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, 2002
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 ________
As of May 31, 2002, there were 16,207,474 shares of the registrant's common
stock outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
May 31, February 28,
2002 2002
---- ----
Assets
Current assets:
Cash and cash equivalents $ 96,070 $ 98,065
Short-term investments 32,790 28,595
Accounts receivable, net 21,090 21,828
Inventories 21,292 17,585
Deferred income taxes 8,786 8,582
Other current assets 5,089 4,317
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Total current assets 185,117 178,972
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Property, plant and equipment, net 23,570 24,170
Investment in Chartered Semiconductor 9,956 9,992
Deferred income taxes 6,886 7,196
Other assets 16,842 15,733
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$ 242,371 $ 236,063
============================================================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 11,775 $ 8,477
Deferred income on shipments to
distributors 7,009 6,225
Accrued expenses, income taxes and
other liabilities 8,043 9,289
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Total current liabilities 26,827 23,991
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Other liabilities 6,889 6,973
Minority interest in subsidiary 11,652 11,646
Shareholders' equity:
Preferred stock - -
Common stock 1,764 1,728
Additional paid-in capital 123,546 119,505
Retained earnings 85,315 84,963
Treasury stock, at cost (15,675) (13,861)
Accumulated other comprehensive
income 2,053 1,118
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Total shareholders' equity 197,003 193,453
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$ 242,371 $ 236,063
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See Notes to Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended
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May 31,
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2002 2001
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Revenues $ 34,007 $ 30,836
Cost of goods sold 18,935 19,060
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Gross profit 15,072 11,776
Operating expenses:
Research and development 6,851 8,442
Selling, general and administrative 8,194 7,846
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Income (loss) from operations 27 (4,512)
Interest income 581 1,069
Other income (expense), net (15) 1,064
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Income (loss) before provision for income taxes
and minority interest 593 (2,379)
Provision for (benefit from) income taxes 154 (785)
Minority interest in net income of subsidiary 6 30
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Income (loss) from continuing operations 433 (1,624)
Loss from discontinued operations
(net of income taxes of $46 and $132) (81) (245)
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Net income (loss) $ 352 $ (1,869)
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Basic net income (loss) per share:
Income (loss) from continuing operations $ 0.03 $ (0.10)
Loss from discontinued operations (0.01) (0.02)
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Basic net income (loss) per share $ 0.02 $ (0.12)
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Diluted net income (loss) per share:
Income (loss) from continuing operations $ 0.02 $ (0.10)
Loss from discontinued operations (0.00) (0.02)
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Diluted net income (loss) per share $ 0.02 $ (0.12)
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Weighted average common shares outstanding:
Basic 16,060 16,102
Diluted 17,811 16,102
See Notes to Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended May 31,
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2002 2001
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Cash flows from operating activities:
Cash received from customers and licensees $ 36,239 $ 29,432
Cash paid to suppliers and employees (34,502) (33,345)
Interest received 525 1,618
Interest paid (20) (41)
Income taxes paid (70) (505)
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Net cash provided by (used for) operating
activities 2,172 (2,841)
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Cash flows from investing activities:
Capital expenditures (1,439) (1,728)
Sales of property, plant and equipment 5 2,059
Sales of long-term investments and options - 489
Purchases of short-term investments (11,795) (4,000)
Sales of short-term investments 7,600 9,629
Other (13) (30)
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Net cash provided by (used for) investing
activities (5,642) 6,419
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Cash flows from financing activities:
Proceeds from issuance of common stock 3,890 406
Purchases of treasury stock (2,595) -
Repayments of obligations under capital leases (264) (243)
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Net cash used for financing activities 1,031 163
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Effect of foreign exchange rate changes on cash
and cash equivalents 543 (122)
Net cash used for discontinued operation (99) (401)
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Net increase (decrease) in cash and cash
equivalents (1,995) 3,218
Cash and cash equivalents at beginning of period 98,065 99,545
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Cash and cash equivalents at end of period $ 96,070 $ 102,763
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Reconciliation of income (loss) from continuing
operations to net cash provided by (used for)
operating activities:
Income (loss) from continuing operations $ 433 $ (1,624)
Adjustments to reconcile income (loss) from
continuing operations to net cash provided
by (used for) operating activities:
Depreciation and amortization 2,179 2,892
Gains on sales of investments and property 5 (1,106)
Other adjustments, net (6) 8
Changes in operating assets and liabilities:
Accounts receivable 1,330 (518)
Inventories (3,631) 4,111
Accounts payable and accrued expenses and
other liabilities 3,496 (5,156)
Other changes, net (1,634) (1,448)
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Net cash provided by (used for) operating
activities $ 2,172 $ (2,841)
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See Notes to Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and 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 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 as of and for the three months ended May 31, 2002
and 2001. The February 28, 2002 Consolidated Balance Sheet was derived from
audited financial statements on that date.
