Semtech(SMTC) - 2025 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents Semtech Corporation's unaudited condensed consolidated financial statements and related notes, along with management's discussion and analysis of financial condition and results of operations ITEM 1. Financial Statements This item includes Semtech Corporation's unaudited condensed consolidated financial statements, comprising the statements of operations, comprehensive loss, balance sheets, statements of stockholders' equity, and statements of cash flows, along with comprehensive notes detailing the company's accounting policies, significant transactions, and financial position Condensed Consolidated Statements of Operations This statement presents the company's revenues, costs, and net loss for the three and six months ended July 28, 2024, and July 30, 2023 Condensed Consolidated Statements of Operations (in thousands, except per share data) | Metric (Three Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Net sales | $215,355 | $238,372 | | Gross profit | $105,464 | $100,728 | | Operating income (loss) | $7,768 | $(300,109) | | Net loss | $(170,295) | $(382,003) | | Basic loss per share | $(2.61) | $(5.97) | | Diluted loss per share | $(2.61) | $(5.97) | | | | | | Metric (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Net sales | $421,460 | $474,911 | | Gross profit | $205,056 | $203,674 | | Operating income (loss) | $10,911 | $(311,989) | | Net loss | $(193,454) | $(411,420) | | Basic loss per share | $(2.98) | $(6.43) | | Diluted loss per share | $(2.98) | $(6.43) | Condensed Consolidated Statements of Comprehensive Loss This statement details the company's net loss and other comprehensive income or loss components, leading to total comprehensive loss for the specified periods Condensed Consolidated Statements of Comprehensive Loss (in thousands) | Metric (Three Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Net loss | $(170,295) | $(382,003) | | Other comprehensive (loss) income, net | $(7,940) | $5,116 | | Comprehensive loss | $(178,235) | $(376,887) | | | | | | Metric (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Net loss | $(193,454) | $(411,420) | | Other comprehensive (loss) income, net | $263 | $2,492 | | Comprehensive loss | $(193,191) | $(408,928) | Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's assets, liabilities, and stockholders' deficit as of July 28, 2024, and January 28, 2024 Condensed Consolidated Balance Sheets (in thousands) | Metric | July 28, 2024 | January 28, 2024 | | :-------------------------- | :------------ | :--------------- | | Total current assets | $541,743 | $534,197 | | Total assets | $1,368,000 | $1,373,735 | | Total current liabilities | $224,673 | $217,156 | | Long-term debt | $1,192,865 | $1,371,039 | | Total stockholders' deficit | $(141,437) | $(307,434) | | Total liabilities and equity (deficit) | $1,368,000 | $1,373,735 | Consolidated Statements of Stockholders' Equity (Deficit) This statement outlines changes in stockholders' equity, including net loss and stock issuance, for the three and six months ended July 28, 2024 Consolidated Statements of Stockholders' Equity (Deficit) (in thousands) | Metric (Three Months Ended July 28, 2024) | Amount | | :---------------------------------------- | :----- | | Balance at April 28, 2024 | $(313,098) | | Net loss | $(170,295) | | Issuance of common stock upon exchange of 2028 Notes | $333,255 | | Balance at July 28, 2024 | $(141,437) | | | | | Metric (Six Months Ended July 28, 2024) | Amount | | :---------------------------------------- | :----- | | Balance at January 28, 2024 | $(307,434) | | Net loss | $(193,454) | | Issuance of common stock upon exchange of 2028 Notes | $333,255 | | Balance at July 28, 2024 | $(141,437) | Condensed Consolidated Statements of Cash Flows This statement summarizes cash flows from operating, investing, and financing activities for the six months ended July 28, 2024, and July 30, 2023 Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :------------------------ | :------------ | :------------ | | Net cash used in operating activities | $(5,084) | $(101,992) | | Net cash used in investing activities | $(2,672) | $(19,577) | | Net cash (used in) provided by financing activities | $(4,550) | $34,727 | | Net decrease in cash and cash equivalents | $(12,657) | $(87,598) | | Cash and cash equivalents at end of period | $115,928 | $147,912 | Note 1: Organization and Basis of Presentation This note describes Semtech Corporation's business, fiscal year reporting, and management's assessment of liquidity and financial covenant compliance - Semtech Corporation is a high-performance semiconductor, IoT systems, and cloud connectivity service provider, designing, developing, manufacturing, and marketing products for infrastructure, high-end consumer, and industrial end markets[20] - The Company reports results on a 52 and 53-week fiscal year basis, with the second quarter of fiscal years 2025 and 2024 each consisting of 13 weeks[21] - Management believes existing cash, projected operating cash flows, and available borrowing capacity are adequate to meet operating needs and liabilities for the next twelve months, maintaining compliance with financial covenants[26] Note 2: Acquisition This note details the acquisition of Sierra Wireless, Inc., including the finalization of purchase price allocation and its impact on goodwill - On January 12, 2023, Semtech completed the acquisition of Sierra Wireless, Inc. for approximately $1.3 billion. The transaction was accounted for as a business combination[29] - The purchase price allocation for the Sierra Wireless Acquisition was finalized in Q3 fiscal year 2024, increasing goodwill by $23.9 million to $955.3 million due to measurement period adjustments[29] Sierra Wireless Acquisition - Net Assets Acquired (in thousands) | Item | Amounts recognized as Acquisition Date (as