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Semtech 10-K 2005
Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

(Mark One)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended January 30, 2005

 

OR

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from              to             

 

Commission file number 1-6395

 


 

SEMTECH CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Delaware   95-2119684

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

200 Flynn Road, Camarillo, California, 93012-8790

(Address of principal executive offices, Zip Code)

 

Registrant’s telephone number, including area code: (805) 498-2111

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class


 

Name of each exchange

on which registered


None   None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock par value $.01 per share

Rights to Purchase Series X Junior Participating Preferred Stock

(Title of Class)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2.)    Yes  x    No  ¨

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of July 23, 2004 (the last business day of the Company’s most recently completed second fiscal quarter) was approximately $1,003,626,255. Stock held by directors, officers and shareholders owning 5% or more of the outstanding common stock (as reported on Schedules 13D and 13G) were excluded as they may be deemed affiliates. This determination of affiliate status is not a conclusive determination for any other purpose.

 

The number of shares of the Registrant’s common stock outstanding at April 8, 2005 was 73,753,087.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the following documents are incorporated by reference in Part III of this report: Definitive Proxy Statement in connection with registrant’s annual meeting of shareholders to be held on June 16, 2005.

 



Table of Contents

SEMTECH CORPORATION

INDEX TO FORM 10-K

FOR THE YEAR ENDED JANUARY 30, 2005

 

          Page

PART I

    

Item 1

  

Business

   2

Item 2

  

Properties

   11

Item 3

  

Legal Proceedings

   12

Item 4

  

Submission of Matters to a Vote of Security Holders

   12

PART II

    

Item 5

  

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   12

Item 6

  

Selected Financial Data

   14

Item 7

  

Management’s Discussion and Analysis of Financial Condition and Results of Operation

   15

Item 7A

  

Quantitative and Qualitative Disclosures About Market Risks

   35

Item 8

  

Financial Statements and Supplementary Data

   37

Item 9

  

Changes in or Disagreements with Accountants on Accounting and Financial Disclosure

   61

Item 9A

  

Controls and Procedures

   61

Item 9B

  

Other Information

   61

PART III

    

Item 10

  

Directors and Executive Officers of the Registrant

   62

Item 11

  

Executive Compensation

   62

Item 12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   62

Item 13

  

Certain Relationships and Related Transactions

   63

Item 14

  

Principal Accounting Fees and Services

   63

PART IV

    

Item 15

  

Exhibits, Financial Statement Schedules

   63
    

Signatures

   66


Table of Contents

Forward Looking and Cautionary Statements

 

This Annual Report on Form 10-K (the “Form 10-K”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may also make forward-looking statements in other reports filed with the Securities and Exchange Commission (“SEC”), in materials delivered to shareholders and in press releases. In addition, Company representatives may make oral forward-looking statements from time to time. Forward-looking statements are statements other than historical information or statements of current condition and relate to matters such as our future financial performance, future operational performance, and our plans, objectives and expectations. Some forward-looking statements may be identified by use of terms such as “expects,” “anticipates,” “intends,” “estimates,” “believes”, “projects”, “should”, “will”, “plans” and similar words.

 

Forward-looking statements should be considered in conjunction with the cautionary statements contained in the “Risk Factors” section and elsewhere in this Form 10-K, in our other filings with the SEC, and in material incorporated herein and therein by reference. In light of the risks and uncertainties inherent in all such projected matters, forward-looking statements should not be regarded as a representation by the Company or any other person that our objectives or plans will be achieved or that any of our operating expectations or financial forecasts will be realized. Financial forecasts could differ materially from those projected in forward-looking statements. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

PART I

 

ITEM 1. BUSINESS

 

General

 

We are a leading supplier of analog and mixed-signal semiconductors and were incorporated in Delaware in 1960. We design, produce and market a broad range of products that are sold principally to customers in the computer, communications and industrial markets. Our products are designed into a wide variety of end applications, including notebook and desktop computers, personal digital assistants (PDAs), cellular phones, wireline networks, high-end consumer devices and semiconductor test platforms. Our end-customers are primarily original equipment manufacturers and their suppliers, including Apple, Cisco, Compal Electronics, Curitel Communications, Dell, Hewlett Packard, Intel, LG Electronics, Motorola, Nortel, Panasonic, Quanta Computer and Samsung.

 

Overview of the Semiconductor Industry

 

The semiconductor industry is broadly divided into analog and digital semiconductor products. Analog semiconductors condition and regulate “real world” functions such as temperature, speed, sound and electrical current. Digital semiconductors process binary information, such as that used by computers. Mixed-signal devices incorporate both analog and digital functions into a single chip and provide the ability for digital electronics to interface with the outside world.

 

The market for analog and mixed-signal semiconductors differs from the market for digital semiconductors. The analog and mixed-signal industry is characterized by longer product life cycles than the digital industry. In addition, analog semiconductor manufacturers tend to have lower capital investment requirements for manufacturing because their facilities tend to be less dependent than digital producers on state-of-the-art production equipment. The end-product markets for analog and mixed-signal semiconductors are smaller, more varied and more specialized than the relatively standardized digital semiconductor product markets.

 

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Another difference between the analog and digital markets is the amount of available talented labor. The analog industry relies more heavily than the digital industry on design and applications talent to distinguish its products from one another. While digital expertise is extensively taught in universities due to its overall market size, analog and mixed-signal expertise tends to be learned over time based on experience and hands-on training. Consequently, personnel with this training are scarce, a fact that makes it difficult for new suppliers to quickly gain significant market share.

 

The electronics market is characterized by several trends that we believe are driving demand for our products. Electronic systems are being designed to operate at increasingly lower operating voltages, battery-powered devices such as handheld computers and cellular telephones are proliferating, and devices are becoming smaller and requiring higher levels of integration. Our products are designed to address these needs by providing solutions that extend battery life, meet tighter voltage requirements, improve the human interface of systems, and support higher transmission and processor speeds. As communications functions are increasingly integrated into a range of systems and devices, these products require analog processing capabilities and the number and size of our end-markets grows. Finally, industrial, medical, consumer and other end-market applications have increasingly incorporated data processing and communications features into their finished systems, which in turn has broadened the opportunities for selling our analog and mixed-signal devices.

 

Advancements in digital processing technology typically drive the need for corresponding advancements in analog and mixed-signal solutions. We believe that the diversity of our applications allows us to take advantage of areas of relative market strength and limits our vulnerability to competitive pressure in any one area.

 

Semtech End-Markets

 

A majority of our products are sold to customers in the computer, communications and industrial markets. Until ten years ago, we had largely been focused on serving the military and aerospace end-market. In calendar year 1996, we used the desktop segment of the computer market as our first major entry into the commercial marketplace for our circuits. Seven years ago, approximately half of our revenues were derived from desktop computer related applications. In recent years, we have seen relative growth from the communications and industrial markets as a percentage of the total. We have also seen a greater diversification within our computer market segment, beyond our initial focus on desktop computer applications.

 

For the fiscal year ended January 30, 2005, our revenues from the computer end-market were 32% of net sales, the communications end-market was 48%, and the remaining 20% of net sales were from industrial, military and aerospace, and various other end-markets.

 

Computer market applications include notebook and desktop computers, computer graphics and PDAs. End-product applications for our products within the communication market include cellular phones and base stations, set-top-boxes, and local and wide-area networks. Industrial applications include automated test equipment (ATE), power supplies, medical devices and factory automation systems. We believe that our diversity in the end-markets provides stability to our business and opportunity for growth. Presented below are the estimated splits of sales by various end-applications for the last two fiscal years.

 

(fiscal years, percentage of net sales)

 

            

End-Application


   2005

    2004

 

Cell phone

   32 %   27 %

Notebook computers and PDA

   21 %   22 %

Desktop computers/server

   9 %   12 %

Graphics/gaming

   3 %   6 %

Wireline equipment

   15 %   13 %

ATE

   10 %   12 %

Industrial/other

   10 %   8 %
    

 

     100 %   100 %
    

 

 

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The following table depicts our main product lines and their end-product applications:

 

Semtech’s Main

Product Lines


 

Specific End-Product Applications


 

Computer


 

Communications


 

Industrial


Power Management   Desktop PCs, servers, workstations, notebook computers, add-on cards, PDAs, computer gaming systems   Cellular phones, network cards, routers and hubs, telecom network boards   Power supplies, industrial systems
Protection   Notebook computers, PDAs, USB ports, LAN cards   Cellular phones, base stations, DSL equipment, routers and hubs   Handheld measurement or instrumentation devices
Test and Measurement   Workstations   Cellular base stations, routers and hubs, SONET networks   Automated test equipment
Advanced Communications       SONET networks, routers, hubs, switches, fiber modems    
Human Input Devices  

Notebook computers,

PDAs

  Cellular phones, web phones   Touch screen, consumer appliances and security systems

 

Historically, our results have reflected some seasonality, with demand levels generally being higher in the computer and consumer products segments during the third and fourth quarters of our fiscal year in comparison to the first and second quarters. In recent years, macro-level industry trends and end-application cycles have had a more significant impact than seasonality on our results.

 

Business Strategy

 

Our objective is to be the leading supplier of analog and mixed-signal devices to the fastest growing segments of our target markets. We intend to leverage our pool of skilled technical personnel to develop new products, or, where appropriate, use acquisitions, to serve the fastest growing segments of these markets. In order to capitalize on our strengths in analog and mixed-signal processing design, developing and marketing, we intend to pursue the following strategies:

 

Leverage our rare analog design expertise

 

We have developed a strategy to invest heavily in human resources needed to define and market high-performance products. We have built a team of experienced engineers who combine industry expertise with advanced semiconductor design expertise to meet customer requirements and enable our customers to get their products to market rapidly. We intend to leverage this strategy to achieve new levels of integration, power reduction and miniaturization, enabling our customers to achieve leading performance in their products.

 

Continue to release unique new product, achieve new design wins, and cross-sell products

 

We are focused on developing unique, new, high-margin products to serve our target markets. These markets have experienced growing consumer demand for increased product performance at competitive price points. We also focus on achieving design wins for our products with current and future customers. Design wins are indications by the customers that they intend to incorporate our products into new designs. Our technical talent works closely with our customers in securing design wins, developing new products and in implementing and integrating our products into their systems. We also focus on selling additional products to our existing customers, as we believe the technical expertise of our marketing department permits it to identify and capitalize on cross-selling opportunities.

 

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Focus on fast-growing market segments

 

We have chosen to target the analog segments of the fastest growing end-markets. We intend to enhance this growth potential by focusing on specific products within the analog and mixed-signal market, including notebook computers, PDAs, cellular phones, wide area networks and certain broad-based industrial markets. These markets are characterized by their need for leading-edge, high-performance analog and mixed-signal semiconductor technology.

 

Diversify into new markets

 

We intend to enter new markets that complement our existing operations through internal development of new products and by strategic acquisitions. Our focus during fiscal year 2005 was to expand our presence within the markets of portable devices, networking and more broad-based industrial applications. A large amount of design and marketing talent was focused on developing products for these markets.

 

Leverage outsourced semiconductor fabrication capacity

 

We outsource most of our manufacturing in order to focus more of our resources on defining, developing and selling our products. We use outside wafer foundries that are based in Asia, the United States and Europe. Our largest wafer source is a foundry based in China. We believe that outsourcing provides us numerous benefits, including capital efficiency, the flexibility to adopt and leverage emerging process technologies without significant investment risk and a more variable cost of goods, which provides us with greater operating flexibility.

 

Increase sales efforts in certain geographic areas

 

We believe that certain geographic markets, such as China, Japan and Europe represent opportunities for added sales and end-customer diversity. China is an emerging market with quickly developing opportunities that range from portable consumer devices up to expensive networking equipment. Our subsidiary, Semtech International AG, has developed a local presence in China and has leveraged its relationship with its Taiwanese and Korean-based customers that are transferring business into China. For years Japan and Europe have been major consumers of analog and mixed-signal components. We have bolstered our sales efforts in these regions in hopes of finding added success in these large geographic markets.

 

Product Segments

 

We have two product segments, both of which are comprised of semiconductor products. A majority of our sales come from our Standard Semiconductor Products, which we consider to be our most strategic product segment. The balance of sales come from our Rectifier, Assembly and Other Products segment. The products in that segment are older-technology products, in many cases dating back to the earliest days of our Company when our focus was primarily the military and aerospace end-markets.

 

Standard Semiconductor Products. Included in Standard Semiconductor Products are integrated circuits (ICs) and discrete components designed for use in standard and specific applications. Standard Semiconductor Products represented approximately 96%, 95% and 95% of our overall net sales for fiscal years 2005, 2004 and 2003, respectively. The main product lines within our Standard Semiconductor Products are described below.

 

    Power Management Circuits. Power management circuits control, alter, regulate and condition the electrical pulses that flow through electronics. The highest volume product types within the power management product line are switching voltage regulators, combination switching and linear regulators, smart regulators and charge pumps. The primary application for these products is power regulation for computer, communications and industrial systems. Internally, we divide the power management product line into three sub-product groups, entitled portable power management, desktop/server power management and networking/industrial power management. In fiscal year 2005, power management represented more than half of the Standard Semiconductor Products segment.

 

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Table of Contents
    Protection Products. We design and market protection products, which are often referred to as transient voltage suppressors (TVS). TVS devices provide protection for electronic systems where large voltage spikes (called transients), such as electrostatic discharge generated by the human body, can permanently damage voltage-sensitive components. We also have developed filter and termination devices that can be sold as a complement to TVS devices. Specific protection product applications are found in computer, data-communications, telecommunications and industrial markets. In fiscal year 2005, protection products represented approximately 25% of Standard Semiconductor Products segment sales.

 

    Test and Measurement Circuits. We design and market a wide variety of test and measurement products, namely pin electronics, timing, clock distribution, parametric measurement, and clock products for use in ATE, workstations and communication infrastructure equipment. In fiscal year 2005, test and measurement circuits represented about 10% of Standard Semiconductor Products segment sales.

 

    Human Input Devices (HID). We offer a line of human input devices that include touch-screen and touch-pad controllers, pointing stick devices and battery management circuits. Some of these products, including our MicroBuddy® product family, also perform a system management function in the end-products they are used in. These products are designed to handle human input and battery functions in portable systems such as notebook computers, PDAs and cellular phones. They also have applications in security, consumer appliances and other industrial applications. In fiscal year 2005, HID products represented approximately 2% of Standard Semiconductor Products segment sales.

 

    Advanced Communication Circuits. We have developed a line of highly proprietary advanced communication ICs, which perform specialized timing and synchronization functions in high-speed networks. Our primary product offering in this area is our “SETS” product family. Our advanced communication ICs are used in metropolitan, wide area, and wireless networks and in fiscal year 2005 represented about 3% of Standard Semiconductor Products segment sales.

 

Rectifier, Assembly and Other Products. Rectifiers, assemblies and other products are older-technology products. Rectifier, Assembly and Other Products represented approximately 4%, 5% and 5% of our overall net sales for fiscal years 2005, 2004 and 2003, respectively.

 

    Rectifiers. We have several different categories of silicon rectifiers, which are primarily used to convert alternating current to direct current. These products are sold mainly to military, aerospace, industrial equipment and medical equipment customers.

 

    Assemblies. A rectifier assembly is a package of rectifiers of one or more types, sometimes encased in epoxy or silicon by various molding techniques, constituting one or more basic rectifier circuits. We also offer some non-rectifier assemblies such as voltage multipliers. Assemblies are used in x-ray scanners, microwave ovens, aircraft engines, avionics equipment, airport radar and other specialized applications.

 

    Other Products. We produce and sell other products that are not part of our main product segment. Included in the other products are custom and application specific integrated circuits.

 

For further financial information on these segments, refer to the information contained in Note 17. “Business Segments and Concentrations of Risk”, in the Notes to Consolidated Financial Statements included in Item 8.

 

Intellectual Capital and Product Development

 

We believe that our emphasis on the development of our intellectual capital and introduction of new proprietary product designs are key to our success. Recruiting and retaining technical talent is the foundation for developing and selling new products into the marketplace. One of our strategies to harness this talent is the establishment of multiple design center locations. We have dedicated design centers in Santa Clara, California; Raleigh, North Carolina; Glasgow, Scotland; Romsey, England; and Swindon, England. In addition, dedicated test and measurement circuit design occurs at our San Diego location and HID design and protection product design occurs at our Camarillo, California headquarters.

 

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Circuit design engineers are some of our most valuable engineers. Circuit designers perform the critical task of designing and laying out integrated circuits. As of January 30, 2005, we employed more than 75 circuit designers and layout engineers. A majority of these individuals have senior-level expertise in the design, development and layout of circuits targeted for use in power management, protection, test, measurement and communication applications. We also employ a limited number of engineers that specialize in the development of software, sometimes referred to as firmware, that is incorporated into certain of our HID and advanced communications products.

