SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[x] QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-7422
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STANDARD MICROSYSTEMS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2234952
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Arkay Drive, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 631-435-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes _X_ No ____
As of May 31, 2003, there were 16,816,175 shares of the registrant's common
stock outstanding.
Standard Microsystems Corporation
Form 10-Q
For the Quarter Ended May 31, 2003
Table of Contents
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Part I Financial Information
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Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of May 31, 2003 and
February 28, 2003
Condensed Consolidated Statements of Operations for the Three
Months Ended May 31, 2003 and May 31, 2002
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended May 31, 2003 and May 31, 2002
Notes to Condensed Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Item 4 Controls and Procedures
Part II Other Information
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Item 1 Legal Proceedings
Item 6 Exhibits and Reports on Form 8-K
Signature
Certifications
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands)
May 31, February 28,
2003 2003
------------ -------------
Assets
Current assets:
Cash and cash equivalents $ 101,807 $ 90,025
Short-term investments 19,100 22,872
Accounts receivable, net 23,690 22,738
Inventories 20,766 17,644
Deferred income taxes 10,772 8,545
Other current assets 10,694 8,710
- ------------------------------------------------------------------------------
Total current assets 186,829 170,534
- ------------------------------------------------------------------------------
Property, plant and equipment, net 20,080 22,257
Goodwill 29,773 29,773
Intangible assets, net 5,648 6,008
Deferred income taxes 8,608 11,779
Other assets 5,433 7,598
- ------------------------------------------------------------------------------
$ 256,371 $ 247,949
==============================================================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 13,146 $ 9,114
Deferred income on shipments to distributors 7,428 5,943
Accrued expenses, income taxes and other
current liabilities 10,167 9,838
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Total current liabilities 30,741 24,895
- ------------------------------------------------------------------------------
Other liabilities 7,128 7,379
Minority interest in subsidiary 11,724 11,663
Shareholders' equity:
Preferred stock - -
Common stock 1,863 1,859
Additional paid-in capital 148,234 147,655
Retained earnings 79,211 77,492
Treasury stock, at cost (23,454) (23,454)
Deferred stock-based compensation (2,355) (2,102)
Accumulated other comprehensive income 3,279 2,562
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Total shareholders' equity 206,778 204,012
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$ 256,371 $ 247,949
==============================================================================
See Notes to Condensed Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended May 31,
-----------------------------
2003 2002
------------ -----------
Sales and revenues $ 42,721 $ 34,007
Cost of goods sold 22,059 18,935
- ------------------------------------------------------------------------------
Gross profit 20,662 15,072
Operating expenses (income):
Research and development 9,101 6,851
Selling, general and administrative 9,513 8,194
Amortization of intangible assets 360 -
Gains on real estate transactions (1,444) -
- ------------------------------------------------------------------------------
Income from operations 3,132 27
Interest income 443 581
Other expense, net (736) (15)
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Income before provision for income taxes
and minority interest 2,839 593
Provision for income taxes 895 154
Minority interest in net income of subsidiary 61 6
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Income from continuing operations 1,883 433
Loss from discontinued operations
(net of income tax benefits of $92 and $46) (164) (81)
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Net income $ 1,719 $ 352
==============================================================================
Basic net income per share:
Income from continuing operations $ 0.11 $ 0.03
Loss from discontinued operations (0.01) (0.01)
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Basic net income per share $ 0.10 $ 0.02
==============================================================================
Diluted net income per share:
Income from continuing operations $ 0.11 $ 0.02
Loss from discontinued operations (0.01) -
- ------------------------------------------------------------------------------
Diluted net income per share $ 0.10 $ 0.02
==============================================================================
Weighted average common shares outstanding:
Basic 16,793 16,060
Diluted 17,331 17,811
See Notes to Condensed Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended May 31,
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2003 2002
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Cash flows from operating activities:
Cash received from customers $ 44,274 $ 36,239
Cash paid to suppliers and employees (42,623) (34,502)
Interest received 427 525
Interest paid (24) (20)
Income taxes paid (125) (70)
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Net cash provided by operating activities 1,929 2,172
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Cash flows from investing activities:
Capital expenditures (1,602) (1,439)
Sales of property, plant and equipment 7,071 5
Sales of long-term investments 1,199 -
Purchases of short-term investments (9,022) (11,795)
Sales of short-term investments 12,794 7,600
Other (9) (13)
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Net cash provided by (used for) investing
activities 10,431 (5,642)
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Cash flows from financing activities:
Proceeds from issuance of common stock 31 3,890
Purchases of treasury stock - (2,595)
Repayments of obligations under capital
leases and notes payable (438) (264)
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Net cash provided by (used for) financing
activities (407) 1,031
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Effect of foreign exchange rate changes on cash
and cash equivalents 85 543
Cash used for discontinued operation (256) (99)
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Net increase (decrease) in cash and cash
equivalents 11,782 (1,995)
Cash and cash equivalents at beginning
of period 90,025 98,065
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Cash and cash equivalents at end of period $ 101,807 $ 96,070
===============================================================================
Reconciliation of income from continuing
operations to net cash provided by
operating activities:
Income from continuing operations $ 1,883 $ 433
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization 2,750 2,179
(Gains) and losses from sales of investments
and property, net (696) 5
Other adjustments, net (67) (6)
Changes in operating assets and liabilities:
Accounts receivable (1,739) 1,330
Inventories (2,711) (3,631)
Accounts payable and accrued expenses and
other liabilities 2,994 3,496
Other changes, net (485) (1,634)
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Net cash provided by operating activities $ 1,929 $ 2,172
===============================================================================
During the three months ended May 31, 2003, the Company made $3,222 of capital
expenditures which are being financed by the supplier through March 2004.
