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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended May 31, 2007 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-7422
STANDARD MICROSYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE | 11-2234952 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
80 Arkay Drive, Hauppauge, New York | 11788-3728 | |
(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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero | Accelerated filerþ | Non-accelerated filero |
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act). Yes o No þ
As of May 31, 2007 there were 23,175,709 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
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PART I
Item 1.��— | Financial Statements |
STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
(in thousands)
May 31, | February 28, | |||||||
2007 | 2007 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 30,060 | $ | 36,255 | ||||
Short-term investments | 139,750 | 123,768 | ||||||
Accounts receivable, net | 47,735 | 48,014 | ||||||
Inventories | 49,816 | 50,873 | ||||||
Deferred income taxes | 19,047 | 19,312 | ||||||
Other current assets | 9,205 | 8,751 | ||||||
Total current assets | 295,613 | 286,973 | ||||||
Property, plant and equipment, net | 57,844 | 58,020 | ||||||
Goodwill | 99,386 | 98,259 | ||||||
Intangible assets, net | 39,190 | 40,256 | ||||||
Deferred income taxes | 7,256 | 7,094 | ||||||
Other assets | 3,088 | 3,037 | ||||||
TOTAL ASSETS | $ | 502,377 | $ | 493,639 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 22,246 | $ | 25,617 | ||||
Deferred income on shipments to distributors | 16,653 | 12,752 | ||||||
Accrued expenses, income taxes and other liabilities | 32,351 | 36,378 | ||||||
Total current liabilities | 71,250 | 74,747 | ||||||
Deferred income taxes | 9,859 | 10,100 | ||||||
Other liabilities | 14,755 | 16,850 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Preferred stock | — | — | ||||||
Common stock | 2,542 | 2,511 | ||||||
Additional paid-in capital | 284,835 | 276,701 | ||||||
Retained earnings | 144,347 | 139,657 | ||||||
Treasury stock, at cost | (32,038 | ) | (32,038 | ) | ||||
Accumulated other comprehensive income | 6,827 | 5,111 | ||||||
Total shareholders’ equity | 406,513 | 391,942 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 502,377 | $ | 493,639 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
Three Months Ended | ||||||||
May 31, | ||||||||
2007 | 2006 | |||||||
(Unaudited) | ||||||||
Product sales | $ | 78,513 | $ | 83,292 | ||||
Intellectual property revenues | 3,033 | 2,852 | ||||||
81,546 | 86,144 | |||||||
Costs and expenses: | ||||||||
Costs of goods sold (exclusive of amortization shown below) | 38,851 | 44,914 | ||||||
Research and development | 17,989 | 15,168 | ||||||
Amortization of intangible assets | 1,641 | 1,569 | ||||||
Selling, general and administrative | 20,271 | 13,803 | ||||||
Income from operations | 2,794 | 10,690 | ||||||
Interest income | 1,402 | 1,146 | ||||||
Interest expense | (85 | ) | (32 | ) | ||||
Other income (expense), net | 358 | (63 | ) | |||||
Income before provision for income taxes | 4,469 | 11,741 | ||||||
Provision for income taxes | 1,267 | 3,108 | ||||||
Net income | $ | 3,202 | $ | 8,633 | ||||
Basic net income per share: | $ | 0.14 | $ | 0.40 | ||||
Diluted net income per share: | $ | 0.13 | $ | 0.37 | ||||
Weighted average common shares outstanding: | ||||||||
Basic | 22,790 | 21,824 | ||||||
Diluted | 23,852 | 23,147 |
See accompanying Notes to Condensed Consolidated Financial Statements
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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
May 31, | ||||||||
2007 | 2006 | |||||||
(Unaudited) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 3,202 | $ | 8,633 | ||||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | ||||||||
Depreciation and amortization | 5,013 | 4,084 | ||||||
Excess tax benefits associated with stock-based compensation | (271 | ) | (126 | ) | ||||
Stock-based compensation | 4,109 | (2,559 | ) | |||||
Deferred income taxes | (137 | ) | 2,602 | |||||
Changes in operating assets and liabilities, net of business acquisition impact: | ||||||||
Accounts receivable | 595 | (6,183 | ) | |||||
Inventories | 1,211 | (7,278 | ) | |||||
Accounts payable, accrued expenses and other liabilities | (6,376 | ) | (1,529 | ) | ||||
Deferred income | 3,901 | 1,803 | ||||||
Income taxes payable | (3,285 | ) | 4,126 | |||||
Other changes, net | 437 | (3,401 | ) | |||||
Net cash provided by operating activities | 8,399 | 172 | ||||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (3,174 | ) | (10,201 | ) | ||||
Acquisition of OASIS SiliconSystems Holding AG, net of cash acquired | — | (12,555 | ) | |||||
Purchases of short-term investments | (164,252 | ) | (97,932 | ) | ||||
Sales of short-term investments | 148,270 | 104,010 | ||||||
Net cash used in investing activities | (19,156 | ) | (16,678 | ) | ||||
Cash flows from financing activities: | ||||||||
Excess tax benefits associated with stock-based compensation | 271 | 126 | ||||||
Proceeds from issuance of common stock | 4,972 | 1,462 | ||||||
Purchases of treasury stock | — | (4,326 | ) | |||||
Repayments of obligations under capital leases and notes payable | (637 | ) | (142 | ) | ||||
Net cash provided by (used in) financing activities | 4,606 | (2,880 | ) | |||||
Effect of foreign exchange rate changes on cash and cash equivalents | (44 | ) | (46 | ) | ||||
Net decrease in cash and cash equivalents | (6,195 | ) | (19,432 | ) | ||||
Cash and cash equivalents at beginning of period | 36,255 | 43,932 | ||||||
Cash and cash equivalents at end of period | $ | 30,060 | $ | 24,500 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
1. | BASIS OF PRESENTATION |
The accompanying unaudited condensed consolidated financial information of Standard Microsystems Corporation and subsidiaries (“SMSC” or the “Company”) has been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”), 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 May 31, 2007 and for the three months ended May 31, 2007 and 2006. The February 28, 2007 balance sheet information has been derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
The preparation of financial statements in conformity with U.S. GAAP 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 fiscal year ended February 28, 2007 included in the Company’s Annual Report onForm 10-K, as filed on April 30, 2007 with the SEC.
