company's Board of Directors authorized the expansion of the stock repurchase program by $250.0 million. As of October 27, 2019,25, 2020, the Company had repurchased $310.2$404.2 million in shares of its common stock under the program since inception and the remaining authorization under the program was $138.2$44.2 million. Under the program, the Company may repurchase its common stock at any time or from time to time, without prior notice, subject to market conditions and other considerations. The Company’s repurchases may be made through Rule 10b5-1 and/or Rule 10b-18 or other trading plans, open market purchases, privately negotiated transactions, block purchases or other transactions. The Company intends to fund repurchases under the program from cash on hand. The Company has no obligation to repurchase any shares under the program and may suspend or discontinue it at any time.
Note 15: Derivatives and Hedging Activities
The Company is exposed to certain risk arising from both its business operations and economic conditions and principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company, on a routine basis and in the normal course of business, experiences expenses denominated in Swiss Franc ("CHF"), Canadian Dollar ("CAD") and Great British Pound ("GBP"). Such expenses expose the Company to exchange rate fluctuations between these foreign currencies and the U.S. Dollar ("USD"). The Company occasionally uses derivative financial instruments, in the form of forward contracts, to mitigate a portion of the risk associated with adverse movements in these foreign currency exchange rates during a twelve monthtwelve-month window. Currency forward contracts involve fixing the exchange rate for delivery of a specified amount of foreign currency on a specified date.
The Company’s accounting treatment for these instruments is based on whether or not the instruments are designated as a hedging instrument. The Company is currently applying hedge accounting to all foreign currency derivatives and has designated these hedges as cash flow hedges.
At October 27, 2019, the Company did not have a material amount of outstandingThe Company's foreign exchange contracts. Forcontracts had the first nine monthsfollowing outstanding balances:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance as of |
(in thousands, except number of instruments data) | | October 25, 2020 | | January 26, 2020 |
Foreign Exchange Contracts | | Number of Instruments | | Sell Notional Value | | Buy Notional Value | | Number of Instruments | | Sell Notional Value | | Buy Notional Value |
Sell USD/Buy CAD Forward Contract | | 3 | | $ | 4,287 | | | C$ | 6,000 | | | 0 | | $ | 0 | | | C$ | 0 | |
Sell USD/Buy GBP Forward Contract | | 3 | | $ | 2,255 | | | £ | 1,800 | | | 0 | | $ | 0 | | | £ | 0 | |
| | | | | | | | | | | | |
Total | | 6 | | | | | | 0 | | | | |
These contracts have been designated as cash flows hedges and the unrealized gains or losses, net of fiscal years 2020 and 2019,tax, are recorded as a component of "Accumulated other comprehensive income or loss" ("AOCI") in the impactBalance Sheets. The effective portions of the cash flow hedges are recorded in AOCI until the hedged item is recognized in "SG&A expense" in the Statements of Income once the foreign exchange contractscontract matures, offsetting the underlying hedged expenses. Any ineffective portions of the cash flow hedges are recorded in "Non-operating expense, net" in the Statements of Income.
In the first quarter of fiscal year 2021, the Company 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 the Company's Credit Facility. Interest payments on $150.0 million of the Company's debt are now fixed at a rate of 1.9775%, based on the Company's current leverage ratio. The interest rate swap agreement has been designated as a cash flow hedge and unrealized gains or losses, net of income tax, are recorded as a component of AOCI in the Balance Sheets. As the various settlements are made on a monthly basis, the realized gain or loss on the settlements are recorded in "Interest expense" in the Statements of Income. The realized loss on the interest rate swap agreement was not material.material for the three and nine months ended October 25, 2020.
The fair values of the Company's derivative assets and liabilities that qualify as cash flow hedges in the Balance Sheets were as follows:
| | | | | | | | | | | | | | |
| | Balance as of |
(in thousands) | | October 25, 2020 | | January 26, 2020 |
Foreign currency forward contracts | | $ | 377 | | | $ | 0 | |
Total other current assets | | $ | 377 | | | $ | 0 | |
| | | | |
| | | | |
| | | | |
Interest rate swap agreement | | $ | 813 | | | $ | 0 | |
Total accrued liabilities | | $ | 813 | | | $ | 0 | |
| | | | |
| | | | |
Interest rate swap agreement | | $ | 1,041 | | | $ | 0 | |
Total other long-term liabilities | | $ | 1,041 | | | $ | 0 | |
Note 16: Subsequent EventsCorrection of Immaterial Errors in Prior Period Financial Statements
The Credit Facility was amended on November 7, 2019, 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. 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 proceeds of the Revolving Loans may be used by the Company 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, the Company 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 the Company's consolidated 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 the Company's 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 the Company plus a margin ranging from 1.25% to 2.25% depending upon the Company's 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 the Company plus the Applicable Margin.
Commitment fees on the unused portion of the Revolving Loans accrue at a rate per annum ranging from 0.20% to 0.35% depending upon the Company’s consolidated leverage ratio. The initial commitment fee rate is 0.20% per annum.
With respect to letters of credit, the Company will pay the Administrative Agent, for the account of the Lenders, letter of credit participation fees at a rate per annum equal to the Applicable Margin then in effect with respect to LIBOR-based loans on the face amount of all outstanding letters of credit. The Company will also pay HSBC Bank USA, N.A., as the issuing bank, a fronting fee for each letter of credit issued under the Credit Agreement at a rate equal to 0.125% per annum based on the maximum amount available to be drawn under each such letter of credit, as well as its customary documentation fees.
All obligations of the Company under the Credit Agreement are unconditionally guaranteed by all of the Company’s direct and indirect domestic subsidiaries, other than certain excluded subsidiaries, including, but not limited to, any domestic subsidiary the primary assets of which consist of equity or debt of non-U.S. subsidiaries, certain immaterial non-wholly-owned domestic subsidiaries and subsidiaries that are prohibited from providing a guarantee under applicable law or that would require governmental approval to provide such guarantee. The Company and the guarantors have also pledged substantially all of their assets to secure their obligations under the Credit Agreement.
No amortization is required with respect to the Revolving Loans and the Company 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.
In connection with the amendment of the Credit Agreement inDuring the fourth quarter of fiscal year 2020, management identified certain immaterial errors related to share-based compensation expense of market-condition awards granted during fiscal years 2018, 2019 and 2020. At the inception of these grants, the Company drew $201.0 millionappropriately determined that the awards contained a market condition and that the effect of the market condition should be reflected in new Revolving Loansthe grant date fair value of the awards, with the resulting compensation expense fixed at inception and recognized ratably over the requisite service period, regardless of when, if ever, the market condition is satisfied. The actual awards, however, were incorrectly accounted for as performance-based awards, whereby the number of shares expected to pay offvest and corresponding compensation expense was adjusted on a quarterly basis. The Company assessed the outstanding principalmateriality of the errors from a qualitative and quantitative perspective, and concluded that the impact of the errors is not material. Therefore, the correction of the errors did not require the amendment of the Company's previously filed Annual Reports on Form 10-K or its Quarterly Reports on Form 10-Q for the impacted periods. The Company has corrected its consolidated financial statements for these errors for the impacted prior periods presented in this Quarterly Report on Form 10-Q.