See Notes to Condensed Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial information of
Standard Microsystems Corporation and subsidiaries, referred to herein as
"SMSC" or "the Company", has been prepared in accordance with generally
accepted accounting principles and the rules and regulations of the
Securities and Exchange Commission, and reflects all adjustments,
consisting only of normal recurring adjustments, which in management's
opinion are necessary to state fairly the Company's financial position,
results of operations and cash flows for all periods presented.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of sales and revenues
and expenses during the reporting period. Actual results may differ from
those estimates, and such differences may be material to the financial
statements. These condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements for
the year ended February 28, 2003 included in the Company's annual report on
Form 10-K, as filed on May 29, 2003 with the Securities and Exchange
Commission. The results of operations for the three months ended May 31,
2003 are not necessarily indicative of the results to be expected for any
future periods.
2. Stock-Based Compensation
The Company has in effect several stock-based compensation plans under
which incentive stock options, non-qualified stock options and restricted
stock awards are granted to employees and directors. All stock options are
granted with exercise prices equal to the fair value of the underlying
shares on the date of grant. The Company accounts for stock option grants
in accordance with Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" and accordingly recognizes no
compensation expense for the stock option grants. Additional pro forma
disclosures as required under Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation", as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure", are detailed below.
For purposes of pro forma disclosures, the estimated fair market value of
the Company's options is amortized as an expense over the options' vesting
periods. The fair value of each option grant, as defined by SFAS No. 123,
is estimated on the date of grant using the Black-Scholes option-pricing
model. The Black-Scholes model, as well as other currently accepted option
valuation models, was developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, that
significantly differ from the Company's stock option awards. Because the
Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate,
in the opinion of management, the existing models do not necessarily
provide a reliable single measure of the fair value of employee stock
options.
Had compensation expense been recorded under the provisions of SFAS No.
123, the Company's net income (loss) and net income (loss) per share would
have been the pro forma amounts indicated below (in thousands, except per
share data):
Three Months Ended
May 31,
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2003 2002
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Net income - as reported $ 1,719 $ 352
Add: Stock-based compensation expense included in
net income, net of taxes - as reported 182 120
Deduct: Stock-based compensation expense determined
using fair value method, net of taxes (2,415) (242)
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Net income (loss) - pro forma $ (514) $ 230
===========================================================================
Basic and diluted net income per share -
as reported $ 0.10 $ 0.02
===========================================================================
Basic and diluted net income (loss)
per share - pro forma $ (0.03) $ 0.01
===========================================================================
3. Balance Sheet Data
Inventories are valued at the lower of first-in, first-out cost or market
and consist of the following (in thousands):
May 31, 2003 Feb. 28, 2003
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Raw materials $ 686 $ 761
Work in process 8,343 7,686
Finished goods 11,737 9,197
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$ 20,766 $ 17,644
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Property, plant and equipment consists of the following (in thousands):
May 31, 2003 Feb. 28, 2003
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Land $ 1,571 $ 3,434
Buildings and improvements 20,265 29,927
Machinery and equipment 83,867 81,562
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105,703 114,923
Less: accumulated depreciation 85,623 92,666
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$ 20,080 $ 22,257
================================================================
During the three months ended May 31, 2003, the Company sold certain
portions of its real estate holdings, further details for which appear
within Note 10.