adjusted) | | :-------------------------- | :--------------------------------------------------- | | Accounts receivable, net | $92,633 | | Inventories | $94,440 | | Property, plant and equipment | $26,458 | | Intangible assets | $214,780 | | Goodwill | $955,322 | | Total purchase price consideration, net of cash acquired | $1,240,757 | Note 3: Loss per Share This note provides the calculation of basic and diluted loss per share, considering the impact of net losses on anti-dilutive securities Loss per Share (in thousands, except per share data) | Metric (Three Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Net loss attributable to common stockholders | $(170,295) | $(382,002) | | Weighted-average shares outstanding–basic | 65,281 | 64,005 | | Basic loss per share | $(2.61) | $(5.97) | | Diluted loss per share | $(2.61) | $(5.97) | | | | | | Metric (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Net loss attributable to common stockholders | $(193,454) | $(411,417) | | Weighted-average shares outstanding–basic | 64,895 | 63,964 | | Basic loss per share | $(2.98) | $(6.43) | | Diluted loss per share | $(2.98) | $(6.43) | - Due to net losses, all shares underlying stock options and restricted stock units were considered anti-dilutive for the three and six months ended July 28, 2024[32] Note 4: Share-Based Compensation This note outlines the pre-tax share-based compensation expenses and details the grants of restricted stock units to employees and executives Pre-tax Share-Based Compensation (in thousands) | Category | Three Months Ended July 28, 2024 | Six Months Ended July 28, 2024 | | :-------------------------------- | :------------------------------- | :----------------------------- | | Cost of sales | $525 | $1,396 | | Selling, general and administrative | $9,409 | $24,373 | | Product development and engineering | $3,465 | $6,603 | | Total share-based compensation | $13,399 | $32,372 | - In the six months ended July 28, 2024, the Company granted 893,114 restricted stock units (settled in shares) to employees with a weighted-average grant date fair value of $27.64[36] - The Company granted 443,943 financial metric-based restricted stock units with a market condition (Performance Awards) to executives in the six months ended July 28, 2024, with varying grant-date fair values for different performance periods[39] Note 5: Available-for-sale securities This note describes the company's available-for-sale convertible debt investments, their fair value, amortized cost, and unrealized losses Available-for-Sale Securities (in thousands) | Metric | July 28, 2024 Fair Value | July 28, 2024 Amortized Cost | July 28, 2024 Gross Unrealized Loss | | :-------------------------- | :----------------------- | :--------------------------- | :---------------------------------- | | Convertible debt investments | $12,294 | $14,303 | $(2,009) | | Total | $12,294 | $14,303 | $(2,009) | - All available-for-sale securities, consisting of convertible debt instruments from privately-held companies, mature within one year and are recorded at fair value[43] Note 6: Fair Value Measurements This note details the fair value measurements of financial assets and liabilities, including convertible debt investments and interest rate swaps, using a three-level hierarchy Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis (in thousands) | Financial Assets (July 28, 2024) | Total | Level 1 | Level 2 | Level 3 | | :------------------------------- | :------ | :------ | :------ | :------ | | Interest rate swap agreement | $7,636 | $— | $7,636 | $— | | Convertible debt investments | $12,294 | $— | $— | $12,294 | | Total financial assets | $19,930 | $— | $7,636 | $12,294 | | | | | | | | Financial Liabilities (July 28, 2024) | Total | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :------ | :------ | :------ | :------ | | Foreign currency forward contracts | $80 | $— | $80 | $— | | Total financial liabilities | $80 | $— | $80 | $— | - Convertible debt investments are valued using Level 3 inputs (discounted cash flows and equity fair value), while interest rate swap agreements and foreign currency forward contracts use Level 2 inputs (readily available market curves)[47][48] Carrying Values and Fair Values of Convertible Senior Notes (in thousands) | Debt Instrument (July 28, 2024) | Fair Value Hierarchy | Carrying Value | Fair Value | | :------------------------------ | :------------------- | :------------- | :--------- | | 1.625% convertible senior notes due 2027, net | Level 2 | $311,768 | $357,696 | | 4.00% convertible senior notes due 2028, net | Level 2 | $60,139 | $98,212 | | Total long-term debt, net of debt issuance costs | | $371,907 | $455,908 | Note 7: Inventories This note provides a breakdown of the company's inventories, including raw materials, work in progress, and finished goods, as of specified dates Inventories (in thousands) | Category | July 28, 2024 | January 28, 2024 | | :-------------------------- | :------------ | :--------------- | | Raw materials and electronic components | $48,797 | $46,425 | | Work in progress | $83,396 | $69,404 | | Finished goods | $23,818 | $29,163 | | Total inventories | $156,011 | $144,992 | Note 8: Goodwill and Intangible Assets This note presents goodwill by operating segment and details finite-lived intangible assets, including their estimated useful lives and amortization expense Goodwill by Operating Segment (in thousands) | Segment | July 28, 2024 | January 28, 2024 | | :--------------------------- | :------------ | :--------------- | | Signal Integrity | $267,205 | $267,205 | | Analog Mixed Signal and Wireless | $83,101 | $83,101 | | IoT Systems and Connectivity | $190,798 | $190,921 | | Total goodwill | $541,104 | $541,227 | - In the first quarter of fiscal year 2025, the Company combined the IoT Systems and IoT Connected Services operating segments into the new IoT Systems and Connectivity segment due to organizational restructuring[56][100] - No