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 revenue 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, 2002 included in the Company's Annual Report on
Form 10-K, as filed on April 26, 2002 with the Securities and Exchange
Commission. The results of operations for the three months ended May 31,
2002 are not necessarily indicative of the results to be expected for any
future periods.
2. 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, 2002 Feb. 28, 2002
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Raw Materials $ 507 $ 465
Work in Process 9,226 5,820
Finished Goods 11,559 11,300
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$ 21,292 $ 17,585
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Property, plant and equipment consists of the following (in thousands):
May 31, 2002 Feb. 28, 2002
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Land $ 3,434 $ 3,434
Buildings and Improvements 29,300 29,257
Machinery and Equipment 77,521 76,121
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110,255 108,812
Less: accumulated depreciation 86,685 84,642
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$ 23,570 $ 24,170
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3. Net Income (Loss) Per Share
Basic net income (loss) per share is calculated using the weighted-average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed 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 (loss) per
share are reconciled as follows (in thousands):
Three Months Ended
May 31,
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2002 2001
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Average shares outstanding for
basic net income (loss) per share 16,060 16,102
Dilutive effect of stock options 1,751 -
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Average shares outstanding for
diluted net income (loss) per share 17,811 16,102
==============================================================
Options covering 0.1 million shares were excluded from the computation of
diluted net income per share for the three months ended May 31, 2002
because their effect was antidilutuve. The impact of all outstanding
options, covering 4.2 million shares, was excluded from the calculation of
the net loss per share for the three months ended May 31, 2001.
4. Comprehensive Income
The Company's other comprehensive income (loss) 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
long-term equity investments classified as available-for-sale. The
components of the Company's comprehensive income (loss) for the three-month
periods ended May 31, 2002 and 2001 were as follows (in thousands):
Three Months Ended
May 31,
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2002 2001
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Net income (loss) $ 352 $(1,869)
Other comprehensive income (loss):
Change in foreign currency translation
adjustment
966 (290)
Change in unrealized gain (loss) on
investments (31) (253)
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Total comprehensive income (loss) $ 1,287 $(2,412)
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5. Business Restructuring
In November 2001, the Company's Board of Directors approved management's
plan to exit the PC chipset business, redirect the Company's resources, and
increase its focus on leveraging its core technologies toward higher growth
and higher margin businesses. This restructuring was announced on December
3, 2001. The decision to exit this business was based upon an assessment of
the PC chipset marketplace, and management's conclusions that the
opportunities for profitability in this marketplace had declined, and the
costs of entry had increased, to a point where further investments in PC
chipset technology were not justified. As a result of this restructuring,
the Company recorded a charge of $9.0 million in fiscal 2002, including
$5.3 million for impairments in asset values, $1.3 million for excess and
obsolete inventory, $1.9 million for long-term, non-cancelable lease
obligations, $0.3 million for a workforce reduction of 55 people, and $0.2
million in other costs.
The following is a summary of the changes in restructuring liabilities for
the three months ended May 31, 2002 (in thousands):
Business Non-Cash Cash Business
Restructuring Charges Payments Restructuring
Reserve as of Reserve as of
February 28, 2002 May 31, 2002
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Workforce reduction $ 2 $ (2) $ - $ -
Non-cancelable lease
obligations 1,771 - 97 1,674
Other charges 181 2 6 177
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$ 1,954 $ - $ 103 $ 1,851
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The Company completed its restructuring program during the fourth quarter
of fiscal 2002. Substantially all of the cash payments related to the
workforce reduction were made in that period. Payments related to
non-cancelable lease obligations will be paid over their respective terms,
through August 2008.