The results of operations for the three month period ended May 31, 2007 are not necessarily indicative of results to be expected for the full fiscal year or any future periods.
Certain items in the prior periods’ consolidated financial statements have been revised to conform to the fiscal 2008 presentation. Specifically, the Company had previously included rebates payable on product sales as a component of Accounts receivable, net in its consolidated balance sheets. Such rebates will now be included as a component of Accrued expenses, income taxes and other liabilities. This change resulted in an increase in both Accounts receivable, net and Accrued expenses, income taxes and other liabilities of $4.5 million and $7.4 million as of May 31, 2007 and February 28, 2007, respectively. The Condensed Consolidated Statement of Cash Flows for the three months ended May 31, 2006 has also been revised to reflect this change.
2. | STOCK-BASED COMPENSATION |
The Company has several stock-based compensation plans in effect under which incentive stock options, non-qualified stock options, restricted stock awards (“RSAs”) and stock appreciation rights (“SARs”) are granted to employees and directors. Stock options and SARs are granted with exercise prices equal to the fair value of the underlying shares on the date of grant.
The following table summarizes the stock-based compensation expense for stock options, RSAs and SARs under SFAS No. 123R,Share-Based Payments(“SFAS 123R”) included in our income from operations (in thousands):
Three Months | Three Months | |||||||
Ended | Ended | |||||||
May 31, 2007 | May 31, 2006 | |||||||
Costs of goods sold | $ | 377 | $ | (451 | ) | |||
Research and development | 1,843 | (322 | ) | |||||
Selling, general and administrative | 2,587 | (1,786 | ) | |||||
Stock-based compensation expense (benefit) under SFAS 123R, before income tax benefit (provision) | 4,807 | (2,559 | ) | |||||
Tax benefit (provision) | 1,731 | (921 | ) | |||||
Stock-based compensation expense (benefit) under SFAS 123R, after income tax benefit (provision) | $ | 3,076 | $ | (1,638 | ) | |||
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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Employee and Director Stock Option Plans
Under the Company’s stock option plans, the Compensation Committee of the Board of Directors is authorized to grant options to purchase shares of common stock. The purpose of these plans is to promote the interests of the Company and its shareholders by providing officers, directors and key employees with additional incentives and the opportunity, through stock ownership, to better align their interests with the Company’s and enhance their personal interest in its continued success. Options under inducement plans may only be offered to new employees. Options are granted at prices not less than the fair market value on the date of grant. As of May 31, 2007, 676,446 shares of common stock were available for future grants of stock options, of which 500,210 shares can also be issued as restricted stock awards. The grant date fair values of stock options are recorded as compensation expense ratably over the vesting period of each award. Option awards generally vest over four or five-year periods, and expire no later than ten years from the date of grant.
Stock option plan activity is summarized below(shares in thousands):
Weighted | ||||||||||||||||
Average | Weighted | |||||||||||||||
Fiscal | Exercise | Average | ||||||||||||||
2008 | Prices | Contractual | Aggregate | |||||||||||||
Shares | per Share | Term | Intrinsic Value | |||||||||||||
Options outstanding, March 1, 2007 | 4,302 | $ | 20.81 | |||||||||||||
Granted | 65 | $ | 32.82 | |||||||||||||
Exercised | (292 | ) | $ | 17.29 | ||||||||||||
Canceled or expired | (51 | ) | $ | 21.54 | ||||||||||||
Options outstanding, May 31, 2007 | 4,024 | $ | 21.25 | 6.8 | $ | 39,695,510 | ||||||||||
Options exercisable, May 31, 2007 | 1,761 | $ | 18.54 | 5.4 | $ | 22,013,628 |
The total remaining unrecognized compensation cost related to SMSC’s employee and director stock option plans is $23.5 million as of May 31, 2007. The weighted average period over which the cost is expected to be recognized is 2.30 years.
The Company recognizes compensation expense for options using the Black-Scholes option pricing model. The Black-Scholes model requires certain assumptions, judgements and estimates by the Company to determine fair value, including expected stock price volatility, risk-free interest rate, and expected life. The Company based the expected volatility on historical volatility. Additionally, the Company based the expected life of options granted on an actuarial model. There are no dividends expected to be paid on the Company’s common stock over the expected lives estimated.
