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 November 30, 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 November 30, 2003, there were 17,990,546 shares of the registrant's common
stock outstanding.
Standard Microsystems Corporation
Form 10-Q
For the Quarter Ended November 30, 2003
Table of Contents
Part I Financial Information
Item 1 Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of November 30, 2003 and
February 28, 2003
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended November 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended November 30, 2003 and 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
Item 1 Legal Proceedings
Item 6 Exhibits and Reports on Form 8-K
Signature
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands)
November 30, February 28,
2003 2003
---- ----
Assets
Current assets:
Cash and cash equivalents $ 125,186 $ 90,025
Short-term investments 36,752 22,872
Accounts receivable, net 21,544 22,738
Inventories 21,600 17,644
Deferred income taxes 13,411 8,545
Other current assets 5,164 8,710
- --------------------------------------------------------------------------------
Total current assets 223,657 170,534
- --------------------------------------------------------------------------------
Property, plant and equipment, net 19,852 22,257
Goodwill 29,595 29,773
Intangible assets, net 5,014 6,008
Deferred income taxes 8,916 11,779
Other assets 5,760 7,598
- --------------------------------------------------------------------------------
$ 292,794 $ 247,949
================================================================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 11,648 $ 9,114
Deferred income on shipments to distributors 6,614 5,943
Accrued expenses, income taxes
and other liabilities 11,675 9,838
- --------------------------------------------------------------------------------
Total current liabilities 29,937 24,895
- --------------------------------------------------------------------------------
Other liabilities 6,956 7,379
Minority interest in subsidiary 11,802 11,663
Shareholders' equity:
Preferred stock - -
Common stock 1,981 1,859
Additional paid-in capital 167,628 147,655
Retained earnings 95,475 77,492
Treasury stock, at cost (23,454) (23,454)
Deferred stock-based compensation (2,016) (2,102)
Accumulated other comprehensive income 4,485 2,562
- --------------------------------------------------------------------------------
Total shareholders' equity 244,099 204,012
- --------------------------------------------------------------------------------
$ 292,794 $ 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 Nine Months Ended
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November 30, November 30,
--------------------------- ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
Sales and revenues:
Product sales $ 52,282 $ 40,293 $ 142,751 $ 111,890
Intellectual property revenues 20,467 305 21,008 1,015
- ---------------------------------------------------------------------------------------------- ----------------------------
72,749 40,598 163,759 112,905
Cost of goods sold 30,350 22,653 79,192 62,777
- ---------------------------------------------------------------------------------------------- ----------------------------
Gross profit 42,399 17,945 84,567 50,128
Operating expenses (income):
Research and development 10,244 8,037 28,625 22,662
Selling, general and administrative 11,570 9,534 31,048 26,387
Amortization of intangible assets 317 360 994 807
Gains on real estate transactions - - (1,444) -
- ---------------------------------------------------------------------------------------------- ----------------------------
Income from operations 20,268 14 25,344 272
Interest income 617 496 1,451 1,610
Impairment of investments - (16,306) - (16,306)
Other expense, net (145) (78) (890) (100)
- ---------------------------------------------------------------------------------------------- ----------------------------
Income (loss) before provision for (benefit from) income
taxes and minority interest 20,740 (15,874) 25,905 (14,524)
Provision for (benefit from) income taxes 5,910 (6,854) 7,590 (6,503)
Minority interest in net income of subsidiary 43 12 139 10
- ---------------------------------------------------------------------------------------------- ----------------------------
Income (loss) from continuing operations 14,787 (9,032) 18,176 (8,031)
Loss from discontinued operations
(net of income tax benefits of $2, $69, $108, and $260) (3) (125) (193) (464)
- ---------------------------------------------------------------------------------------------- ----------------------------
Net income (loss) $ 14,784 $ (9,157) $ 17,983 $ (8,495)
============================================================================================== ============================
Basic net income (loss) per share:
Income (loss) from continuing operations $ 0.84 $ (0.54) $ 1.06 $ (0.49)
Loss from discontinued operations - (0.01) (0.01) (0.03)
- ---------------------------------------------------------------------------------------------- ----------------------------
Basic net income (loss) per share $ 0.84 $ (0.55) $ 1.05 $ (0.52)
============================================================================================== ============================
Diluted net income (loss) per share:
Income (loss) from continuing operations $ 0.77 $ (0.54) $ 1.00 $ (0.49)
Loss from discontinued operations - (0.01) (0.01) (0.03)