4. Net Income Per Share
Basic net income per share is calculated using the weighted-average number
of common shares outstanding during the period. Diluted net income per
share is calculated using the weighted-average number of common shares
outstanding during the period, plus the dilutive effect of shares issuable
through stock options.
The shares used in calculating basic and diluted net income per share for
the Condensed Consolidated Statements of Operations included within this
report are reconciled as follows (in thousands):
Three Months Ended
May 31,
----------------------
2003 2002
----------------------
Average shares outstanding for
basic net income per share 16,793 16,060
Dilutive effect of stock options 538 1,751
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Average shares outstanding for
diluted net income per share 17,331 17,811
============================================================
Options covering 3.4 million and 0.1 million shares were excluded from the
computation of average shares outstanding for diluted net income per share
for the three months ended May 31, 2003 and 2002, respectively, because
their effect was antidilutive.
5. Comprehensive Income
The Company's other comprehensive income consists of foreign currency
translation adjustments from those subsidiaries not using the U.S. dollar
as their functional currency, and unrealized gains and losses on equity
investments classified as available-for-sale. The components of the
Company's comprehensive income for the three months ended May 31, 2003 and
2002 were as follows (in thousands):
Three Months Ended
May 31,
-------------------------
2003 2002
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Net income $ 1,719 $ 352
Other comprehensive income (loss):
Change in foreign currency translation
adjustment 38 966
Change in unrealized gain (loss) on marketable
equity securities, net of taxes 14 (31)
Reclassification adjustment for loss on
marketable equity security included in net
income, net of taxes 665 -
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Total comprehensive income $ 2,436 $ 1,287
===========================================================================
During the three months ended May 31, 2003, the Company sold its remaining
equity investment in Chartered Semiconductor Manufacturing, Ltd. This
investment was classified as available-for-sale, and temporary changes in
its market value, net of income taxes, were included within the Company's
Other comprehensive income, and were presented cumulatively as an
unrealized gain or loss, net of income taxes, within Accumulated other
comprehensive income on the Company's Consolidated Balance Sheets. The
amount presented as a reclassification adjustment in the preceding table
represents the amounts previously reported within Other comprehensive
income as an unrealized loss on this investment, net of income taxes,
through February 28, 2003.
6. Business Acquisition
In June 2002, the Company acquired all of the outstanding common stock of
Gain Technology Corporation (Gain), a developer and supplier of high-speed,
high-performance analog and mixed-signal communications integrated circuits
and proprietary intellectual property cores, based in Tucson, Arizona, for
initial consideration of $36.1 million.
The terms of the acquisition provided that up to $17.5 million of
additional consideration, payable in SMSC common stock and cash, could be
issued to Gains's former shareholders during fiscal 2004 contingent upon
satisfaction of certain performance goals. It has been determined that this
additional consideration was not earned.
The unaudited pro forma results of operations for the three months ended
May 31, 2002 set forth below give effect to the acquisition of Gain as if
it had occurred at the beginning of fiscal 2003. Pro forma data is subject
to certain assumptions and estimates, and is presented for informational
purposes only. This data does not purport to be indicative of the results
that would have actually occurred had the acquisition occurred on the basis
described above, nor do they purport to be indicative of future operating
results.
Three Months Ended
May 31, 2002
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(in thousands, except per share data) Actual Pro forma
-------------------------
Sales and revenues $ 34,007 $ 35,245
Net income (loss) 352 (1,011)
=======================================================================
Basic and diluted net income (loss)
per share $ 0.02 $ (0.06)
=======================================================================
7. Business Restructuring
In December 2001, the Company announced a restructuring plan for its exit
from the PC chipset business.
A summary of the activity in the reserve related to this restructuring for
the three months ended May 31, 2003 is as follows (in thousands):
Non-cancelable
lease Other
obligations Charges Total
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Business restructuring reserve
at February 28, 2003 $ 1,374 $ 45 $ 1,419
Cash payments (100) - (100)
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Business restructuring reserve
at May 31, 2003 $ 1,274 $ 45 $ 1,319
===========================================================================
Payments related to non-cancelable lease obligations are being paid over
their respective terms through August 2008.
8. Discontinued Operations
The Company is currently involved in a legal action relating to a past
divestiture of a business unit. This divestiture was accounted for as a
discontinued operation, and accordingly, costs associated with this action,
net of income taxes, are reported as a Loss from discontinued operations on
the Condensed Consolidated Statements of Operations. These costs totaled
$0.2 million and $0.1 million for the three months ended May 31, 2003 and
2002, respectively, after applicable income tax benefits.