The weighted average fair values per share of stock options granted in connection with the Company’s stock incentive plans have been estimated utilizing the following assumptions:
Three Months | Three Months | |||||||
Ended | Ended | |||||||
May 31, | May 31, | |||||||
2007 | 2006 | |||||||
Dividend yield | — | — | ||||||
Expected volatility | 52 | % | 59 | % | ||||
Risk-free interest rates | 4.59 | % | 4.59 | % | ||||
Expected lives (in years) | 4.46 | 4.42 |
Restricted Stock Awards
The Company provides common stock awards to certain officers and key employees. The Company grants these awards, at its discretion, from the shares available under its 2001 and 2003 Stock Option and Restricted Stock
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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Plans and its 2005 Inducement Stock Option and Restricted Stock Plan. The shares awarded are typically earned in 25%, 25% and 50% increments on the first, second and third anniversaries of the award, respectively, and are distributed provided the employee has remained employed by the Company through such anniversary dates; otherwise the unearned shares are forfeited. The grant date fair value of these shares at the date of award is recorded as compensation expense ratably as vested over the three-year periods from the respective award dates, as adjusted for forfeitures of unvested awards.
Restricted stock activity for the three months ended May 31, 2007 is set forth below (shares in thousands):
Number of | Grant-Date | |||||||
Shares | Fair Value | |||||||
Restricted stock shares outstanding, March 1, 2007 | 231 | $ | 22.71 | |||||
Granted | 21 | $ | 32.05 | |||||
Canceled or expired | (1 | ) | $ | 24.74 | ||||
Vested | (49 | ) | $ | 20.55 | ||||
Restricted stock shares outstanding, May 31, 2007 | 202 | $ | 24.20 | |||||
The total unrecognized compensation cost related to SMSC’s restricted stock plans is $4.0 million as of May 31, 2007. The weighted average period over which the cost is expected to be recognized is 1.57 years.
Stock Appreciation Rights Plans
In September 2004 and September 2006, the Company’s Board of Directors approved Stock Appreciation Rights (SAR) Plans (the “Plans”), the purpose of which is to attract, retain, reward and motivate employees and consultants to promote the Company’s best interests and to share in its future success. The Plans authorize the Board’s Compensation Committee to grant up to four million SAR awards to eligible officers, employees and consultants. Each award, when granted, provides the participant with the right to receive payment in cash, upon exercise, for the appreciation in market value of a share of SMSC common stock over the award’s exercise price. On July 11, 2006, the Company’s Board of Directors approved the 2006 Director Stock Appreciation Rights Plan. The Company can grant up to 200,000 Director SARs under this plan. The exercise price of a SAR is equal to the closing market price of SMSC stock on the date of grant. SAR awards generally vest over four or five-year periods, and expire no later than ten years from the date of grant.
Activity under the Stock Appreciation Rights Plans is summarized below (shares in thousands):
Weighted | ||||||||||||||||
Average | Weighted | |||||||||||||||
Exercise | Average | |||||||||||||||
Fiscal 2008 | Prices | Contractual | Aggregate | |||||||||||||
Shares | per Share | Term | Intrinsic Value | |||||||||||||
SARs outstanding, March 1, 2007 | 2,775 | $ | 25.54 | |||||||||||||
Granted | 158 | $ | 32.99 | |||||||||||||
Exercised | (57 | ) | $ | 18.35 | ||||||||||||
Canceled or expired | (19 | ) | $ | 29.07 | ||||||||||||
SARs outstanding, May 31, 2007 | 2,857 | $ | 26.07 | 8.6 | $ | 14,940,045 | ||||||||||
SARs exercisable, May 31, 2007 | 305 | $ | 19.50 | 7.1 | $ | 3,536,991 | ||||||||||
The total unrecognized compensation cost related to SMSC’s stock appreciation rights plans is $25.2 million as of May 31, 2007. The weighted average period over which the cost is expected to be recognized is 1.89 years.
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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted average fair values per share of stock appreciation rights granted in connection with the Company’s stock incentive plans have been estimated utilizing the following assumptions:
Three Months | Three Months | |||||||
Ended | Ended | |||||||
May 31, | May 31, | |||||||
2007 | 2006 | |||||||
Dividend yield | — | — | ||||||
Expected volatility | 52 | % | 59 | % | ||||
Risk-free interest rates | 4.59 | % | 4.97 | % | ||||
Expected lives (in years) | 1.79-4.34 | 2.75-4.31 |
3. | INVESTMENTS |
Short-term investments consist of investments in obligations with maturities of between three and twelve months, at acquisition, and investments in auction rate securities. All of these investments are classified as available-for-sale. The costs of these short-term investments approximate their market values as of May 31, and February 28, 2007.
The Company invests excess cash in a variety of marketable securities, including auction rate securities. Auction rate securities have long-term underlying maturities, but have interest rates that are reset every 90 days or less, at which time the securities can typically be purchased or sold, creating a highly liquid market. The Company’s intent is not to hold these securities to maturity, but rather to use the interest rate reset feature to provide the opportunity to maximize returns while preserving liquidity. The Company’s investment in these securities provides higher yields than money market and other cash equivalent investments.