- ---------------------------------------------------------------------------------------------- ----------------------------
Diluted net income (loss) per share $ 0.77 $ (0.55) $ 0.99 $ (0.52)
============================================================================================== ============================
Weighted average common shares outstanding:
Basic 17,577 16,718 17,120 16,472
Diluted 19,242 16,718 18,143 16,472
See Notes to Condensed Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended November 30,
-----------------------------------
2003 2002
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Cash flows from operating activities:
Cash received from customers and licensees $ 164,609 $ 112,542
Cash paid to suppliers and employees (131,263) (108,203)
Interest received 1,361 1,803
Interest paid (51) (126)
Income taxes paid (363) (390)
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Net cash provided by operating activities 34,293 5,626
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (7,563) (4,346)
Sales of property, plant and equipment 7,121 -
Acquisition of Gain Technology Corporation - (15,669)
Sales of long-term investments 2,114 -
Purchases of short-term investments (36,675) (30,292)
Sales of short-term investments 22,795 28,785
Other 139 180
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Net cash used for investing activities (12,069) (21,342)
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Cash flows from financing activities:
Proceeds from issuance of common stock 13,698 4,716
Purchases of treasury stock - (10,375)
Repayments of obligations under capital leases and notes payable (1,249) (2,320)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 12,449 (7,979)
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Effect of foreign exchange rate changes on cash and cash equivalents 789 693
Cash used for discontinued operation (301) (866)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 35,161 (23,868)
Cash and cash equivalents at beginning of period 90,025 98,065
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Cash and cash equivalents at end of period $ 125,186 $ 74,197
===============================================================================================================
Reconciliation of income (loss) from continuing operations
to net cash provided by operating activities:
Income (loss) from continuing operations $ 18,176 $ (8,031)
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 8,142 7,822
Tax benefits from employee stock plans 5,615 1,707
Gains from sales of investments and property, net (686) (43)
Asset impairment charges - 16,306
Other adjustments, net (197) 36
Changes in operating assets and liabilities:
Accounts receivable 1,512 (1,928)
Inventories (3,444) (420)
Accounts payable and accrued expenses and other liabilities 3,891 (1,313)
Current and deferred income taxes 1,136 (8,643)
Other changes, net 148 133
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 34,293 $ 5,626
===============================================================================================================
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 and nine months ended
November 30, 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 Nine Months Ended
November 30, November 30,
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2003 2002 2003 2002
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Net income (loss) - as reported $ 14,784 $ (9,157) $ 17,983 $ (8,495)
Stock-based compensation expense included in
net income, net of taxes - as reported 232 200 691 548
Stock-based compensation expense determined
using fair value method, net of taxes 2,916 (2,190) (1,775) (5,236)
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Net income (loss) - pro forma $ 17,932 $ (11,147) $ 16,899 $ (13,183)
=========================================================================================================
Basic net income (loss) per share - as
reported $ 0.84 $ (0.55) $ 1.05 $ (0.52)
=========================================================================================================
Diluted net income (loss) per share - as
reported $ 0.77 $ (0.55) $ 0.99 $ (0.52)
=========================================================================================================
Basic net income (loss) per share - pro forma $ 1.02 $ (0.67) $ 0.99 $ (0.80)
=========================================================================================================
Diluted net income (loss) per share - pro
forma $ 1.02 $ (0.67) $ 0.99 $ (0.80)
=========================================================================================================
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):
Nov. 30, 2003 Feb. 28, 2003
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Raw materials $ 502 $ 761
Work in process 8,776 7,686
Finished goods 12,322 9,197
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$ 21,600 $ 17,644
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Property, plant and equipment consists of the following (in thousands):
Nov. 30, 2003 Feb. 28,2003
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Land $ 1,571 $ 3,434
Buildings and improvements 20,707 29,927
Machinery and equipment 84,410 81,562
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106,688 114,923
Less: accumulated depreciation 86,836 92,666
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$ 19,852 $ 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 11.