9. Goodwill and Intangible Assets
The Company's June 2002 acquisition of Gain Technology Corporation included
the acquisition of $7.1 million of finite-lived intangible assets and $29.8
million of goodwill. In accordance with the provisions of SFAS No. 142,
this goodwill is not amortized, but is tested for impairment in value
annually, as well as when an event or circumstance occurs indicating a
possible impairment in its value.
All finite-lived intangible assets are being amortized on a straight-line
basis over their estimated useful lives. Existing technologies have been
assigned an estimated useful life of six years. Customer contracts have
been assigned useful lives of between one and ten years (with a weighted
average life of approximately seven years), and non-compete agreements have
been assigned useful lives of two years. The weighted average useful life
of all intangible assets is approximately six years.
As of May 31, 2003, the Company's finite-lived intangible assets consisted
of the following (in thousands):
Accumulated
Cost Amortization Net
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Existing technologies $ 6,179 $ 1,030 $ 5,149
Customer contracts 498 204 294
Non-compete agreements 410 205 205
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$ 7,087 $ 1,439 $ 5,648
=========================================================================
Estimated future intangible asset amortization expense for the remainder of
fiscal 2004, and for the five fiscal years thereafter, is as follows (in
thousands):
Period Amount
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Remainder of fiscal 2004 $ 951
Fiscal 2005 1,114
Fiscal 2006 1,062
Fiscal 2007 1,062
Fiscal 2008 1,062
Fiscal 2009 290
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10. Real Estate Transactions
During the first quarter of fiscal 2004, the Company sold certain portions
of its Hauppauge, New York real estate holdings, for combined proceeds of
$7.0 million, net of applicable transaction costs. These transactions
resulted in a combined gain of $1.7 million, $1.4 million of which related
to property in which the Company has no continued interest and was
recognized within the Company's fiscal 2004 first quarter operating
results, and $0.3 million of which related to property that the Company has
leased back from the purchaser and has therefore been deferred. This
deferred gain will be recognized within the Company's operating results on
a straight-line basis over a 30-month period beginning in June 2003,
consistent with the term of the lease. The Company's rent obligation over
the term of this lease is approximately $0.9 million.
11. Sales of Equity Investment
During the three months ended May 31, 2003, the Company sold its remaining
equity investment in Chartered Semiconductor Manufacturing, Ltd., realizing
a loss of $0.7 million, which is included within Other expense, net.
12. Litigation
In June 2003, Standard Microsystems Corporation was named as a defendant in
a patent infringement lawsuit filed by Analog Devices, Inc. in the United
States District Court for the District of Massachusetts (Analog Devices,
Inc. v. Standard Microsystems Corporation, Case Number 03 CIV 11216). The
Complaint filed in the suit alleges that some of the Company's products
infringe one or both of two Analog Devices' patents, and seeks injunctive
relief and unspecified damages. The Company has reviewed and investigated
the allegations in the Complaint and believes that the suit is without
merit.
13. Recent Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement
No. 123", which is effective for financial statements for fiscal years
ending after December 15, 2002, with early adoption permitted. SFAS No. 148
enables companies that choose to adopt the fair value based method to
report the full effect of employee stock options in their financial
statements immediately upon adoption, and to make available to investors
better and more frequent disclosure about the cost of employee stock
options. As further discussed within Note 2, the Company will continue to
apply the disclosure-only provisions of both SFAS No. 123 and SFAS No. 148.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003. The Company does
not believe that the adoption of SFAS No. 149 will have a material effect
on its financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated condensed financial statements and notes thereto contained in
this report.
Portions of this report may contain forward-looking statements about
expected future events and financial and operating results that involve
risks and uncertainties. These include the timely development and market
acceptance of new products; the impact of competitive products and pricing;
the effect of changing economic conditions in domestic and international
markets; changes in customer order patterns, including loss of key
customers, order cancellations or reduced bookings; and excess or obsolete
inventory and variations in inventory valuation, among others. Words such
as "believe," "expect," "anticipate" and similar expressions identify
forward-looking statements. Such statements are qualified in their entirety
by the inherent risks and uncertainties surrounding future expectations and
may not reflect the potential impact of any future acquisitions, mergers or
divestitures.