4. | BALANCE SHEET DATA |
Inventories are valued at the lower offirst-in, first-out cost or market and consist of the following (in thousands):
May 31, | February 28, | |||||||
2007 | 2007 | |||||||
Raw materials | $ | 2,154 | $ | 2,307 | ||||
Work-in-process | 18,117 | 20,861 | ||||||
Finished goods | 29,545 | 27,705 | ||||||
$ | 49,816 | $ | 50,873 | |||||
Property, plant and equipment consist of the following (in thousands):
May 31, | February 28, | |||||||
2007 | 2007 | |||||||
Land | $ | 578 | $ | 578 | ||||
Buildings and improvements | 32,487 | 32,303 | ||||||
Machinery and equipment | 108,482 | 104,281 | ||||||
141,547 | 137,162 | |||||||
Less: accumulated depreciation | (83,703 | ) | (79,142 | ) | ||||
$ | 57,844 | $ | 58,020 | |||||
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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. | 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 unvested restricted stock awards and shares issuable through stock options.
The shares used in calculating basic and diluted net income per share for the Condensed Consolidated Income Statements included within this report are reconciled as follows (in thousands):
Three Months Ended | ||||||||
May 31, | ||||||||
2007 | 2006 | |||||||
Average shares outstanding for basic net income per share | 22,790 | 21,824 | ||||||
Dilutive effect of stock options and unvested restricted stock awards | 1,062 | 1,323 | ||||||
Average shares outstanding for diluted net income per share | 23,852 | 23,147 | ||||||
Options covering 0.4 million and 0.6 million shares for the three month periods ended May 31, 2007 and 2006, respectively, were excluded from the computation of average shares outstanding for diluted net income per share because their effect was antidilutive.
6. | 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, unrealized gains and losses on equity investments classified as available-for-sale, and changes in minimum pension liability adjustments.
The components of the Company’s comprehensive income for the three month period ended May 31, 2007 and 2006 were as follows (in thousands):
Three Months | ||||||||
Ended May 31, | ||||||||
2007 | 2006 | |||||||
Net income | $ | 3,202 | $ | 8,633 | ||||
Other comprehensive income: | ||||||||
Change in foreign currency translation adjustments | 1,666 | 4,228 | ||||||
Change in unrealized gain (loss) on marketable equity securities, net of taxes | 3 | (8 | ) | |||||
Change in minimum pension liability adjustment, net of taxes | 47 | — | ||||||
Total comprehensive income | $ | 4,918 | $ | 12,853 | ||||
The components of the Company’s accumulated other comprehensive income as of May 31, 2007 and February 28, 2007, net of taxes, were as follows (in thousands):
May 31, | February 28, | |||||||
2007 | 2007 | |||||||
Unrealized gains and losses on investments | $ | (18 | ) | $ | (21 | ) | ||
Foreign currency items | 7,302 | 5,636 | ||||||
Minimum pension liability adjustment | (457 | ) | (504 | ) | ||||
Total accumulated other comprehensive income | $ | 6,827 | $ | 5,111 | ||||
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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. | BUSINESS RESTRUCTURING |
In December 2001, the Company announced a restructuring plan for its exit from the PC chipset business.
The Company carried a reserve related to this restructuring of approximately $0.2 million at May 31, 2007 and February 28, 2007 for future payments against previously reserved non-cancelable lease obligations, which will continue through their respective lease terms through August 2008.
8. | GOODWILL AND INTANGIBLE ASSETS |
The Company’s March 2005 acquisition of OASIS included the acquisition of $42.9 million of finite-lived intangible assets, an indefinite-lived trademark of $5.4 million, and goodwill of $67.8 million. The Company’s June 2002 acquisition of Tucson, Arizona-based Gain Technology Corporation included the acquisition of $7.1 million of finite-lived intangible assets and $29.4 million of goodwill, after adjustments.
In accordance with the provisions of SFAS No. 142,Goodwill and Other Intangible Assets (“SFAS 142”), goodwill is not amortized, but is tested for impairment in value at least annually, or when events or circumstances indicate possible impairment in value. The Company performs an annual goodwill impairment review during the fourth quarter of each fiscal year, and completed its most recent annual review during the fourth quarter of fiscal 2007; no impairment in value was identified.
All finite-lived intangible assets are being amortized on a straight-line basis, which approximates the pattern in which the estimated economic benefits of the assets are realized, over their estimated useful lives. Existing technologies have been assigned estimated useful lives of between six and eight years, with a weighted-average useful life of approximately eight years. Customer relationships and contracts have been assigned useful lives of between one and ten years, with a weighted-average useful life of approximately eight years.
Goodwill and intangible assets that are denominated in a functional currency other than the U.S. dollar have been translated into U.S. dollars using the exchange rate in effect on the reporting date. As of May 31, 2007 and February 28, 2007, the Company’s goodwill was $99.4 million and $98.3 million, respectively. As of May 31, 2007 and February 28, 2007, the Company’s identifiable intangible assets consisted of the following (in thousands):
May 31, 2007 | February 28, 2007 | |||||||||||||||
Accumulated | Accumulated | |||||||||||||||
Cost | Amortization | Cost | Amortization | |||||||||||||
Purchased technologies | $ | 39,204 | $ | 14,094 | $ | 38,846 | $ | 12,718 | ||||||||
Customer relationships and contracts | 11,205 | 3,109 | 10,988 | 2,709 | ||||||||||||
Total — finite-lived intangible assets | 50,409 | 17,203 | 49,834 | 15,427 | ||||||||||||
Trademark and other | 5,984 | — | 5,849 | — | ||||||||||||
$ | 56,393 | $ | 17,203 | $ | 55,683 | $ | 15,427 | |||||||||
Total amortization expense recorded for finite-lived intangible assets was approximately $1.6 million for the three month periods ended May 31, 2007 and 2006.