 

We spent $33.5 million or 13% of net sales on product development and engineering in fiscal year 2005. Product development and engineering costs were $30.4 million or 16% of net sales and $31.3 million or 16% of net sales in fiscal years 2004 and 2003, respectively. We intend to make further investments in research and development in the future, which may include including increasing our employee headcount and investing in design and development equipment.

 

Sales and Marketing

 

Sales made directly to original equipment manufacturers during fiscal year 2005 were approximately 49% of net sales. The remaining 51% of net sales were made through independent distributors. We have direct sales personnel located throughout the United States who manage the sales activities of independent sales representative firms and independent distributors within North America. We expense our advertising costs as they are incurred.

 

We operate internationally primarily through our wholly-owned Swiss subsidiary, Semtech International AG. Semtech International serves the European markets through its wholly-owned subsidiaries based in France, Germany and the United Kingdom. Semtech International maintains branch sales offices, either directly or through one of its wholly owned subsidiaries, in Taiwan, Korea and Japan. Semtech International also has a small representative office located in Shanghai, China and is working to establish another small representative office in Shenzhen, China. Independent representatives and distributors are also used to serve customers throughout the world. Some of our distributors and sales representatives may also offer products from our competitors, as is customary in the industry.

 

Customers, Sales Data and Backlog

 

For fiscal year 2005, we estimate that more than 1,000 customers purchased our products either directly from us or through our authorized distributors. The following is a representative sample of our customers by end-markets:

 

Representative Customers by End-Markets:

 

Computer


 

Communications


 

Industrial


Apple

  Cisco   Agilent Tech.

Dell

  Motorola   LTX

Hewlett Packard

  Nortel   Rockwell

Intel

  Samsung   Siemens

LG Electronics

  Sony   Unisys

 

Our customers include major computer and peripheral manufacturers and their subcontractors, ATE manufacturers, data communications and telecommunications equipment vendors, and a variety of large and small companies serving the industrial, automotive, aerospace and military markets. Customers tend to make their decision on whether to buy our products or our competitors’ products based on such key factors as price, technical support and product performance.

 

During fiscal years 2005, 2004 and 2003, U.S. sales constituted 26%, 31%, and 33%, respectively, of our net sales. Conversely, during fiscal years 2005, 2004 and 2003, foreign sales constituted 74%, 69% and 67%, respectively, of our net sales. A majority of foreign sales were to customers located in the Asia-Pacific region. The remaining foreign sales were primarily to customers in Europe, Canada, and Mexico.

 

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A summary of net external sales by region follows:

 

(fiscal years, in thousands)

 

                    
     2005

   2004

   2003

North America

   $ 65,884    $ 59,927    $ 62,901

Asia-Pacific

     167,336      115,936      117,220

Europe

     20,392      16,216      12,837
    

  

  

Total Net Sales

   $ 253,612    $ 192,079    $ 192,958
    

  

  

 

No end-customer accounted for 10% or more of net sales in fiscal years 2005, 2004 or 2003. For fiscal years 2005, 2004 and 2003, one of our Asian distributors accounted for approximately 11%, 10% and 14%, respectively, of net sales. For fiscal year 2005 and 2004, another one of our Asian distributors accounted for approximately 10% and 14% of net sales, respectively.

 

Our backlog of orders as of the end of fiscal years 2005, 2004 and 2003 were approximately $35.6 million, $45.4 million and $26.6 million, respectively. Nearly all backlog is deliverable within six months; experience has shown that short-delivery lead times are required by most customers. A backlog analysis at any given time gives little indication of our future business except on a short-term basis, principally within the next 45 days. We do not have any significant contracts with our customers calling for shipments over a period of more than 18 months.

 

Manufacturing Capabilities

 

Unlike digital products, our products are less reliant on state-of-the-art manufacturing and more reliant on design and applications support. As part of our business strategy, we focus on design and outsource a majority of our manufacturing functions to third-party contractors that fabricate silicon wafers and package and test our products. We believe this outsourcing permits us to take advantage of the best available technology, leverage the capital investment of others and reduce our operating costs associated with manufacturing assets and increase the variable component of our cost of goods sold.

 

We perform a very limited amount of test and probe activities in our Camarillo and San Diego, California facilities. All of our products, with the exception of the rectifier and assembly product lines, are packaged and tested by outside subcontractors.

 

We sold our Santa Clara, California wafer fabrication facility in 2001 and in December of 2002, we stopped production at our last remaining commercial wafer fabrication facility located in Corpus Christi, Texas. Our Reynosa, Mexico facility now fabricates a very small amount of silicon needed to support our rectifier and assembly products. For fiscal year 2005, we supported approximately 4% of our end product sales with wafers that were fabricated internally. The remaining 96% of our end products were supported with finished silicon wafers purchased from outside wafer foundries in Asia, the United States and Europe. Only our rectifier and assembly products were supported by internal wafer production in fiscal year 2005. We anticipate that in fiscal year 2006 virtually all the silicon wafers we use will likewise be purchased from outside foundries.

 

Despite the divestiture of our own internal wafer fab facilities in favor of outside wafer foundries for sourcing a majority of our silicon needs, we do maintain internal process development capabilities. These departments work closely with our outside foundries on the improvement and development of process capabilities. In fiscal year 2005, we purchased wafers from eight different third-party wafer foundries and used more than 20 different manufacturing processes, including various Bipolar, High-Speed Bipolar, CMOS, and Bi-CMOS processes.

 

While we do have some redundancy of fab processes by using multiple outside foundries, any interruption of supply by one or more of these foundries could materially impact us. Likewise, we maintain some amount of business interruption insurance to help reduce the risk of wafer supply interruption, but we are not fully insured against such risk.

 

Although our products are made from basic materials (principally silicon, metals and plastics), all of which are available from a number of suppliers, capacity at wafer foundries sometimes becomes constrained. In addition to using multiple foundries, we have taken other steps to reserve capacity at certain foundries in order to minimize risks associated with constrained capacity.

 

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Our largest wafer source is a foundry in China. In fiscal year 2005, this Chinese foundry provided 59% of our total silicon requirements in terms of finished wafers purchased. During fiscal years 2005 and 2004, we agreed to consign certain equipment to this foundry to support our specialized processes run at the foundry and to ensure a specified level of capacity over the next few years. The provision of these assets to the wafer foundry is factored into our long-term pricing arrangement with the foundry for any reserved wafers we may purchase.

 

Early in fiscal year 2005, we made a prepayment for wafers at our second largest wafer source, a foundry based in Germany. This foundry provided 17% our total silicon requirements in terms of finished wafers purchased in fiscal year 2005. In exchange for the prepayment, the foundry has reserved a specified level of capacity for us through calendar year 2006. We also negotiated favorable wafer pricing with this foundry for any reserved wafers purchased. Any unused capacity at the end of calendar year 2006 will either be applied to purchases made in calendar year 2007 or the corresponding portion of the prepayment will be returned. The balance of our unsecured prepaid account with this foundry is included in other current assets and other assets.

 

We use third-party contractors to perform assembly and test operations. A majority of our assembly and test activity is conducted by third-party contractors that are based in Malaysia, the Philippines and China. Our subsidiary, Semtech International AG, has an operations office located in the Philippines that supports and coordinates some of the worldwide shipment of products. We have installed our own test equipment at some of our packaging and testing subcontrators in order to ensure a certain level of capacity, assuming the subcontractor has ample employees to operate the equipment. We have a prepayment arrangement with one of our assembly and test contactors to provide us with guaranteed capacity and preferred pricing. The balance with this contractor does not have collateral backing.

 

In the case of both outside wafer foundries and package and test subcontractors, our arrangements with these vendors are designed to provide some assurance of capacity but are not expected to assure access to all the manufacturing capacity we may need in the future.

 

For further information on the location of our long-lived assets, see Note 17. “Business Segments and Concentrations of Risk”, in the Notes to Consolidated Financial Statements included in Item 8.

 

Competition

 

The analog and mixed-signal semiconductor industry is highly competitive, and we expect competitive pressures to continue. Our ability to compete effectively and to expand our business will depend on our ability to continue to recruit applications and design talent, our ability to introduce new products, and the rate at which we introduce these new products to offset the generally short product life cycles. Our industry is characterized by decreasing unit selling prices over the life of a product. We believe we compete effectively based upon our ability to capitalize on efficiencies and economies of scale in production and sales, and our ability to maintain or improve our productivity and product yields to reduce manufacturing costs.

 

We are in direct and active competition, with respect to one or more of our product lines, with at least 30 manufacturers of varying size and financial strength. A number of these competitors are dependent on semiconductor products as their principal source of income, and some are much larger than we are. The number of our competitors has grown due to expansion of the market segments in which we participate. We consider our primary competitors to include Texas Instruments, National Semiconductor, Linear Technology, Maxim Integrated Products, Fairchild Semiconductor and Intersil Semiconductor, all with respect to our power management products; ST Microelectronics N.V., Philips and California Micro Devices with respect to our protection products; Analog Devices and Maxim Integrated Products with respect to our test and measurement products; Silicon Laboratories and Zarlink Semiconductor with respect to our advanced communications products; and Alps Electronics and Synaptics Inc. with respect to our HID products.

 

Intellectual Property and Licenses

 

Our business is highly reliant on the design talents, technical abilities, applications knowledge, and creativity of our employees. We attempt to protect our intellectual property by filing patent applications, trademark applications, and copyright registrations. We consider these actions to be helpful in maintaining a competitive advantage, but do not believe that patents and other intellectual property rights create definitive competitive barriers to entry.

 

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At this time, we do not license our patents or products. We do, however, license certain technology from other companies. We do not consider any of the licensed technology to be material in terms of royalties payable, and we believe the duration and other terms of the licenses are appropriate for our needs.

 

Employees

 

As of January 30, 2005, we had 613 full-time employees. There were 143 employees in research and development, 110 in sales, marketing and field services, and 65 in general, administrative and finance. The remaining 295 employees support operational activities, including product and test engineering, assembly, manufacturing, distribution and quality functions. We have never had a work stoppage and only our Mexican operation has unionized employees. Our employee relations during the last fiscal year have been, and remain, satisfactory. Competition for key design and application engineers is significant.

 

In fiscal year 2004, we reduced a limited amount of headcount associated with our test and measurement and power management product lines. In the third quarter of fiscal year 2005, we implemented a 34 person reduction-in-force associated with various product lines and in general and administrative and sales and marketing functions.

 

Government Regulations

 

We are required to comply, and it is our policy to comply, with numerous government regulations that are normal and customary to businesses in our industry and that operate in our markets and operating locations.

 

Our sales that serve the military and aerospace markets primarily consist of products from the Rectifier, Assembly, and Other Products segment that have been qualified to be sold in these markets by the U.S. Department of Defense (DOD). In order to maintain these qualifications, we must comply with certain specifications promulgated by the DOD. As part of maintaining these qualifications, we are routinely audited by DOD personnel. Based on current specifications, we believe we can maintain our qualifications for the foreseeable future. However, these specifications could be modified by the DOD in the future or we could become subject to other government requirements, which could make the manufacturing of these products more difficult and thus, could adversely impact our profitability in those product lines. The U.S. State Department has determined that a small number of special assemblies from the Rectifier, Assembly, and Other Products segment are subject to the International Traffic in Arms Regulations (ITAR). We have a Technical Assistance Agreement in place that permits us to assemble these products in Mexico. Any international shipment of these products requires a State Department license. Sales of products subject to the ITAR are not material relative to the total sales of the Company.

 

Our facilities throughout the world are subject to various environmental laws and regulations and we believe our operations are in substantial compliance with those laws and regulations. Due to the limited nature of our manufacturing operations, the expense related to environmental compliance for our ongoing operations was immaterial for fiscal years 2005, 2004, and 2003 and has not had any material adverse effect on our capital expenditures, net income, or competitive position. New laws or regulations or changes to existing laws or regulations could subject our ongoing operations to different or additional environmental standards that could increase our cost of compliance in the future.

 

We have incurred, and may continue to incur, liabilities under various statutes for the cleanup of pollutants at locations we have operated and at third-party disposal and recycling sites (see Note 12 to our consolidated financial statements). During fiscal years 2005, 2004, and 2003, the expense incurred with respect to these clean up matters was not material.

 

We use an environmental firm, specializing in hydrogeology, to perform periodic monitoring of the groundwater at the facility in Newbury Park, California that we leased for approximately forty years. We vacated the building in May 2002. Certain contaminants have been found in the local groundwater. Monitoring results over a number of years indicate that contaminants are coming from adjacent facilities. It is currently not possible to determine the ultimate amount of future clean-up costs, if any, that may be required of us for this site. There are no claims pending with respect to environmental matters at the Newbury Park site. Accordingly, no reserve for clean-up has been provided at this time.

 

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Available Information

 

General information about us can be found on our website at www.semtech.com. The information on our website is for information only and should not be relied on for investment purposes. The information on or website is not incorporated by reference into this Form 10-K and should not be considered part of this or any other report filed with the Securities and Exchange Commission (“SEC”).

 

We make available free of charge, either by direct access on our website or a link to the SEC website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Our reports filed with, or furnished to, the SEC are also available directly at the SEC’s website at www.sec.gov.

 

ITEM 2. PROPERTIES

 

Our headquarters is located in Camarillo, California where we own an approximately 85,000 square foot facility that was completed in 2002. The original parcel on which the headquarters is located will accommodate substantial expansion, and we purchased a vacant lot adjacent to the headquarters when it became available in fiscal year 2003. The Camarillo facility houses a very limited amount of test and probe activity, as well as inside sales, marketing and administrative offices. The Camarillo facility serves as the business headquarters for our Rectifier, Assembly and Other Products segment and all the product lines that make up the Standard Semiconductor Products segment, with the exception of our test and measurement product line that is headquartered in San Diego, California.

 

We own a 30,000 square foot building in Reynosa, Mexico that supports the assembly and production needs of our rectifier and assembly product lines.

 

We also lease a 44,000 square foot facility in Corpus Christi, Texas, which housed a wafer fabrication line, production testing and certain engineering functions for our protection product line (part of the Standard Semiconductor Products segment). In December 2002, we stopped production in the Corpus Christi facility as part of the strategic move to obtain nearly all of our silicon wafers from outside sources. The Corpus Christi lease runs through December 2021, but we have the ability to terminate it in 2011. We are investigating sublease opportunities and exploring other alternatives with respect to this property.

 

Our San Diego, California facility is an approximately 25,000 square foot building that houses design, test and administrative functions and serves as the business headquarters for our test and measurement product line (part of the Standard Semiconductor Product segment). The lease on this facility runs through September 2009.

 

We also lease space to house certain of our other design, sales and marketing and operations facilities in Santa Clara, California; Raleigh, North Carolina; Austin, Texas; China; England; France; Germany; Japan; Korea; the Philippines; Scotland; Switzerland; and Taiwan. Subsequent to the end of fiscal year 2005, we signed a lease on approximately 15,000 square feet of office space in San Jose and will relocate employees now working at our Santa Clara location. The cost associated with this new lease will range from $22,000 to $32,000 per month over the five year term of the agreement. The previous monthly rent expense for the Santa Clara facility was $16,000. Some space in New York City that previously housed our HID product group has been sublet and we are seeking subtenants for the remaining space.

 

In December 2000, we purchased a parcel of land in San Diego, California for approximately $7.9 million and began exploring plans to build a facility to support our test and measurement product line. We deferred the project due to the significant downturn in the product line’s business. We are exploring the possible sale of this parcel of land.

 

We believe that our existing leased and owned space is more than adequate for our current operations, and that suitable replacement and additional space will be available in the future on commercially reasonable terms.

 

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ITEM 3. LEGAL PROCEEDINGS

 

We periodically become subject to legal proceedings in the ordinary course of our business. We are not currently involved in any legal proceedings that we believe will materially and adversely affect our business.

 

On June 22, 2001, we were notified by the California Department of Toxic Substances Control (“State”) that we may have liability associated with the clean-up of the one-third acre Davis Chemical Company site in Los Angeles, California. We have been included in the clean-up program because we are one of the companies that used the Davis Chemical Company site for waste recycling and/or disposal between 1949 and 1990. We have joined with other potentially responsible parties in an effort to resolve this matter with the State. The group has entered into a Consent Order with the State that requires the group to perform a soils investigation at the site and submit a draft remediation plan. The group has submitted various reports to the State for review, including the results of limited groundwater sampling. The State has the right to require the removal of contaminated soils and to expand the scope of work to include further investigation of groundwater contamination. The Consent Order does not require the group to remediate the site. To date, our share of the group’s expenses has not been material and has been expensed. At this time there is not a specific proposal or budget with respect to additional studies or the clean-up of the site. Thus, no reserve has been established for this matter.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is traded on the Nasdaq National Market under the symbol “SMTC.” The following table sets forth, for the periods indicated, the high and low sale prices of our common stock, as reported on the Nasdaq National Market, giving effect to all stock splits through the date hereof.