Standard Microsystems Corporation (the Company or SMSC) competes in the
semiconductor industry, which has historically been characterized by
intense competition, rapid technological change, cyclical market patterns,
price erosion and periods of mismatched supply and demand. In addition,
sales of many of the Company's products depend largely on sales of personal
computers and peripheral devices, and reductions in the rate of growth of
the PC and embedded markets could adversely affect its operating results.
SMSC conducts business outside the United States and is subject to tariff
and import regulations and currency fluctuations, which may have an effect
on its business. All forward-looking statements speak only as of the date
hereof and are based upon the information available to SMSC at this time.
Such information is subject to change, and the Company will not necessarily
inform investors of such changes, except as required by law. These and
other risks and uncertainties, including potential liability resulting from
pending or future litigation, are detailed from time to time in the
Company's reports filed with the Securities and Exchange Commission (SEC).
Investors are advised to read the Company's Annual Report on Form 10-K and
other quarterly reports on Form 10-Q filed with the SEC, particularly those
sections entitled "Other Factors That May Affect Future Operating Results",
for a more complete discussion of these and other risks and uncertainties.
Overview
--------
Description of Business
SMSC is a designer and worldwide supplier of advanced digital, mixed-signal
and analog semiconductor solutions for a broad range of communications and
computing applications in the areas of Advanced Input/Output (I/O), USB
connectivity, networking and embedded control systems. The Company is a
fabless semiconductor supplier whose products are manufactured by
world-class third-party semiconductor foundries and assemblers. To ensure
the highest quality, the Company conducts a significant portion of its
final testing requirements in the Company's own state-of-the-art testing
operation.
The Company is prominent as the world's leading supplier of Advanced I/O
integrated circuits for desktop and mobile personal computers. Advanced I/O
circuits contain a variety of individual functions ranging from legacy PC
I/O to leading edge system management, including flash memory, infrared
communications support, a real-time clock, and power management.
The Company serves the networking and connectivity markets with its
families of integrated Ethernet and USB 2.0 products, along with other
products, which provide solutions for the needs of network printers,
set-top boxes, home gateway products, automobile navigation systems,
cellular base stations, USB peripherals and a variety of other
machine-to-machine communications applications.
The Company's headquarters are located in Hauppauge, New York, and SMSC
operates design and validation centers in New York, Austin, Texas, Tucson,
Arizona and Phoenix, Arizona, and has sales offices in the United States,
Europe, Taiwan, Korea and China. The Company conducts most of its business
in the Japanese market through its majority-owned subsidiary, SMSC Japan.
Critical Accounting Policies and Estimates
------------------------------------------
This discussion and analysis of the Company's financial condition and
results of operations is based upon the unaudited consolidated condensed
financial statements included in this report, which have been prepared in
accordance with accounting principles for interim financial statements
generally accepted in the United States. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amount of sales and revenues and expenses during the reporting
period.
The Company believes that the critical accounting policies and estimates
listed below are important to the portrayal of the Company's financial
condition and operating results, and require critical management judgments
and estimates about matters that are inherently uncertain. Although
management believes that its judgments and estimates are appropriate and
reasonable, actual future results may differ from these estimates, and to
the extent that such differences are material, future reported operating
results may be affected.
o Revenue recognition
o Inventory valuation
o Determination of the allowance for doubtful accounts receivable
o Valuation of long-lived assets
o Accounting for deferred income tax assets
o Legal contingencies
Further information regarding these policies appears within the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's annual report on Form 10-K for the
fiscal year ended February 28, 2003 filed with the SEC on May 29, 2003.
During the three-month period ended May 31, 2003, there were no significant
changes to any critical accounting policies or to the procedures used in
making the estimates and judgments required to apply these policies.
Results of Operations
---------------------
Sales and Revenues
Sales and revenues for the three months ended May 31, 2003 were $42.7
million, an increase of approximately 26% compared to $34.0 million
reported in the first quarter of the prior fiscal year. The largest portion
of this increase was attributable to higher product sales from the
Company's networking and USB connectivity product lines, both of which
continue to achieve increased product sales from new product introductions.
Continued market acceptance of the Company's LAN91C111 single-chip non-PCI
Ethernet controller contributed to the sixth consecutive quarter of
increased networking product sales, while the Company's USB connectivity
products experienced a fourth consecutive quarter of growth, driven in part
by several recently-introduced products for USB 2.0 connectivity
applications. Product sales of PC I/O products were also higher in the
first quarter of fiscal 2004 than in the prior year's first quarter, as
several key design wins drove an increase in unit PC I/O shipments.