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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimated future finite-lived intangible asset amortization expense for the remainder of fiscal 2008 and thereafter is as follows (in thousands):
Period | Amount | |||
Remainder of fiscal 2008 | $ | 4,913 | ||
Fiscal 2009 | $ | 5,776 | ||
Fiscal 2010 | $ | 5,521 | ||
Fiscal 2011 | $ | 5,521 | ||
Fiscal 2012 | $ | 5,521 | ||
Fiscal 2013 and thereafter | $ | 5,954 |
9. | INCOME TAXES |
Effective March 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. Under FIN 48, benefits associated with uncertain tax positions are recognized in the Company’s consolidated financial statements only when it is determined to be more likely than not that such positions would be sustained upon examination, based on technical merits. FIN 48 outlines a two-step approach to recognizing and measuring uncertain tax positions. If the weight of available evidence indicates that it is more likely than not (more than 50% likely) that a tax position would be sustained on examination (including resolution of related appeals or litigation processes, if any), the associated tax benefit is then measured as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
Upon adoption, the Company reduced previously recorded tax reserves by approximately $1.9 million, of which $1.5 million was accounted for as a cumulative effect of a change in accounting principle that resulted in a corresponding increase to retained earnings. The Company also reduced certain deferred tax assets relating to stock based compensation by approximately $0.3 million this fiscal quarter. As of the date of adoption, the Company had approximately $3.3 million of liabilities for uncertain tax positions, consisting of $2.7 million of gross unrecognized tax benefits and $0.6 million in accrued interest and penalties. In the three month period ended May 31, 2007, the Company increased its reserves for liabilities for uncertain tax positions by approximately $0.2 million in connection with credits expected to be taken in its fiscal 2008 U.S. federal income tax return. Substantially all such unrecognized tax benefits would be recorded as part of the provision for income taxes if realized in future periods. The Company does not currently anticipate that liabilities for uncertain tax positions will significantly increase or decrease on or prior to May 31, 2008, and all liabilities for uncertain tax positions are classified as long term and included in Other liabilities in the condensed consolidated balance sheet as of May 31, 2007.
The Company will continue its policy of including interest and penalties related to unrecognized tax benefits within the provision for income taxes in the condensed consolidated statements of income. For the three month period ended May 31, 2007, the Company provided an additional $0.1 million for interest and penalties.
The Company files U.S. federal, U.S. state, and foreign tax returns, and is generally no longer subject to tax examinations for fiscal years prior to 2003 (in the case of certain foreign tax returns, calendar year 2002).
10. | RETIREMENT PLANS |
The Company maintains an unfunded Supplemental Executive Retirement Plan to provide senior management with retirement, disability and death benefits. The Company’s subsidiary, SMSC Japan, also maintains an unfunded retirement plan, which provides its employees and directors with separation benefits, consistent with customary practices in Japan. Benefits under these defined benefit plans are based upon various service and compensation factors.
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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth the components of the consolidated net periodic pension expense for the three month periods ended May 31, 2007 and 2006, respectively (in thousands):
Three Months | ||||||||
Ended | ||||||||
May 31, | ||||||||
2007 | 2006 | |||||||
Components of net periodic benefit costs: | ||||||||
Service cost — benefits earned during the period | $ | 133 | $ | 92 | ||||
Interest cost on projected benefit obligations | 87 | 110 | ||||||
Amortization of net obligation | 65 | 76 | ||||||
Net periodic pension expense | $ | 285 | $ | 278 | ||||
May 31, | February 28, | |||||||
2007 | 2007 | |||||||
Amounts recognized in accumulated other comprehensive loss: | ||||||||
Transition obligation | $ | 539 | $ | 603 | ||||
Net loss | 190 | 190 | ||||||
Prior service cost | 5 | 5 | ||||||
Total amount recognized in accumulated other comprehensive loss | $ | 734 | $ | 798 | ||||
Annual benefit payments under these plans are expected to be approximately $0.6 million in fiscal 2008.
Additionally, the Company is the beneficiary of life insurance policies that have been purchased as a method of partially financing benefits under the Supplemental Executive Retirement Plan.
11. | 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 and in July 2002 the authorization was expanded from two million shares to three million shares. As of May 31, 2007, the Company had repurchased approximately 2.2 million shares of common stock at a cost of $32.0 million under this program. No purchases were made during the first quarter of fiscal 2008.
12. | OPERATING SEGMENT INFORMATION |
The Company operates in and reports as one business segment — the design, development, and marketing of semiconductor integrated circuits.
13. | COMMITMENTS AND CONTINGENCIES |
United States Customs Liability Payment
On July 6, 2006 SMSC made a prior disclosure to the United States Commissioner of Customs (“Customs”) pursuant to 19 C.F.R. § 162.74 related to SMSC’s learning that in certain cases it has not declared the full value or costs of assists provided by SMSC to its foreign suppliers. SMSC conducted a comprehensive review of its customs entries over the past five years and determined the amount of the additional fees. SMSC filed with Customs on October 4, 2006 an updated disclosure, and tendered to Customs approximately $0.4 million for these prior periods.
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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. | RECENT ACCOUNTING PRONOUNCEMENTS |
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 (SMSC’s fiscal year ending February 28, 2009). We plan to adopt SFAS No. 157 beginning in the first quarter of fiscal 2009. We are currently evaluating the impact, if any, the adoption of SFAS No. 157 will have on our operating income or net earnings.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option. SFAS No. 159 is effective for fiscal years beginning November 15, 2007 (SMSC’s fiscal year ending February 28, 2009). The Company is currently evaluating the impact, if any, the adoption of SFAS No. 159 will have on its financial position, results of operations and cash flows.