goodwill impairment was recorded in the six months ended July 28, 2024. In the second quarter of fiscal year 2024, a $279.6 million pre-tax non-cash goodwill impairment was recorded due to reduced earnings forecasts and macroeconomic conditions[56] Finite-Lived Intangible Assets (in thousands) | Category | Estimated Useful Life | July 28, 2024 Net Carrying Amount | January 28, 2024 Net Carrying Amount | | :----------------------- | :-------------------- | :-------------------------------- | :----------------------------------- | | Core technologies | 1-8 years | $23,480 | $28,063 | | Customer relationships | 1-10 years | $3,864 | $4,104 | | Trade name | 2-10 years | $1,126 | $1,484 | | Capitalized development costs | 3 years | $246 | $0 | | Total | | $28,716 | $33,651 | Amortization Expense of Finite-Lived Intangible Assets (in thousands) | Category | Three Months Ended July 28, 2024 | Six Months Ended July 28, 2024 | | :----------------------- | :------------------------------- | :----------------------------- | | Core technologies | $2,279 | $4,560 | | Customer relationships | $114 | $228 | | Trade name | $168 | $361 | | Capitalized development costs | $49 | $49 | | Total amortization expense | $2,610 | $5,198 | Note 9: Long-Term Debt This note details the company's long-term debt, including revolving loans, term loans, and convertible senior notes, along with interest rates and recent debt exchange activities Long-Term Debt (in thousands) | Debt Type | July 28, 2024 | January 28, 2024 | | :-------------------------- | :------------ | :--------------- | | Revolving loans | $215,000 | $215,000 | | Term loans | $622,625 | $622,625 | | 1.625% convertible senior notes due 2027 | $319,500 | $319,500 | | 4.00% convertible senior notes due 2028 | $61,950 | $250,000 | | Total debt | $1,219,075 | $1,407,125 | | Debt issuance costs | $(26,210) | $(36,086) | | Total long-term debt, net of debt issuance costs | $1,192,865 | $1,371,039 | - The Company's effective interest rate as of July 28, 2024, was a weighted-average of 9.21% for floating SOFR revolving loans, 7.29% and 7.43% for fixed SOFR term loans, 9.20% for floating SOFR term loans, 1.625% for 2027 Notes, and 4.00% for 2028 Notes[64] - As of July 28, 2024, the Company had $282.2 million of available undrawn borrowing capacity under its $500.0 million Revolving Credit Facility and was in compliance with all financial covenants[65] - On July 24, 2024, the Company exchanged approximately $188.1 million of 2028 Notes for 10,378,431 shares of common stock, resulting in a $144.7 million loss on extinguishment of debt and a $5.5 million write-off of deferred financing costs[75] Interest Expense Components (in thousands) | Component (Three Months Ended) | July 28, 2024 | July 30, 2023 | | :----------------------------- | :------------ | :------------ | | Contractual interest | $23,502 | $24,156 | | Interest swap agreement | $(2,800) | $(2,445) | | Amortization of deferred financing costs | $2,379 | $1,689 | | Write-off of deferred financing costs | $5,497 | $771 | | Total interest expense | $28,578 | $24,171 | | | | | | Component (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :----------------------------- | :------------ | :------------ | | Contractual interest | $47,147 | $45,397 | | Interest swap agreement | $(5,595) | $(4,590) | | Amortization of deferred financing costs | $4,758 | $3,103 | | Write-off of deferred financing costs | $5,497 | $771 | | Total interest expense | $51,807 | $44,681 | Note 10: Income Taxes This note explains the effective tax rate, changes in unrecognized tax benefits, and the expected impact of Pillar Two global minimum tax rules - The effective tax rate differs from the statutory federal rate of 21% due to regional income mix, valuation allowance changes, R&D tax credits, and nondeductible loss on debt extinguishment[78] Gross Unrecognized Tax Benefits (in thousands) | Metric | July 28, 2024 | | :-------------------------- | :------------ | | Balance at January 28, 2024 | $36,548 | | Additions | $588 | | Decreases | $(33) | | Balance at July 28, 2024 | $37,103 | - The Company does not expect Pillar Two global minimum tax rules (effective January 1, 2024) to have a material impact on its provision for income taxes[78] Note 11: Leases This note provides a breakdown of total lease costs for operating and short-term leases, including sublease income, and key lease terms Total Lease Cost (in thousands) | Lease Cost Component (Three Months Ended) | July 28, 2024 | July 30, 2023 | | :---------------------------------------- | :------------ | :------------ | | Operating lease cost | $1,807 | $2,167 | | Short-term lease cost | $19 | $484 | | Sublease income | $(140) | $(162) | | Total lease cost | $1,686 | $2,489 | | | | | | Lease Cost Component (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :---------------------------------------- | :------------ | :------------ | | Operating lease cost | $3,697 | $4,316 | | Short-term lease cost | $163 | $1,093 | | Sublease income | $(296) | $(320) | | Total lease cost | $3,564 | $5,089 | - As of July 28, 2024, the weighted-average remaining lease term for operating leases was 5.1 years, with a weighted-average discount rate of 7.0%[83] Note 12: Commitments and Contingencies This note discusses the company's involvement in legal actions, including intellectual property and product liability matters, and environmental remediation liabilities - The Company is involved in various legal actions, including intellectual property, contract, and product liability matters, and accrues liabilities when a loss is probable and estimable[85] - A lawsuit filed by Harman Becker Automotive Systems GmbH against Sierra Entities for alleged product defects is in early stages, and the Company is currently unable to estimate a possible loss[85] - The Company has an accrued liability of $0.6 million as of July 28, 2024, for environmental remediation at