6. Discontinued Operations
The Company has been involved in several legal actions relating to past
divestitures of divisions and business units. These divestitures were
accounted for as discontinued operations, and accordingly, costs associated
with these actions, one of which has continued into fiscal 2003, are
reported as a Loss from discontinued operations on the Consolidated
Statements of Operations. These costs totaled $0.1 million and $0.4
million, before applicable income tax benefits, for the three-month periods
ended May 31, 2002 and 2001, respectively.
7. Shareholders Equity
Common Stock Repurchase Program - In October 1998, the Company's Board of
Directors approved a common stock repurchase program, allowing the Company
to repurchase up to one million shares of its common stock on the open
market or in private transactions. In July 2000, the authorization was
expanded from one million shares to two million shares. As of May 31, 2002,
the Company has repurchased 1,428,000 shares of common stock at a cost of
$15.7 million under this program, including 90,000 shares repurchased in
the first quarter of fiscal 2003 at a cost of $1.8 million. The Company
also paid $0.8 million in early March 2002 to settle 45,000 treasury shares
acquired at the end of February 2002. The Company currently holds
repurchased shares as treasury stock, reported at cost.
8. Subsequent Event - Business Combination
In April 2002, the Company announced the signing of a definitive agreement
to acquire 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. On June 3, 2002, the Company closed the acquisition,
acquiring all of Gain's outstanding capital stock by merger in exchange for
approximately 749,000 shares of SMSC common stock, valued at $17.9 million,
and $17.0 million of cash. Under the terms of the Merger Agreement,
approximately 224,000 of the shares have been placed into an escrow account
as security for certain indemnity obligations of Gain's former
shareholders. Up to $17.5 million of additional consideration, payable in
SMSC common stock and cash, may be issued to Gain's former shareholders
during fiscal 2004 upon satisfaction of certain future performance goals.
The Company also expects to incur approximately $1.7 million of costs
associated with this transaction.
This transaction will be accounted for using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations. The Company's preliminary allocation
of the purchase consideration includes approximately $7.1 million of
intangible assets acquired from Gain, excluding goodwill, and a one-time
charge of $0.1 million for purchased in-process research and development,
which is expected to be recorded in the second quarter of fiscal 2003. The
Company is currently finalizing this allocation, based upon independent
appraisals and management's estimates and judgments.
9. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires the use of the purchase method of accounting
for all business combinations initiated after June 30, 2001, thereby
eliminating use of the pooling-of-interests method. SFAS No.142 requires
goodwill and certain other intangible assets to be tested for impairment at
least annually and written down only when determined to be impaired,
replacing the previous accounting practice of ratably amortizing these
items over their estimated useful lives. Intangible assets other than
goodwill that have a finite life are amortized over their useful lives.
This statement applies to existing goodwill and intangible assets,
beginning with fiscal years starting after December 15, 2001. The adoption
of these pronouncements did not impact the Company's results of operations
or financial position.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees.
SFAS No. 143 is effective for financial statements issued for fiscal years
beginning after June 25, 2002. The Company currently does not expect this
pronouncement to have any impact on its results of operations or financial
position.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets. This statement establishes a
single accounting model, based upon the framework established in SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, for long-lived assets to be disposed of by sale
and addressed significant implementation issues. This statement is
effective for fiscal years beginning after December 15, 2001.
Implementation of this pronouncement did not have any impact on the
Company's results of operations or financial position.
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 Financial Statements and footnotes thereto contained in this
report.
Overview
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Description of Business
Standard Microsystems Corporation (the Company or SMSC) is a designer and
worldwide supplier of advanced digital and analog Input/Output (I/O) system and
connectivity solutions for a broad range of communications and computing
applications in the areas of Advanced I/O, Connectivity, Local Area Networking
and Embedded Control Systems. The Company is a fabless semiconductor supplier
whose products are manufactured by third party world-class semiconductor
foundries and assemblers. To insure 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
Input/Output (I/O) integrated circuits for desktop and mobile personal
computers. Advanced I/O circuits contain a variety of individual functions and
unique I/O controllers delivered in a single package, including floppy disk
control, keyboard control and BIOS, parallel and serial port control, and often
flash memory, infrared communications support, a real time clock, system
management and power management.
The Company serves the USB connectivity market with its family of connectivity
products, which provide solutions using both USB 1.1 and USB 2.0 technologies.