 

     High

   Low

Fiscal year ending January 25, 2004:              

First Quarter

   $ 17.09    $ 11.45

Second Quarter

   $ 17.94    $ 14.09

Third Quarter

   $ 23.20    $ 14.99

Fourth Quarter

   $ 27.14    $ 20.06
Fiscal year ending January 30, 2005:              

First Quarter

   $ 26.47    $ 20.58

Second Quarter

   $ 25.42    $ 18.92

Third Quarter

   $ 21.50    $ 15.94

Fourth Quarter

   $ 22.43    $ 17.54

 

Holders

 

On April 8, 2005, the reported last sale price of our common stock on the Nasdaq National Market was $17.90 per share. As of April 8, 2005, we had 491 stockholders of record.

 

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Dividends

 

The payment of dividends on our common stock is within the discretion of our board of directors. Currently, we intend to retain earnings to finance the growth of our business. We have not paid cash dividends on our common stock during the two most recent fiscal years and our board of directors has not indicated an intent to declare a cash dividend on the common stock in the foreseeable future.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

See the information set forth in item 12 of this Form 10-K.

 

Sales of Unregistered Securities

 

We did not make any unregistered sales of equity securities during fiscal year 2005.

 

Purchases of Equity

 

This table provides information with respect to purchases by the Company of shares of common stock during the fourth quarter of fiscal year 2005.

 

Issuer Purchases of Equity Securities

 

Calendar Month/Year


   Total Number of
Shares Purchased
(2)


   Average Price
Paid per Share


   Total Number of
Shares Purchased as
Part of Publicly
Announced Program
(1)


   Approximate Dollar
Value of Shares That
May Yet Be Purchased
Under The Program
(1)


Nov-04

   —        —      —      $ 22.4 million

Dec-04

   250,000    $ 21.48    250,000    $ 17.0 million

Jan-05

   300,000    $ 18.75    300,000    $ 11.4 million

Total fourth quarter

   550,000    $ 19.99    550,000       

(1) On February 24, 2004 the Company announced that the Board of Directors authorized the repurchase of up to $50 million of the Company’s common stock from time to time through negotiated or open market transactions (the “2004 Program”). The 2004 Program does not have an expiration date. No publicly announced plan or program of the Company for the purchase of shares expired during the period covered by the table.
(2) As shown in the table, all shares purchased by the Company during the fourth quarter were purchased through the 2004 Program. The table does not include shares surrendered to the Company in connection with the cashless exercise of stock options by employees and directors.

 

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ITEM 6. SELECTED FINANCIAL DATA The selected historical financial data for each of the fiscal years in the five-year period ended January 30, 2005 have been derived from our audited financial statements. Such information for the three fiscal years ended January 30, 2005 is contained in and should be read in conjunction with our management’s discussion and analysis, and audited financial statements and accompanying notes included in this Form 10-K. The fiscal year ended January 30, 2005 consisted of fifty-three weeks and all other fiscal years presented consisted of fifty-two weeks. Our past results are not necessarily indicative of our future performance.

 

Consolidated Statements of Income Data:

(In thousands, expect earnings per share data)

 

      
    

Fiscal Year Ended


    

Jan. 28,

2001


  

Jan. 27,

2002


  

Jan. 26,

2003


  

Jan. 25,

2004


   

Jan. 30,

2005


Net Sales

   $ 256,685    $ 191,210    $ 192,958    $ 192,079     $ 253,612

Cost of Sales

     111,819      97,920      83,097      81,332       105,705
    

  

  

  


 

Gross Profit

     144,866      93,290      109,861      110,747       147,907

Operating costs and expenses:

                                   

Selling, general & administrative

     36,164      33,798      34,426      37,207       44,449

Product development & engineering

     32,008      29,744      31,336      30,371       33,492

One-time costs

     —        2,727      13,202      —         —  
    

  

  

  


 

Total operating costs and expenses

     68,172      66,269      78,964      67,578       77,941
    

  

  

  


 

Operating income

     76,694      27,021      30,897      43,169       69,966

Interest and other income (expense), net

     9,334      9,095      15,187      (451 )     6,304
    

  

  

  


 

Income before taxes

     86,028      36,116      46,084      42,718       76,270

Provision for taxes

     25,808      10,113      11,903      10,252       17,382
    

  

  

  


 

Net income

   $ 60,220    $ 26,003    $ 34,181    $ 32,466     $ 58,888
    

  

  

  


 

Earnings per share:

                                   

Basic

   $ 0.91    $ 0.37    $ 0.47    $ 0.44     $ 0.79

Diluted

   $ 0.79    $ 0.33    $ 0.44    $ 0.42     $ 0.75

Weighted average number of shares:

                                   

Basic

     66,247      69,983      73,013      73,570       74,187

Diluted

     76,527      77,747      77,789      77,504       78,124

 

Interest and other income (expense) for the fiscal year ended January 25, 2004 includes one-time cost of $6.8 million for the retirement of debt and $2.9 million of gain on the extinguishment of debt.

 

Interest and other income (expense) for the fiscal year ended January 26, 2003 includes $12.7 million of gain on the extinguishment of debt. Operating costs and expenses for the fiscal year ended January 26, 2003 include one-time costs of $13.2 million, which included $12.0 million associated with the settlement of a customer dispute, $852,000 for an expected loss on the sub-lease of our New York office and $350,000 for asset impairment at our previously operated wafer fabrication facility in Corpus Christi, Texas.

 

Operating costs and expenses for the fiscal year ended January 27, 2002 include one-time cost of $2.0 million associated with an approximate 200-person reduction in headcount made in the first half of the year and one-time cost of $765,000 associated with a Superfund settlement.

 

Consolidated Balance Sheet Data:

(In thousands)

 

      
     Balances as of

    

Jan. 28,

2001


  

Jan. 27,

2002


  

Jan. 26,

2003


  

Jan. 25,

2004


  

Jan. 30,

2005


Cash, cash equivalents and investments

   $ 530,979    $ 543,502    $ 489,047    $ 275,477    $ 301,898

Working capital

     530,737      402,970      420,912      216,419      221,416

Total assets

     677,288      690,401      620,546      409,554      457,925

Convertible subordinated notes

     400,000      364,320      241,570      —        —  

Other long-term liabilities

     —        —        —        —        2,410

Total stockholders’ equity

   $ 242,357    $ 298,795    $ 341,440    $ 379,610    $ 424,366

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and our audited consolidated financial statements and related notes included elsewhere in this Form 10-K.

 

As discussed in “Forward Looking and Cautionary Statements” earlier in this report, this Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward looking statements, including as a result of the risks described in the cautionary statements in the “Risk Factors” section and elsewhere in this Form 10-K, in our other filings with the SEC, and in material incorporated herein and therein by reference. We undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Overview

 

We design, produce and market a broad range of products that are sold principally to customers in the computer, communications and industrial markets. Our products are designed into a wide variety of end applications, including notebook and desktop computers, computer graphics, personal digital assistants (PDAs), cellular phones, wireline networks, wireless base stations, set-top-boxes and automated test equipment (ATE). Products within the communications market include products for local area networks, metro and wide area networks, cellular phones and base stations. Industrial applications include ATE, medical devices and factory automation systems. Our end-customers are primarily original equipment manufacturers and their suppliers, including Apple, Agilent, Cisco, Compal Electronics, Dell, Hewlett Packard, IBM, Intel, LG Electronics, Motorola, Quanta Computer, Samsung, Siemens, Sony and Unisys.

 

We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. Product design and engineering revenue is recognized during the period in which services are performed. We defer revenue recognition on shipment of certain products to distributors where return privileges exist until the products are sold through to end-users. 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. Our operating costs and expenses generally consist of selling, general and administrative (SG&A), product development and engineering costs (R&D), costs associated with acquisitions, and other operating related charges.

 

Most of our sales to customers are made on the basis of individual customer purchase orders. Many large commercial customers include terms in their purchase orders, which provide liberal cancellation provisions. 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. Sales made directly to original equipment manufacturers during fiscal year 2005 were 49% of net sales. The remaining 51% of net sales were made through independent distributors.

 

We divide and operate our business based on two reportable segments: Standard Semiconductor Products and Rectifier, Assembly and Other Products. We evaluate segment performance based on net sales and operating income of each segment. We do not track segment data or evaluate segment performance on additional financial information. We do not track balance sheet items by individual reportable segments. As such, there are no separately identifiable segment assets nor are there any separately identifiable statements of income data (below operating income). The Standard Semiconductor Products segment makes up the vast majority of overall sales and includes our power management, protection, test and measurement, advanced communications and human input device product lines. The Rectifier, Assembly and Other Products segment includes our line of assembly and rectifier devices, which are the remaining products from our founding as a supplier into the military and aerospace market. It also includes other products made up of custom integrated circuits.

 

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Our business involves reliance on foreign-based entities. Most of our outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Malaysia, the Philippines and Germany. For the fiscal year ended January 30, 2005, approximately 59% of our silicon in terms of finished wafers purchased were manufactured in China. Foreign sales for fiscal year 2005 constituted approximately 74% of our net sales. Approximately 90% of foreign sales in fiscal year 2005 were to customers located in the Asia-Pacific region. The remaining sales were primarily to customers in Europe, Canada, and Mexico.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

 

On an ongoing basis, we evaluate and discuss with our audit committee our estimates, including those related to our allowance for doubtful accounts and sales returns, inventory reserves, asset impairments and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Our critical accounting policies and estimates do not vary between our two reportable segments. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies, among others, affect the significant judgments and estimates we use in the preparation of our consolidated financial statements:

 

Accounting for Temporary and Long-Term Investments

 

Our temporary and long-term investments consist of government, bank and corporate obligations. Temporary investments have original maturities in excess of three months, but mature within twelve months of the balance sheet date. Long-term investments have maturities in excess of one year from the date of the balance sheet. We classify our investments as “available for sale” because we expect to possibly sell some securities prior to maturity. We included any unrealized gain or loss, net of tax, in the comprehensive income portion of our Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss).

 

Allowance for Doubtful Accounts

 

We evaluate the collectibility of our accounts receivable based on a combination of factors. If we are aware of a customer’s inability to meet its financial obligations to us, we record an allowance to reduce the net receivable to the amount we reasonably believe we will be able to collect from the customer. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and our historical experience. If the financial condition of our customers were to deteriorate or if economic conditions worsen, additional allowances may be required in the future.

 

Revenue Recognition

 

We recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. Product design and engineering revenue is recognized during the period in which services are performed. We defer revenue recognition on shipment of products to certain customers, principally distributors, where return privileges exist until these products are sold through to end-users or the return privilege lapses. The estimated deferred gross margin on these sales, where there are no outstanding receivables, are recorded on the balance sheet under the heading of “Deferred Revenue.” We record a provision for estimated sales returns in the same period as the related revenues are recorded. We base these estimates on historical sales returns and other known factors. Actual returns could be different from our estimates and current provisions for sales returns and allowances, resulting in future charges to earnings.

 

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Inventory Valuation

 

Our inventories are stated at lower of cost or market and consist of materials, labor and overhead. We determine the cost of inventory by the first-in, first-out method. At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand. In order to state our inventory at lower of cost or market, we maintain reserves against our inventory. If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made.

 

Contingencies and Litigation

 

We are involved in various disputes and litigation matters as a claimant and as defendant. We record any amounts recovered in these matters when collection is certain. We record liabilities for claims against us when the losses are probable and estimable. Any amounts recorded are based on reviews by outside counsel, in-house counsel and management. Actual results may differ from estimates.

 

Accounting for Income Taxes

 

SFAS 109, Accounting for Income Taxes, establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position or our results of operations.

 

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax liability together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Unless a valuation allowance relates to benefits from stock option exercise activity, to the extent we change the valuation allowance in a period, the change is recorded through the tax provision in the statement of operations. If a valuation allowance relates to a benefit from stock option exercise activity, any adjustment to the valuation allowance would be recorded to paid-in-capital in the period of the adjustment. Management continually evaluates our deferred tax assets to assess whether it is likely that the deferred tax assets will be realized.

 

We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws. We recognize probable liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on an estimate of the ultimate resolution of whether, and the extent to which, additional taxes may be due. In the current period, a tax contingency reserve of $1.2 million was established to address this exposure. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. Should additional taxes be assessed as a result of an audit or litigation, a material effect on our income tax provision and net income in the period or periods for which that determination is made could result.

 

In addition to the risks to the effective tax rate discussed above, the effective tax rate reflected in forward-looking statements is based on current enacted tax law. Significant changes in enacted tax law could materially affect these estimates.

 

On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act creates a temporary incentive for U.S. corporations to repatriate foreign subsidiary earnings by providing an elective 85% dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and requirements, including adoption of a specific domestic reinvestment plan for the

 

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repatriated funds. On January 13, 2005 the U.S. Treasury published Notice 2005-10 providing guidance on the implementation of the repatriation deduction. Based on our current understanding of the Act, we believe that we may repatriate from $0 to approximately $38 million in dividends subject to the elective 85% dividends received deduction generating a corresponding tax provision liability between $0 and $5 million. We expect to confirm our understanding of this provision and seek the required chief executive officer and Board of Directors approval of the required domestic reinvestment plan within the timeframe the incentive is available.

 

Results of Operations

 

Fiscal Year 2005 Compared With Fiscal Year 2004

 

Net Sales. Net sales for fiscal year 2005 were $253.6 million, an increase of 32% over the $192.1 million for fiscal year 2004. Semiconductor and electronics industry conditions improved dramatically in the fiscal year, especially during the first half of the year. The significant increase in sales reflected both the strength of fiscal year 2005 and the general weakness that occurred during fiscal year 2004.

 

Presented below are the estimated sales by end-market. End-products in the computer end-market include notebook and desktop computers, graphics applications, PDAs and computer gaming systems. Communications include cellular phone handsets, wireless base stations, set-top boxes, and networking, broadband and long-hail communications infrastructure equipment. The end-market for industrial/other products includes traditional industrial and automation equipment, power supplies, military, aerospace and medical applications.

 

(fiscal years, in thousands)

 

                      
     2005

    2004

   

Change


 

End-Markets


   Net Sales

   % total

    Net Sales

   % total

   

Computer

   $ 81,156    32 %   $ 76,809    40 %   6 %

Communications

     121,734    48 %     76,046    40 %   60 %

Industrial/Other

     50,722    20 %     39,224    20 %   29 %
    

  

 

  

     

Net sales

   $ 253,612    100 %   $ 192,079    100 %   32 %
    

  

 

  

     

 

Within the computer end-market category, sales to notebook computer customers increased more than 20% during fiscal year 2005, while sales of products used in desktop computers were down about 7% and computer graphics/gaming systems were down about 21%. Sales in the communications category were most impacted by a greater than 55% increase in sales of products used in cellular handsets and a greater than 60% increase in networking and communications infrastructure applications. The increase in the industrial end-market category reflected increased sales into the automated test equipment (ATE), which was up about 12%, and a greater than 50% increase in more broad-based industrial end-market segments.

 

Standard Semiconductor Products represented 96% of net sales in fiscal year 2005, while 4% were represented by the Rectifier, Assembly and Other Products segment. Details on net sales by reportable segment are presented below.

 

(fiscal years, in thousands)

 

                      
     2005

    2004

   

Change


 

Reportable Segment


   Net Sales

   % total

    Net Sales

   % total

   

Standard Semiconductor Products

   $ 243,202    96 %   $ 182,522    95 %   33 %

Rectifier, Assembly and Other Products

     10,410    4 %     9,557    5 %   9 %
    

  

 

  

     

Net Sales

   $ 253,612    100 %   $ 192,079    100 %   32 %
    

  

 

  

     

 

Increased sales of Standard Semiconductor Products reflected broad-based strength, especially in portable applications such as notebook computers and cellular phones, communications infrastructure and test systems applications.

 

Sales of our Rectifier, Assembly and Other Products increased in fiscal year 2005 due to improved demand for these older technology products which are used in military, medical and certain industrial applications.

 

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Gross Profit. Gross profit for fiscal year 2005 was $147.9 million, compared to $110.7 million for the prior year. This increase was due to higher absolute sales levels in fiscal year 2005 and slightly higher gross margin on products sold. We continue to try and develop new products that are more complex, which in turn generally provides for higher gross margin. These margin improvements can be offset by lower average selling prices and other factors tied to industry conditions. Our gross margin was 58% for fiscal year 2005, unchanged from fiscal year 2004.

 

In fiscal year 2005 and fiscal year 2004, we sold $507,000 and $1.4 million, respectively, of inventory of the Standard Semiconductor Products segment that had been written-down during the second quarter of fiscal year 2002.