The impact of the corrections on the Term LoansCompany's Statements of approximately $101.3 millionIncome and Revolving LoansStatements of $97.0 million, leaving $399.0 million of capacity remaining onComprehensive Income for the new Credit Facility. Relatedthree and nine months ended October 27, 2019, are presented in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 27, 2019 | | October 27, 2019 |
(in thousands, except per share data) | As Reported | | As Corrected | | As Reported | | As Corrected |
Selling, general and administrative | $ | 33,795 | | | $ | 37,777 | | | $ | 112,047 | | | $ | 120,074 | |
Product development and engineering | $ | 26,670 | | | $ | 26,976 | | | $ | 79,322 | | | $ | 80,012 | |
Total operating costs and expenses | $ | 64,083 | | | $ | 68,371 | | | $ | 201,877 | | | $ | 210,594 | |
Operating income | $ | 22,165 | | | $ | 17,877 | | | $ | 50,530 | | | $ | 41,813 | |
Income before taxes and equity in net gains of equity method investments | $ | 20,626 | | | $ | 16,338 | | | $ | 46,183 | | | $ | 37,466 | |
Provision for income taxes | $ | 3,379 | | | $ | 2,693 | | | $ | 10,033 | | | $ | 8,638 | |
Net income before equity in net gains of equity method investments | $ | 17,247 | | | $ | 13,645 | | | $ | 36,150 | | | $ | 28,828 | |
Net income | $ | 17,599 | | | $ | 13,997 | | | $ | 36,259 | | | $ | 28,937 | |
Earnings per share: | | | | | | | |
Basic | $ | 0.27 | | | $ | 0.21 | | | $ | 0.55 | | | $ | 0.44 | |
Diluted | $ | 0.26 | | | $ | 0.21 | | | $ | 0.54 | | | $ | 0.43 | |
| | | | | | | |
Comprehensive income | $ | 18,025 | | | $ | 14,423 | | | $ | 36,551 | | | $ | 29,229 | |
There was no impact to this extinguishment of debt, we expectthe Company's Balance Sheets or to write off $0.5 million of charges related to unamortized discounts and loan costs, which will be includedtotal operating cash flows in "Interest Expense" within the Statements of IncomeCash Flows for any periods presented in the fourth quarter of fiscal year 2020.
this Quarterly Report on Form 10-Q.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following "Management’s Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with our interim unaudited condensed consolidated financial statements and the accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this "Quarterly Report"), and the "Special Note Regarding Forward-Looking and Cautionary Statements" in this Quarterly Report.
Overview
Semtech Corporation (together with its consolidated subsidiaries, the "Company", "we", "our", or "us") designs, develops, manufactures and markets high-performance analog and mixed signal semiconductors and advanced algorithms. We operate and account for results in one reportable segment through three product lines: Signal Integrity, Protection, and Wireless and Sensing.Sensing, and Protection.
Signal Integrity Products.Integrity. We design, develop and market a portfolio of optical data communications and video transport products used in a wide variety of enterprise computing, communications, and industrial applications. Our comprehensive portfolio of integrated circuits ("ICs") for data centers, enterprise networks, passive optical networks ("PON"), and wireless base station optical transceivers and high-speed interfaces ranges from 100Mbps to 400Gbps and supports key industry standards such as Fibre Channel, Infiniband, Ethernet, PON and synchronous optical networks. Our video products offer advanced solutions for next generation high-definition broadcast applications, as well as highly differentiated video-over-IP technology for professional audio video ("Pro AV") applications.
Protection Products.Wireless and Sensing. We design, develop and market a portfolio of specialized radio frequency products used in a wide variety of industrial, medical and communications applications, and specialized sensing products used in industrial and consumer applications. Our wireless products, which include our LoRa® devices and wireless radio frequency technology ("LoRa Technology"), feature industry leading and longest range industrial, scientific and medical radio, enabling a lower total cost of ownership and increased reliability in all environments. This makes these products particularly suitable for machine to machine and Internet-of-Things ("IoT") applications. Our unique sensing technology enables proximity sensing and advanced user interface solutions for our mobile and consumer products. Our wireless and sensing products can be found in a broad range of applications in the industrial, medical, and consumer markets. We also design, develop, and market power product devices that control, alter, regulate, and condition the power within electronic systems focused on the LoRa and IoT infrastructure segment. The highest volume product types within this category are switching voltage regulators, combination switching and linear regulators, smart regulators, isolated switches, and wireless charging.
Protection. 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, electrical over stress or secondary lightning surge energy, can permanently damage sensitive ICs. Our portfolio of protection solutions include filter and termination devices that are integrated with the TVS device. Our products provide robust protection while preserving signal integrity in high-speed communications, networking and video interfaces. These products also operate at very low voltage. Our protection products can be found in a broad range of applications including smart phones, LCD and organic light-emitting diode TVs and displays, set-top boxes, monitors and displays, tablets, computers, notebooks, base stations, routers, automobile and industrial instruments.
Wireless and Sensing Products. We design, develop and market a portfolio of specialized radio frequency products used in a wide variety of industrial, medical and communications applications, and specialized sensing products used in industrial and consumer applications. Our wireless products, which include our LoRa® devices and wireless radio frequency technology ("LoRa Technology"), feature industry leading and longest range industrial, scientific and medical radio, enabling a lower total cost of ownership and increased reliability in all environments. This makes these products particularly suitable for machine to machine and IoT applications. Our unique sensing technology enables proximity sensing and advanced user interface solutions for our mobile and consumer products. Our wireless and sensing products can be found in a broad range of applications in the industrial, medical, and consumer markets. We also design, develop, and market power product devices that control, alter, regulate, and condition the power within electronic systems focused on the LoRa® and IoT infrastructure segment. The highest volume product types within this category are switching voltage regulators, combination switching and linear regulators, smart regulators, isolated switches, and wireless charging.
Our interim unaudited condensed consolidated balance sheets are referred to herein as the "Balance Sheets" and interim unaudited condensed consolidated statements of income are referred to herein as the "Statements of Income."
Our net sales by product line were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
Signal Integrity | $ | 61,553 | | | $ | 58,563 | | | $ | 193,127 | | | $ | 163,913 | |
Wireless and Sensing | 51,145 | | | 42,287 | | | 122,933 | | | 126,190 | |
Protection | 41,384 | | | 40,161 | | | 114,384 | | | 119,408 | |
Total | $ | 154,082 | | | $ | 141,011 | | | $ | 430,444 | | | $ | 409,511 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | October 27, 2019 | | October 28, 2018 | | October 27, 2019 | | October 28, 2018 |
Signal Integrity | $ | 58,563 |
| | $ | 69,981 |
| | $ | 163,913 |
| | $ | 204,381 |
|
Wireless and Sensing | 42,287 |
| | 50,484 |
| | 126,190 |
| | 144,435 |
|
Protection | 40,161 |
| | 53,085 |
| | 119,408 |
| | 139,875 |
|
Other: Warrant Shares (1) | — |
| | — |
| | — |
| | (21,501 | ) |
Total | $ | 141,011 |
| | $ | 173,550 |
| | $ | 409,511 |
| | $ | 467,190 |
|
We design, develop and market a wide range of products for commercial applications, the majority of which are sold into the infrastructure, high-end consumer and industrial end markets. During the first quarter of fiscal year 2021, we reviewed the process for mapping our net sales to our end markets. This process can be challenging for the semiconductor industry due to the large number of products that can be used across multiple customer platforms and in different end markets. As a result, effective as of the beginning of the first quarter of fiscal year 2021, we combined our enterprise computing and communications end markets, which were historically presented separately, into our Infrastructure end market, which we believe better reflects actual end-market consumption. Accordingly, we now categorize our net sales into the following three end markets:(1)Infrastructure: data centers, PON, base stations, optical networks, servers, carrier networks, switches and routers, cable modems, wireless local area network ("LAN") and other communication infrastructure equipment.