Embedded Networking products are designed to serve a variety of
machine-to-machine communications applications, such as set-top boxes, home
gateway products, printers and wireless communication interfaces.
The Company's headquarters are in Hauppauge, New York, and SMSC operates design
and validation centers in New York, Austin, Texas, San Jose, California, Tucson,
Arizona and Phoenix, Arizona and has sales offices in the United States, Europe
and Taiwan. The Company conducts most of its business in the Japanese market
through its majority-owned subsidiary, SMSC Japan.
Business Restructuring
In November 2001, the Company's Board of Directors approved management's plan to
exit the PC chipset business, redirect the Company's resources, and increase its
focus on leveraging its core technologies toward higher growth and higher margin
businesses. As a result, the Company discontinued further investments in PC
chipset development activities. This restructuring was announced on December 3,
2001.
The decision to exit this business was based upon an assessment of the PC
chipset marketplace, and management's conclusions that the opportunities for
profitability in this marketplace had declined, and the costs of entry had
increased, to a point where further investments in PC chipset technology were
not justified. In addition to the changing market prospects for PC chipset
products, the ongoing, unprecedented semiconductor market downturn had prevented
the Company from producing profits while continuing its significant investment
in PC chipset products.
As a result of this restructuring, the Company recorded a charge of $9.0 million
in fiscal 2002, including $5.3 million for impairments in asset values, $1.3
million for excess and obsolete inventory, $1.9 million for long-term,
non-cancelable lease obligations, $0.3 million for a workforce reduction of 55
people, and $0.2 million in other costs. The Company completed its restructuring
program during the fourth quarter of fiscal 2002. Substantially all of the $0.3
million in cash payments related to the workforce reduction were made in that
period. Payments related to the non-cancelable lease obligations will be paid
over their respective terms, through August 2008. Substantially all of the
remaining restructuring costs were non-cash costs.
By virtue of this restructuring, the Company has redeployed certain resources
previously devoted to chipset marketing and development programs back to its
core technologies in high-speed communications and computing applications. The
restructuring also reduced the Company's annual operating expenses by
approximately $7 million, but had minimal impact on current product sales, as
the Company had yet to achieve significant product sales of PC chipset products.
Business Acquisition
In April 2002, the Company announced the signing of a definitive agreement to
acquire 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.
On June 3, 2002, the Company closed the acquisition, acquiring all of Gain's
outstanding capital stock in exchange for approximately 749,000 shares of SMSC
common stock, valued at $17.9 million, and $17.0 million of cash. Under the
terms of the Merger Agreement, approximately 224,000 of the shares have been
placed into an escrow account as security for certain indemnity obligations of
Gain's former shareholders. Up to $17.5 million of additional consideration,
payable in SMSC common stock and cash, may be issued to Gain's former
shareholders during fiscal 2004 upon satisfaction of certain future performance
goals. The Company also expects to incur approximately $1.7 of costs associated
with this transaction.
This transaction will be accounted for using the purchase method of accounting
in accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations. The Company's preliminary allocation of the purchase
consideration includes approximately $7.1 million of intangible assets acquired
from Gain, excluding goodwill, and a one-time charge of $0.1 million for
purchased in-process research and development, which is expected to be recorded
in the second quarter of fiscal 2003. The Company is currently finalizing this
allocation, based upon independent appraisals and management's estimates and
judgments.
Results of Operations
- ---------------------
Revenues
The Company's revenues for the three months ended May 31, 2002 were $34.0
million, compared to $30.8 million for the three months ended May 31, 2001. This
increase reflects higher unit volume shipments in the first quarter of fiscal
2003, driven by Advanced I/O product design-wins achieved in fiscal 2002. The
Company believes it increased its Advanced I/O market share during fiscal 2002
on the strength of these key design-wins. Partially offsetting this increased
Advanced I/O revenue was a decrease in embedded products revenues, compared to
the prior year's first quarter, as the ongoing technology slump continues to
restrain demand for the broad applications served by these products, including
networking and telecommunications applications. However, revenues from embedded
products have now increased for three consecutive fiscal quarters, signaling
that demand for the Company's embedded products has begun to recover.
Revenues from customers outside of North America accounted for 89% of the
Company's revenues in the first quarter of fiscal 2003, consistent with the
prior year's first quarter. The Company expects that international shipments,
particularly to the Asia and Pacific Rim region, will continue to represent a
significant portion of its revenues.