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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ONFORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2007
QUARTERLY REPORT ONFORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 2007
Item 2. — | Management’s Discussion and Analysis of Financial Conditions and Results of Operations |
GENERAL
The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes included in Part I Item 1. —Financial Statements, of this Quarterly Report onForm 10-Q (“Quarterly Report”) of Standard Microsystems Corporation (the “Company” or “SMSC”).
Forward-Looking Statements
Portions of this report may contain forward-looking statements about expected future events and financial and operating results that involve risks and uncertainties. Words such as “believe,” “expect,” “anticipate” and similar expressions identify forward-looking statements. These uncertainties may cause the Company’s actual future results to be materially different from those discussed in forward-looking statements. The Company’s risks and uncertainties include the timely development and market acceptance of new products; the impact of competitive products and pricing; the Company’s ability to procure capacity from suppliers and the timely performance of their obligations, the effects of changing economic conditions domestically and internationally and on its customers; changes in customer order patterns, relationships with and dependence on customers and growth rates in the personal computer, consumer electronics and embedded and automotive markets and with the Company’s sales channel; changes in customer order patterns, including order cancellations or reduced bookings; the effects of tariff, import and currency regulation; potential or actual litigation; and excess or obsolete inventory and variations in inventory valuation, among others. In addition, 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.
The Company’s forward looking 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. All forward-looking statements speak only as of the date hereof and are based upon the information available to SMSC at this time. Such statements are subject to change, and the Company does not undertake to update such statements, except to the extent required under applicable law and regulation. 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 United States Securities & Exchange Commission (“SEC”). Investors are advised to read the Company’s Annual Report onForm 10-K and quarterly reports onForm 10-Q as filed with the SEC, particularly those sections entitled“Risk Factors”, for a more complete discussion of these and other risks and uncertainties. Other cautionary statements and risks and uncertainties may also appear elsewhere in this report.
Description of Business
Many of the world’s global technology companies rely upon SMSC as a resource for semiconductor system solutions that span analog, digital and mixed-signal technologies. Leveraging intellectual property, integration expertise and global infrastructure, SMSC solves design challenges and delivers performance, space, cost and time-to-market advantages to its customers. SMSC’s application focus targets key vertical markets including consumer electronics & infotainment, mobile & desktop PCs and industrial applications. The Company has developed leading technology positions, providing application-specific solutions such as analog/mixed-signal system controllers, non-PCI Ethernet, ARCNET, MOST® and Hi-Speed USB. Each of these technologies is increasingly sold into multiple end markets, and the underlying technology, intellectual property and processes are increasingly being re-used and re-combined into new solutions.
SMSC is headquartered in Hauppauge, New York with operations in North America, Taiwan, Japan, Korea, China and Europe. Engineering design centers are located in Arizona, New York, Texas and Karlsruhe, Germany. Additional information is available at www.smsc.com.
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CRITICAL ACCOUNTING POLICIES & ESTIMATES
This discussion and analysis of the Company’s financial condition and results of operations is based upon the unaudited condensed consolidated 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 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.
• | Revenue Recognition | |
• | Inventory Valuation | |
• | Determination of the Allowance for Doubtful Accounts Receivable | |
• | Valuation of Long-Lived Assets | |
• | Valuation of Share-Based Payments | |
• | Accounting for Deferred Income Taxes | |
• | Accounting for Uncertain Tax Positions | |
• | 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 onForm 10-K for the fiscal year ended February 28, 2007, as filed with the SEC on April 30, 2007. During the three month period ended May 31, 2007, there were no significant changes to any critical accounting policies or to the related estimates and judgments involved in applying these policies, other than the adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 48,Accounting for Income Tax Uncertainties(“FIN 48”). See Part I Item 1 —Financial Statements — Note 9, for further discussion on the Company’s adoption of FIN 48.
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RESULTS OF OPERATIONS
Sales and Revenues
SMSC’s sales and revenues are comprised of sales of products across three strategically targeted “vertical” end-markets, as well as intellectual property revenues (consisting of royalties and similar contractual payments), as presented in the following table for the three month periods ended May 31, 2007 and 2006 (dollars in millions):
Three Months Ended May 31, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Consumer Electronics & Infotainment | $ | 30.8 | 39 | % | $ | 31.0 | 37 | % | ||||||||
Mobile & Desktop PC | 31.6 | 40 | % | 37.4 | 45 | % | ||||||||||
Industrial & Other | 16.1 | 21 | % | 14.9 | 18 | % | ||||||||||
Total Product Sales | 78.5 | 100 | % | 83.3 | 100 | % | ||||||||||
Intellectual Property Revenues | 3.0 | 2.8 | ||||||||||||||
Total Sales and Revenues | $ | 81.5 | $ | 86.1 | ||||||||||||
The Company’s sales and revenues for the three months ended May 31, 2007 were $81.5 million, consisting of $78.5 million of product sales and $3.0 million of intellectual property revenues.
Sales in the Consumer Electronics & Infotainment market decreased by approximately $0.2 million, or 1%, as compared to sales in the three month period ended May 31, 2006. Year-over year growth in networking products was largely offset by a decline in Universal Serial Bus (“USB”) and Physical Layer Interface (“PLI”) product sales.