High-End Consumer: On October 5, 2016,smartphones, tablets, wearables, desktops, notebooks, and other handheld products, wireless charging, set-top boxes, digital televisions, monitors and displays, digital video recorders and other consumer equipment.
Industrial: IoT, analog and digital video broadcast equipment, video-over-IP solutions, automated meter reading, smart grid, wireless charging, military and aerospace, medical, security systems, automotive, industrial and home automation and other industrial equipment.
Impact of COVID-19
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. As a result of the pandemic, certain of our facilities and the third-party foundries and assembly and test contractors which we issuedoutsource 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. Our customers have also 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 warrant (the "Warrant")longer term than the prior shutdown of such facilities, thereby causing a disruption to Comcast Cable Communications Management LLC ("Comcast")the manufacturing and shipping of 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. Our authorized distributors have experienced disruptions to their operations, including temporary reductions or closures during which they have diminished ability or are unable to sell our products. The ability of our distributors to purchase up to 1,086,957 shares (the "Warrant Shares")our products may be materially impacted depending on the length and severity of the common stockpandemic, including the impact on general economic conditions. Further, if credit conditions worsen in response to the COVID-19 pandemic, our customers may ask for extension of Semtech Corporation. The Warrant was issued in connection with an agreement betweenpayment terms and are more likely to default, thereby increasing risk of receivables being uncollectible.
We believe our liquidity position will allow us to withstand some of the parties regarding the intended trial deployment by Comcast of a low-power wide-area Network ("LPWAN")uncertainties in the U.S., basedcurrent environment. As of October 25, 2020, we had $262.3 million of cash and cash equivalents and $415.0 million of undrawn capacity on our LoRa® devicescredit facility. Our business is structured in a manner that is not capital intensive, which enhances our ability to preserve our overall liquidity even if conditions were to deteriorate further.
As a result of the COVID-19 pandemic, we continue to evaluate the impact on long-lived assets, such as goodwill and wireless radio frequency technology. Asintangible assets for possible impairment. We did not record a goodwill impairment charge during the first nine months of January 27, 2019,fiscal year 2021. We recorded $0.3 million and $5.5 million of investment impairments and credit loss reserves during the Warrant was fully vestedthree and exercisablenine months ended October 25, 2020, respectively, some of which were in part due to the impact of the COVID-19 pandemic on our investees.
Although some of the government measures implemented to reduce the spread of the virus have been lifted or scaled back, a recent resurgence of COVID-19 in the United States and some other countries has resulted in the reinstatement of restrictions and may lead to other restrictions being reinstated in a response to efforts to reduce the spread of the virus. The COVID-19 pandemic has negatively impacted our financial results for the first nine months of fiscal year 2021 compared to the same period last year by decreasing sales in the high-end consumer and industrial end markets and increasing impairments. We expect it to continue to have an adverse impact on our financial results. We believe, however, that our strong liquidity position, continued strong bookings, and a total of 869,565 shares, with no additional costspredominantly fabless business model will help us to be recognized in future periods. The Warrant was fully exercised and no longer outstanding as of March 15, 2019.
navigate through these uncertain times.
Factors Affecting Our Performance
Most of our sales to customers are made on the basis of individual customer purchase orders. Many customers include 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 third quarters of fiscal years 2021 and 2020 represented 26% and 2019 represented 42% and 37% of net sales, respectively. Sales made directly to customers during the third quarters of fiscal years 2021 and 2020 were 18% and 2019 were 24% and 31% of net sales, respectively. The remaining sales were made through independent distributors. Our business relies 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 and Israel. For the third quarters of fiscal years 2021 and 2020, approximately 15% and 2019, approximately 30% and 15%, respectively, of the Company’s silicon in terms of cost of wafers was supplied by a third-party foundry in China, and 10%approximately 4% and 9%10%, respectively, of the Company’s silicon in terms of cost of wafers was supplied by a third-party foundry in Israel. These percentages could be higher in future periods.Our concentration of wafer purchases from China has decreased as a percentage of total wafer purchases due to our strategy to diversify our supply base to improve business continuity. Foreign sales constituted approximately 90% of our net sales during the third quarters of fiscal years 20202021 and 2019.2020. Approximately 80% and 75% and 77% of foreign sales during the third quarters of fiscal years 20202021 and 2019,2020, respectively, were to customers located in the Asia-Pacific region. The remaining foreign sales were primarily to customers in Europe, Canada, and Mexico.
We use several metrics as indicators of future potential growth. The indicators that we believe best correlate to potential future sales growth are design wins and new product releases. There are many factors that may cause a design win or new product release not to result in sales, including a customercustomer's decision not to go to system production, a change in a customer’s perspective regarding a product’s value or a customer’s product failing in the end market. As a result, although a design win or new product introduction is an important step towards generating future sales, it does not inevitably result in us being awarded business or receiving a purchase commitment.
Historically, our results have reflected some seasonality, with demand levels generally lower during the first and fourth quarters of our fiscal year in comparison to the second and third quarters. 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 if we were unable to pass these higher costs on to our customers. We are continuing to monitor the near term geopolitical uncertainty and the recent export restrictions on shipments to certain customers, such as Huawei Technologies Co., Ltd. ("Huawei") and certain of its affiliates. On May 15, 2020, the U.S. Department of Commerce issued an interim final rule (the final rule was issued on August 17, 2020) that amended the Export Administration Regulations ("EAR") to expand the controls on foreign-produced direct products based on certain U.S. software and technology and 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 duration of the export restrictions imposed on Huawei and the corresponding future effects on our business. The following discussion reflectsand above discussions reflect our current assessment of the near termnear-term impact of this uncertainty.
Revenue and Cost of Sales
We derive our revenue primarily fromthese uncertainties, as well as the sale of semiconductor products into various end markets. Revenue is recognized when control of these products is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for these products. Control is generally transferred when products are shipped and, to a lesser extent, when the products are delivered. Recovery of costs associated with product design and engineering services are recognized during the period in which services are performed and are reported as a reduction to product development and engineering expense. Historically, these recoveries have not exceeded the cost of the related development efforts. We include revenue related to granted technology licenses as part of "Net sales" in the Statements of Income. Historically, revenue from these arrangements has not been significant though it is part of our recurring ordinary business.
We determine revenue recognition through the following five steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, performance obligations are satisfied
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Our revenue contracts generally represent a single performance obligation to sell our products to trade customers. Net sales reflect the transaction prices for contracts, which include units shipped at selling prices reduced by variable consideration. Determination of variable consideration requires judgment by us. Variable consideration includes expected sales returns and other price adjustments. Variable consideration is estimated using the expected value method considering all reasonably available information, including our historical experience and our current expectations, and is reflected in the transaction price when sales are recorded. Sales returns are generally accepted at our discretion or from distributors with such rights. Our contracts with trade customers do not have significant financing components or non-cash consideration. We record net sales excluding taxes collected on our sales to our trade customers.
recent COVID-19 pandemic.