From time to time, several key customers can account for a significant portion
of the Company's revenues. Revenues from one customer represented 19% for the
three months ended May 31, 2002, and 18% for the three months ended May 31,
2001, of the Company's revenues for those respective periods. Revenues from a
second customer represented 17% for the three months ended May 31, 2002, and 11%
for the three months ended May 31, 2001, of the Company's revenues for those
respective periods. Revenues from a third customer represented 10% of the
Company's revenues the three months ended May 31, 2002. No other customer
represented more than 10% of the Company's revenues in those periods. The
Company expects that its key customers will continue to account for a
significant portion of its revenues for the remainder of fiscal 2003 and for the
foreseeable future.
Gross Profit
Gross profit for the first quarter of fiscal 2003 was $15.1 million, or 44.3% of
revenues, compared to $11.8 million, or 38.2% of revenues reported for the first
quarter of fiscal 2002.
This improvement in gross profit reflects the combination of lower product
costs, new product introductions, and an increase in unit production. Also,
revenues for the first quarter of fiscal 2003 include several new Advanced I/O
devices, and, as is typical of this family of products, these products command
higher gross profit margins than mature products. Finally, record unit
production during the first quarter of fiscal 2003 resulted in more efficient
use of fixed overhead costs.
Research and Development Expenses
The Company's research and development expenses (R&D) consist of circuit design,
development and validation, product engineering, software development and
related support activities. The Company's ongoing commitment to research and
development is essential to maintaining product leadership in existing product
lines and to providing innovative product offerings, which, in turn, drive the
Company's opportunities for future growth.
Research and development expenses were $6.9 million for the three months ended
May 31, 2002, compared to $8.4 million for the three months ended May 31, 2001.
The prior year's first quarter included the impact of engineering staff,
prototype costs and other development costs associated with the Company's
then-active investment in PC chipset development programs. The decrease in
fiscal 2003's first quarter R&D reflects the impact of the Company's November
2001 business restructuring, whereby the Company discontinued its PC chipset
development and reduced its annual R&D expenses by approximately $5.0 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $8.2 million, or approximately
24% of revenues, in the first quarter of fiscal 2003, compared to $7.8 million,
or approximately 25% of revenues, in the first quarter of fiscal 2002.
Contributing to the dollar increase in the current year's first quarter, as
compared to the prior year's first quarter, were higher variable selling
expenses associated with increased product sales. Partially offsetting this
increase was the impact of the Company's November 2001 business restructuring,
which reduced annual selling, general and administrative expenses by
approximately $0.9 million.
Other Income and Expense
Interest income of $0.6 million in the first quarter of fiscal 2003 declined
from $1.1 million reported in the first quarter of fiscal 2002, reflecting lower
interest rates on short-term investments during the current year period. Other
income (expense), net, was negligible in the first quarter of fiscal 2003, but
totaled $1.1 million in the first quarter of fiscal 2002. The fiscal 2002 figure
included gains of $0.6 million realized from the sale of two underutilized
facilities and a gain of $0.5 million realized on the sale of a portion of an
equity investment, partially offset by $0.1 million of interest and other
expenses.
Income Taxes
The Company's income tax rate includes the federal, state and foreign statutory
tax rates, the impact of certain permanent differences between the book and tax
treatment of certain expenses, the impact of tax-exempt income and various tax
credits.
The Company recorded a provision for income taxes from continuing operations for
the three months ended May 31, 2002 at its expected effective rate for fiscal
2003 of approximately 26%. By comparison, the effective income tax benefit rate
was approximately 33% for the three months ended May 31, 2001. The expected
effective income tax rate for fiscal 2003 primarily reflects the impact of
tax-exempt interest income and income tax credits anticipated for fiscal 2003.
Discontinued Operations
The Company has been involved in several legal actions relating to past
divestitures of divisions and business units. These divestitures were accounted
for as discontinued operations, and accordingly, costs associated with these
actions, one of which has continued into fiscal 2003, are reported as a Loss
from discontinued operations on the Consolidated Statements of Operations. These
costs totaled $0.1 million, before applicable income tax benefits, in the first
quarter of fiscal 2003, compared to $0.4 million, before applicable income tax
benefits, in the first quarter of fiscal 2002.