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 Nine Months Ended
November 30, November 30,
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2003 2002 2003 2002
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Average shares outstanding for
basic net income (loss) per share 17,577 16,718 17,120 16,472
Dilutive effect of stock options 1,665 - 1,023 -
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Average shares outstanding for
diluted net income (loss) per share 19,242 16,718 18,143 16,472
=======================================================================================================
Options covering 0.3 million and 1.4 million shares for the three-month
periods ended November 30, 2003 and 2002, respectively, and 1.6 million and
0.8 million shares for the nine-month periods ended November 30, 2003 and
2002, respectively, were excluded from the computation of average shares
outstanding for diluted net income per share 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 (loss) for the three and nine months ended
November 30, 2003 and 2002 were as follows (in thousands):
Three Months Ended Nine Months Ended
November 30, November 30,
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2003 2002 2003 2002
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Net income (loss) $ 14,784 $ (9,157) $ 17,983 $ (8,495)
Other comprehensive income (loss):
Change in foreign currency
translation adjustment 995 (509) 1,211 1,209
Change in unrealized gain (loss) on
marketable equity securities, net of taxes 12 22 47 (18)
Reclassification adjustment for loss on
marketable equity security included in net
income, net of taxes - 3,542 665 432
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Total comprehensive income (loss) $ 15,791 $ (6,102) $ 19,906 $ (6,872)
=======================================================================================================
During the nine months ended November 30, 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
amounts presented as reclassification adjustments in the preceding table
represent the amounts previously reported within Other comprehensive income
as an unrealized loss on this investment, net of income taxes, through the
applicable reporting dates.
6. Agreements with Intel Corporation
As previously reported, the Company and Intel Corporation (Intel) entered
into an agreement in 1987 providing for, among other things, a broad,
worldwide, non-exclusive patent cross-license, covering manufacturing
processes and products, thereby providing each company access to the
other's current and future patent portfolios.
In September 2003, the Company and Intel announced that they had enhanced
their intellectual property and business relationship. The companies agreed
to collaborate on certain future I/O and sensor products, and Intel agreed
to use the Company's devices on certain current and future generations of
Intel products. In addition, the Company agreed to limit its rights under
its 1987 patent cross-license with Intel to manufacture and sell
Northbridge products and Intel Architecture Microprocessors on behalf of
third parties. The companies also terminated an Investor Rights Agreement
between them, which had been entered into in connection with Intel's 1997
acquisition of 1,543,000 shares of the Company's common stock. Under this
agreement, Intel had certain information, corporate governance and other
rights with respect to the activities of the Company.
In respect of this new relationship, Intel will pay to the Company an
aggregate amount of $75 million, of which $20 million was paid and
recognized as intellectual property revenue in the third quarter of the
Company's fiscal 2004, $10 million will be paid in each of calendar years
2004 and 2005, $11 million will be paid in calendar year 2006, and $12
million will be paid in each of calendar years 2007 and 2008. Such amounts
are payable in equal quarterly installments within each calendar year, and
are subject to possible reduction, in a manner and to an extent to be
agreed by the parties, based upon the companies' collaboration and sales,
facilitated by Intel, of certain future new products of the Company.
7. 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
$36.1 million.
The unaudited pro forma results of operations for the nine months ended
November 30, 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.
Nine Months Ended
November 30, 2002
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(in thousands, except per share data) Autual Pro forma
-------------- ------------
Sales and revenues $ 112,905 $ 114,143
Net loss (8,495) (9,338)
===========================================================================
Basic and diluted net loss per share $ (0.52) $ (0.54)
===========================================================================
8. 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 nine months ended November 30, 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 (309) - (309)
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Business restructuring reserve at
November 30, 2003 $ 1,065 $ 45 $ 1,110
===========================================================================
Payments related to non-cancelable lease obligations are being paid over
their respective terms through August 2008.
9. Discontinued Operations
The Company had been involved in an arbitration with Accton Technology
Corporation (Accton) and SMC Networks, Inc. (Networks) related to claims
associated with the purchase of an 80.1% interest in Networks by Accton
from SMSC in October 1997. 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 Consolidated Statements of Operations. These costs were nominal during
the three months ended November 30, 2003, compared to $0.1 million for the
three months ended November 30, 2002, after applicable income tax benefits.
These costs totaled $0.2 million and $0.5 million in the nine-month periods
ended November 30, 2003 and 2002, respectively, after applicable income tax
benefits.
In September 2003, the arbitration panel issued its decision in this
action, which directed the release of a $2.5 million escrow account to SMSC
and awarded certain other payments among the parties.
In December 2003, the parties reached a final settlement of the award,
resulting in SMSC receiving $2.7 million in cash and realizing a gain of
$0.1 million, after income taxes, which will be reported as a Gain on
discontinued operations in the quarter ending February 29, 2004.