Sales in the Mobile & Desktop PC market decreased by approximately $5.8 million, or 15%, in the quarter ended May 31, 2007, compared to the same period in the prior year. The decline in Mobile & Desktop PC sales was primarily attributable to overall PC market conditions and corresponding demand reductions from some of the Company’s largest end customers in this end market. Revenue was also impacted by the phase-out of sales of lower margin products, consistent with a strategy adopted by the Company this fiscal year. This decline was partially offset by continued sales growth associated with new Analog Products and Technology (“APT”) products, as the Company continued to successfully broaden its APT product offerings.
Sales in the Industrial & Other market in the current period increased approximately $1.2 million, or 8%, in the three month period ended May 31, 2007 as market demand for SMSC’s embedded computing designs and embedded networking technology increased both as a result of new product offerings and market penetration. The Company expects that overall industrial market adoption rates of embedded technology and market penetration due to enhanced product offerings will increase in the future.
Intellectual property revenues include $3.0 million and $2.8 million in the three months ended May 31, 2007 and 2006, respectively, of payments received from Intel Corporation pursuant to the terms of a September 2003 business agreement.
Costs of Goods Sold
Costs of goods sold for the quarter ended May 31, 2007 was $38.9 million, or 47.6% of sales and revenues, as compared to $44.9 million, or 52.1% of sales and revenues, in the comparable prior year period. Excluding intellectual property revenues, costs of goods sold were 49.5% of product sales in the current year period compared to 53.9% in the same period last year. The decrease in costs of goods sold on a percentage basis in the current-year period compared to the prior-year results is primarily a result of ongoing cost reduction initiatives and the selective phase out of sales of lower margin products this fiscal year. Stock based compensation charges of $0.4 million are included in the current quarterly period as compared to a net credit of $0.5 million upon the adoption of SFAS 123R in the three month period ended May 31, 2006.
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Research and Development Expenses
R&D expenses were $18.0 million, or 22.1% of sales and revenues, for the three months ended May 31, 2007 compared to $15.2 million, or approximately 17.6% of sales and revenues, for the three months ended May 31, 2006. Stock based compensation charges of $1.8 million are included in the current quarterly period as compared to a net credit of $0.3 million upon the adoption of SFAS 123R in the three month period ended May 31, 2006. In addition to the increase related to stock based compensation charges, R&D expenses also increased due to increased headcount to support further investment in new product development.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $20.3 million, or approximately 24.9% of sales and revenues, for the quarter ended May 31, 2007, compared to $13.8 million, or approximately 16.0% of revenues, for the quarter ended May 31, 2006. Stock based compensation charges of $2.6 million are included in the current quarterly period as compared to a net credit of $1.8 million upon the adoption of SFAS 123R in the three month period ended May 31, 2006. In addition to the increase in stock based compensation charges, selling, general and administrative expenses also increased due to increased headcount and other infrastructure costs in support of business growth.
Amortization of Intangible Assets
Amortization expense was $1.6 million for the three month periods ended May 31, 2007 and 2006 and represents the amortization of finite-lived intangible assets acquired in the March 2005 OASIS transaction and the June 2002 Gain Technology Corporation (“Gain”) transaction.
Interest and Other Income (Expense)
The increase in interest income, from $1.1 million in the three month period ended May 31, 2006, to $1.4 million in the three month period ended May 31, 2007, respectively, primarily reflects the impact of higher average interest rates in the current year. Other income in the three month period ended May 31, 2007 included $0.3 million related to the sale of a claim against the estate in bankruptcy of one of the Company’s former customers.
Provision for Income Taxes
The Company’s effective income tax rate reflects statutory federal, state and foreign tax rates, the impact of certain permanent differences between the book and tax treatment of certain expenses, and the impact of tax-exempt income and various income tax credits.
The provision for income taxes for the three month period ended May 31, 2007 was $1.3 million, or an effective income tax rate of 28.4% against $4.5 million of income before income taxes. This provision included the impact of $0.4 million from income tax credits and $0.4 million from tax exempt income.
The provision for income taxes for the three month period ended May 31, 2006 was $3.1 million, or an effective income tax rate of 26.5% against $11.7 million of income before income taxes. This tax rate was reduced 6.0% by the $0.7 million impact of utilizing a net operating loss in Germany which is not expected to recur or to benefit future periods.
LIQUIDITY & CAPITAL RESOURCES
The Company currently finances its operations through a combination of cash generated by operations and existing working capital resources.
The Company’s cash, cash equivalents and liquid investments (including investments in marketable securities with maturities in excess of one year, if any) were $169.8 million at May 31, 2007, compared to $160.0 million at February 28, 2007.
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Operating activities provided $8.4 million of cash during the first three months of fiscal 2008, compared to $0.2 million of cash generated during the first three months of fiscal 2007. Comparative operating cash flows primarily reflect a substantial decrease in net inventory investment and income taxes payable, as well as substantial decreases in accounts payable and accounts receivable due to the overall decrease in sales volume and related activities relative to the first three months of fiscal 2007. In the three months ended May 31, 2007, approximately $1.2 million of cash was provided by a reduction in net inventories, compared to the three months ended May 31, 2006, in which approximately $7.3 million of cash was used for net inventory build. The Company is actively managing its inventory levels to minimize inventory investment while ensuring adequate supply and maximizing cost efficiency opportunities.