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
$128.9 million as of May 31, 2002, compared to $126.7 million at February 28,
2002. The Company had $158.3 million of working capital, and a current ratio of
6.9 to 1, at May 31, 2002, compared to $155.0 million and 7.5 to 1,
respectively, at February 28, 2002. The Company had no bank debt at May 31, 2002
or February 28, 2002.
Operating activities generated $2.2 million of cash in the first quarter of
fiscal 2003. Fiscal 2003 operating cash flow was impacted by a $3.6 million
increase in inventories, as the Company stages for higher revenues anticipated
in the second quarter of fiscal 2003, substantially offset by a related $3.5
million increase in accounts payable, accrued expenses and other liabilities.
Capital spending during the first quarter of fiscal 2003 was $1.4 million.
Capital expenditures in fiscal 2003 are expected to exceed the $4.5 million
incurred in fiscal 2002, but will depend upon, among other factors, the level of
economic recovery, if any, in the high technology sector during this period.
Visibility regarding the level of that recovery is still unclear. Capital
expenditures are typically incurred to support the Company's semiconductor test
operation and to acquire hardware, software and other tools used in the design
of the Company's products. There were no material commitments for capital
expenditures as of May 31, 2002.
The Company generated $1.0 million of cash in its net financing activities
during the three months ended May 31, 2002. This activity included purchases of
90,000 shares treasury stock for $1.8 million under its common stock repurchase
program, and the payment of $0.8 million in early March 2002 to settle 45,000
treasury shares acquired at the end of February 2002. As of May 31, 2002, the
Company held 1,428,000 shares of treasury stock, at a cost of $15.7 million. The
exercise of stock options by employees and directors generated $3.9 million of
cash during the first quarter of fiscal 2003.
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. As noted in the Business Acquisition
section of this discussion, the Company recently completed the acquisition of
Gain Technology Corporation for a combination of SMSC common stock and $17.0
million of cash. From time to time, in the ordinary course of business, the
Company may again evaluate potential acquisitions of or investment in
complementary businesses, products or technologies and utilize cash to acquire
or invest in such businesses or products, or obtain the right to use
complementary 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
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In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of
the purchase method of accounting for all business combinations initiated after
June 30, 2001, thereby eliminating use of the pooling-of-interests method. SFAS
No.142 requires goodwill and certain other intangible assets to be tested for
impairment at least annually and written down only when determined to be
impaired, replacing the previous accounting practice of ratably amortizing these
items over their estimated useful lives. Intangible assets other than goodwill
that have finite lives are amortized over their useful lives. This statement
applies to existing goodwill and intangible assets, beginning with fiscal years
beginning after December 15, 2001. These pronouncements did not impact the
Company's results of operations or financial condition.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. SFAS No. 143 is effective for
financial statements issued for fiscal years beginning after June 25, 2002. The
Company currently does not expect this pronouncement to have any impact on its
results of operations or financial condition.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets. This statement establishes a single accounting
model, based upon the framework established in SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, for
long-lived assets to be disposed of by sale and addressed significant
implementation issues. This statement is effective for fiscal years beginning
after December 15, 2001. This pronouncement did not materially impact the
Company's results of operations or financial condition.
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, 2002, the Company's $32.8 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 May 31, 2002, 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 the effect of
a sudden change in market interest rates on short-term investments.
Equity Price Risk - The Company is exposed to an equity price risk on its
investment in Chartered Semiconductor Manufacturing, Ltd. and other publicly
traded equity investments. For every 10% adverse change in the market value of
Chartered Semiconductor common stock, the Company would experience a decrease of
approximately $1.0 million to its May 31, 2002 investment value. The Company has
sold call options covering this investment in the past and may do so in the
future to reduce some of this market risk.
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 March 2002, 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 were not significant. The contract is
scheduled to expire in March 2003.
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 report on Form 10-K
filed with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
During the three month period ended May 31, 2002, the Company filed a
Current Report on Form 8-K under Item 4 - Changes in Registrant's
Certifying Accountant, dated April 30, 2002 and filed on May 7, 2002.
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 2, 2002 /S/ Andrew M. Caggia
-----------------------
(Signature)
Andrew M. Caggia
Senior Vice President -
Finance (duly authorized
officer) and Chief Financial
Officer (principal financial
officer)