We provide an assurance type warranty, which is typically not sold separately and does not represent a separate performance obligation. Our payment terms are generally aligned with shipping terms.
On October 5, 2016, we issued a Warrant to Comcast to purchase up to 1,086,957 Warrant Shares. The cost of the Warrant Shares is recognized as an offset to net sales. On April 27, 2018, we accelerated the vesting of the remaining 586,956 unvested shares from the Warrant ("Acceleration Event"), resulting in the full recognition of the previously unrecognized costs. For the nine-month period ended October 28, 2018, the net sales offset reflects the cost associated with the Warrant Shares of $21.5 million, including $15.9 million related to the Acceleration Event. As of January 27, 2019, the Warrant was fully vested and exercisable for a total of 869,565 shares, with no additional costs to be recognized in future periods. The Warrant was fully exercised and no longer outstanding as of March 15, 2019.
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, restructuring charges, and other operating related charges.
Results of Operations
The following table sets forth, for the periods indicated, our Statements of Income expressed as a percentage of net sales. | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
| October 27, 2019 | | October 28, 2018 | | October 27, 2019 | | October 28, 2018 | | October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | 38.8 | % | | 38.6 | % | | 38.4 | % | | 40.5 | % | Cost of sales | 39.0 | % | | 38.8 | % | | 38.9 | % | | 38.4 | % |
Gross profit | 61.2 | % | | 61.4 | % | | 61.6 | % | | 59.5 | % | Gross profit | 61.0 | % | | 61.2 | % | | 61.1 | % | | 61.6 | % |
Operating costs and expenses: | | | | | | | | Operating costs and expenses: | |
Selling, general and administrative | 24.0 | % | | 22.8 | % | | 27.4 | % | | 24.5 | % | Selling, general and administrative | 27.8 | % | | 26.8 | % | | 26.9 | % | | 29.3 | % |
Product development and engineering | 18.9 | % | | 15.6 | % | | 19.4 | % | | 17.4 | % | Product development and engineering | 18.1 | % | | 19.1 | % | | 19.7 | % | | 19.5 | % |
Intangible amortization | 2.7 | % | | 3.7 | % | | 3.1 | % | | 4.3 | % | Intangible amortization | 1.2 | % | | 2.7 | % | | 1.5 | % | | 3.1 | % |
| Changes in the fair value of contingent earn-out obligations | (0.1 | )% | | (4.9 | )% | | (0.6 | )% | | (2.0 | )% | Changes in the fair value of contingent earn-out obligations | — | % | | (0.1) | % | | — | % | | (0.6) | % |
| Total operating costs and expenses | 45.4 | % | | 37.3 | % | | 49.3 | % | | 44.2 | % | Total operating costs and expenses | 47.1 | % | | 48.5 | % | | 48.1 | % | | 51.4 | % |
Operating income | 15.7 | % | | 24.1 | % | | 12.3 | % | | 15.3 | % | Operating income | 13.9 | % | | 12.7 | % | | 13.0 | % | | 10.2 | % |
Interest expense | (1.5 | )% | | (1.4 | )% | | (1.8 | )% | | (1.4 | )% | Interest expense | (0.7) | % | | (1.5) | % | | (0.9) | % | | (1.8) | % |
Non-operating income, net | 0.5 | % | | 0.7 | % | | 0.7 | % | | 0.4 | % | |
Investment impairments | — | % | | (17.3 | )% | | — | % | | (6.4 | )% | |
Income before taxes and equity in net gains (losses) of equity method investments | 14.6 | % | | 6.2 | % | | 11.3 | % | | 7.9 | % | |
Provision (benefit) for income taxes | 2.4 | % | | (0.8 | )% | | 2.4 | % | | (2.8 | )% | |
Net income before equity in net gains (losses) of equity method investments | 12.2 | % | | 7.0 | % | | 8.8 | % | | 10.7 | % | |
Equity in net gains (losses) of equity method investments | 0.2 | % | | — | % | | — | % | | — | % | |
Non-operating (expense) income, net | | Non-operating (expense) income, net | (0.2) | % | | 0.5 | % | | — | % | | 0.7 | % |
Investment impairments and credit loss reserves | | Investment impairments and credit loss reserves | (0.2) | % | | — | % | | (1.3) | % | | — | % |
Income before taxes and equity in net gains of equity method investments | | Income before taxes and equity in net gains of equity method investments | 12.9 | % | | 11.6 | % | | 10.9 | % | | 9.1 | % |
Provision for income taxes | | Provision for income taxes | 1.0 | % | | 1.9 | % | | 0.6 | % | | 2.1 | % |
Net income before equity in net gains of equity method investments | | Net income before equity in net gains of equity method investments | 11.9 | % | | 9.7 | % | | 10.3 | % | | 7.0 | % |
Equity in net gains of equity method investments | | Equity in net gains of equity method investments | 0.1 | % | | 0.2 | % | | — | % | | — | % |
Net income | 12.5 | % | | 7.0 | % | | 8.9 | % | | 10.6 | % | Net income | 12.0 | % | | 9.9 | % | | 10.3 | % | | 7.1 | % |
Net loss attributable to noncontrolling interest | | Net loss attributable to noncontrolling interest | — | % | | — | % | | — | % | | — | % |
Net income attributable to common stockholders | | Net income attributable to common stockholders | 12.0 | % | | 9.9 | % | | 10.3 | % | | 7.1 | % |
Percentages may not add precisely due to rounding. | | | | | | | | Percentages may not add precisely due to rounding. | | | | | | | |
Our regional mix of income (loss) from continuing operations before taxes and equity in net gains (losses) of equity method investments was as follows: | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended |
(in thousands) | October 27, 2019 | | October 28, 2018 | | October 27, 2019 | | October 28, 2018 | (in thousands) | October 25, 2020 | | October 27, 2019 | | October 25, 2020 | | October 27, 2019 |
Domestic | $ | 2,212 |
| | $ | (1,647 | ) | | $ | (12,682 | ) | | $ | (12,871 | ) | Domestic | $ | (2,054) | | | $ | (1,845) | | | $ | (19,065) | | | $ | (20,907) | |
Foreign | 18,414 |
| | 12,341 |
| | 58,865 |
| | 49,746 |
| Foreign | 21,957 | | | 18,183 | | | 65,813 | | | 58,373 | |
Total | $ | 20,626 |
| | $ | 10,694 |
| | $ | 46,183 |
| | $ | 36,875 |
| Total | $ | 19,903 | | | $ | 16,338 | | | $ | 46,748 | | | $ | 37,466 | |
Domestic performance from continuing operations includes amortization of acquired intangible assets and higher levels of share-based compensation compared to foreign operations.