 

Operating Costs and Expenses. Operating costs and expenses were $77.9 million for the fiscal year 2005, up from $67.6 million in fiscal year 2004. Detailed below are the operating costs and expenses for fiscal years 2005 and 2004.

 

(fiscal years, in thousands)

 

                      
     2005

    2004

   

Change


 

Operating Costs & Exp.


   Costs/Exp.

   % sales

    Costs/Exp.

   % sales

   

Selling, general and administrative

   $ 44,449    18 %   $ 37,207    19 %   19 %

Product development and engineering

     33,492    13 %     30,371    16 %   10 %
    

  

 

  

     

Total operating costs and expenses

   $ 77,941    31 %   $ 67,578    35 %   15 %
    

  

 

  

     

 

The increase in selling, general and administrative costs in fiscal year 2005 reflects higher headcount and added variable costs associated with higher sales levels. They also reflect increased legal expenses and the costs associated with compliance with new SEC regulations. The increase in product development and engineering costs, also referred to as research and development (R&D), was mostly due to higher spending related to salaries, variable compensation and increased new product development efforts. As a percentage of net sales, operating costs were lower in fiscal year 2005 compared to fiscal year 2004 due to better efficiencies as sales levels increased.

 

Operating Income. Operating income was $70.0 million in fiscal year 2005, up from operating income of $43.2 million in fiscal year 2004. Operating income was impacted by higher sales levels, a slight improvement in gross margin and better efficiencies on operating costs and expenses.

 

We evaluate segment performance based on net sales and operating income of each segment. Detailed below is operating income by reportable segment.

 

(fiscal years, in thousands)

 

                      
     2005

    2004

   

Change


 

Reportable Segment


   Op. Income

   % total

    Op. Income

   % total

   

Standard Semiconductor Products

   $ 66,901    96 %   $ 40,402    94 %   66 %

Rectifier, Assembly and Other Products

     3,065    4 %     2,767    6 %   11 %
    

  

 

  

     

Total operating income

   $ 69,966    100 %   $ 43,169    100 %   62 %
    

  

 

  

     

 

Operating income for the Standard Semiconductor Products increased in fiscal year 2005 due to higher sales levels and better efficiencies on operating costs and expenses. Operating income for the Rectifier, Assembly and Other Products segment improved in fiscal year 2005 due to higher sales and better manufacturing efficiencies.

 

Interest and Other Income (Expense), Net. Interest and other income (expense), net was income of $6.3 for fiscal year 2005, up from net expense of $451,000 in fiscal year 2004. For fiscal year 2005, a vast majority of interest and other income was interest income from investments. In fiscal year 2004, interest and other income (expense), net was made of interest income on investment, a small amount of interest expense associated with our previously outstanding convertible subordinated notes, and gain and expense on the extinguishment of debt.

 

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The improvement in net interest and other income and expense in fiscal year 2005 was mostly due to the absence of one-time cost of $6.8 million for the retirement of debt, partially offset by $2.9 million of gain on the extinguishment of debt that occurred in fiscal year 2004.

 

Provision for Taxes. Provision for income taxes was $17.4 million for fiscal year 2005, compared to $10.3 million in fiscal year 2004. The effective tax rate for fiscal year 2005 and fiscal year 2004 were 23% and 24%, respectively. The decline is due to increased sales by our foreign-based subsidiaries that are in lower tax jurisdictions.

 

Fiscal Year 2004 Compared With Fiscal Year 2003

 

Net Sales. Net sales for fiscal year 2004 were $192.1 million, a less than a 1% decline compared to $192.9 million for fiscal year 2003. Semiconductor and electronics industry conditions, as well as overall macro economic conditions, were weak during the first half of fiscal year 2004 but improved during the second half of the year.

 

Presented below are the estimated sales by end-market. End-products in the computer end-market include notebook and desktop computers, graphics applications, PDAs and computer gaming systems. Communications include cellular phone handsets, wireless base stations, set-top boxes, and networking, broadband and long-hail communications infrastructure equipment. The end-market for industrial/other products includes traditional industrial and automation equipment, power supplies, military, aerospace and medical applications.

 

(fiscal years, in thousands)

 

                      
     2004

    2003

   

Change


 

End-Markets


   Net Sales

   % total

    Net Sales

   % total

   

Computer

   $ 76,809    40 %   $ 94,549    49 %   -19 %

Communications

     76,046    40 %     57,887    30 %   31 %

Industrial/Other

     39,224    20 %     40,522    21 %   -3 %
    

  

 

  

     

Net sales

   $ 192,079    100 %   $ 192,958    100 %   0 %
    

  

 

  

     

 

Within the computer end-market category, sales to notebook computer customers increased during fiscal year 2004 but were more than offset by a 60% decline in sales of products used in desktop computers and computer gaming systems. Sales in the communications category were most impacted by increased sales of products used in cellular handsets. The small decline in the industrial end-market category was most impacted by a more than 10% decline in sales into the automated test equipment (ATE) market.

 

Standard Semiconductor Products represented 95% of net sales in fiscal year 2004, while 5% were represented by the Rectifier, Assembly and Other Products segment. Details on net sales by reportable segment are presented below.

 

(fiscal years, in thousands)

 

                      
     2004

    2003

   

Change


 

Reportable Segment


   Net Sales

   % total

    Net Sales

   % total

   

Standard Semiconductor Products

   $ 182,522    95 %   $ 183,235    95 %   0 %

Rectifier, Assembly and Other Products

     9,557    5 %     9,723    5 %   -2 %
    

  

 

  

     

Net Sales

   $ 192,079    100 %   $ 192,958    100 %   0 %
    

  

 

  

     

 

Increased sales of Standard Semiconductor Products reflected strength in portable applications such as notebook computers and cellular phones but was partially offset by weakness in desktop computers and computer gaming systems. Strength in these end-applications was partially offset by weakness in the desktop computer, ATE and other capital intensive end-market segments.

 

Sales of our Rectifier, Assembly and Other Products segment decreased in fiscal year 2004 due to declining demand for these older technology products and other non-strategic product offerings, which we have de-emphasized due to their lower growth and profit margin opportunities.

 

20


Table of Contents

Gross Profit. Gross profit for fiscal year 2004 was $110.7 million, compared to $109.9 million for the prior year. This increase was due to higher gross margin on products sold as compared to prior years. We continue to try and develop new products that are more complex, which in turn generally provides for higher gross margin. Our gross margin was 58% for fiscal year 2004, compared to a gross margin of 57% for fiscal year 2003.

 

In fiscal year 2004 and fiscal year 2003, we sold $1.4 million and $1.3 million, respectively, of inventory of the Standard Semiconductor Products segment that had been written-down during the second quarter of fiscal year 2002.

 

Operating Costs and Expenses. Operating costs and expenses were $67.6 million for the fiscal year 2004, down from $79.0 million in fiscal year 2003. Detailed below are the operating costs and expenses for fiscal years 2004 and 2003.

 

(fiscal years, in thousands)

 

                      
     2004

    2003

   

Change


 

Operating Costs & Exp.


   Costs/Exp.

   % sales

    Costs/Exp.

   % sales

   

Selling, general and administrative

   $ 37,207    19 %   $ 34,426    18 %   8 %

Product development and engineering

     30,371    16 %     31,336    16 %   -3 %

One-time costs

     —      0 %     13,202    7 %   -100 %
    

  

 

  

     

Total operating costs and expenses

   $ 67,578    35 %   $ 78,964    41 %   -14 %
    

  

 

  

     

 

The increase in selling, general and administrative costs in fiscal year 2004 reflects added headcount in the area of marketing and field applications support. The decline in product development and engineering costs, also referred to as research and development (R&D), was mostly due to lower spending not related to salaries and headcount levels.

 

Operating costs and expenses for fiscal year 2003 include one-time costs of $13.2 million; which included $12.0 million associated with the Standard Semiconductor Products segment for the settlement of a customer dispute, $852,000 not assigned to a reportable segment for an expected loss on the future sub-lease of our New York office and $350,000 not assigned to a reportable segment for asset impairment at the Corpus Christi, Texas wafer fabrication facility.

 

Operating Income. Operating income was $43.2 million in fiscal year 2004, up from operating income of $30.9 million in fiscal year 2003. Operating income was impacted by improvement in gross margin and lower operating costs and expenses.

 

We evaluate segment performance based on net sales and operating income of each segment. Detailed below is operating income by reportable segment.

 

(fiscal years, in thousands)

 

                      
     2004

    2003

   

Change


 

Reportable Segment


   Op. Income

   % total

    Op. Income

    % total

   

Standard Semiconductor Products

   $ 40,402    94 %   $ 29,927     97 %   35 %

Rectifier, Assembly and Other Products

     2,767    6 %     2,172     7 %   27 %

One-time costs

     —      0 %     (1,202 )   -4 %   -100 %
    

  

 


 

     

Total operating income

   $ 43,169    100 %   $ 30,897     100 %   40 %
    

  

 


 

     

 

Operating income for the Standard Semiconductor Products increased in fiscal year 2004, having benefited by an increase in gross margin and a decline in one-time costs. Standard Semiconductor Products segment operating income in fiscal year 2003 was negatively impacted by a one-time cost of $12.0 million for the settlement of a customer dispute.

 

Operating income for the Rectifier, Assembly and Other Products segment improved in fiscal year 2004 due to lower spending and better manufacturing efficiencies.

 

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Table of Contents

Interest and Other Income (Expense), Net. Net interest and other income and expense was a net expense of $451,000 for fiscal year 2004, down from income of $15.2 million in fiscal year 2003. Interest, other income and expenses includes interest income from investments, interest expense associated with our previously outstanding convertible subordinated notes, and gain and expense on the extinguishment of debt.

 

The decline in net interest and other income and expense in fiscal year 2004 was mostly due to a one-time cost of $6.8 million for the retirement of debt, partially offset by $2.9 million of gain on the extinguishment of debt. The interest income portion of this category was lower in fiscal year 2004 due to lower rates of return on our investments as compared to the prior year. Interest and other income in fiscal year 2003 included $12.7 million of gain on the extinguishment of debt.

 

Provision for Taxes. Provision for income taxes was $10.3 million for fiscal year 2004, compared to $11.9 million in fiscal year 2003. The effective tax rate for fiscal year 2004 and fiscal year 2003 were 24% and 26%, respectively. The decline is due to increased sales by our foreign-based subsidiaries that are in lower tax jurisdictions.

 

Selected Quarterly Financial Data (Unaudited)

 

The following tables set forth our unaudited consolidated statements of income data for each of the eight quarterly periods ended January 30, 2005, as well as that data expressed as a percentage of our net sales for the quarters presented. Per our fiscal calendar, fiscal year 2005 was a fifty-three week year, with the third quarter ending October 31, 2004 being a fourteen week quarter. All other quarters presented consisted of thirteen weeks.

 

You should read this selected quarterly financial data in conjunction with our consolidated financial statements and related notes appearing in this Form 10-K. We have prepared this unaudited consolidated information on a basis consistent with our audited consolidated financial statements, and, in the opinion of our management, it reflects all normal recurring adjustments that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. You should not draw any conclusions about our future results from the operating results for any quarter.

 

     Quarters Ended

    

Apr. 27,

2003


  

July 27,

2003


   

Oct. 26,

2003


  

Jan. 25,

2004


  

Apr. 25,

2004


  

July 25,

2004


  

Oct. 31,

2004


  

Jan. 30,

2005


Net Sales

   $ 44,017    $ 44,569     $ 48,112    $ 55,381    $ 61,893    $ 68,305    $ 64,987    $ 58,427

Cost of Sales

     19,160      19,039       20,230      22,903      25,111      27,470      27,767      25,357
    

  


 

  

  

  

  

  

Gross Profit

     24,857      25,530       27,882      32,478      36,782      40,835      37,220      33,070

Operating costs and expenses:

                                                        

Selling, general & administrative

     8,946      9,228       9,271      9,762      10,341      11,323      11,438      11,347

Product development & engineering

     7,825      7,477       7,533      7,536      7,907      8,435      8,826      8,324

One-time costs

     —        —         —        —        —        —        —        —  
    

  


 

  

  

  

  

  

Total operating costs and expenses

     16,771      16,705       16,804      17,298      18,248      19,758      20,264      19,671
    

  


 

  

  

  

  

  

Operating income

     8,086      8,825       11,078      15,180      18,534      21,077      16,956      13,399

Interest and other income (expense), net

     2,792      (5,651 )     1,103      1,305      894      1,288      2,142      1,980

Income before taxes

     10,878      3,174       12,181      16,485      19,428      22,365      19,098      15,379

Provision for taxes

     2,611      762       2,923      3,956      4,663      4,946      4,503      3,270
    

  


 

  

  

  

  

  

Net income

   $ 8,267    $ 2,412     $ 9,258    $ 12,529    $ 14,765    $ 17,419    $ 14,595    $ 12,109
    

  


 

  

  

  

  

  

Earnings per share:

                                                        

Basic

   $ 0.11    $ 0.03     $ 0.13    $ 0.17    $ 0.20    $ 0.23    $ 0.20    $ 0.16
    

  


 

  

  

  

  

  

Diluted

   $ 0.11    $ 0.03     $ 0.12    $ 0.16    $ 0.19    $ 0.22    $ 0.19    $ 0.16
    

  


 

  

  

  

  

  

Weighted average number of shares:

                                                        

Basic

     73,236      73,411       73,704      73,941      74,226      74,452      74,000      74,067

Diluted

     76,522      76,985       77,902      78,736      78,819      78,658      77,486      77,758

 

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Apr. 27,

2003


   

July 27,

2003


   

Oct. 26,

2003


   

Jan. 25,

2004


   

Apr. 25,

2004


   

July 25,

2004


   

Oct. 31,

2004


   

Jan. 30,

2005


 

Net Sales

   100 %   100 %   100 %   100 %   100 %   100 %   100 %   100 %

Cost of Sales

   44 %   43 %   42 %   41 %   41 %   40 %   43 %   43 %
    

 

 

 

 

 

 

 

Gross Profit

   56 %   57 %   58 %   59 %   59 %   60 %   57 %   57 %

Operating costs and expenses:

                                                

Selling, general & administrative

   20 %   21 %   19 %   18 %   17 %   17 %   18 %   19 %

Product development & engineering

   18 %   17 %   16 %   14 %   13 %   12 %   14 %   14 %
    

 

 

 

 

 

 

 

Total operating costs and expenses

   38 %   37 %   35 %   31 %   29 %   29 %   31 %   34 %
    

 

 

 

 

 

 

 

Operating income

   18 %   20 %   23 %   27 %   30 %   31 %   26 %   23 %

Interest and other income (expense), net

   6 %   -13 %   2 %   2 %   1 %   2 %   3 %   3 %

Income before taxes

   25 %   7 %   25 %   30 %   31 %   33 %   29 %   26 %

Provision for taxes

   6 %   2 %   6 %   7 %   8 %   7 %   7 %   6 %
    

 

 

 

 

 

 

 

Net income

   19 %   5 %   19 %   23 %   24 %   26 %   22 %   21 %
    

 

 

 

 

 

 

 

 

Liquidity and Capital Resources

 

We evaluate segment performance based on net sales and operating income of each segment. We do not track segment data or evaluate segment performance or additional financial information. As such, there are no separately identifiable segment assets and liabilities.

 

On February 14, 2000, we completed a private offering of $400.0 million principal amount of 4 1/2% convertible subordinated notes. The notes were due in 2007 and were callable beginning in February of 2003. Through an ongoing buyback program, we had bought back and retired a portion of the convertible subordinated notes in open market transactions. On July 18, 2003, we called the remaining $165.0 million outstanding balance of the convertible subordinated notes.

 

As of January 30, 2005, we had working capital of $221.4 million, compared with $217.1 million as of January 25, 2004 and $420.9 million as of January 26, 2003. The ratio of current assets to current liabilities as of January 30, 2005 was 8.6 to 1, compared to 8.5 to 1 as of January 25, 2004 and 12.2 to 1 as of January 26, 2003. The small increase in working capital as of January 30, 2005 compared to the prior year was mostly the result of a modest $4.5 million increase in current assets, only slightly offset by a $155,000 increase in current liabilities. The decrease in working capital as of January 25, 2004 compared to January 26, 2003 most reflected a decline in cash and cash equivalents and temporary investments that were used to retire $241.6 million of long-term debt during fiscal year 2004.

 

Cash provided by operating activities was $70.1 million for fiscal year 2005, compared to $35.8 million for fiscal year 2004 and $62.6 million for fiscal year 2003. Net operating cash flows were impacted by non-cash charges for depreciation and amortization of $9.8 million, $9.0 million and $9.6 million in fiscal years 2005, 2004 and 2003, respectively.