10. 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 $29.6
million of goodwill, after adjustments. During the nine months ended
November 30, 2003, the Company reduced the amount of goodwill relating to
this transaction from $29.8 million to $29.6 million, reflecting the
resolution of certain contingencies at amounts different than originally
estimated. 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 were
assigned an estimated useful life of six years. Customer contracts were
assigned useful lives of between one and ten years (with a weighted average
life of approximately seven years), and non-compete agreements were
assigned useful lives of two years. The weighted average useful life of all
intangible assets is approximately six years.
As of November 30, 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 $ 1,545 $ 4,634
Customer contracts 326 49 277
Non-compete agreements 410 307 103
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$ 6,915 $ 1,901 $ 5,014
=======================================================================
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
--------------------------------------------------
Remainder of fiscal 2004 $ 317
Fiscal 2005 1,114
Fiscal 2006 1,062
Fiscal 2007 1,062
Fiscal 2008 1,062
Fiscal 2009 290
==================================================
11. Real Estate Transactions
During the first quarter of fiscal 2004, the Company sold certain portions
of its Hauppauge, New York real estate holdings, for aggregate proceeds of
$7.0 million, net of transaction costs. These transactions resulted in an
aggregate 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 is being
recognized within the Company's operating results as a reduction of rent
expense on a straight-line basis over a 30-month period beginning in June
2003, consistent with the term of the lease. The Company's remaining rent
obligation over the term of this lease is approximately $0.7 million.
12. 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.
13. Litigation
In June 2003, Standard Microsystems Corporation was named as a defendant in
a patent infringement lawsuit filed by Analog Devices, Inc. (ADI) 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, as amended, alleges that some of the Company's
products infringe one or more of three of ADI's patents, and seeks
injunctive relief and unspecified damages. In September 2003, the Company
filed an Answer in the lawsuit, denying ADI's allegations and raising
affirmative defenses and counterclaims. Although it is premature to assess
the outcome of the litigation, the Company believes that the allegations
against it are without merit.
14. Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force (EITF), reached a
consensus on EITF Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 requires revenue arrangements with
multiple deliverables to be divided into separate units of accounting if
the deliverables in the arrangement meet certain criteria. The
arrangement's consideration should be allocated among the separate units of
accounting based on their relative fair values. Applicable revenue
recognition criteria should be considered separately for each unit. The
provisions of EITF Issue No. 00-21 are effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption
of this standard did not have a material impact on the Company's financial
condition or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of SFAS No. 123", which is
effective for financial statements for fiscal years ending after December
15, 2002, with early adoption permitted. SFAS No. 148 will enable 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 adoption of
this standard did not have a material impact on the Company's financial
condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity, and requires that an issuer classify a financial
instrument that is within its scope as a liability (or as an asset, in some
circumstances). Many of those instruments were previously classified as
equity. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption. The adoption
of this standard did not have a material impact on the Company's financial
condition 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, among others, 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. 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 non-PC 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
filed with the SEC, particularly the section 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 communications and 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
product 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, that
provide solutions for the needs of network printers, set-top boxes, home gateway
products, automobile navigation systems, cellular base stations, USB peripheral
devices 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.
Strategic Business Agreement
As previously reported, the Company and Intel Corporation (Intel) entered into
an agreement in 1987 providing for, among other things, a broad, worldwide,
non-exclusive patent cross-license, covering manufacturing processes and
products, thereby providing each company access to the other's current and
future patent portfolios.
In September 2003, the Company and Intel announced that they had enhanced their
intellectual property and business relationship. The companies agreed to
collaborate on certain future I/O and sensor products, and Intel agreed to use
the Company's devices on certain current and future generations of Intel
products. In addition, the Company agreed to limit its rights under its 1987
patent cross-license with Intel to manufacture and sell Northbridge products and
Intel Architecture Microprocessors on behalf of third parties. The companies
also terminated an Investor Rights Agreement between them, which had been
entered into in connection with Intel's 1997 acquisition of 1,543,000 shares of
the Company's common stock. Under this agreement, Intel had certain information,
corporate governance and other rights with respect to the activities of the
Company.
In respect of this new relationship, Intel will pay to the Company an aggregate
amount of $75 million, of which $20 million was paid and recognized as
intellectual property revenue in the third quarter of the Company's fiscal 2004,
$10 million will be paid in each of calendar years 2004 and 2005, $11 million
will be paid in calendar year 2006, and $12 million will be paid in each of
calendar years 2007 and 2008. Such amounts are payable in equal quarterly
installments within each calendar year, and are subject to possible reduction,
in a manner and to an extent to be agreed by the parties, based upon the
companies' collaboration and sales, facilitated by Intel, of certain future new
products of the Company.