a former facility in Newbury Park, California, with an estimated total probable loss range of $0.6 million to $2.1 million[87] Note 13: Restructuring This note details restructuring charges primarily related to workforce reductions and acquisition synergies, and their impact on financial results Restructuring Charges (in thousands) | Metric (Three Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Restructuring charges | $1,541 | $9,399 | | Total restructuring charges | $1,541 | $9,761 | | | | | | Metric (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Restructuring charges | $3,810 | $10,962 | | Total restructuring charges | $3,810 | $11,821 | - Restructuring activities, primarily workforce reductions due to cost-saving measures and Sierra Wireless Acquisition synergies, resulted in $3.8 million in charges for the six months ended July 28, 2024, a decrease from $11.8 million in the prior year[93][94] Note 14: Concentration of Risk This note identifies significant customer concentrations and the company's reliance on a limited number of third-party suppliers and subcontractors Significant Customers (Percentage of Net Sales) | Customer (Three Months Ended) | July 28, 2024 | July 30, 2023 | | :---------------------------- | :------------ | :------------ | | Frontek Technology Corporation (and affiliates) | 13% | * | | Trend-tek Technology Ltd. (and affiliates) | 10% | * | | | | | | Customer (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :---------------------------- | :------------ | :------------ | | Frontek Technology Corporation (and affiliates) | 13% | * | | Trend-tek Technology Ltd. (and affiliates) | 10% | * | - The Company relies on a limited number of third-party subcontractors and suppliers for silicon wafers, chipsets, components, and manufacturing, with significant operations in the U.S., China, Taiwan, Malaysia, Mexico, and Vietnam[98] Note 15: Segment Information This note provides financial data by reportable segment, geographic region, and revenue type, reflecting recent organizational restructuring - The Company operates with three reportable segments as of fiscal year 2025: Signal Integrity, Analog Mixed Signal and Wireless, and IoT Systems and Connectivity, following organizational restructuring[100] Net Sales by Reportable Segment (in thousands) | Segment (Three Months Ended) | July 28, 2024 | July 30, 2023 | | :--------------------------- | :------------ | :------------ | | Signal Integrity | $59,434 | $46,126 | | Analog Mixed Signal and Wireless | $79,311 | $69,989 | | IoT Systems and Connectivity | $76,610 | $122,257 | | Total net sales | $215,355 | $238,372 | | | | | | Segment (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :--------------------------- | :------------ | :------------ | | Signal Integrity | $117,733 | $87,017 | | Analog Mixed Signal and Wireless | $154,655 | $129,608 | | IoT Systems and Connectivity | $149,072 | $258,286 | | Total net sales | $421,460 | $474,911 | Net Sales by Geographic Region (Percentage of Total Net Sales) | Region (Three Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Asia-Pacific | 65% | 62% | | North America | 21% | 24% | | Europe | 14% | 14% | | | | | | Region (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Asia-Pacific | 64% | 57% | | North America | 22% | 28% | | Europe | 14% | 15% | Net Sales by Revenue Type (in thousands) | Revenue Type (Three Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------------- | :------------ | :------------ | | Product sales | $185,966 (86%) | $210,196 (88%) | | Service revenue | $29,389 (14%) | $28,176 (12%) | | Total net sales | $215,355 (100%) | $238,372 (100%) | | | | | | Revenue Type (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------------- | :------------ | :------------ | | Product sales | $363,455 (86%) | $417,577 (88%) | | Service revenue | $58,005 (14%) | $57,334 (12%) | | Total net sales | $421,460 (100%) | $474,911 (100%) | Note 16: Stock Repurchase Program This note outlines the company's stock repurchase program, including remaining authorization and the absence of repurchases in recent periods - The Company has a stock repurchase program with a remaining authorization of $209.4 million as of July 28, 2024. No repurchases occurred in the three or six months ended July 28, 2024, or July 30, 2023[107] Note 17: Derivatives and Hedging Activities This note describes the company's use of foreign currency forward contracts and interest rate swap agreements to manage market risks - The Company uses foreign currency forward contracts to mitigate exchange rate risks from expenses in CHF, CAD, and GBP, designating them as cash flow hedges[109] - Interest rate swap agreements, designated as cash flow hedges, resulted in realized gains of $2.8 million and $5.6 million for the three and six months ended July 28, 2024, respectively, hedging variability of interest payments on Term Loans[110] Fair Values of Cash Flow Hedges in Balance Sheets (in thousands) | Instrument (July 28, 2024) | Other Current Assets | Other Long-Term Assets | Accrued Liabilities | Other Long-Term Liabilities | | :------------------------- | :------------------- | :--------------------- | :------------------ | :-------------------------- | | Interest rate swap agreement | $6,774 | $862 | $— | $— | | Foreign currency forward contracts | $— | $— | $80 | $— | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion and analysis of Semtech Corporation's financial condition and results of operations for the three and six months ended July 28, 2024, compared to the corresponding periods in the prior fiscal year. It covers net sales, gross profit, operating expenses, and other financial metrics, highlighting the impact of macroeconomic conditions, recent developments like leadership changes and debt exchange, and segment performance Overview This section provides an overview of Semtech's business as a semiconductor and IoT service provider, its