 

Net operating cash flows in fiscal year 2005 were positively impacted by net income of $58.9 million, a $13.3 million tax benefit from stock option exercises, a decline of $5.8 million in income taxes refundable, a decline of $2.4 million in other liabilities and other smaller items. These positive operating cash flow items were only partially offset by a $15.0 million increase in other assets, a $5.2 million decline in accrued liabilities and smaller increases in receivables and inventories. Net operating cash flows in fiscal year 2004 were most positively impacted by net income of $32.5 million and by a decline in deferred income taxes, loss on extinguishment of debt, increase in accounts payable, tax benefit from stock option exercises and declines in other assets. These were partially offset by increases in receivables, inventories, income taxes refundable, other assets, and declines in accrued liabilities, income taxes payable and other liabilities. Net operating cash flows in fiscal year 2003 were positively impacted by net income of $34.2 million and by a decrease in inventories and receivables, increases in accrued liabilities, tax benefit from stock option exercises, income taxes payable, loss on the disposition of property, plant and equipment and other assets. These were partially offset by increases in gains on repurchase of long-term debt, accounts payable, deferred revenue and other liabilities.

 

Investing activities used $58.4 million in fiscal year 2005 compared to net cash provided by investing activities of $164.2 million in fiscal year 2004 and $132.9 million provided in fiscal year 2003. Investing activities for all three

 

23


Table of Contents

periods consist of changes in temporary investments and long-term investments, and cash used for capital expenditures. For fiscal years 2005 and 2004, investing activity included small amounts provided by the sale of property, plant and equipment.

 

Our financing activities used $25.8 million during fiscal year 2005, $241.0 million in the fiscal year 2004 and $105.0 million during fiscal year 2003. Financing activities in fiscal year 2005 reflect the proceeds from stock option exercises and reissuance of treasury stock, which were more than offset by $38.6 million of cash used to repurchase common stock. Financing activities in fiscal year 2004 reflect the proceeds from stock option exercises, which were more than offset by $241.6 million of cash used to retire long-term debt and $7.0 million to repurchase common stock. Financing activities in fiscal year 2003 reflect the proceeds from stock option exercises, which were more than offset by $107.6 million of cash used to repurchase long-term debt and $9.1 million of cash used to repurchase common stock.

 

In order to develop, design and manufacture new products, we have incurred significant expenditures during the past five years. We expect to continue these investments aimed at developing new products, including the hiring of many design and applications engineers and related purchase of equipment. Our intent is to continue to invest in those areas that have shown potential for viable and profitable market opportunities. 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 operations and investments.

 

A portion of our capital resources, and the related liquidity they represent, are held by our foreign subsidiaries. If we needed these funds for investment in domestic operations, any repatriation could have negative tax implications.

 

Purchases of new capital equipment were made to expand our test capacity and support other engineering functions, including product design and qualification. These purchases were funded from our operating cash flows and cash reserves.

 

We believe that operating cash flows together with cash reserves are sufficient to fund operations and capital expenditures for the foreseeable future.

 

Off-Balance Sheet Arrangements

 

We do not have any transactions, arrangements, financial condition, changes in financial condition, revenues or expenses, results of operations, and other relationships with unconsolidated subsidiaries or affiliated entities that are reasonably likely to affect our 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, engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the financial statements. Noted below under “Contractual Obligations” are various commitments we have associated with our business such as lease commitments, open purchase obligations and other items, that are not recorded as liabilities on our balance sheet, since we have not yet received the related goods or services as of January 30, 2005.

 

Contractual Obligations

 

Presented below is a summary of our contractual obligations as of January 30, 2005.

 

     Less than
1 year


   1-3 years

   4-5 years

  

After

5 years


   Total

Long-term debt

   $ —      $ —      $ —      $ —      $ —  

Operating leases

     2,244      3,021      2,376      1,415      9,056

Open capital purchase commitments

     4,578      —        —        —        4,578

Other open purchase commitments

     20,386      —        —        —        20,386

Other long-term liabilities

     —        —        —        2,410      2,410
    

  

  

  

  

Total contractual cash obligations

   $ 27,208    $ 3,021    $ 2,376    $ 3,825    $ 36,430
    

  

  

  

  

 

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Table of Contents

As of January 30, 2005, we had approximately $9.1 million in operating lease commitments that extend over an eight-year period. The portion of these operating lease payments due during fiscal year fiscal 2006 is approximately $2.2 million.

 

Capital purchase commitments and other open purchase commitments are for the purchase of plant, equipment, raw material, supplies and services. They are not recorded as liabilities on our balance sheet as of January 30, 2005, as we have not yet received the related goods or taken title to the property.

 

Late in fiscal year 2004, we established a deferred compensation plan for certain officers and key executives that allows participants to defer a portion of their compensation for future distribution at various times permitted by the plan. We match a portion of the employee’s deferral, with the match subject to a vesting period. Compensation expense under this plan totaled $161,000 in fiscal year 2005. Our liability for deferred compensation totaled $2.4 million as of January 30, 2005, and is included in other long-term liabilities in the table above.

 

We have purchased whole life insurance on the lives of certain of the deferred compensation plan participants. This company-owned life insurance is held in a grantor trust and is intended to cover a majority of our costs of the deferred compensation plan. The cash surrender value of our company-owned life insurance was $2.2 million as of January 30, 2005, and is included in other assets.

 

Inflation

 

Inflationary factors have not had a significant effect on our performance over the past several years. A significant increase in inflation would affect our future performance.

 

Recently Issued Accounting Standards

 

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The pronouncement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years after November 23, 2004. The adoption of this pronouncement is not expected to have a material effect on our financial condition, the results of operations or liquidity.

 

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure under this provision is no longer an alternative.

 

The provisions of this statement are scheduled to become effective for fiscal years beginning after June 15, 2005. Assuming this new standard is implemented as scheduled, we plan to adopt this in the first quarter of fiscal year 2007 that ends on April 30, 2006. We are currently evaluating the two methods of adoption allowed by SFAS No. 123(R): the modified-prospective transition method and the modified-retrospective transition method. The exact impact of adopting this pronouncement cannot be predicted at this time because it will depend on many factors, including the levels of share-based payments granted in the future. However, had we adopted this pronouncement in prior periods, the impact of this pronouncement would approximate the impact of SFAS No. 123 described in the disclosure of the pro forma results in Note 1, under the heading “Stock-Based Compensation” in our Notes to Financial Statements included elsewhere in this Form 10-K.

 

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Table of Contents

RISK FACTORS

 

You should carefully consider and evaluate all of the information in this Form 10-K, including the risk factors listed below. The risks described below are not the only ones facing our Company. Additional risks not now known to us or that we currently deem immaterial may also impair our business operations. If any of these risks occur, our business could be materially harmed. If our business is harmed, the trading price of our common stock could decline.

 

As discussed in “Forward Looking and Cautionary Statements” earlier in this report, this Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward looking statements, including as a result of the risks described in the cautionary statements in this “Risk Factors” section and elsewhere in this Form 10-K, in our other filings with the SEC, and in material incorporated herein and therein by reference. We undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Economic decline may have adverse consequences for our business

 

We sell our products into several commercial markets, primarily the computer, communication and industrial end-markets, whose performance is tied to the overall economy. Many of these industries were severely impacted in calendar years 2001 and 2002 due to an economic slowdown in the United States and globally. Our business during these periods reflected the weak economic conditions. Market research analysts have claimed that historically the semiconductor industry is impacted by broad economic factors, such as United States’ gross domestic product (GDP) and worldwide oil prices.

 

If economic conditions were to once again worsen or a wider global slowdown were to occur, demand for our products may be reduced. In addition, economic slowdowns may also affect our customers’ ability to pay for our products. Accordingly, economic slowdowns may harm our business.

 

The cyclical nature of the electronics and semiconductor industries may limit our ability to maintain or increase revenue and profit levels during industry downturns

 

The semiconductor industry is highly cyclical and has experienced significant downturns, which are characterized by reduced product demand, production overcapacity, increased levels of inventory, industry-wide fluctuations in the demand for semiconductors and the significant erosion of average selling prices. The occurrence of these conditions has adversely affected our business in the past. In fiscal year 2002, our net sales declined by 26% compared to the prior year as a result of a dramatic slowdown in the industry. Past downturns in the semiconductor industry have resulted in a sudden impact on the semiconductor and capital equipment markets. Consequently, any future downturns in the semiconductor industry may harm our business.

 

We compete against larger, more established entities and our market share may be reduced if we are unable to respond to our competitors effectively

 

The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change, and design and other technological obsolescence. We compete with domestic and international semiconductor companies, many of which have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing and distribution of their products. Some of these competitors include: Texas Instruments, National Semiconductor, Linear Technology, Maxim Integrated Products, Fairchild Semiconductor and Intersil Semiconductor, with respect to our power management products; ST Microelectronics N.V. and California Micro Devices, with respect to our protection products; Analog Devices and Maxim Integrated Products, with respect to our test and measurement products; Zarlink Semiconductor and Silicon Laboratories, with respect to our advanced communications products; and Alps Electric and Synaptics Inc., with respect to our HID products. We expect continued competition from existing competitors as well as competition from new entrants in

 

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the semiconductor market. Our ability to compete successfully in the rapidly evolving area of integrated circuit technology depends on several factors, including:

 

    success in designing and manufacturing new products that implement new technologies;

 

    protection of our processes, trade secrets and know-how;

 

    maintaining high product quality and reliability;

 

    pricing policies of our competitors;

 

    performance of competitors’ products;

 

    ability to deliver in large volume on a timely basis;

 

    marketing, manufacturing and distribution capability; and

 

    financial strength.

 

To the extent that our products achieve market success, competitors typically seek to offer competitive products or lower prices, which, if successful, could harm our business.

 

A majority of our net sales are into larger, vertical end-market applications. Fluctuations and seasonality and economic downturns in any of our end-markets may have adverse consequences for our business

 

A majority of our net sales are into larger, vertical end-market applications such as notebook computers, desktop computers and cellular phones. Vertical end-market applications tend to be highly cyclical over time and highly competitive given the significant unit opportunities they represent. Horizontal markets tend to be less cyclical, but unit volume opportunities are much lower. We consider the industrial market to be a horizontal end-market, because it is much more broad-based and comprised on many non-standardized end-applications.

 

Many of our products are used in personal computers and related peripherals. For fiscal year 2005, we estimate 32% of our sales were used in computer applications, including 21% tied to notebook computers. Industry-wide fluctuations in demand for desktop and notebook computers have in the past, and may in the future, harm our business. In addition, our past results have reflected some seasonality, with demand levels being higher in computer segments during the third and fourth quarters of the year in comparison to the first and second quarters.

 

For fiscal year 2005, shipment of our products to the ATE customers represented approximately 10% of our net sales. Products sold into the ATE tend to have above corporate average gross margins. Consequently, downturns in the ATE market and declines in the sales of our products used in ATE systems may adversely affect our business.

 

Since the middle of fiscal year 2004, we saw demand from cellular phone manufacturers increase, and we estimate 32% of our sales in fiscal year 2005 were tied to this end-market application. Any decline in the number of cellular phones made, especially feature-rich phones with color displays, could adversely affect our business.

 

We obtain many essential components and materials and certain critical manufacturing services from a limited number of suppliers and subcontractors, which are principally foreign-based entities

 

Our reliance on a limited number of outside subcontractors and suppliers for silicon wafers, packaging, test and certain other processes involves several risks, including potential inability to obtain an adequate supply of required components and reduced control over the price, timely delivery, reliability and quality of components. These risks may be attributable to several factors, including limitation on resources, labor problems, equipment failures or the occurrence of natural disasters. There can be no assurance that problems will not occur in the future with suppliers or subcontractors. Disruption or termination of our supply sources or subcontractors could significantly delay our shipments and harm our business. Delays could also damage relationships with current and prospective customers. Any prolonged inability to obtain timely deliveries or quality manufacturing or any other circumstances that would require us to seek alternative sources of supply or to manufacture or package certain components internally could limit our growth and harm our business.

 

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Most of our outside subcontractors and suppliers, including third-party foundries that supply silicon wafers, are located in foreign countries, including China, Malaysia, the Philippines and Germany. For fiscal year 2005, approximately 59% of our silicon in terms of finished wafers, was supplied by a third-party foundry in China, and this percentage could be even higher in future periods. For fiscal year 2004, approximately 62% of our silicon in terms of finished wafers was supplied by this third-party foundry in China. While we do have some redundancy of fab processes by using multiple outside foundries, any interruption of supply by one or more of these foundries could materially impact us. Likewise, we maintain some amount of business interruption insurance to help reduce the risk of wafer supply interruption, but we are not fully insured against such risk.

 

A majority of our package and test operations are performed by third-party contractors that are based in Malaysia, the Philippines and China. Our international business activities, in general, are subject to a variety of potential risks resulting from certain political and economic uncertainties. Any political turmoil or trade restrictions in these countries, particularly China, could limit our ability to obtain goods and services from these suppliers and subcontractors. The effect of an economic crisis or a political turmoil on our suppliers located in these countries may impact our ability to meet the demands of our customers. If we find it necessary to transition the goods and services received from our existing suppliers or subcontractors to other firms, we would likely experience an increase in production costs and a delay in production associated with such a transition, both of which could have a significant negative effect on our operating results, as these risks are substantially uninsured.

 

We may be unsuccessful in developing and selling new products required to maintain or expand our business

 

We operate in a dynamic environment characterized by price erosion, rapid technological change and design and other technological obsolescence. Our competitiveness and future success depend on our ability to achieve design wins for our products with current and future customers and introduce new or improved products that meet customer needs while achieving favorable margins. A failure to achieve design wins, to introduce these new products in a timely manner or to achieve market acceptance for these products, could harm our business.

 

The introduction of new products presents significant business challenges because product development commitments and expenditures must be made well in advance of product sales. The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specific implementation factors, including:

 

    timely and efficient completion of process design and development;

 

    timely and efficient implementation of manufacturing and assembly processes;

 

    product performance;

 

    the quality and reliability of the product; and

 

    effective marketing, sales and service.

 

The failure of our products to achieve market acceptance due to these or other factors could harm our business.

 

Our products may be found to be defective, product liability claims may be asserted against us and we may not have sufficient liability insurance

 

One or more of our products may be found to be defective after shipment, requiring a product replacement, recall, or a software solution that would cure the defect but impede performance of the product. We may also be subject to product returns which could impose substantial costs and harm our business.

 

Product liability claims may be asserted with respect to our technology or products. Our products are typically sold at prices that are significantly lower than the cost of the end-products into which they are incorporated. A defect or failure in our product could give rise to failures in our customer’s end-product, so we may face claims for damages that are disproportionately higher than the revenues and profits we receive from the products involved, especially if our customer seeks to recover for damage claims made against it by its own customers. While we maintain some insurance, there can be no assurance that we have obtained a sufficient amount of insurance coverage, that asserted claims will be within the scope of coverage of the insurance, or that we will have sufficient resources to satisfy any asserted claims.

 

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The costs associated with our general product warranty policy and our indemnification of certain customers, distributors, and other parties could be higher in future periods

 

Our 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, we have agreed to other warranty terms, including some indemnification provisions, that could prove to be significantly more costly. If there is a substantial increase in the rate of customer claims, if our estimate of probable losses relating to identified warranty exposures prove inaccurate, or our efforts to contractually limit liability prove inadequate, we may record a charge against future cost of sales.

 

In the normal course of our business, we indemnify other parties, including customers, distributors, and lessors, with respect to certain matters. These obligations typically arise under contracts under which we customarily agree to hold the other party harmless against losses arising from a breach of representations and covenants related to certain matters, such as acts or omissions of our employees, infringement of third-party intellectual property rights, and certain environmental matters. We have also entered into agreements with our directors and some of our executives indemnifying them against certain liabilities incurred in connection with their duties, and our Certificate of Incorporation and Bylaws contain similar indemnification obligations with respect to our directors and employees. In some cases there are limits on and exceptions to our potential indemnification liability. We cannot estimate the amount of potential future payments, if any, that we might be required to make as a result of these agreements. Over at least the last decade, we have not incurred any significant expense as a result of agreements of this type. Accordingly, we have not accrued any amounts for such indemnification obligations. However, there can be no assurances that we will not incur expense under these indemnification provisions in the future.

 

Our share price could be subject to extreme price fluctuations, and shareholders could have difficulty trading shares

 

The market for the stock of high technology companies has been volatile, and the market price of our common stock has been and may continue to be subject to significant fluctuations. Fluctuations could be in response to items such as operating results, announcements of technological innovations, or market conditions for technology stocks in general. Additionally, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated to the operating performance of individual companies. These market fluctuations, as well as general economic conditions, may adversely affect the price of our common stock.