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 nine-month
period ended November 30, 2003, there were no significant changes to any
critical accounting policies or to the related estimates and judgments involved
in applying these policies.
Results of Operations
- ---------------------
Sales and Revenues
Sales and revenues for the three months ended November 30, 2003 were $72.7
million, an increase of approximately 79% compared to $40.6 million reported in
the third quarter of the prior fiscal year. For the nine months ended November
30, 2003, sales and revenues were $163.8 million, compared to $112.9 million in
the prior year nine-month period, an increase of 45%. Sales and revenues for the
three- and nine-month periods ended November 30, 2003 include the initial $20.0
million payment from Intel under the above-described agreement. The Company
received no similar payment in the prior-year periods. Without that payment, the
increase in sales and revenues over the comparable year-earlier periods would
have been 30% for the three-month period and 27% for the nine-month period.
These increases reflect higher product sales in the current year periods in all
of the Company's major product categories, in terms of both units and dollars,
compared to the corresponding prior year periods. Increased PC demand has helped
drive increased unit PC I/O shipments. The Company's non-PC products, which are
primarily focused in networking and USB connectivity applications, achieved
higher product sales from recent new product introductions, as well as the
Company's ongoing focus on aggressively identifying and pursuing new market
opportunities in these product lines.
Sales and revenues from customers outside of North America accounted for
approximately 68% and 81% of the Company's sales and revenues for the three and
nine- month periods ended November 30, 2003, respectively, the largest portion
of which was to the Asia and Pacific Rim region. These percentages were 94% and
92%, respectively, excluding the $20 million intellectual property payment. The
comparable percentages for the three- and nine-month periods in the prior fiscal
year were 91% and 90%, respectively. 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 November 30, 2003 was $42.4 million, or
58.3% of sales and revenues, compared to $17.9 million, or 44.2% of sales and
revenues, for the three months ended November 30, 2002. For the nine months
ended November 30, 2003, gross profit was $84.6 million, or 51.6% of sales and
revenues, compared to $50.1 million, or 44.4% of sales and revenues, in the
prior year nine-month period. Without the $20.0 million intellectual property
payment from Intel, gross profit would have been 42.5% and 44.9% of sales and
revenues for the three- and nine-month periods ended November 30, 2003,
respectively.
The gross profit percentage in the current year's third quarter, without the
$20.0 million payment, was impacted by significant shipments of a low-margin
part that is no longer shipping in significant volumes. For the current year
nine-month period, the improvement in gross profit percentage reflects the $20.0
million intellectual property payment.
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 $10.2 million, or approximately 14% of sales and revenues (19%
without the $20 million intellectual property payment), for the three months
ended November 30, 2003, compared to $8.0 million, or approximately 20% of sales
and revenues, for the three months ended November 30, 2002. This dollar increase
reflects the impact of engineering staff additions, investments in advanced
semiconductor design tools and costs associated with development programs in
advanced semiconductor geometries.
For the nine months ended November 30, 2003, R&D expenses were $28.6 million,
compared to $22.7 million for the nine months ended November 30, 2002, which
equaled approximately 20% of sales and revenues in both periods, after excluding
the $20.0 million intellectual property payment from sales and revenues for the
current-year period. This increase reflects the impact of the factors noted in
the three-month discussion within the preceding paragraph, as well as 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $11.6 million, or
approximately 16% of sales and revenues, for the three months ended November 30,
2003, compared to $9.5 million, or approximately 23% of sales and revenues, for
the three months ended November 30, 2002. For the current nine-month period,
selling, general and administrative expenses were $31.0 million, or
approximately 19% of sales and revenues, compared to $26.4 million, or
approximately 23% of sales and revenues, in the prior year nine-month period.
The dollar increases reflect the impact of additional staff added to expand the
Company's sales and marketing capabilities, as well as incremental selling
costs, primarily sales commissions and incentives, associated with higher
product sales in the current year periods. The increases also reflect $0.8
million of expenses associated with completion of the agreement with Intel.
Excluding those expenses and excluding the $20 million intellectual property
payment from sales and revenues, selling, general and administrative expenses
would have been 20% and 21% of sales and revenues for the three- and nine-month
periods ended November 30, 2003, respectively.