operating segments, and target end markets - Semtech is a high-performance semiconductor, IoT systems, and cloud connectivity service provider with three operating segments: Signal Integrity, Analog Mixed Signal and Wireless, and IoT Systems and Connectivity[115] - The Company's operating segments were reorganized in fiscal year 2024 and 2025, consolidating IoT Systems and IoT Connected Services into a single IoT Systems and Connectivity segment[115] - Products are sold into infrastructure (data centers, networks), high-end consumer (smartphones, displays), and industrial (IoT, video-over-IP, medical) end markets[116] Recent Developments This section highlights key recent events, including leadership changes and a significant debt-for-equity exchange transaction - Effective June 6, 2024, Hong Q. Hou was appointed President and Chief Executive Officer, succeeding Paul Pickle[117] - In July 2024, the Company exchanged approximately $188.1 million of 2028 Notes for 10,378,431 shares of common stock, resulting in a $144.7 million loss on extinguishment of debt and a $5.5 million write-off of deferred financing costs[118] Impact of Macroeconomic Conditions This section discusses how market volatility, inflation, elevated interest rates, and geopolitical tensions affect customer demand and channel inventories - Macroeconomic factors such as market volatility, inflation, elevated interest rates, and geopolitical tensions have caused uncertainty in end customer demand, leading to elevated channel inventories[119] Factors Affecting Our Performance This section describes key operational factors influencing performance, such as reliance on distributors, global sales, and new product development - A significant portion of sales (74% in Q2 FY25) are made through independent distributors, and the Company relies on orders received and shipped within the same quarter[120] - The Company is a global business, with 80% of net sales outside the U.S. in Q2 FY25, and 65% to customers in the Asia-Pacific region, making it subject to export restrictions and trade regulations[121] - Key performance indicators for future growth include design wins and new product releases, though these do not guarantee future sales[121] Results of Operations This section presents a high-level summary of the company's financial performance, including net sales, gross profit, and net loss as percentages of sales Statements of Operations as a Percentage of Net Sales | Metric (Three Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Net sales | 100.0 % | 100.0 % | | Gross profit | 49.0 % | 42.3 % | | Operating income (loss) | 3.6 % | (125.9)% | | Net loss | (79.1)% | (160.3)% | | | | | | Metric (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Net sales | 100.0 % | 100.0 % | | Gross profit | 48.7 % | 42.9 % | | Operating income (loss) | 2.6 % | (65.7)% | | Net loss | (45.9)% | (86.6)% | Regional Loss Before Taxes and Equity Method (Loss) Income (in thousands) | Region (Three Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Domestic | $(170,591) | $(73,470) | | Foreign | $4,511 | $(251,929) | | Total | $(166,080) | $(325,399) | | | | | | Region (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :-------------------------- | :------------ | :------------ | | Domestic | $(189,460) | $(92,311) | | Foreign | $3,127 | $(264,915) | | Total | $(186,333) | $(357,226) | Comparison of the Three Months Ended July 28, 2024 and July 30, 2023 This section provides a detailed comparative analysis of financial performance for the three-month periods, covering sales, profit, and expenses Net Sales This section analyzes net sales performance by major end market and reportable segment for the three-month period Net Sales by Major End Market (in thousands) | End Market | July 28, 2024 Net Sales | July 28, 2024 % Net Sales | July 30, 2023 Net Sales | July 30, 2023 % Net Sales | Change | | :--------------- | :---------------------- | :------------------------ | :---------------------- | :------------------------ | :----- | | Infrastructure | $52,942 | 25% | $42,369 | 18% | 25% | | High-End Consumer | $37,080 | 17% | $34,016 | 14% | 9% | | Industrial | $125,333 | 58% | $161,987 | 68% | (23)% | | Total | $215,355 | 100% | $238,372 | 100% | (10)% | Net Sales by Reportable Segment (in thousands) | Segment | July 28, 2024 Net Sales | July 28, 2024 % Net Sales | July 30, 2023 Net Sales | July 30, 2023 % Net Sales | Change | | :--------------------------- | :---------------------- | :------------------------ | :---------------------- | :------------------------ | :----- | | Signal Integrity | $59,434 | 28% | $46,126 | 19% | 29% | | Analog Mixed Signal and Wireless | $79,311 | 37% | $69,989 | 29% | 13% | | IoT Systems and Connectivity | $76,610 | 35% | $122,257 | 52% | (37)% | | Total | $215,355 | 100% | $238,372 | 100% | (10)% | Gross Profit This section details gross profit and gross margin by reportable segment for the three-month period Gross Profit and Gross Margin by Reportable Segment (in thousands) | Segment | July 28, 2024 Gross Profit | July 28, 2024 Gross Margin | July 30, 2023 Gross Profit | July 30, 2023 Gross Margin | | :--------------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Signal Integrity | $36,768 | 61.9% | $27,606 | 59.8% | | Analog Mixed Signal and Wireless | $45,399 | 57.2% | $43,123 | 61.6% | | IoT Systems and Connectivity | $27,111 | 35.4% | $47,349 | 38.7% | | Total | $105,464 | 49.0% | $100,728 | 42.3% | Operating Expenses, net This section provides a comparative analysis of operating expenses, including selling, product development, amortization, restructuring, and impairment Operating Expenses, Net (in thousands) | Expense Category | July 28, 2024 | July 30, 2023 | Change | | :-------------------------------- | :------------ | :------------ | :----- | | Selling, general and administrative | $55,789 | $59,579 | (6)% | | Product development and engineering | $40,084 | $47,433 | (15)% | | Intangible amortization | $282 | $4,871 | (94)% | | Restructuring | $1,541 | $9,399 | (84)% | | Goodwill impairment | $— | $279,555 | (100)% | | Total operating expenses, net | $97,696 | $400,837 | (76)% | Interest Expense This section explains the changes in interest expense, primarily due to the write-off of deferred financing costs from debt exchange - Interest expense increased to $28.6 million from $24.2 million, primarily due to a $5.5 million write-off of deferred financing costs from the 2028 Notes exchange[137] Loss on Extinguishment of Debt This section details the significant loss recognized from the exchange of 2028 Notes for common stock - A $144.7 million loss on extinguishment of debt was recognized due to the exchange of 2028 Notes for common stock[138] Investment Impairments and Credit Loss Reserves, Net This section reports on investment impairments and credit loss reserves, noting no significant losses in the current quarter - During the second quarter of fiscal year 2025, no investment impairments and credit loss reserves were recorded, compared to a $0.2 million loss in the prior year due to adjustments to credit loss reserves for available-for-sale debt securities[139] Provision for Income Taxes This section analyzes the decrease in income tax expense and the factors influencing the effective tax rate - Income tax expense decreased significantly to $4.2 million from $56.6 million, with effective tax rates of 2.5% and 17.4% respectively, influenced by regional income mix, valuation allowance, and non-deductible debt extinguishment loss[140] Comparison of the Six Months Ended July 28, 2024 and July 30, 2023 This section provides a detailed comparative analysis of financial performance for the six-month periods, covering sales, profit, and expenses Net Sales This section analyzes net sales performance by major end market and reportable segment for the six-month period Net Sales by Major End Market (in thousands) | End Market | July 28, 2024 Net Sales | July 28, 2024 % Net Sales | July 30, 2023 Net Sales | July 30, 2023 % Net Sales | Change | | :--------------- | :---------------------- | :------------------------ | :---------------------- | :------------------------ | :----- | | Infrastructure | $108,919 | 26% | $81,369 | 17% | 34% | | High-End Consumer | $71,619 | 17% | $55,610 | 12% | 29% | | Industrial | $240,922 | 57% | $337,932 | 71% | (29)% | | Total | $421,460 | 100% | $474,911 | 100% | (11)% | Net Sales by Reportable Segment (in thousands) | Segment | July 28, 2024 Net Sales | July 28, 2024 % Net Sales | July 30, 2023 Net Sales | July 30, 2023 % Net Sales | Change | | :--------------------------- | :---------------------- | :------------------------ | :---------------------- | :------------------------ | :----- | | Signal Integrity | $117,733 | 28% | $87,017 | 18% | 35% | | Analog Mixed Signal and Wireless | $154,655 | 37% | $129,608 | 27% | 19% | | IoT Systems and Connectivity | $149,072 | 35% | $258,286 | 55% | (42)% | | Total | $421,460 | 100% | $474,911 | 100% | (11)% | Gross Profit This section details gross profit and gross margin by reportable segment for the six-month period Gross Profit and Gross Margin by Reportable Segment (in thousands) | Segment | July 28, 2024 Gross Profit | July 28, 2024 Gross Margin | July 30, 2023 Gross Profit | July 30, 2023 Gross Margin | | :--------------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | | Signal Integrity | $71,529 | 60.8% | $52,093 | 59.9% | | Analog Mixed Signal and Wireless | $86,103 | 55.7% | $79,597 | 61.4% | | IoT Systems and Connectivity | $54,205 | 36.4% | $101,157 | 39.2% | | Total | $205,056 | 48.7% | $203,674 | 42.9% | Operating Expenses, net This section provides a comparative analysis of operating expenses, including selling, product development, amortization, restructuring, and impairment Operating Expenses, Net (in thousands) | Expense Category | July 28, 2024 | July 30, 2023 | Change | | :-------------------------------- | :------------ | :------------ | :----- | | Selling, general and administrative | $108,058 | $117,359 | (8)% | | Product development and engineering | $81,688 | $98,034 | (17)% | | Intangible amortization | $589 | $9,753 | (94)% | | Restructuring | $3,810 | $10,962 | (65)% | | Goodwill impairment | $— | $279,555 | (100)% | | Total operating expenses, net | $194,145 | $515,663 | (62)% | Interest Expense This section explains the changes in interest expense, primarily due to the write-off of deferred financing costs from debt exchange - Interest expense increased to $51.8 million from $44.7 million, primarily due to a $5.5 million write-off of deferred financing costs from the 2028 Notes exchange[154] Loss on Extinguishment of Debt This section details the significant loss recognized from the exchange of 2028 Notes for common stock - A $144.7 million loss on extinguishment of debt was recognized due to the exchange of 2028 Notes for common stock[155] Investment Impairments and Credit Loss Reserves, Net This section reports on investment impairments and credit loss reserves, including an other-than-temporary impairment on equity investments - Investment impairments and credit loss reserves totaled $1.1 million loss, primarily from an other-than-temporary impairment on one of our non-marketable equity investments[156] Provision for Income Taxes This section analyzes the decrease in income tax expense and the factors influencing the effective tax rate - Income tax expense decreased to $7.2 million from $54.2 million, with effective tax rates of 3.8% and 15.2% respectively, primarily due to regional income mix and changes in valuation allowance[157] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations, including cash on hand, credit facilities, and debt - The Company believes its cash on hand ($115.9 million), future operating cash flows, and available borrowing capacity ($282.2 million) are sufficient to meet liquidity