 

In the past, securities class action litigation has often been instituted against a company following periods of volatility in the company’s stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management’s attention and resources.

 

In addition, the future sale of a substantial number of shares of common stock by us or by our existing stockholders may have an adverse impact on the market price of the shares of common stock. There can be no assurance that the trading price of our common stock will remain at or near its current level.

 

We sell and trade with foreign customers, which subjects our business to increased risks applicable to international sales

 

Sales to foreign customers accounted for approximately 74% of net sales in the fiscal year ended January 30, 2005. Sales to our customers located in Taiwan and Korea constituted 25% and 28%, respectively, of net sales for fiscal year 2005. International sales are subject to certain risks, including unexpected changes in regulatory requirements, tariffs and other barriers, political and economic instability, difficulties in accounts receivable collection, difficulties in managing distributors and representatives, difficulties in staffing and managing foreign subsidiary operations and potentially adverse tax consequences. These factors may harm our business. Our use of the Semtech name may be prohibited or restricted in some countries, which may negatively impact our sales efforts. In addition, substantially all of our foreign sales are denominated in U.S. dollars and currency exchange fluctuations in countries where we do business could harm us by resulting in pricing that is not competitive with prices denominated in local currencies.

 

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The outbreak of severe acute respiratory syndrome (SARS) or other heath related issues, could impact our customer or supply base, especially in Asia

 

A large percentage of our sales are to customers located in Asia and a large percentage of our products are manufactured in Asia. Our largest customer base in Asia is located in Taiwan. Our largest wafer source is located in China. SARS or other health related issues could have a negative impact on consumer demand, on travel needed to secure new business or manage our operations, on transportation of our products from our suppliers or to our customers, or on workers needed to manufacture our products or our customers’ products.

 

Our foreign currency exposures may change over time as the level of activity in foreign markets grows and could have an adverse impact upon financial results

 

As a global enterprise, we face exposure to adverse movements in foreign currency exchange rates. Certain of our assets, including certain bank accounts, exist in non U.S. dollar-denominated currencies, which are sensitive to foreign currency exchange rate fluctuations. The non U.S. dollar-denominated currencies are principally the Euro, Swiss Francs, and British Pounds Sterling. We also have a significant number of employees that are paid in foreign currency, the largest being United Kingdom-based employees who are paid in British Pounds Sterling.

 

If the value of the United States dollar continues to weaken relative to these specific currencies, as it has done in recent years, the cost of doing business in terms of United States dollars goes up. With the growth of our international business, our foreign currency exposures may grow and under certain circumstances, could harm our business.

 

We do a limited amount of hedging of our foreign exchange exposure. In a limited number of cases, we have purchased forward contracts that lock in our right to purchase foreign currencies at an agreed upon rate. In other cases, we convert United Sates dollars into foreign currency in advance of the expected payment. The use of forward contracts to hedge foreign exchange exposure may be required to be marked-to-market each quarter and can create volatility in net income not directly tied to our operating results.

 

Our future results may fluctuate, fail to match past performance or fail to meet expectations

 

Our results may fluctuate in the future, may fail to match our past performance or fail to meet the expectations of analysts and investors. Our results and related ratios, such as gross margin, operating income percentage and effective tax rate may fluctuate as a result of:

 

    general economic conditions in the countries where we sell our products;

 

    seasonality and variability in the computer market and our other end-markets;

 

    the timing of new product introductions by us and our competitors;

 

    product obsolescence;

 

    the scheduling, rescheduling or cancellation of orders by our customers;

 

    the cyclical nature of demand for our customers’ products;

 

    our ability to develop new process technologies and achieve volume production;

 

    changes in manufacturing yields;

 

    capacity utilization;

 

    product mix and pricing;

 

    movements in exchange rates, interest rates or tax rates;

 

    the availability of adequate supply commitments from our outside suppliers;

 

    the manufacturing and delivery capabilities of our subcontractors; and

 

    litigation and regulatory matters.

 

As a result of these factors, our past financial results are not necessarily indicative of our future results.

 

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We receive a significant portion of our revenues from a small number of customers and the loss of any one of these customers or failure to collect a receivable from them could adversely affect our operations and financial position

 

The identity of our largest customers has varied from year to year. Historically, we have had significant customers that individually accounted for 10% or more of consolidated revenues in certain quarters or represented 10% or more of net accounts receivables at any given date. We had several end-customers in fiscal year 2005 that on an annual basis accounted for more than 5% of net sales, but less than 10% of net sales. The last time we had an end-customer that accounted for more than 10% of net sales on an annual basis was in fiscal year 2002, when one of our ATE end-customers, including its subcontractors, accounted for approximately 13% of net sales.

 

Several of our authorized distributors have regularly accounted for more than 10% of net sales on an annual basis. Depending on the authorized distributor and their strategic focus, they can support anywhere from a few end-customers to many end-customers. For fiscal year 2005, two of our Asian distributors accounted for approximately 11% and 10%, respectively, of net sales. As of the end of fiscal year 2005, one of these Asian distributors accounted for approximately 12% of net accounts receivable. Sales to our customers are generally made on open account, subject to credit limits we may impose, and the receivables are subject to the risk of being uncollectible.

 

We primarily conduct our sales on a purchase order basis, rather than pursuant to long-term supply contracts. The loss of any significant customer, any material reduction in orders by any of our significant customers, the cancellation of a significant customer order or the cancellation or delay of a customer’s significant program or product could harm our business.

 

Most of our authorized distributors, who represent nearly half of our net sales, can terminate their contract with us with little or no notice. The termination of a distributor could negatively impact our business, including net sales and accounts receivable

 

In fiscal year 2005, authorized distributors accounted for approximately 51% of our net sales. We generally do not have long-term contracts with our distributors and most can terminate their agreement with us with little or no notice. For fiscal year 2005, our two largest distributors were based in Asia.

 

The termination of any distributor could impact our net sales and limit our access to certain end-customers. It could also result in the return of excess inventory of our product they hold as the distributor. Since many distributors simply resell finished products, they generally operate on very thin profit margins. If a distributor were to terminate their agreement with us or go out of business, our unsecured accounts receivable from them are subject to collection risk.

 

We have acquired and may continue to acquire other companies and may be unable to successfully integrate these companies into our operations

 

In the past, we have expanded our operations through strategic acquisitions, and we may continue to expand and diversify our operations with additional acquisitions. If we are unsuccessful in integrating these companies into our operations or if integration is more difficult than anticipated, then we may experience disruptions that could harm our business. Some of the risks that may affect our ability to integrate acquired companies include those associated with:

 

    unexpected losses of key employees or customers of the acquired company;

 

    conforming the acquired company’s standards, processes, procedures and controls with our operations;

 

    coordinating new product and process development;

 

    hiring additional management and other critical personnel; and

 

    increasing the scope, geographic diversity and complexity of our operations.

 

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We must commit resources to product production prior to receipt of purchase commitments and could lose some or all of the associated investment

 

Sales are made primarily on a current delivery basis, pursuant to purchase orders that may be revised or cancelled by our customers without penalty, rather than pursuant to long-term supply contracts. Some contracts require that we maintain inventories of certain products at levels above the anticipated needs of our customers. As a result, we must commit resources to the production of products without binding purchase commitments from customers. Our inability to sell products after we devote significant resources to them could harm our business.

 

The loss of any of our key personnel or the failure to attract or retain the specialized technical and management personnel could impair our ability to grow our business

 

Our future success depends upon our ability to attract and retain highly qualified technical, marketing and managerial personnel. We are dependent on a relatively small group of key technical personnel with analog and mixed-signal expertise. Personnel with highly skilled managerial capabilities, and analog and mixed-signal design expertise, are scarce and competition for personnel with these skills is intense. There can be no assurance that we will be able to retain key employees or that we will be successful in attracting, integrating or retaining other highly qualified personnel in the future. If we are unable to retain the services of key employees or are unsuccessful in attracting new highly qualified employees, our business could be harmed.

 

We are subject to government regulations and other standards that impose operational and reporting requirements

 

We and our suppliers are subject to a variety of United States federal, foreign, state and local governmental laws, rules and regulations, including those related to the use, storage, handling, discharge or disposal of certain toxic, volatile or otherwise hazardous chemicals. If we or our suppliers were to incur substantial additional expenses to acquire equipment or otherwise comply with environmental regulations, product costs could significantly increase, thus harming our business. We are also subject to laws, rules, and regulations related to export licensing and customs requirements, including the North American Free Trade Agreement and State Department and Commerce Department rules.

 

The Sarbanes-Oxley Act of 2002 required us to change or supplement some of our corporate governance and securities disclosure and compliance practices. The SEC and Nasdaq have revised, and continue to revise, their regulations and listing standards. These developments have increased, and may continue to increase, our legal compliance and financial reporting costs. These developments also may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. This, in turn, could make it more difficult for us to attract and retain qualified members of our board of directors, or qualified executive officers.

 

Failure to comply with present or future laws, rules and regulations of any kind that govern our business could result in suspension of all or a portion of production, cessation of all or a portion of operations, or the imposition of significant administrative, civil, or criminal penalties, any of which could harm our business.

 

Earthquakes or other natural disasters may cause us significant losses

 

Our corporate headquarters, a portion of our assembly and research and development activities and certain other critical business operations are located near major earthquake fault lines. We do not maintain earthquake insurance and could be harmed in the event of a major earthquake. We generally do not maintain flood coverage, including in our Asian locations were we have certain operations support and sales offices. Such flood coverage has become very expensive; as a result the Company has elected not to purchase this coverage. Our business could be harmed if natural disasters interfere with production of wafers by our suppliers, assembly and testing of products by our subcontractors, or our distribution network. We maintain some business interruption insurance to help reduce the effect of such business interruptions, but we are not fully insured against such risks. Likewise, our business could be adversely impacted if a natural disaster were to shut down or significantly curtail production at one or more of our end customers. Any such loss of revenue due to a slowdown or cessation of end customer demand is uninsured.

 

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Terrorist attacks, war and other acts of violence may negatively affect our operations and your investment

 

Terrorist attacks, such as the attacks that took place on September 11, 2001, wars, such as the war in Iraq, and other acts of violence, such as those that may result from the increasing tension in the Middle East and the Korean peninsula, or any other national or international crisis, calamity or emergency, may result in interruption to the business activities of many entities, business losses and overall disruption of the U.S. economy at many levels. These events may directly impact our physical facilities or those of our customers and suppliers. Additionally, these events or armed conflicts may cause some of our customers or potential customers to reduce the level of expenditures on their services and products that ultimately may reduce our revenue. The consequences of these reductions are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business. For example, as a result of these events, insurance premiums for businesses may increase and the scope of coverage may be decreased. Consequently, we may not be able to obtain adequate insurance coverage for our business and properties. A “high” or “Orange” or “severe” or “Red” threat condition announced by the Homeland Security Advisory System or similar agency and any consequent effect on the transportation industry may adversely affect our ability to timely import materials from our suppliers located outside the United States or impact our ability to deliver our products to our customers without incurring significant delays. To the extent that these disruptions result in delays or cancellations of customer orders, a general decrease in corporate spending, or our inability to effectively market our services and products, our business and results of operations could be harmed.

 

We may be unable to adequately protect our intellectual property rights

 

We pursue patents for some of our new products and unique technologies, but we rely primarily on a combination of nondisclosure agreements and other contractual provisions, as well as our employees’ commitment to confidentiality and loyalty, to protect our know-how and processes. We intend to continue protecting our proprietary technology, including through trademark and copyright registrations and patents. Despite this intention, we may not be successful in achieving adequate protection. Our failure to adequately protect our material know-how and processes could harm our business. There can be no assurance that the steps we take will be adequate to protect our proprietary rights, that our patent applications will lead to issued patents, that others will not develop or patent similar or superior products or technologies, or that our patents will not be challenged, invalidated, or circumvented by others. Furthermore, the laws of the countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as laws in the United States.

 

The semiconductor industry is characterized by frequent claims of infringement and litigation regarding patent and other intellectual property rights. Due to the number of competitors, intellectual property infringement is an ongoing risk since other companies in our industry could have intellectual property rights that may not be identifiable when we initiate development efforts. Litigation may be necessary to enforce our intellectual property rights and we may have to defend ourselves against infringement claims. Any such litigation could be very costly and may divert our management’s resources. If one of our products is found to infringe, we may have liability for past infringement and may need to seek a license going forward. If a license is not available or if we are unable to obtain a license on terms acceptable to us, we would either have to change our product so that it does not infringe or stop making the product.

 

We could be required to register as an investment company and become subject to substantial regulation that would interfere with our ability to conduct our business

 

The Investment Company Act of 1940 requires the registration of companies which are engaged primarily in the business of investing, reinvesting or trading in securities, or which are engaged in the business of investing, reinvesting, owning, holding or trading in securities and which own or propose to acquire investment securities with a value of more than 40% of the company’s assets on an unconsolidated basis (other than U.S. government securities and cash). We are not engaged primarily in the business of investing, reinvesting or trading in securities, and we intend to invest our cash and cash equivalents in U.S. government securities to the extent necessary to take advantage of the 40% safe harbor. To manage our cash holdings, we invest in short-term instruments consistent with prudent cash management and the preservation of capital and not primarily for the purpose of achieving investment returns. U.S. government securities generally yield lower rates of income than other short-term instruments in which we have invested to date. Accordingly, investing substantially all of our cash and cash equivalents in U.S. government securities could result in lower levels of interest income and net income.

 

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If we were deemed an investment company and were unable to rely upon a safe harbor or exemption under the Investment Company Act, we would among other things be prohibited from engaging in certain businesses or issuing certain securities. Certain of our contracts might be voidable, and we could be subject to civil and criminal penalties for noncompliance.

 

We are subject to review by taxing authorities, including the Internal Revenue Service

 

We are subject to review by domestic and foreign taxing authorities, including the Internal Revenue Service (IRS). In fiscal year 2005, the IRS completed a routine review of our 1995 through 2001 tax filings. The final audit adjustments did not have a material impact on our financial statements. However, future audits by taxing authorities could impact us.

 

Changes in stock option accounting rules will impact our reported operating results prepared in accordance with generally accepted accounting principles, and may impact our stock price and our competitiveness in the employee marketplace.

 

Technology companies like ours have a history of using broad based employee stock option programs to hire, incentivize and retain our workforce in a competitive marketplace. SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) allows companies the choice of either using a fair value method of accounting for options, which would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. We have elected to apply APB 25 and accordingly we generally do not recognize any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant.

 

On October 13, 2004, the FASB concluded that the Proposed Statement of Financial Accounting Standards, Share-Based Payment, which would require all companies to measure compensation cost for all share-based payments (including stock options) at fair value, would be effective for public companies for interim or annual periods beginning after June 15, 2005. On April 14, 2005 the Securities and Exchange Commission amended the compliance date for this new standard to be the next fiscal year that begins after June 15, 2005. We could adopt the new standard in one of two ways – the modified prospective transition method or the modified retrospective transition method.

 

Assuming this new standard is implemented as scheduled, we will adopt this new standard in the first quarter of fiscal year 2007. Should this proposed statement be finalized and implemented, it could have a significant impact on our consolidated statement of operations as we will be required to expense the fair value of our stock options rather than disclosing the impact on our consolidated result of operations within our footnotes in accordance with the disclosure provisions of SFAS 123 (see Note 1 of the Notes to the consolidated financial statements). This will result in lower reported earnings per share, which could negatively impact our future stock price. In addition, this could impact our ability to utilize broad based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace.

 

Failure to achieve and maintain effective internal controls could have a material adverse effect on our business and stock price.

 

We recently completed the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires an annual management assessment of the effectiveness of internal controls over financial reporting and an annual report by our independent registered public accounting firm addressing the assessment.

 

We also will be required to satisfy these requirements in future years. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Effective internal controls are necessary for us to produce reliable financial reports and are important in the prevention of financial fraud. If we cannot produce reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and there could be a material adverse effect on our stock price.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are subject to a variety of market risks, such as the foreign exchange and interest rate risks that are detailed below. Many of the factors that can impact on our market risk are external to the company, and so we are unable to fully predict them.

 

Foreign Currency Risk

 

As a global enterprise, we face exposure to adverse movements in foreign currency exchange rates and we could experience currency gains or losses. Because of the relatively small size of each individual currency exposure, we generally do not use forward contracts to mitigate foreign currency exposures. Our foreign currency exposures may change over time as the level of activity in foreign markets grows and could have an adverse impact upon our financial results.

 

Certain of our assets, including certain bank accounts and accounts receivable, exist in non U.S. dollar-denominated currencies, which are sensitive to foreign currency exchange rate fluctuations. The non U.S. dollar-denominated currencies are principally the Euro, Swiss Francs and British Pounds Sterling. Additionally, certain of our current

and long-term liabilities are denominated principally in British Pounds Sterling currency, which is also sensitive to foreign currency exchange rate fluctuations.