Comparison of the Three Months Ended October 27, 201925, 2020 and October 28, 201827, 2019
As noted above in "Overview", we revised the end market categories for our net sales at the beginning of the first quarter of fiscal year 2021. All net sales amounts shown below for our end markets, including periods presented inprior to the first quarter of fiscal year 2021, have been reclassified to conform to our current classification of end markets. The following summary oftable summarizes our net sales by major end market reflect our current classification methodology (see Note 1 to our unaudited condensed consolidated financial statements for a description of each market category):market:
|
| | | | | | | | | | | | | |
| Three Months Ended |
(in thousands, except percentages) | October 27, 2019 | | October 28, 2018 |
Industrial | $ | 48,013 |
| | 34 | % | | $ | 52,828 |
| | 30 | % |
Enterprise Computing | 43,226 |
| | 31 | % | | 51,776 |
| | 30 | % |
High-End Consumer | 35,644 |
| | 25 | % | | 49,370 |
| | 29 | % |
Communications | 14,128 |
| | 10 | % | | 19,576 |
| | 11 | % |
Total | $ | 141,011 |
| | 100 | % | | $ | 173,550 |
| | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
(in thousands) | October 25, 2020 | | October 27, 2019 |
Infrastructure | $ | 58,916 | | | 39 | % | | $ | 54,925 | | | 39 | % |
High-End Consumer | 45,321 | | | 29 | % | | 38,073 | | | 27 | % |
Industrial | 49,845 | | | 32 | % | | 48,013 | | | 34 | % |
Total | $ | 154,082 | | | 100 | % | | $ | 141,011 | | | 100 | % |
Net Sales
Net sales for the third quarter of fiscal year 20202021 were $141.0$154.1 million, a decreasean increase of 18.7%9.3% compared to $173.6$141.0 million for the third quarter of fiscal year 2019.2020. During the third quarter of fiscal year 2020,2021, we experienced continued weakness in China-basedstrong demand across all ofthree end markets. In our end markets, primarily due to geopolitical headwinds driven by export restrictions and tariffs imposed by the U.S. government. The high-end consumer end market, declined due to lower China and Korea-based demand for smartphones and softer demand for ourstronger sales were driven by mobile applications such as proximity sensing products. The enterprise computingproducts, particularly in China. Increases in our infrastructure end market declined due to lower PON demand,were primarily in China, and lowerdriven by data center demand by cloud and hyper scale providers, while the communications end market declined on softer demand for base stations for the wireless infrastructure market.hyperscale providers. The increase in our industrial end market declinedwas driven by higher LoRa enabled product sales, partially offset by lower broadcast application sales, due to the adverse impact of COVID-19 on lower overall demand forlarge venue events.
Despite the ongoing COVID-19 pandemic, our broad-based industrial products that address a numberbookings remained strong during the first nine months of diverse markets.
fiscal year 2021. Based on bookingsbooking trends and our backlog entering the quarter, we estimate net sales for the fourth quarter of fiscal year 20202021 to be between $130.0$153.0 million and $140.0$163.0 million. The range of guidance reflects continued uncertainty regarding macro-related events and those associated with the geopolitical headwindsCOVID-19 pandemic discussed above.
Gross Profit
For the third quarter of fiscal year 2020,2021, gross profit decreasedincreased to $86.2$94.1 million from $106.6$86.2 million for the third quarter of fiscal year 2019.2020 driven by higher net sales. Gross margins were 61.0% for the third quarter of fiscal year 2021 compared to 61.2% for the third quarter of fiscal year 2020 compared2020. This decrease in gross margins was primarily due to 61.4% for the third quarter of fiscal year 2019.changes in product mix. For the third quarter of fiscal year 2020,2021, our gross margins remained within our target range and reflected shifts in product mix and inventory valuation allowances.
range. For the fourth quarter of fiscal year 2020,2021, we expect our gross margins to be in the range of 60.6%60.5% to 61.6%.
Operating Costs and Expenses |
| | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except percentages) | October 27, 2019 | | October 28, 2018 | |
Selling, general and administrative | $ | 33,795 |
| | 53 | % | | $ | 39,587 |
| | 61 | % | | (15 | )% |
Product development and engineering | 26,670 |
| | 41 | % | | 27,147 |
| | 42 | % | | (2 | )% |
Intangible amortization | 3,770 |
| | 6 | % | | 6,480 |
| | 10 | % | | (42 | )% |
Changes in the fair value of contingent earn-out obligations | (152 | ) | | — | % | | (8,519 | ) | | (13 | )% | | (98 | )% |
Total operating costs and expenses | $ | 64,083 |
| | 100 | % | | $ | 64,695 |
| | 100 | % | | (1 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change |
(in thousands, except percentages) | October 25, 2020 | | October 27, 2019 | |
Selling, general and administrative | $ | 42,891 | | | 59 | % | | $ | 37,777 | | | 55 | % | | 14 | % |
Product development and engineering | 27,890 | | | 38 | % | | 26,976 | | | 39 | % | | 3 | % |
Intangible amortization | 1,798 | | | 3 | % | | 3,770 | | | 6 | % | | (52) | % |
| | | | | | | | | |
| | | | | | | | | |
Changes in the fair value of contingent earn-out obligations | — | | | — | % | | (152) | | | — | % | | 100 | % |
Total operating costs and expenses | $ | 72,579 | | | 100 | % | | $ | 68,371 | | | 100 | % | | 6 | % |
Selling, General and Administrative Expenses
Selling, general, and administrative ("SG&A") expenses decreasedincreased for the third quarter of fiscal year 20202021 compared to the same quarter of fiscal year 20192020 primarily as a result of lower levels of performance-basedhigher staffing related expenses, including higher supplemental compensation including share-based compensation tied to total stockholder return.costs.
Product Development and Engineering Expenses
Product development and engineering expenses decreasedincreased for the third quarter of fiscal year 20202021 compared to the third quarter of fiscal year 20192020 as a result of fluctuations in the timing of development activities.activities and higher staffing related costs. 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 recorded as a reduction to product development and engineering expense.
Intangible Amortization
Intangible amortization was $3.8$1.8 million and $6.5$3.8 million for the third quarters of fiscal years 20202021 and 2019,2020, respectively. This decrease was primarily due to certain finite-lived intangible assets associated with the acquisitionacquisitions of Gennum Corporation, Triune Systems, L.L.C. and AptoVision Technologies, Inc. that had become fully amortized during fiscal years 2020 and 2021.
Changes in the Fair Value of Contingent Earn-out Obligations
The change in the fair value of contingent earn-out obligations for the third quarter of fiscal year 2020.2021 compared to the third quarter of fiscal year 2020 reflects the impact of changes in the estimated probability of achievement of earn-out targets for Cycleo SAS.
Interest Expense
Interest expense, including amortization of debt discounts and issuance costs, was $2.2$1.0 million and $2.4$2.2 million for the third quarters of fiscal years 20202021 and 2019,2020, respectively. This decrease was primarily due to lower interest rates and lower overall debt levels. As a result of the interest rate swap agreement we entered into in the first quarter of fiscal year 2021, the interest rate on the first $150.0 million of debt outstanding under our revolving credit facility, or approximately 81% of our debt outstanding as of October 25, 2020, is fixed at a rate of 1.9775%, based on our current leverage ratio.
Investment Impairments and Credit Loss Reserves
During the third quarter of fiscal year 2019, we reduced2021, investment impairments and credit loss reserves totaled a loss of $0.3 million and primarily reflected adjustments to our expectation of Multiphy Ltd.'s future operating performance due to new information that became availablereserve for current expected credit losses. We had no investment impairments or changes in credit loss reserves during the quarter. We concluded that the competitive landscape had evolved and that product release and broad market adoptionthird quarter of 400G PAM4 digital signal processing (DSP) technology was delayed. As a result of these indicators of impairment, we tested the investment for an other-than-temporary impairment using a discounted cash flow model. The results of its analysis indicated that the investment was other than temporarily impaired by $30.0 million, representing the entire carrying value of the investment.fiscal year 2020.