requirements for at least the next 12 months[158] - As of July 28, 2024, foreign subsidiaries held $102.7 million in cash and cash equivalents[158] - Future non-operating cash uses are expected to be for capital expenditures and debt repayment, funded by operating cash flows[159] Credit Agreement This section details the company's outstanding term loans and revolving credit facility, including available borrowing capacity and maturities - As of July 28, 2024, the Company had $622.6 million outstanding under Term Loans and $215.0 million under the Revolving Credit Facility, with $282.2 million available undrawn capacity[160] - The Revolving Credit Facility has a borrowing capacity of $500.0 million, with maturities in November 2024 ($162.5 million) and January 2028 ($337.5 million)[160] Convertible Senior Notes Due 2027 This section describes the 1.625% Convertible Senior Notes due 2027, including their principal amount, maturity, and conversion conditions - The Company has $319.5 million aggregate principal amount of 1.625% Convertible Senior Notes due 2027, maturing November 1, 2027[161] - The 2027 Notes have an initial conversion rate of 26.8325 shares per $1,000 principal amount (approx. $37.27/share), but none of the conversion conditions were met as of April 28, 2024[161] Convertible Senior Notes Due 2028 This section details the 4.00% Convertible Senior Notes due 2028, including outstanding amounts, conversion conditions, and the impact of recent exchanges - The Company issued $250.0 million of 4.00% Convertible Senior Notes due 2028, with approximately $62.0 million remaining outstanding as of July 28, 2024[163] - One condition for conversion was met as of July 28, 2024, allowing holders to convert from July 29, 2024, through October 25, 2024, due to the common stock trading price exceeding 130% of the $20.37 conversion price[163] - The exchange of $188.1 million of 2028 Notes for common stock in July 2024 resulted in a $144.7 million loss on extinguishment of debt[163] Capital Expenditures and Research and Development This section outlines the company's expenditures for new product development and manufacturing, and their planned financing sources - The Company incurs significant expenditures for new product development, design, and manufacturing, focusing on viable and profitable market opportunities[164] - These expenditures are planned to be financed by operating cash flows, existing cash balances, and draws on the Revolving Credit Facility[164] Purchases under our Stock Repurchase Program This section provides an update on the company's stock repurchase program, including remaining authorization and recent activity - The Company has a stock repurchase program with $209.4 million remaining authorization as of July 28, 2024. No shares were repurchased in the first six months of fiscal years 2025 or 2024[164] Working Capital This section discusses the factors influencing working capital fluctuations and confirms no material changes to cash requirements - Working capital fluctuates with end-market demand, inventory management, and debt instrument transactions, with no material changes to cash requirements from the prior Annual Report[165] Cash Flows This section summarizes the net decrease in cash and cash equivalents for the six-month periods Net Decrease in Cash and Cash Equivalents (in thousands) | Metric (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :------------------------ | :------------ | :------------ | | Net decrease in cash and cash equivalents | $(12,657) | $(87,598) | Operating Activities This section analyzes the significant decrease in net cash used in operating activities, driven by various cost reductions - Net cash used in operating activities decreased significantly to $(5.1) million for the six months ended July 28, 2024, from $(102.0) million in the prior year, driven by lower bonus payments, reduced payroll, decreased income tax payments, and lower transaction costs[167] Investing Activities This section details the decrease in capital expenditures and purchases of intangible assets due to cost-saving initiatives - Capital expenditures decreased to $4.7 million for the six months ended July 28, 2024, from $20.9 million in the prior year, due to cost-saving initiatives[168] - Purchases of intangibles were $5.0 million, including capitalized development costs and software licenses[168] Financing Activities This section explains the shift from cash provided to cash used in financing activities, primarily due to changes in revolving credit facility activity - Net cash used in financing activities was $(4.6) million for the six months ended July 28, 2024, compared to $34.7 million provided in the prior year[168] - No borrowings or payments were made on the Revolving Credit Facility in the first six months of fiscal year 2025, compared to $60.0 million borrowed in the prior year[168] Cash Flows (in thousands) | Cash Flow Category (Six Months Ended) | July 28, 2024 | July 30, 2023 | | :------------------------------------ | :------------ | :------------ | | Net cash used in operating activities | $(5,084) | $(101,992) | | Net cash used in investing activities | $(2,672) | $(19,577) | | Net cash (used in) provided by financing activities | $(4,550) | $34,727 | | Net decrease in cash and cash equivalents | $(12,657) | $(87,598) | Critical Accounting Estimates This section confirms no significant changes to critical accounting estimates from the prior annual report - No significant changes to critical accounting estimates were reported during the six months ended July 28, 2024, as compared to those disclosed in the Annual Report on Form 10-K[170] Recent Accounting Pronouncements This section discusses the company's evaluation of new accounting standards related to income taxes and segment reporting - The Company is evaluating the impact of ASU 2023-09 (Income Taxes) and ASU 2023-07 (Segment Reporting) on its financial