 

Substantially all of our foreign sales, which amounted to $187.7 million in fiscal year 2005, are denominated in United States dollars. Currency exchange fluctuations in countries where we do business could harm our business by resulting in pricing that is not competitive with prices denominated in local currencies.

 

For the fiscal year ended January 30, 2005, we had approximately $9.6 million of expenses that were settled in British Pound Sterling. For this same period, we had approximately $1.4 million of expenses that were settled in Swiss Francs and $1.3 million of expenses that were settled in Euros. Had rates of these various foreign currencies been 10% higher relative to the U.S. dollar in fiscal year 2005, our costs would have increased approximately $960,000 related to expenses settled in British Pound Sterling, approximately $140,000 related to expenses settled in Swiss Francs and $130,000 related to expenses settled in Euros.

 

As of the end of fiscal year 2005, we held as part of cash and cash equivalents $3.1 million of British Pound Sterling and $913,000 of Swiss Francs. If rates of these foreign currencies were to move higher or lower by some percentage, it would have equal effect on the relative U.S. dollar value of the balances we hold.

 

In fiscal year 2004, we entered into a forward contract to purchase 2.8 million Swiss Francs in fiscal year 2005 in exchange for $2.0 million. The forward contract was entered into as a partial hedge against future tax payments in Swiss Francs and shortly after maturity was used to help settle such tax liabilities.

 

Interest Rate and Market Risk

 

As of January 30, 2005, we had no long-term debt outstanding. We do not currently hedge any potential interest rate exposure.

 

Interest rates affect our return on excess cash and investments. As of January 30, 2005, we had $82.2 million of cash and cash equivalents and $219.7 million of temporary and long-term investments. A majority of our cash and cash equivalents and investments generate interest income based on prevailing interest rates. Investments and cash and cash equivalents generated interest income of $6.3 million in fiscal year 2005. A significant change in interest rates would impact the amount of interest income generated from our excess cash and investments. It would also impact the market value of our investments. As of January 30, 2005, we estimate that our pool of investments had an effective duration of .97, which implies that a 1% increase in the prevailing interest rate could result in approximately $2.1 million of additional unrealized loss on our investments.

 

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Our investments are subject to market risk, primarily interest rate and credit risk. Our investments are managed by a limited number of outside professional managers within investment guidelines set by us. Such guidelines include security type, credit quality and maturity and are intended to limit market risk by restricting our investments to high quality debt instruments with relatively short-term maturities.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that as of January 30, 2005 the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this report, has issued an attestation report on our management’s assessment of our internal control over financial reporting as of January 30, 2005. This report appears below.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL

CONTROL OVER FINANCIAL REPORTING

 

The Board of Directors and Stockholders of Semtech Corporation

 

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Semtech Corporation maintained effective internal control over financial reporting as of January 30, 2005 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Semtech Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that Semtech Corporation maintained effective internal control over financial reporting as of January 30, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Semtech Corporation maintained, in all material respects, effective internal control over financial reporting as of January 30, 2005, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Semtech Corporation (and subsidiaries) as of January 30, 2005 and January 25, 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended January 30, 2005 of Semtech Corporation and our report dated April 1, 2005 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

Woodland Hills, California

April 1, 2005

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The Board of Directors and Stockholders of Semtech Corporation

 

We have audited the accompanying consolidated balance sheets of Semtech Corporation (a Delaware corporation) and subsidiaries as of January 30, 2005 and January 25, 2004, and the related consolidated statements of income, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended January 30, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Semtech Corporation at January 30, 2005 and January 25, 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 30, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Semtech Corporation’s internal control over financial reporting as of January 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 1, 2005 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

 

Woodland Hills, California

April 1, 2005

 

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SEMTECH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

THREE YEARS ENDED JANUARY 30, 2005

(In thousands, except earnings per share data)

 

     2005

    2004

    2003

 
NET SALES    $ 253,612     $ 192,079     $ 192,958  

Cost of sales

     105,705       81,332       83,097  
    


 


 


Gross profit      147,907       110,747       109,861  
    


 


 


Operating costs and expenses:                         

Selling, general and administrative

     44,449       37,207       34,426  

Product development and engineering

     33,492       30,371       31,336  

One-time costs

     —         —         13,202  
    


 


 


Total operating costs and expenses

     77,941       67,578       78,964  
    


 


 


Operating income      69,966       43,169       30,897  

Interest expense

     (17 )     (4,162 )     (15,125 )

Interest and other income

     6,321       3,711       30,312  
    


 


 


Income before taxes      76,270       42,718       46,084  

Provision for taxes

     17,382       10,252       11,903  
    


 


 


NET INCOME    $ 58,888     $ 32,466     $ 34,181  
    


 


 


Earnings per share -                         

Basic

   $ 0.79     $ 0.44     $ 0.47  

Diluted

   $ 0.75     $ 0.42     $ 0.44  
Weighted average number of shares -                         

Basic

     74,187       73,570       73,013  

Diluted

     78,124       77,504       77,789  

 

See accompanying notes.

 

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SEMTECH CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF JANUARY 30, 2005 AND JANUARY 25, 2004

(In thousands, except share data)

 

     2005

    2004

ASSETS

              

Current assets:

              

Cash and cash equivalents

   $ 82,154     $ 96,314

Temporary investments

     108,167       93,044

Receivables, less allowances of $512 in 2005 and $656 in 2004

     22,098       20,362

Inventories

     24,734       22,166

Income taxes refundable

     —         5,795

Deferred income taxes

     7,255       5,212

Other current assets

     6,026       3,062
    


 

Total current assets

     250,434       245,955

Property, plant and equipment, net

     55,674       49,579

Investments, maturities in excess of 1 year

     111,577       86,119

Deferred income taxes

     26,916       26,633

Other assets

     13,324       1,268
    


 

TOTAL ASSETS

   $ 457,925     $ 409,554
    


 

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Current liabilities:

              

Accounts payable

   $ 9,504     $ 8,554

Accrued liabilities

     11,697       16,894

Income taxes payable

     3,495       1,699

Deferred revenue

     2,879       1,689

Deferred income taxes

     1,443       673

Other current liabilities

     —         27
    


 

Total current liabilities

     29,018       29,536

Deferred income taxes

     2,131       408

Other long-term liabilities

     2,410       —  

Commitments and contingencies

              

Stockholders’ equity:

              

Common stock, $0.01 par value, 250,000,000 authorized 75,605,005 issued and 73,845,130 outstanding in 2005 and 74,125,684 issued and outstanding in 2004

     758       742

Treasury stock, 1,759,875 at cost in 2005

     (35,060 )     —  

Additional paid-in capital

     214,573       189,945

Retained earnings

     245,037       188,321

Accumulated other comprehensive income (loss)

     (942 )     602
    


 

Total Stockholders’ equity

     424,366       379,610
    


 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 457,925     $ 409,554
    


 

 

See accompanying notes.

 

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SEMTECH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

THREE YEARS ENDED JANUARY 30, 2005

(In thousands, except share amounts)

 

     Common Stock

                             
     Number of
Shares


    Amount

   Additional Paid-
in Capital


   Retained
Earnings


    Treasury
Stock, at
Cost


    Accumulated
Other
Comprehensive
Income (Loss)


    Stockholders’
Equity


 

Balance at January 27, 2002

   72,148,573     $ 722    $ 162,856    $ 131,459     $ —       $ 3,758     $ 298,795  
    

 

  

  


 


 


 


Comprehensive income:

                                                    

Net income

   —         —        —        34,181       —         —         34,181  

Change in unrealized gains/loss on investments, net of taxes

   —         —        —        —         —         (2,388 )     (2,388 )

Translation adjustment

   —         —        —        —         —         238       238  
                                                


Comprehensive income

   —         —        —        —         —         —         32,031  

Treasury stock repurchase

   (841,200 )     —        —        —         (9,072 )     —         (9,072 )

Exercise of stock options

   1,858,041       18      11,660      —         —         —         11,678  

Tax benefit from exercised stock options

   —         —        8,008      —         —         —         8,008  
    

 

  

  


 


 


 


Balance at January 26, 2003

   73,165,414     $ 740    $ 182,524    $ 165,640     $ (9,072 )   $ 1,608     $ 341,440  
    

 

  

  


 


 


 


Comprehensive income:

                                                    

Net income

   —         —        —        32,466       —         —         32,466  

Change in unrealized gains/loss on investments, net of taxes

   —         —        —        —         —         (1,276 )     (1,276 )

Translation adjustment

   —         —        —        —         —         270       270  
                                                


Comprehensive income

   —         —        —        —         —         —         31,460  

Treasury stock repurchase

   (350,000 )     —        —        —         (7,038 )     —         (7,038 )

Treasury stock reissued

   971,200       1      —        (9,785 )     16,110       —         6,326  

Exercise of stock options

   339,070       1      1,346      —         —         —         1,347  

Tax benefit from exercised stock options

   —         —        6,075      —         —         —         6,075  
    

 

  

  


 


 


 


Balance at January 25, 2004

   74,125,684     $ 742    $ 189,945    $ 188,321     $ —       $ 602     $ 379,610  
    

 

  

  


 


 


 


Comprehensive income:

                                                    

Net income

   —         —        —        58,888       —         —         58,888  

Change in unrealized gains/loss on investments, net of taxes

   —         —        —        —         —         (1,500 )     (1,500 )

Translation adjustment

   —         —        —        —         —         (44 )     (44 )
                                                


Comprehensive income

   —         —        —        —         —         —         57,344  

Treasury stock repurchase

   (1,915,700 )     —        —        —         (38,589 )     —         (38,589 )

Treasury stock reissued

   155,825       2      —        (2,172 )     3,529       —         1,359  

Exercise of stock options

   1,479,321       14      11,368      —         —         —         11,382  

Tax benefit from exercised stock options

   —         —        13,260      —         —         —         13,260  
    

 

  

  


 


 


 


Balance at January 30, 2005

   73,845,130     $ 758    $ 214,573    $ 245,037     $ (35,060 )   $ (942 )   $ 424,366  
    

 

  

  


 


 


 


 

See accompanying notes.

 

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SEMTECH CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE YEARS ENDED JANUARY 30, 2005

 

     2005

    2004

    2003

 

Cash flows from operating activities:

                        

Net Income

   $ 58,888     $ 32,466     $ 34,181  

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

                        

Depreciation and amortization

     9,790       9,000       9,581  

Deferred income taxes

     167       8,110       571  

Loss (gain) on disposition of property, plant and equipment

     362       (41 )     557  

Loss (gain) on extinguishment of debt

     —         3,909       (12,718 )

Provision (reduction) for doubtful accounts

     (144 )     118       29  

Tax benefit of stock option exercises

     13,260       6,075       8,008  

Changes in assets and liabilities:

                        

Receivables

     (1,592 )     (2,804 )     1,476  

Inventories

     (2,568 )     (5,815 )     6,377  

Income taxes refundable

     5,795       (5,795 )     2,019  

Other assets

     (14,953 )     (756 )     2,298  

Accounts payable

     950       2,829       (1,616 )

Accrued liabilities

     (5,197 )     (9,702 )     9,751  

Deferred revenue

     1,190       106       (353 )

Income taxes payable

     1,796       (1,894 )     2,494  

Other liabilities

     2,383       (13 )     (26 )
    


 


 


Net cash provided by operations

     70,127       35,793       62,629  

Cash flows from investing activities:

                        

Purchase of available-for-sale investments

     (183,265 )     (224,600 )     (336,743 )

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

     141,185       396,167       479,551  

Proceeds from sale of property, plant and equipment

     208       102       —    

Purchases of property, plant and equipment

     (16,523 )     (7,495 )     (9,914 )
    


 


 


Net cash provided by (used in) investing activities

     (58,395 )     164,174       132,894  

Cash flows from financing activities:

                        

Exercise of stock options

     11,382       1,347       11,678  

Repurchase of treasury stock

     (38,589 )     (7,038 )     (9,072 )

Reissuance of treasury stock

     1,359       6,326       —    

Repurchase of convertible subordinated notes

     —         (72,356 )     (107,626 )

Retirement of convertible subordinated notes

     —         (169,243 )     —    
    


 


 


Net cash used in financing activities

     (25,848 )     (240,964 )     (105,020 )

Effect of exchange rate changes on cash and cash equivalents

     (44 )     270       238  
    


 


 


Net increase (decrease) in cash and cash equivalents

     (14,160 )     (40,727 )     90,741  

Cash and cash equivalents at beginning of period

     96,314       137,041       46,300  
    


 


 


Cash and cash equivalents at end of period

   $ 82,154     $ 96,314     $ 137,041  
    


 


 


 

See accompanying notes.

 

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SEMTECH CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Summary of Significant Accounting Policies

 

Business

 

Semtech Corporation and its directly and indirectly wholly-owned subsidiaries (Semtech International AG, Semtech Corpus Christi Corporation, Semtech Corpus Christi SA de CV, Semtech Limited, Semtech Germany GmbH, Semtech France SARL, Semtech Switzerland GmbH, Semtech San Diego Corporation and Semtech New York Corporation, together, the Company) is a supplier of analog and mixed-signal semiconductors. The Company designs, manufacturers and markets a wide range of products for commercial applications, the majority of which are sold into the communications, industrial and computer markets. The end-customers for the Company’s products are primarily original equipment manufacturers, or OEMs, that produce and sell electronics. The Company’s primary facilities are in Camarillo, Santa Clara and San Diego, California; St. Gallen, Switzerland; Reynosa, Mexico; and Glasgow and Southampton, United Kingdom.

 

Fiscal Year

 

The Company reports results on the basis of fifty-two and fifty-three week periods. The Company’s fiscal year ends on the last Sunday of January. The fiscal year ended January 30, 2005 consisted of fifty-three weeks and the fiscal years ended January 25, 2004 and January 26, 2003 each consisted of fifty-two weeks.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Semtech Corporation and its wholly-owned subsidiaries. All intercompany transactions and accounts have been eliminated.

 

Translation

 

The assets and liabilities of the Company’s foreign subsidiaries are translated using currency exchange rates at fiscal year end. Income statement items are translated at average exchange rates prevailing during the period. The translation gains or losses are included in accumulated other comprehensive income (loss) in the accompanying consolidated financial statements. Transaction gains and losses are included in the determination of net income and have been insignificant.

 

Cash, Cash Equivalents and Investments

 

The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. The Company maintains cash balances and investments in highly qualified financial institutions. At various times such amounts are in excess of insured limits. The Company has small amounts of restricted cash that are pledged or subject to withdrawal restrictions; these amounts are not material to cash and cash equivalents balances. The Company accounts for its investments, which are all available for sale securities, under the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, “Accounting for Certain Investments in Debt and Securities.” Investments consist of government and corporate obligations. The Company’s investment policy restricts investments to high credit quality investments with limits on the length to maturity and the amount invested with any one issuer. These investments, especially corporate obligations, are subject to default risk.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

The Company evaluates the collectibility of its accounts receivable based on a combination of factors. If the Company becomes aware of a customer’s inability to meet its financial obligations after a sale has occurred, it records an allowance to reduce the net receivable to the amount it reasonably believes it will be able to collect from the customer. For all other customers, the Company recognizes allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and historical experience. If the financial condition of the Company’s customers were to deteriorate or if economic conditions worsen, additional allowances may be required in the future.

 

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Inventories

 

Inventories are stated at lower of cost or market and consist of materials, labor and overhead. The Company determines the cost of inventory by the first-in, first-out method. At each balance sheet date, the Company evaluates the ending inventories for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand. In order to state the inventory at lower of cost or market, the Company maintains reserves against its inventory. If future demand or market conditions are less favorable than the Company’s projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost. Depreciation is computed primarily using the straight-line method over the following estimated useful lives: buildings for either thirty or thirty-nine years; leasehold improvements for the lesser of estimated useful life or lease term; machinery and equipment for two to six years; and furniture and office equipment for three to seven years. Maintenance and repairs are charged to expense as incurred and the costs of additions and betterments that increase the useful lives of the assets are capitalized. When property or equipment are disposed of, the cost and related accumulated depreciation and amortization are removed from the accounts and any gain or loss is included in operations. Depreciation expense was $9.8 million, $8.8 million and $9.3 million in fiscal years 2005, 2004 and 2003, respectively.

 

Software Development Costs

 

In accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” development costs related to software products are expensed as incurred until the technological feasibility of the product has been established. The cost of purchased software is capitalized when related to a product which has achieved technological feasibility or that has an alternative future use. Software development costs incurred prior to achieving technological feasibility as well as certain licensing costs are charged to product development and engineering expense as incurred.