Sales and revenues from customers outside of North America accounted for
approximately 90% and 89% of the Company's revenues for the three-month
periods ended May 31, 2003 and 2002, respectively, the largest portion of
which was to the Asia and Pacific Rim region. The Company expects that
international shipments, particularly to the Asia and Pacific Rim region,
will continue to represent a significant portion of its sales and revenues.
Gross Profit
Gross profit for the three months ended May 31, 2003 was $20.7 million, or
48.4% of sales and revenues, compared to $15.1 million, or 44.3% of sales
and revenues, for the three months ended May 31, 2002. This improvement in
gross profit reflects the impact of higher proportionate sales and revenue
contribution from non-PC I/O product lines in the current fiscal year's
first quarter, which generally carry higher gross profit margins than PC
I/O products. Higher unit production during the first three months of
fiscal 2004 resulted in a more efficient use of fixed manufacturing
overhead costs, also contributing to the higher gross profit in the current
period. In addition, gross profit in the prior fiscal year's first quarter
was adversely impacted by higher charges for slow-moving and obsolete
inventory.
Research and Development Expenses
The semiconductor industry, and the individual markets in which the Company
currently competes, are highly competitive, and the Company believes that
the continued investment in research and development (R&D) is essential to
maintaining and improving its competitive position, and to driving its
opportunities for future growth.
The Company's research and development activities are performed by a team
of highly-skilled and experienced engineers and technicians, and are
primarily directed towards the design of new integrated circuits, the
development of new software design tools and blocks of logic, as well as
ongoing cost reductions and performance improvements in existing products.
R&D expenses were $9.1 million, or approximately 21% of sales and revenues,
for the three months ended May 31, 2003, compared to $6.9 million, or
approximately 20% of sales and revenues, for the three months ended May 31,
2002. The current period's R&D expenses include the impact of the Company's
June 2002 acquisition of Gain Technology Corporation (Gain), which added 35
highly skilled engineers and designers to the Company's staff, as well as
other engineering staff additions. Costs associated with development
programs in advanced .18 and .25 micron semiconductor technologies also
contributed to the current period's increased R&D expenses, compared to the
first quarter of fiscal 2003.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $9.5 million, or
approximately 22% of sales and revenues, for the three months ended May 31,
2003. These expenses compare to $8.2 million, or approximately 24% of sales
and revenues, for the year-earlier period. This dollar increase reflects
the impact of additional selling, general and administrative costs
associated with the June 2002 acquisition of Gain, and also costs
associated with additional staff added to expand the Company's sales and
marketing capabilities. The current year's first quarter also reflects
incremental selling costs, primarily sales commissions and incentives,
associated with the period's higher product sales than those reported in
the corresponding year-earlier period.
Amortization of Intangible Assets
For the three months ended May 31, 2003, the Company recorded amortization
expenses of $0.4 million for intangible assets associated with the June
2002 acquisition of Gain.
Gains on Real Estate Transactions
During the first quarter of fiscal 2004, the Company sold certain portions
of its Hauppauge, New York real estate holdings, for combined proceeds of
$7.0 million, net of applicable transaction costs. These transactions
resulted in a combined gain of $1.7 million, $1.4 million of which related
to property in which the Company has no continued interest and was
recognized within the Company's fiscal 2004 first quarter operating
results, and $0.3 million of which related to property that the Company has
leased back from the purchaser and has therefore been deferred. This
deferred gain will be recognized within the Company's operating results on
a straight-line basis over a 30-month period beginning in June 2003,
consistent with the term of the lease. The Company's rent obligation over
the term of this lease is approximately $0.9 million.
Other Income and Expense
Interest income of $0.4 million for the three-month period ended May 31,
2003 declined from $0.6 million for the corresponding year-earlier period
reflecting lower interest rates on short-term investments.
During the three months ended May 31, 2003, the Company sold its remaining
equity investment in Chartered Semiconductor Manufacturing, Ltd.
(Chartered), realizing losses of $0.7 million, which are included within
Other expense, net.
Provision For Income Taxes
The Company's provision for income taxes from continuing operations in the
first quarter of fiscal 2004 was $0.9 million, resulting in an effective
income tax rate of 31.5%. The provision for income taxes from continuing
operations in the prior fiscal year's first quarter was $0.2 million, with
an effective income tax rate of 26.0%. The Company expects its effective
tax rate on income from continuing operations to be approximately 30.0% in
fiscal 2004, excluding the tax effect of the non-recurring real estate and
equity investment sales which occurred during the first quarter. Taxes on
those non-recurring transactions were provided for at the Company's
approximate incremental income tax rate of 36.0%, the result of which was
an overall effective income tax rate from continuing operations that was
slightly above 30.0% in the first quarter of fiscal 2004.