Provision (Benefit) for Income Taxes
The effective tax rates for the third quarters of fiscal years 20202021 and 20192020 were a provision rate of 16.1%7.9% and an income tax benefita provision rate of 13.6%16.1%, respectively. In the third quarter of fiscal year 2020,2021, we recorded a provisionan income tax expense of $3.4$1.6 million, compared to an income tax benefitexpense of $1.5$2.7 million in the third quarter of fiscal year 2019.2020. The effective tax rate in the third quarter of fiscal year 2021 differs from the statutory federal income tax rate of 21% primarily due to a regional mix of income, return-to-provision adjustments, excess tax benefits from share-based compensation, withholding taxes on certain foreign earnings and research and development tax credits. The effective tax rate in the third quarter of fiscal year 2020 differs from the statutory federal income tax rate of 21% primarily due to a regional mix of income. The effective tax rate in the third quarter of fiscal year 2019 differs from the statutory federal income tax rate of 21% primarily due to regional mix of income and return to provision adjustments recorded for the Transition Tax.impact of final regulations on the U.S. transition tax.
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 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.
Comparison of the Nine Months Ended October 27, 201925, 2020 and October 28, 201827, 2019
As noted above in "Overview", we revised the end market categories for our net sales at the beginning of the first quarter of fiscal year 2021. All net sale amounts shown below for our end markets, including periods presented inprior to the first quarter of fiscal year 2021, have been reclassified to conform to our current classification of end markets. The following summary oftable summarizes our net sales by major end market reflect our current classification methodology (see Note 1 to our unaudited condensed consolidated financial statements for a description of each market category):market:
|
| | | | | | | | | | | | | |
| Nine Months Ended |
(in thousands, except percentages) | October 27, 2019 | | October 28, 2018 |
Industrial | $ | 135,887 |
| | 33 | % | | $ | 151,419 |
| | 33 | % |
Enterprise Computing | 116,171 |
| | 29 | % | | 150,315 |
| | 32 | % |
High-End Consumer | 115,930 |
| | 28 | % | | 131,542 |
| | 28 | % |
Communications | 41,523 |
| | 10 | % | | 55,415 |
| | 12 | % |
Other: Warrant Shares | — |
| | — | % | | (21,501 | ) | | (5 | )% |
Total | $ | 409,511 |
| | 100 | % | | $ | 467,190 |
| | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
(in thousands, except percentages) | October 25, 2020 | | October 27, 2019 |
Infrastructure | $ | 185,083 | | | 43 | % | | $ | 152,490 | | | 37 | % |
High-End Consumer | 112,507 | | | 26 | % | | 121,134 | | | 30 | % |
Industrial | 132,854 | | | 31 | % | | 135,887 | | | 33 | % |
Total | $ | 430,444 | | | 100 | % | | $ | 409,511 | | | 100 | % |
Net Sales
Net sales for the first nine months of fiscal year 20202021 were $430.4 million, an increase of 5.1% compared to $409.5 million a decrease of 12.3% compared to $467.2 million infor the first nine months of fiscal year 2019.2020. During the first nine months of fiscal year 2020, China-related2021, we experienced strong demand weakenedin our infrastructure end market, primarily driven by data center demand by cloud and contributedhyperscale providers and increased 10G PON sales. These increases were partially offset by a decline in our high-end consumer end market, primarily within mobile applications and partially attributable to weakness across allCOVID-19 closures at certain customer sites. Our industrial end markets,market also declined versus the prior year, primarily due to geopolitical headwindslower broadcast application sales, driven by export restrictions and tariffs imposedthe adverse impact of COVID-19 on large venue events. This was partially offset by the U.S. government. The enterprise computing end market declined due to lower PON demand in China and lower data center demand at cloud computing and hyper scale providers. Industrial end market performance reflects a decline in
China-based LoRa®higher LoRa enabled product demand. High-end consumer end market declines reflected weaker China and Korea-based demand for smartphones and our proximity sensing products. The communications end market declined on softer demand for base stations for the wireless infrastructure market. The cost of the Warrant Shares, which were recorded as an offset to net sales, fully vested in the first quarter of fiscal year 2019, and therefore, did not impact the first nine months of fiscal year 2020. For the first nine months of fiscal year 2019, the cost associated with the Warrant Shares was $21.5 million, which included $15.9 million related to the Acceleration Event (see Note 3).sales.
Gross Profit
For the first nine months of fiscal year 2020,2021, gross profit decreasedincreased to $252.4$263.1 million from $278.2$252.4 million for the first nine months of fiscal year 20192020 as a result of lowerhigher sales. Gross margins were 61.1% for the first nine months of fiscal year 2021 compared to 61.6% for the first nine months of fiscal year 2020, compared to 59.5% for the first nine months of fiscal year 2019. For the first nine months of fiscal year 2019, gross margins were unfavorably impacted by the costs of the Warrant Shares.reflecting a slightly unfavorable product mix.
Operating Costs and Expenses | | | Nine Months Ended | | Change | | Nine Months Ended | | Change |
(in thousands, except percentages) | October 27, 2019 | | October 28, 2018 | | (in thousands, except percentages) | October 25, 2020 | | October 27, 2019 | |
Selling, general and administrative | $ | 112,047 |
| | 56 | % | | 114,522 |
| | 56 | % | | (2 | )% | Selling, general and administrative | $ | 115,746 | | | 56 | % | | $ | 120,074 | | | 57 | % | | (4) | % |
Product development and engineering | 79,322 |
| | 39 | % | | 81,425 |
| | 39 | % | | (3 | )% | Product development and engineering | 84,696 | | | 41 | % | | 80,012 | | | 38 | % | | 6 | % |
Intangible amortization | 12,821 |
| | 6 | % | | 19,921 |
| | 10 | % | | (36 | )% | Intangible amortization | 6,658 | | | 3 | % | | 12,821 | | | 6 | % | | (48) | % |
Changes in the fair value of contingent earn-out obligations | (2,313 | ) | | (1 | )% | | (9,419 | ) | | (5 | )% | | (75 | )% | Changes in the fair value of contingent earn-out obligations | (33) | | | — | % | | (2,313) | | | (1) | % | | 99 | % |
Total operating costs and expenses | $ | 201,877 |
| | 100 | % | | $ | 206,449 |
| | 100 | % | | (2 | )% | Total operating costs and expenses | $ | 207,067 | | | 100 | % | | $ | 210,594 | | | 100 | % | | (2) | % |
Selling, General and Administrative Expenses
SG&A expenses decreased for the first nine months of fiscal year 20202021 compared to the first nine months of fiscal year 20192020 primarily as a result of lower levels of performance-based compensation, driven by the absence of the impact of a share-based award modification made in fiscal year 2019, which resulted in a fair value re-measurement of the modified awards, and lower share-based compensation tiedexpense, as well as reduced travel expenses due to total stockholder return. This benefit was partially offset by a reduction in legal recoveries related to the settlementCOVID-19. Additionally, certain restructuring costs of the lawsuit filed against HiLight Semiconductor Limited and related individual defendants (the "HiLight lawsuit"). The Company received $6.7$2.1 million were recorded in the first nine months of fiscal year 2019, compared to $1.0 million received2020, which did not repeat in the first nine months of fiscal year 2020. Additionally, restructuring costs of $2.1 million in the first nine months of fiscal year 2020, were higher compared to $0.4 million in the first nine months of fiscal year 2019.current year.