Amortization of Intangible Assets
For the three and nine months ended November 30, 2003, the Company recorded
amortization expenses of $0.3 million and $1.0 million, respectively, for
intangible assets associated with the June 2002 acquisition of Gain. Comparable
amortization expense was $0.4 million and $0.8 million, respectively, in the
three and nine months ended November 30, 2002.
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 aggregate proceeds of $7.0
million, net of transaction costs. These transactions resulted in an aggregate
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 is being recognized within the Company's
operating results as a reduction in rent expense on a straight-line basis over a
30-month period beginning in June 2003, consistent with the term of the lease.
The Company's remaining rent obligation over the term of this lease is
approximately $0.7 million.
Other Income and Expense
During the first quarter of fiscal 2004, 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, for the
nine months ended November 30, 2003.
Provision For Income Taxes
The Company's provision for income taxes from continuing operations in the third
quarter of fiscal 2004 was $5.9 million, resulting in an effective income tax
rate of 28.5%. The benefit from income taxes from continuing operations in the
prior fiscal year's third quarter was $6.9 million, resulting in an effective
income tax benefit rate of 43.2%. For the nine months ended November 30, 2003,
the provision for income taxes from continuing operations was $7.6 million, for
an effective rate of 29.3%, compared to a benefit of $6.5 million, for an
effective income tax benefit rate of 44.8%, in last year's nine-month period.
The Company expects its effective tax rate on income from continuing operations
to be approximately 20.0% in fiscal 2004, excluding the income tax effects of
special real estate and equity investment sales, special intellectual property
revenues and tax benefits related to prior years. Income taxes on the
aforementioned special transactions are recorded when they occur, at the
Company's incremental income tax rate of approximately 36.0%. The overall
expected fiscal 2004 effective tax rate on income from continuing operations,
including all special transactions, is expected to be between 27.0% and 28.0%.
The Company's effective income tax rate primarily reflects statutory Federal and
state income tax rates, adjusted for the impact of tax-exempt interest income
and anticipated income tax credits. Excluding the tax effect of special
transactions in both fiscal years, the higher effective rate expected for fiscal
2004, compared to fiscal 2003, recognizes the impact of higher income from
continuing operations expected in the current year, which in turn dilutes the
percentage impact of income tax credits and tax-exempt interest income on the
Company's provision for income taxes.
The provision for income taxes from continuing operation for the nine months
ended November 30, 2003 has not been reduced by approximately $5.6 million of
income tax benefits related to the Company's stock option plans. This tax
benefit has been credited to additional paid-in capital.
Discontinued Operations
The Company has been involved in an arbitration with Accton Technology
Corporation (Accton) and SMC Networks, Inc. (Networks) related to claims
associated with the purchase of an 80.1% interest in Networks by Accton from
SMSC in October 1997. 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 Consolidated
Statements of Operations. These costs were nominal during the three months ended
November 30, 2003, compared to $0.1 million for the three months ended November
30, 2002, after applicable income tax benefits. These costs totaled $0.2 million
and $0.5 million in the nine-month periods ended November 30, 2003 and 2002,
respectively, after applicable income tax benefits.
In September 2003, the arbitration panel issued its decision in this action,
which directed the release of a $2.5 million escrow account to SMSC and awarded
certain other payments among the parties.
In December 2003, the parties reached a final settlement of the award, resulting
in SMSC receiving $2.7 million in cash and realizing a gain of $0.1 million,
after income taxes, which will be reported as a Gain on discontinued operations
in the quarter ending February 29, 2004.
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
$161.9 million as of November 30, 2003, compared to $112.9 million at February
28, 2003. This increase reflects, among other things, receipt of a $20.0 million
intellectual property payment, $13.7 million of proceeds from stock issuances
under the Company's stock option plans, $7.0 million of cash provided by sales
of real estate and $2.1 million of cash provided by sales of the Company's
investment in Chartered.
Operating activities generated $34.3 million of cash, including the $20.0
million intellectual property payment, during the nine months ended November 30,
2003. Investing activities consumed $12.1 million of cash for the same period,
due principally to $13.9 million of net purchases of short-term investments.
Financing activities provided $12.4 million of cash during the first nine months
of fiscal 2004, including $13.7 million of proceeds from the issuance of stock
under the Company's stock option plans.