The expected effective income tax rate for fiscal 2004 primarily reflects
the statutory Federal and state income tax rates, adjusted for the impact
of tax-exempt interest income and anticipated income tax credits.
Discontinued Operations
The Company is currently involved in a legal action relating to a past
divestiture of a business unit. This divestiture was accounted for as a
discontinued operation, and accordingly, costs associated with this action,
net of income taxes, are reported as a Loss from discontinued operations on
the Condensed Consolidated Statements of Operations. These costs totaled
$0.2 million and $0.1 million for the three months ended May 31, 2003 and
2002, respectively, after applicable income tax benefits.
Liquidity and Capital Resources
-------------------------------
The Company currently finances its operations through a combination of
existing resources and cash generated by operations.
The Company's cash, cash equivalents and short-term investments increased
to $120.9 million as of May 31, 2003, compared to $112.9 million at
February 28, 2003. This increase reflects $7.0 million of cash provided by
sales of real estate and $1.2 million of cash provided by sales of the
Company's investment in Chartered.
Operating activities generated $1.9 million of cash for the three months
ended May 31, 2003. Investing activities provided $10.4 million of cash for
the same period, including the effects of the aforementioned real estate
and Chartered investment transactions. Financing activities consumed $0.4
million of cash during the first three months of fiscal 2004.
The Company's inventories were $20.8 million at May 31, 2003, compared to
$17.6 at February 28, 2003, as the Company stages for higher demand
anticipated in the second quarter of fiscal 2004, consistent with its
typical business cycle.
Accounts receivable increased from $22.7 million at February 28, 2003 to
$23.7 million at May 31, 2003. The aging of the Company's accounts
receivable portfolio remains almost entirely current.
Capital expenditures for the three months ended May 31, 2003 were $4.8
million, of which $1.6 million was paid in cash. First quarter capital
investments included an expenditure of $4.3 million in advanced design
tools, $3.2 million of which is being financed on a short-term basis by the
supplier with payment terms extending through March 1, 2004. This $3.2
million is reported within Accounts payable at May 31, 2003. There were no
material commitments for capital expenditures as of May 31, 2003.
As noted previously, the Company completed its acquisition of Gain in June
2002 for total initial consideration of $36.1 million. It has been
determined that $17.5 million of additional SMSC common stock and cash,
which was contingently payable to former Gain shareholders during fiscal
2004 upon satisfaction of certain performance goals, was not earned.
During the first quarter of fiscal 2004, the Company did not acquire any
additional treasury stock through its common stock repurchase program,
under which approximately 1.2 million shares remain available for
repurchase. As of May 31, 2003, the Company held approximately 1.8 million
shares of treasury stock, at a cost of $23.5 million.
The Company has considered in the past, and will continue to consider,
various possible transactions to secure necessary foundry manufacturing
capacity, including equity investments in, prepayments to, or deposits with
foundries, in exchange for guaranteed capacity or other arrangements which
address the Company's manufacturing requirements. The Company may also
consider utilizing cash to acquire or invest in complementary businesses or
products or to obtain the right to use complementary technologies. From
time to time, in the ordinary course of business, the Company may evaluate
potential acquisitions of or investment in such businesses, products or
technologies owned by third parties.
The Company expects that its cash, cash equivalents, short-term
investments, cash flows from operations and its borrowing capacity will be
sufficient to finance the Company's operating and capital requirements for
at least the next 12 months.
Recent Accounting Pronouncements
--------------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement
No. 123", which is effective for financial statements for fiscal years
ending after December 15, 2002, with early adoption permitted. SFAS No. 148
enables companies that choose to adopt the fair value based method to
report the full effect of employee stock options in their financial
statements immediately upon adoption, and to make available to investors
better and more frequent disclosure about the cost of employee stock
options. The Company will continue to apply the disclosure-only provisions
of both SFAS No. 123 and SFAS No. 148.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003. The Company does
not believe that the adoption of SFAS No. 149 will have a material effect
on its financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial Market Risks
----------------------
Interest Rate Risk - The Company's exposure to interest rate risk relates
primarily to its investment portfolio. The primary objective of the
Company's investment portfolio management is to invest available cash while
preserving principal and meeting liquidity needs. In accordance with the
Company's investment policy, investments are placed with high
credit-quality issuers and the amount of credit exposure to any one issuer
is limited.