Product Development and Engineering Expenses
Product development and engineering expenses decreasedincreased in the first nine months of fiscal year 20202021 compared to the first nine months of fiscal year 20192020 as a result of fluctuations in the timing of development activities and lower performance-basedhigher supplemental compensation. 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 recorded as a reduction to product development and engineering expense.
Intangible Amortization
Intangible amortization was $12.8$6.7 million and $19.9$12.8 million for the first nine months of fiscal years 20202021 and 2019,2020, respectively. This decrease was primarily due to certain finite-lived intangible assets associated with the acquisition of Gennum Corporation, Triune Systems, LLC and AptoVision Technologies, Inc. that had become fully amortized during fiscal years 2020 and 2021.
Changes in the Fair Value of Contingent Earn-out Obligations
The change in the fair value of contingent earn-out obligations for the first nine months of fiscal year 2020.2021 compared to the first nine months of fiscal year 2020 reflects the impact of changes in the estimated probability of achievement of earn-out targets for AptoVision Technologies, Inc. and Cycleo SAS.
Interest Expense
Interest expense, including amortization of debt discounts and issuance costs, was $7.2$3.8 million and $6.7$7.2 million for the first nine months of fiscal years 20202021 and 2019,2020, respectively. This increasedecrease was primarily due to higherlower interest rates partially offset byand lower overall debt levels. As a result of the interest rate swap agreement we entered into in the first quarter of fiscal year 2021, the interest rate on the first $150.0 million of debt outstanding under our revolving credit facility, or approximately 81% of our debt outstanding as of October 25, 2020, is fixed at a rate of 1.9775%, based on our current leverage ratio.
Investment Impairments and Credit Loss Reserves
During the first nine months of fiscal year 2019, we reduced2021, investment impairments and credit loss reserves totaled a loss of $5.5 million. We increased our expectationcurrent expected credit loss reserve by $2.7 million for our held-to-maturity debt securities and available-for-sale debt securities consisting of Multiphy Ltd.'s future operating performanceour convertible debt investments in privately-held companies, in part, due to new information that became available during the quarter. We concluded that the competitive landscape had evolved and that product release and broad market adoptionadverse impact of 400G PAM4 digital signal processing (DSP) technology was delayed. As a result ofCOVID-19 on these indicators of impairment,early-stage companies. In addition, we tested the investmentour equity investments for an other-than-temporary impairment using a discounted cash flow model. Theand the results of itsthis analysis indicated that the investment wasthree of our investments were other than temporarily impaired by $30.0 million, representingan aggregate amount of $2.9 million. We had no investment impairments or changes in credit loss reserves during the entire carrying valuefirst nine months of the investment.
fiscal year 2020.
Provision (Benefit) for Income Taxes
The effective tax rates for the first nine months of fiscal years 20202021 and 20192020 were a provision rate of 21.7%5.4% and an income tax benefita provision rate of 35.0%23.0%, respectively. In the first nine months of fiscal year 2020,2021, we recorded a provision of $10.0$2.5 million, compared to an income tax benefita provision of $12.9$8.6 million in the first nine months of fiscal year 2019.2020. The effective tax rate in the first nine months of fiscal year 20202021 was higherlower than the effective tax rate in the first nine months of fiscal year 20192020 primarily due to the impact of the final regulations of the U.S. transition tax that went into effect during fiscal year 2019 having a $15.8 million benefit related to a partial release of the valuation reserve against our U.S. deferred tax assets.2020. The effective tax rate in the first nine months of fiscal year 2021 differs from the statutory federal income tax rate of 21% primarily due to a regional mix of income, return-to-provision adjustments, excess tax benefits from share-based compensation, withholding taxes on certain foreign earnings and research and development tax credits. The effective tax rate in the first nine months of fiscal year 2020 differs from the statutory federal income tax rate of 21% primarily due to a regional mix of income and the impact of the final regulations on the U.S. transition tax. The effective tax rate in the first nine months of fiscal year 2019 differs from the statutory federal income tax rate of 21% primarily due to regional mix of income and a partial release of the valuation reserve against our U.S. deferred tax assets.
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 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.
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; sales growth or decline; potential acquisitions: the general economic environment in which we operate and potential acquisitions.our ability to generate cash flow from operations, which are more uncertain as a result of the COVID-19 pandemic and its impact on the general economy. Our liquidity needs during this uncertain time 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 performance. We believe that we have the financial resources necessary to meet business requirements for the next 12twelve months, including funds needed for working capital requirements.
As of October 27, 2019,25, 2020, our total stockholders’ equity was $688.7$676.4 million. At that date, we also had approximately $283.1$262.3 million in cash and cash equivalents and $198.3 million of outstanding borrowings on our Credit Facility (defined below), which had $153.0$415.0 million of undrawn capacity on our Revolving Loans (defined below). On November 7, 2019, the Credit Agreement was amended 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 (see "Credit Facility"Facility (as defined below).
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 October 27, 2019,25, 2020, our foreign subsidiaries held approximately $224.0$167.3 million of cash and cash equivalents, compared to $253.1$261.9 million at January 27, 2019.26, 2020. In connection with the enactment of the Tax Cuts and Jobs Act, all historic and current foreign earnings are taxed in the U.S. and are subject to a 5% withholding tax, if repatriated. We haveIn fiscal year 2018, we determined that we willwould repatriate back to the U.S. approximately $240.0 million of foreign earnings, of which $156.0 million has been repatriated sincewas completed in the second quarter of fiscal year 2019.2021. In the second quarter of fiscal year 2021, we determined an additional $50 million of current earnings will not be permanently reinvested. As of October 27, 2019,25, 2020, our foreign subsidiaries had $517.1$547.9 million of unremitted earnings for which no taxes have been provided. Those historical earnings have been and are expected to continue to be permanently reinvested.
Cash Flows
One of our primary goals is to continually improve the cash flows from our existing businessoperating activities. Additionally, we will continue to seek to maintain and improve our existing business performance with capital expenditures and, potentially, acquisitions and other investments that support achievement of our business strategies. Acquisitions may be made for either cash or stock consideration, or a combination of both.
In summary, our cash flows for each period were as follows: | | | Nine Months Ended | | Nine Months Ended |
(in thousands) | October 27, 2019 | | October 28, 2018 | (in thousands) | October 25, 2020 | | October 27, 2019 |
Net cash provided by operating activities | $ | 73,361 |
| | $ | 136,365 |
| Net cash provided by operating activities | $ | 91,676 | | | $ | 73,361 | |
Net cash used in investing activities | (29,672 | ) | | (25,181 | ) | Net cash used in investing activities | (32,399) | | | (29,672) | |
Net cash used in financing activities | (72,752 | ) | | (106,871 | ) | Net cash used in financing activities | (90,330) | | | (72,752) | |
Net (decrease) increase in cash and cash equivalents | $ | (29,063 | ) | | $ | 4,313 |
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Net decrease in cash and cash equivalents | | Net decrease in cash and cash equivalents | $ | (31,053) | | | $ | (29,063) | |
Operating Activities
Net cash provided by operating activities is primarily due todriven by net income adjusted for non-cash items plusand fluctuations in operating assets and liabilities.