 

Capitalized software development costs are reported at the lower of unamortized cost or net realizable value. Commencing upon initial product release, these costs are amortized based on the straight-line method over the estimated life, or a ratio of current revenues to total anticipated revenues, generally three years. Fully amortized software costs are removed from the financial records. As of January 30, 2005 and January 25, 2004, $39,000 and $75,000, respectively, of net capitalized software costs are included in “Other assets” in the accompanying consolidated balance sheets. Amortization expense of capitalized software costs totaled $36,000, $171,000 and $255,000 in fiscal years 2005, 2004 and 2003, respectively, and are included in “Cost of Sales” in the accompanying consolidated statements of income.

 

Income Taxes

 

The Company follows the liability method of accounting for income taxes as set forth in Statement of Financial Accounting Standards No. 109 (SFAS 109), “Accounting for Income Taxes.” Current income taxes payable and deferred income taxes resulting from temporary differences between the financial statements and the tax basis of assets and liabilities are separately classified on the Consolidated Balance Sheets.

 

As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax liability together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance.

 

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Unless a valuation allowance relates to benefits from stock option exercise activity, to the extent we change the valuation allowance in a period, the change is recorded through the tax provision in the statement of operations. If a valuation allowance relates to a benefit from stock option exercise activity, any adjustment to the valuation allowance would be recorded to paid-in-capital in the period of the adjustment.

 

As a result of historical tax deductions associated with stock option exercise activity, the Company has generated substantial U.S. net operating loss carryforwards. The size of the deferred tax assets attributable to Federal NOL’s and credit carryforwards, compared to the projected levels of Federal taxable income, has elevated the Company’s concern regarding the ability to fully utilize these deferred tax assets prior to expiration. Accordingly, the Company has provided for a valuation allowance to address these concerns. As of January 30, 2005 and January 25, 2004, $30.1 million and $32.7 million, respectively, of valuation reserves have been established. Management continually evaluates our deferred tax assets to assess whether it is likely that the deferred tax assets will be realized. If management ever determined that a deferred tax asset was not likely to be realized, a write-down of that asset would be required.

 

U.S. federal and state income taxes have not been provided for the undistributed earnings of the Company’s foreign operations. The Company policy is to leave the income permanently reinvested offshore. The amount of earnings designated as indefinitely reinvested offshore is based upon the actual deployment of such earnings in the Company’s offshore assets and expectations of the future cash needs of U.S. and foreign entities. Income tax considerations are also a factor in determining the amount of foreign earnings to be repatriated.

 

Revenue Recognition

 

The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. Product design and engineering revenue is recognized during the period in which services are performed. The Company defers revenue recognition on shipment of products to certain customers, principally distributors, where return privileges exist until these products are sold through to end-users or the return privilege lapses. The estimated deferred gross margin on these sales, where there are no outstanding receivable, are recorded on the balance sheet under the heading of “Deferred Revenue.” The Company records a provision for estimated sales returns in the same period as the related revenues are recorded. The Company bases these estimates on historical sales returns and other known factors. Actual returns could be different from the estimates and current provisions for sales returns and allowances, resulting in future charges to earnings.

 

Cost of Sales

 

Cost of sales includes materials, depreciation on fixed assets used in the manufacturing process, shipping costs, direct labor and overhead.

 

Sales and Marketing

 

We expense our sales and marketing costs, which include advertising costs, as they are incurred. Advertising costs were $441,000, $496,000 and $440,000 for fiscal years 2005, 2004 and 2003, respectively.

 

Product Development and Engineering

 

Product development and engineering costs are charged to expense as incurred.

 

Earnings per Share

 

Basic earnings per common share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporate the incremental shares issuable upon the assumed exercise of stock options. The weighted average number of shares used to compute basic earnings per share in fiscal years 2005, 2004 and 2003 were 74,187,000, 73,570,000 and 73,013,000, respectively. Diluted earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding, plus the dilutive effect of its outstanding stock options (“common stock equivalents”), or 78,124,000, 77,504,000 and 77,789,000 in fiscal years 2005, 2004 and 2003, respectively.

 

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Options to purchase approximately 3,168,746, 3,372,071 and 3,092,990 shares were not included in the computation of fiscal years 2005, 2004 and 2003 diluted net income per share because such options were considered anti-dilutive. For fiscal years 2004 and 2003, shares associated with the Company’s outstanding convertible subordinated debentures were not included in the computation of net income per share as they were anti-dilutive.

 

Stock-Based Compensation

 

The Company accounts for its employee stock options under the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123.”

 

SFAS No. 123, and as amended by SFAS No. 148, permits companies to recognize, as expense over the vesting period, the fair value of all stock-based awards on the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Because the Company’s stock-based compensation plans have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, management believes that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of awards from the plan. Therefore, as permitted, the Company applies the existing accounting rules under APB No. 25 and provides pro forma net income and pro forma net income per share disclosures for stock-based awards made during the year as if the fair value method defined in SFAS No. 123, as amended, had been applied. Net income and net income per share for each of the three years ended January 30, 2005 would have been reduced to the following pro forma amounts.

 

Pro forma net income:

 

(fiscal years, in thousands)

 

                        
     2005

    2004

    2003

 

Net income as reported

   $ 58,888     $ 32,466     $ 34,181  

Additional pro forma compensation expense

     33,544       34,243       34,370  

Tax benefit of pro forma compensation expense

     (9,195 )     (9,428 )     (8,867 )
    


 


 


Pro forma net income

   $ 34,539     $ 7,651     $ 8,678  
    


 


 


Pro forma earnings per share - basic

   $ 0.47     $ 0.10     $ 0.12  

Pro forma earnings per share - diluted

   $ 0.44     $ 0.10     $ 0.11  

 

The pro forma effect on net income for fiscal years 2005, 2004, and 2003, may not be representative of the pro forma effect on net income of future years because the SFAS No. 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to January 30, 1995.

 

Option valuation models require the input of highly subjective assumptions such as expected option life and expected stock price volatility. The following assumptions were applied: (i) expected dividend yields of 0% for all periods, (ii) expected volatility rates of 64% for 2005, 71% for 2004 and 88% for 2003, (iii) expected lives of 4 to 6 years for all years, and (iv) risk-free interest rates ranging from 2.14% to 7.01% for all years.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which approximate their fair market value due to the short-term nature of those instruments. The fair value of long-term debt obligations is estimated based on current interest rates available to the Company for debt instruments with similar terms, degrees of risk and remaining maturities. The carrying value of these obligations approximate their fair values.

 

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Foreign Exchange Contracts

 

In fiscal year 2004, the Company entered into a forward contract to purchase 2.8 million Swiss Francs in fiscal year 2005 in exchange for $2.0 million. The forward contract was entered into as a partial hedge against future tax payments in Swiss Francs and shortly after maturity was used to help settle such tax liabilities.

 

Recently Issued Accounting Standards

 

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The pronouncement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years after November 23, 2004. The adoption of this pronouncement is not expected to have a material effect on the Company’s financial condition, the results of operations or liquidity.

 

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure under this provision is no longer an alternative.

 

The provisions of this statement are scheduled to become effective for fiscal years beginning after June 15, 2005. Assuming this new standard is implemented as scheduled, the Company plans to adopt this in the first quarter of fiscal year 2007 that ends on April 30, 2006. The Company is currently evaluating the two methods of adoption allowed by SFAS No. 123(R): the modified-prospective transition method and the modified-retrospective transition method. The exact impact of adopting this pronouncement cannot be predicted at this time because it will depend on many factors, including the levels of share-based payments granted in the future. However, had the Company adopted this pronouncement in prior periods, the impact of this pronouncement would approximate the impact of SFAS No. 123 described in the disclosure of the pro forma results in this Note 1, under the heading “Stock-Based Compensation”.

 

Reclassifications

 

Certain prior year balances have been reclassified to be consistent with current year presentation. Deferred tax assets and liabilities in the consolidated balance sheet for fiscal year 2004 have been reclassified to be consistent with current year presentations.

 

Estimates Used by Management

 

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

 

2. Stock and Convertible Subordinated Debt Repurchase Programs

 

Prior Program

 

On January 4, 2001, the Company announced that its Board of Directors had approved a program to repurchase up to $50.0 million of its common stock and registered convertible subordinated notes. In fiscal year 2002, the Company indicated that its Board had authorized an additional $50.0 million in buybacks, increasing the total amount authorized under the buyback program to $100.0 million. In fiscal year 2003, the Company indicated that

 

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its Board had authorized an additional $100.0 million in buybacks, increasing the total amount authorized under the buyback program to $200.0 million. In the first quarter of fiscal year 2004, the Company indicated that its Board had authorized an additional $75.0 million in buybacks, increasing the total amount authorized under the buyback program to $275.0 million. On July 18, 2003 the Company called the remaining outstanding balance of convertible subordinated notes and amended the buyback program to authorize only the repurchase of common stock. This buyback program expired with $13.1 million of unused authorization on January 25, 2004.

 

As of January 25, 2004, the Company had repurchased 2,421,200 shares of its common stock at a cost of $49.4 million under this program. All repurchased shares of common stock have been reissued as a result of stock option exercises. As of January 25, 2004, the Company had repurchased 234,999 convertible subordinated notes (face value of $1,000 each) for $212.5 million in cash in open market transactions. The Company retired all repurchased notes and called the remaining convertible subordinated notes on July 18, 2003.

 

Current Program

 

In the first quarter of fiscal year 2005, the Company announced that its Board of Directors had approved a program to repurchase up to $50.0 million of its common stock. As of January 30, 2005, the Company had repurchased 1,915,700 shares of its common stock at a cost of $38.6 million under this program. Of the repurchased shares, 155,825 have been reissued as a result of stock option exercises and the remaining balance are being held as treasury shares. Treasury shares are expected to be reissued in the future as a result of stock option exercises.

 

3. One-Time Costs

 

Operating income for fiscal year 2003 includes one-time charges of $13.2 million. A one-time charge of $12.0 million associated with the Standard Semiconductor Products segment was recorded in the fourth quarter of fiscal year 2003 to settle a customer dispute. Under the terms of the settlement, the Company agreed to pay the customer $12.0 million in cash in two equal annual installments, plus rebates on the future purchase of certain products. The $12.0 million expense for the cash portion of the settlement was reflected in the Company’s income statement as a one-time charge under “Operating costs and expenses” in the fourth quarter of fiscal year 2003.

 

In the third quarter of fiscal year 2003, the Company recorded a one-time charge of $1.2 million, which included $852,000 of cost for an expected loss on the future sub-lease of the Company’s New York office and $350,000 of cost for asset impairment at the Corpus Christi, Texas wafer fabrication facility.

 

4. Temporary and Long-Term Investments

 

Temporary and long-term investments consist of government, bank and corporate obligations. Temporary investments have original maturities in excess of three months, but mature within twelve months of the balance sheet date. Long-term investments have maturities in excess of one year from the date of the balance sheet. As of January 30, 2005, the Company had $108.2 million of temporary investments and $111.6 million of long-term investments. As of January 25, 2004, the Company had $93.0 million of temporary investments and $86.1 million of long-term investments. Certain short-term, highly liquid investments, namely money-market accounts are accounted for as cash and cash equivalents.

 

The Company classifies its investments as “available for sale” because it expects to possibly sell some securities prior to maturity. The Company’s investments are subject to market risk, primarily interest rate and credit risk. The Company’s investments are managed by a limited number of outside professional managers within investment guidelines set by the Company. Such guidelines include security type, credit quality and maturity and are intended to limit market risk by restricting the Company’s investments to high quality debt instruments with relatively short-term maturities.

 

As a result of declines in the market value of investments, the Company included $1.5 million, $1.3 million and $2.4 million related to the change in the unrealized gain or loss on investments, net of tax, in the comprehensive income portion of the Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for fiscal years 2005, 2004 and 2003, respectively. The tax associated with these comprehensive income items were benefit of $1.0 million and $855,000 in fiscal years 2005 and 2004, respectively, and expense of $937,000 for fiscal years 2003.

 

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Temporary and long-term investments consist of the following security types, stated at fair market value and book value, with the difference in these amounts booked as part of comprehensive income:

 

Investments (in thousands)

 

     January 30, 2005

    January 25, 2004

     Market Value

   Book Value

   Unrealized
(Loss)


    Market Value

   Book Value

   Unrealized
Gain


Government issues

   $ 79,683    $ 80,176    $ (493 )   $ 68,156    $ 68,092    $ 64

Corporate issues

     140,061      141,872      (1,811 )     111,007      110,867      140
    

  

  


 

  

  

Investments

   $ 219,744    $ 222,048    $ (2,304 )   $ 179,163    $ 178,959    $ 204
    

  

  


 

  

  

 

Investments and interest from cash and cash equivalents generated interest income of $6.3 million and $7.4 million in fiscal years 2005 and 2004, respectively. In fiscal year 2005, interest income of $976,000 million was generated from government issues and $5.3 million from corporate and money market issues. In fiscal year 2004, interest income of $3.2 million was generated from government issues and $4.2 million from corporate and money market issues. As of January 30, 2005, all of the Company’s investments mature on various dates through fiscal year 2008.

 

5. Inventories

 

Inventories consist of the following:

 

Inventories (in thousands)

 

             
     January 30,
2005


   January 25,
2004


Raw materials

   $ 726    $ 579

Work in progress

     16,746      14,809

Finished goods

     7,262      6,778
    

  

Inventories

   $ 24,734    $ 22,166
    

  

 

6. Other Current Assets

 

Other current assets consist of the following:

 

Other Current Assets (in thousands)

 

             
     January 30,
2005


   January 25,
2004


Prepaid capacity with suppliers

   $ 2,910    $ 204

Prepaid software maintenance

     806      435

Receivable from suppliers

     603      1,092

Earned interest on withheld tax

     317      222

Prepaid insurance

     303      224

Mark-to-market of foreign exchange contract

     —        236

Other

     1,087      649
    

  

Other Current Assets

   $ 6,026    $ 3,062
    

  

 

The Company has several arrangements with outside wafer foundries and package and test subcontractors, which appear as prepaid capacity with suppliers and receivable from suppliers. These arrangements are designed to provide some assurance of capacity, but are not expected to assure access to all the manufacturing capacity that may be needed in the future.

 

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7. Property, Plant and Equipment

 

Property, plant and equipment consist of the following:

 

Property, Plant and Equipment (in thousands)

 

                
    

January 30,

2005


   

January 25,

2004


 

Property

   $ 14,213     $ 14,213  

Buildings

     16,751       17,025  

Leasehold improvements

     2,116       2,199  

Machinery and equipment

     51,008       43,068  

Furniture and office equipment

     14,671       13,954  

Construction in progress

     738       318  
    


 


Property, plant and equipment, gross

     99,497       90,777  

Less accumulated depreciation and amortization

     (43,823 )     (41,199 )
    


 


Property, Plant and Equipment, Net

   $ 55,674     $ 49,578  
    


 


 

As part of the relationship with its largest third party wafer foundry, which is located in China, the Company has agreed to consign certain equipment to the foundry to support specialized processes the foundry runs for the Company and ensure a specified level of capacity over the next few years. The Company retains title to all the consigned assets located at the wafer foundry.

 

8. Convertible Subordinated Debentures

 

The Company no longer has any convertible subordinated notes outstanding. As described below, the Company called the remaining outstanding balance of its convertible subordinated notes in July 2003.

 

On February 14, 2000, the Company completed a private offering of $400.0 million principal amount of convertible subordinated notes that pay interest semiannually at a rate of 4½% and were convertible into common stock at a conversion price of $42.23 per share. The notes were due on February 1, 2007 and were callable by the Company on or after February 6, 2003. Since the offering date, the Company had repurchased through a buyback program a portion of the convertible subordinated notes in open market transactions and on July 18, 2003, the Company called the remaining convertible subordinated notes.

 

In connection with the issuance of these convertible subordinated notes, the Company incurred $11.5 million in underwriter fees and other costs. The underwriter fees and other costs were amortized as interest expense using the effective interest method for outstanding notes and written off against the gain for those notes repurchased and retired prior to maturity. The Company used the net proceeds of the offering for general corporate purposes, including working capital, expansion of sales, marketing and customer service capabilities, and product development.

 

On July 18, 2003, the Company called the remaining $165.0 million outstanding balance of its convertible subordinated notes. The Company incurred a pre-tax charge related to the calling of the notes of $6.8 million or a net-of-tax impact of approximately 7 cents per diluted share in the second quarter of fiscal year 2004. The pre-tax charge was made up of a $4.2 million call premium and $2.6 million of non-cash expense associated with previously paid note issuance costs.

 

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9. Other Assets

 

Other assets consist of the following:

 

Other Assets (in thousands)

 

             
    

January 30,

2005


  

January 25,

2004


Company-owned life insurance

   $ 2,208    $ —  

Prepaid capacity with suppliers

     6,741      1,000

Deposit on equipment to be consigned to supplier

     4,128