As of May 31, 2003, the Company's $19.1 million of short-term investments
consisted primarily of investments in corporate, government and municipal
obligations with maturities of between three and twelve months. If market
interest rates were to increase immediately and uniformly by 10 percent
from levels at May 31, 2003, the Company estimates that the fair value of
these short-term investments would decline by an immaterial amount. The
Company generally expects to hold its fixed income investments until
maturity and, therefore, would not expect operating results or cash flows
to be affected to any significant degree by a sudden change in market
interest rates on short-term investments.
Equity Price Risk - The Company has no material investments in equity
securities of other companies on its Consolidated Balance Sheet as of May
31, 2003.
Foreign Currency Risk - The Company has international sales and
expenditures and is, therefore, subject to certain foreign currency rate
exposure. The Company conducts a significant amount of its business in
Asia. In order to reduce the risk from fluctuation in foreign exchange
rates, most of the Company's product sales and all of its arrangements with
its foundry, test and assembly vendors are denominated in U.S. dollars.
Transactions in the Japanese market made by the Company's majority-owned
subsidiary, SMSC Japan, are denominated in Japanese yen. SMSC Japan
purchases a significant amount of its products for resale from Standard
Microsystems Corporation in U.S. dollars, and from time to time enters into
forward exchange contracts to hedge against currency fluctuations
associated with these product purchases. During fiscal 2003, SMSC Japan
entered into a contract with a Japanese financial institution to purchase
U.S. dollars to meet a portion of its U.S. dollar denominated product
purchase requirements. Gains and losses on this contract, which expired in
March 2003, were not significant.
The Company has never received a cash dividend (repatriation of cash) from
SMSC Japan nor does it expect to receive such a dividend in the near
future.
Other Factors That May Affect Future Operating Results
------------------------------------------------------
As a supplier of semiconductors, the Company competes in a challenging
business environment, which is characterized by intense competition, rapid
technological change and cyclical business patterns. Except for the
historical information contained herein, the matters discussed in this
report are forward-looking statements. The Company faces a variety of risks
and uncertainties in conducting its business, some of which are out of its
control, and any of which, were they to occur, could impair the Company's
operating performance. For a more detailed discussion of risk factors,
please refer to the Company's annual report on Form 10-K for the fiscal
year ended February 28, 2003 filed with the Securities and Exchange
Commission on May 29, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in the reports
filed under the Exchange Act is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Within the 90 days prior to the filing of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based upon and as of
the date of that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be
disclosed in the reports the Company files and submits under the Exchange
Act is recorded, processed, summarized and reported as and when required.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls or in other
factors that could have significantly affected those controls subsequent to
the date of the Company's most recent evaluation.
PART II - OTHER INFORMATION
===========================
ITEM 1. Legal Proceedings
In June 2003, Standard Microsystems Corporation was named as a defendant in
a patent infringement lawsuit filed by Analog Devices, Inc. in the United
States District Court for the District of Massachusetts (Analog Devices,
Inc. v. Standard Microsystems Corporation, Case Number 03 CIV 11216). The
Complaint filed in the suit alleges that some of the Company's products
infringe one or both of two Analog Devices' patents, and seeks injunctive
relief and unspecified damages. The Company has reviewed and investigated
the allegations in the Complaint and believes that the suit is without
merit.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Contract of Sale between Standard Microsystems Corporation and
RGC Kennedy Drive, LLC, dated May 22, 2003.
99.1 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002.
(b) Reports on Form 8-K
On April 10, 2003, Standard Microsystems Corporation filed a report on
Form 8-K relating to its operating results for the three and
twelve-month periods ended February 28, 2003, as presented in a press
release dated April 7, 2003.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STANDARD MICROSYSTEMS CORPORATION
DATE: July 15, 2003 /s/ Andrew M. Caggia
-------------------------
(Signature)
Andrew M. Caggia
Senior Vice President -
Finance (duly authorized
officer) and Chief Financial
Officer (principal financial
officer)
CERTIFICATION
I, Steven J. Bilodeau, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Standard
Microsystems Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: July 15, 2003 By: /s/ Steven J. Bilodeau
--------------------------
(signature)
Steven J. Bilodeau
Chairman of the Board, President and
Chief Executive Officer
CERTIFICATION
I, Andrew M. Caggia, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Standard
Microsystems Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: July 15, 2003 By: /s/ Andrew M. Caggia
-------------------------
(signature)
Andrew M. Caggia
Senior Vice President - Finance
and Chief Financial Officer