Operating cash flows for the first nine months of fiscal year 2021 were favorably impacted by a 5.1% increase in net sales, compared to the first nine months of fiscal year 2020 and adversely impacted by $11.0 million of withholding taxes paid on cash repatriated during the year. Operating cash flows for the first nine months of fiscal year 2020 were unfavorablyadversely impacted by a $79.2$9.3 million reduction in net sales, compared to the first nine months of fiscal year 2019, excluding the $21.5 million net sales offset impact of the Warrant Shares in fiscal year 2019. Operating cash flows for the first nine months of fiscal year 2020 were also impacted by a $6.4 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 $21.8 million for the first nine months of fiscal year 2021, compared to $20.4 million for the first nine months of fiscal year 2020, compared to $12.9 million for the first nine months of fiscal year 2019.
2020. In the first nine months of fiscal yearyears 2021 and 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 ofColorado in 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. 2020.
In the first nine months of fiscal year 2020,2021, we made $9.6paid $10.9 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 $9.6 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 nine 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 nine 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$17.0 million for employee share-based compensation payroll taxes and received $4.4$5.1 million in proceeds from the exercise of stock options, compared to payments of $17.8$20.5 million for employee share-based compensation payroll taxes and proceeds of $10.4$4.4 million from the exercise of stock options in the first nine 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 925,7431,527,834 shares under this program in the first nine months of fiscal year 20202021 for $42.6$66.4 million. In the first nine months of fiscal year 2019,2020, we repurchased 1,677,433925,743 shares under this program for $79.7$42.6 million. As of October 27, 2019,25, 2020, the remaining authorization under this program was $138.2$44.2 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 nine months of fiscal year 2021, we made payments that totaled $12.0 million on our Credit Facility, compared to $40.0payments on our previous term loans that totaled $14.1 million in the first nine months of fiscal year 2020. As of October 25, 2020, we had $185.0 million of the Revolving Loans may be used to obtain letters of credit, up to $25.0outstanding borrowings on our Credit Facility, which had $415.0 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 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 consolidated 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.undrawn capacity.
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%.
InterestIn 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 loans madethe first $150.0 million of debt outstanding under our Credit Facility. As a result of the swap agreement, interest payments on the first $150.0 million of our debt outstanding under the Credit Facility in Alternative Currencies accruesare fixed 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.1.9775%, based on our current leverage 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 October 25, 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 unaudited condensed consolidated financial statements.
Contractual Obligations
There were no material changes in our contractual obligations during the first nine 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 nine months ended October 27, 2019, except as discussed below related to our adoption of the new leasing standard.25, 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.
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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 engage in the trading of derivative financial instruments in the normal course of business to mitigate our risk related to interest rates. In the event 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 fair value of our variable-rate debt.
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 2020.2021. The adverse impact these changes would have had (after taking into account balance sheet hedges only) on our income before taxes is $1.1$0.9 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 October 25, 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. As a result of the swap agreement, interest payments on the first $150.0 million of our debt outstanding under the Credit Facility are fixed at 1.9775% based on our current leverage ratio. As of October 25, 2020, a one percentage point increase in LIBOR would not have a material impact on our interest expense as only $35.0 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 October 25, 2020, we had $262.3 million of cash and cash equivalents and $13.1 million of investments in debt securities. A majority of our cash and cash equivalents generate interest income based on prevailing interest rates, while our debt securities primarily accrue interest at fixed rates, generally ranging between three and twelve percent. Investments and cash and cash equivalents generated interest income of $0.5 million in the third quarter of fiscal year 2021. A significant change in interest rates would impact the amount of interest income generated from our cash and investments. It would also impact the market value of our investments.
Our investments are primarily subject to credit risk. Our investment 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. Outside of these investment guidelines, we also invest in a limited amount of debt securities in privately held companies that we view as strategic to our business. For example, many of these investments are in companies that are enabling the LoRa and LoRaWAN®-based ecosystem. We evaluate the credit risk of these investments on a quarterly basis and have recorded $2.7 million in current expected loss reverses related to the credit risk on our debt securities investments, for the nine months ended October 25, 2020.
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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, 2019.25, 2020.
Changes in Internal Controls
As of October 27, 2019,25, 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 forthReport and in our AnnualQuarterly Report on Form 10-K are not10-Q for the only ones we face. Additional risks not now known to us or that we currently deem immaterial may also impair our business operations.quarter ended July 26, 2020. 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 exceptand in our Quarterly Report on Form 10-Q for the following updated risk factors below.
We are subject to export restrictions and laws affecting trade and investments.
As a global company headquartered in the U.S., 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 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 before exporting the 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 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 these restrictions and laws have not significantly restricted our operations in the recent past, there is a risk that they could 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 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 onquarter ended 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 Regulations 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. 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.- 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 our U.S. regulated products to Huawei. Sales of our products to Huawei accounted for less than 10% of our net sales during the third quarter of fiscal year26, 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, these exemptions are limited in scope and generally do not apply to the sale of our U.S. regulated products to Huawei. As of the date of this report, we are unable to predict 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 or other foreign customers affected by future U.S. government sanctions or threats of 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.
Changes in government trade policies could have an adverse impact on our business or 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, which could result in lower margins. In addition, the geopolitical headwinds driven by export restrictions 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, we experienced a decrease of 12.3% in our net sales compared to the same period last year primarily due to a decline 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, and may have a material adverse effect on our business, operating results and financial condition. Any resulting trade wars could have a significant 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, operating results and financial condition.
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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 third quarter of fiscal year 2020.2021.
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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 |
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(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 |
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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 2020 (07/27/20-08/23/20) | | — | | | $ | — | | | — | | | $ | 68.2 | million |
September 2020 (08/24/20-09/20/20) | | 104,251 | | | 58.00 | | | 104,251 | | | $ | 62.2 | million |
October 2020 (09/21/20-10/25/20) | | 335,670 | | | 53.62 | | | 335,670 | | | $ | 44.2 | million |
Total activity | | 439,921 | | | $ | 54.66 | | | 439,921 | | | |
(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 25, 2020, we have repurchased $404.2 million in shares of our common stock under the program since inception and the current remaining authorization under our stock repurchase program is $44.2 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.
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ITEM 3. | Defaults Upon Senior Securities |
ITEM 3.Defaults Upon Senior Securities
None.
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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.
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101 | | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 27, 2019,25, 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. | | |
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104 | | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 27, 2019,25, 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.
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| | | SEMTECH CORPORATION |
| | | SEMTECH CORPORATIONRegistrant |
| | | Registrant |
Date: | December 2, 2020 | | |
Date: | December 4, 2019 | | /s/ Mohan R. Maheswaran |
| | | Mohan R. Maheswaran |
| | | President and Chief Executive Officer |
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Date: | December 4, 20192, 2020 | | /s/ Emeka N. Chukwu |
| | | Emeka N. Chukwu |
| | | Executive Vice President and |
| | | Chief Financial Officer |