statements, with effective dates for fiscal years beginning after December 15, 2024, and December 15, 2023, respectively[27][171] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This item discusses Semtech Corporation's exposure to various market risks, including commodity risk, foreign currency risk, and interest rate and credit risk, and outlines the strategies employed to manage these exposures Commodity Risk This section addresses the company's exposure to fluctuating market prices of raw materials, particularly gold, and its potential impact on gross margins - The Company is exposed to fluctuating market prices of commodity raw materials, particularly gold, which can increase supplier costs and potentially reduce gross margins if not offset by price increases or manufacturing efficiencies[173] Foreign Currency Risk This section discusses the company's exposure to exchange rate fluctuations from foreign operations and its use of hedging instruments - Foreign operations expose the Company to exchange rate fluctuations, primarily with CHF, CAD, and GBP, which are partially mitigated using foreign currency forward contracts[174] - A hypothetical 10% adverse change in foreign exchange rates would result in a $5.4 million adverse impact on income before taxes for the quarter ended July 28, 2024[174] Interest rate and credit risk This section details the company's exposure to interest rate fluctuations on floating-rate debt and credit risk on investments, and related hedging strategies - The Company is subject to interest rate risk on its unhedged floating-rate debt ($238.0 million as of July 28, 2024); a one percentage point increase in Term SOFR would increase interest expense by $2.4 million[175] - Interest rate swap agreements hedge $600.0 million of Term Loans at fixed SOFR rates (3.58% for $150M, 3.44% for $450M)[175] - The Company's investments are primarily subject to credit risk, managed by guidelines restricting investments to high-quality, short-term debt instruments, including U.S. Treasury and Federal agency securities[176] ITEM 4. Controls and Procedures This item addresses the effectiveness of Semtech Corporation's disclosure controls and procedures and internal control over financial reporting, identifying material weaknesses and outlining remediation measures Evaluation of Disclosure Controls and Procedures This section reports management's conclusion on the ineffectiveness of disclosure controls due to identified material weaknesses - Management concluded that disclosure controls and procedures were not effective as of July 28, 2024, due to identified material weaknesses in internal control over financial reporting[177] Material Weaknesses This section identifies specific material weaknesses in internal control over financial reporting, including issues with business change assessment and documentation - A material weakness exists in identifying and assessing business changes impacting internal control, stemming from the integration of Sierra Wireless[178] - Specific material weaknesses include inadequate controls over manual journal entry approval, insufficient documentation for VAT withholding exemptions, and lack of adequate evidence for review of inventory excess and obsolescence reserves[178][179] - The Company also did not maintain adequate evidence of the review of operating forecasts used in financial statement preparation[180] Remediation Measures This section outlines the company's plans to address identified material weaknesses through enhanced processes, system migration, and improved documentation - Remediation efforts include enhancing risk assessment processes, migrating the Sierra Wireless ERP system to existing Semtech financial systems, improving controls for inventory reserves, and implementing enhanced documentation for VAT claims and operating forecast reviews[181] - Identified material weaknesses will not be considered remediated until measures are fully designed, implemented, and tested for operating effectiveness over a sufficient period[181] Changes in Internal Controls This section confirms that no material changes to internal control over financial reporting occurred, apart from ongoing remediation efforts - Other than the described remediation measures, no changes to internal control over financial reporting materially affected or are reasonably likely to materially affect controls during the fiscal quarter ended July 28, 2024[182] PART II – OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, unregistered sales of equity securities, and exhibits ITEM 1. Legal Proceedings This item incorporates by reference the discussion of legal proceedings from Note 12, Commitments and Contingencies, detailing the Company's involvement in various claims and lawsuits - Information on material legal proceedings is incorporated by reference from Note 12, Commitments and Contingencies, in Part I, Item 1[184] ITEM 1A. Risk Factors This item states that the Company's risk factors have not materially changed since its Annual Report on Form 10-K for the fiscal year ended January 28, 2024 - The risk factors associated with the business have not materially changed compared to those disclosed in the Annual Report on Form 10-K for the fiscal year ended January 28, 2024[184] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This item details the Company's recent unregistered sales of equity securities, specifically the exchange of 2028 Notes for common stock in July 2024 - On July 24, 2024, the Company issued 10,378,431 shares of common stock in exchange for approximately $188.1 million of 2028 Notes, exempt from registration under Section 3(a)(9) and 4(a)(2) of the Securities Act[185] ITEM 3. Defaults Upon Senior Securities This item confirms that there were no reported defaults upon senior securities - No defaults upon senior securities were reported[186] [ITEM 4. Mine Safety Disclosures](index=66&type=section&id=ITEM%204.%