The Company's inventories were $21.6 million at November 30, 2003, compared to
$17.6 million at February 28, 2003, commensurate with expected demand for the
Company's products.
Accounts receivable decreased from $22.7 million at February 28, 2003 to $21.5
million at November 30, 2003, despite the increase in sales and revenues in the
three-month periods preceding those dates, due to strong collections. The
Company's accounts receivable portfolio remains almost entirely current.
Capital expenditures for the nine months ended November 30, 2003 were $8.7
million, of which $7.6 million was paid in cash. The current year's capital
investments include an expenditure of $4.3 million for advanced design tools,
which is being financed on a short-term basis by the supplier with payment terms
extending through March 1, 2004. As of November 30, 2003, this obligation totals
$1.1 million, which is reported within Accounts payable. There were no material
commitments for capital expenditures as of November 30, 2003.
During the first nine months 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 authorized for repurchase. As of
November 30, 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 November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF
Issue No. 00-21 requires revenue arrangements with multiple deliverables to be
divided into separate units of accounting if the deliverables in the arrangement
meet certain criteria. The arrangement's consideration should be allocated among
the separate units of accounting based on their relative fair values. Applicable
revenue recognition criteria should be considered separately for each unit. The
provisions of EITF Issue No. 00-21 are effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
this standard did not have a material impact on the Company's financial
condition or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of SFAS No. 123", which is effective for financial
statements for fiscal years ending after December 15, 2002, with early adoption
permitted. SFAS No. 148 will enable 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 adoption of this standard did
not have a material impact on the Company's financial condition or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
requires that an issuer classify a financial instrument that is within its scope
as a liability (or as an asset, in some circumstances). Many of those
instruments were previously classified as equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at the beginning of the interim period of adoption. The
adoption of this standard did not have a material impact on the Company's
financial condition 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 November 30, 2003, the Company's $36.8 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 November 30, 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 November 30, 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.
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
The Company has carried out an evaluation under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. There are inherent limitations
to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of
the controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives. Based upon the Company's evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that, as of November 30, 2003, the
disclosure controls and procedures are effective to provide reasonable assurance
that information required to be disclosed in the reports the Company files under
the Exchange Act is recorded, processed, summarized and reported as and when
required.
There has been no change in the Company's internal control over financial
reporting during the Company's fiscal quarter covered by this report that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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. (ADI) 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, as
amended, alleges that some of the Company's products infringe one or more of
three of ADI's patents, and seeks injunctive relief and unspecified damages. In
September 2003, the Company filed an Answer in the lawsuit, denying ADI's
allegations and raising affirmative defenses and counterclaims. Although it is
premature to assess the outcome of the litigation, the Company believes that the
allegations against it are without merit.
The Company had been involved in an arbitration with Accton Technology
Corporation (Accton) and SMC Networks, Inc. (Networks) related to claims
associated with the purchase of an 80.1% interest in Networks by Accton from
SMSC in October 1997. 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 Consolidated
Statements of Operations. These costs were nominal during the three months ended
November 30, 2003, compared to $0.1 million for the three months ended November
30, 2002, after applicable income tax benefits. These costs totaled $0.2 million
and $0.5 million in the nine-month periods ended November 30, 2003 and 2002,
respectively, after applicable income tax benefits.
In September 2003, the arbitration panel issued its decision in this action,
which directed the release of a $2.5 million escrow account to SMSC and awarded
certain other payments among the parties.
In December 2003, the parties reached a final settlement of the award, resulting
in SMSC receiving $2.7 million in cash and realizing a gain of $0.1 million,
after income taxes, which will be reported as a Gain on discontinued operations
in the quarter ending February 29, 2004.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 - Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
(17 CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
(17 CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 - Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On September 25, 2003, SMSC filed a report on Form 8-K relating to its
arbitration with Accton Technology Corporation and SMC Networks, Inc.
On September 18, 2003 SMSC filed a report on Form 8-K relating to a press
release issued on September 16, 2003, announcing the Company's second
quarter fiscal 2004 operating results.
On September 9, 2003, SMSC filed a report on Form 8-K relating to its
September 8, 2003 announcement that Standard Microsystems Corporation and
Intel Corporation have enhanced their intellectual property and business
relationship.
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: January 13, 2004 /s/ Andrew M. Caggia
-------------------------
(Signature)
Andrew M. Caggia
Senior Vice President - Finance
(duly authorized officer) and
Chief Financial Officer
(principal financial officer)