Investing activities consumed $19.2 million of cash during the three month period ended May 31, 2007, reflecting a $16.0 million increase of short-term investments and $3.2 million in capital expenditures. Capital expenditures were significantly lower than in the three month period ended May 31, 2006, which included expenditures for new test and other related production equipment, as well as the completion of the Hauppauge, New York headquarters building expansion.
Net cash provided by financing activities of $4.6 million during the three month period ended May 31, 2007, consisted of $5.0 million of proceeds from exercises of stock options and $0.3 million of excess tax benefits from stock-based compensation, partially offset by $0.6 million of payments under supplier financing arrangements.
Working capital increased $12.1 million, or 5.7%, to $224.4 million in the three month period ended May 31, 2007. Accounts receivable decreased slightly from $48.0 million at February 28, 2007 to $47.7 million at May 31, 2007. The Company’s inventories decreased slightly to $49.8 million at May 31, 2007, compared to $50.9 million at February 28, 2007.
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 and in July 2002 the authorization was expanded from two million shares to three million shares. As of May 31, 2007, the Company had repurchased approximately 2.2 million shares of common stock at a cost of $32.0 million under this program. No purchases were made during the first quarter of fiscal 2008.
The Company has considered in the past, and will continue to consider, various possible transactions to secure necessary wafer foundry or assembly/test manufacturing capacity, including equity investments in, prepayments or equipment consignments 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, the Company may evaluate potential acquisitions of or investments 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 potential borrowing capacity will be sufficient to finance the Company’s operating and capital requirements for the next twelve months and for the foreseeable future.
COMMITMENTS AND CONTINGENCIES
United States Customs Liability Payment
On July 6, 2006 SMSC made a prior disclosure to the United States Commissioner of Customs (“Customs”) pursuant to 19 C.F.R. § 162.74 related to SMSC’s learning that in certain cases it has not declared the full value or costs of assists provided by SMSC to its foreign suppliers. SMSC conducted a comprehensive review of its customs entries over the past five years and determined the amount of the additional fees. SMSC filed with Customs on October 4, 2006 an updated disclosure, and tendered to Customs approximately $0.4 million for these prior periods.
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RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 (SMSC’s fiscal year ending February 28, 2009). We plan to adopt SFAS No. 157 beginning in the first quarter of fiscal 2009. We are currently evaluating the impact, if any, the adoption of SFAS No. 157 will have on our operating income or net earnings.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option. SFAS No. 159 is effective for fiscal years beginning November 15, 2007 (SMSC’s fiscal year ending February 28, 2009). The Company is currently evaluating the impact, if any, the adoption of SFAS No. 159 will have on its financial position, results of operations and cash flows.
Item 3. — | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
The Company’s exposure to interest rate risk relates primarily to its investment portfolio. The primary objective of SMSC’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, 2007, the Company’s $139.8 million of short-term investments consisted primarily of investments in auction rate securities, and investments in corporate, government and municipal obligations with maturities of between three and twelve months at acquisition. Auction rate securities have long-term underlying maturities, but have interest rates that are reset every 90 days or less, at which time the securities can typically be purchased or sold.
As with all fixed-income instruments, these securities are subject to interest rate risk and would likely decline in market value if market interest rates increase. However, if market interest rates were to increase immediately and uniformly by 10% from levels at May 31, 2007, the Company estimates that the fair values of these investments would decline by an immaterial amount, due to the portfolio’s relatively short-term overall maturity. Furthermore, the Company has the option to hold its fixed-income investments until maturity and, therefore, would not expect to realize any material adverse impact to its results from operations or cash flows from such a decline. Declines in market interest rates would, over time, reduce the Company’s interest income.
Equity Price Risk
The Company has no material investments in equity securities of other companies on its Consolidated Balance Sheet as of May 31, 2007.
Foreign Currency Risk
The Company has international sales and expenditures and is, therefore, subject to certain foreign currency rate exposures. 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. Most transactions in the Japanese market made by the Company’s subsidiary, SMSC Japan, are denominated in Japanese yen. SMSC Japan purchases a significant amount of its products for resale from SMSC in U.S. dollars, and from time to time has entered into forward exchange contracts to hedge against currency fluctuations associated with these product purchases. No such contracts were executed during either fiscal 2007 or the first three months of fiscal 2008, and there are no
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obligations under any such contracts as of May 31, 2007. The Company has never received a cash dividend (repatriation of cash) from SMSC Japan.
OASIS’ operating activities in Europe include transactions conducted in both euros and U.S. dollars. The euro has been designated as OASIS’ functional currency for its European operations. From time to time, OASIS has entered into foreign currency contracts to minimize the exposure of its U.S. dollar denominated transactions, assets and liabilities to currency exchange rate risk. Gains or losses on these contracts are intended to offset the gains or losses recorded from the remeasurement of certain assets and liabilities from U.S. dollars into euros. No such contracts were executed during fiscal 2007 or during the first three months of fiscal 2008, and there are no obligations under any such contracts as of May 31, 2007. Gains and losses recorded from the remeasurement of U.S. dollar denominated assets and liabilities into euros were not significant during the three months ended May 31, 2007.
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 May 31, 2007, 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 within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
There have been no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
Item 1. | Legal Proceedings |
As of May 31, 2007 the Company was not aware of any pending or threatened litigation it believes is likely to have a material adverse effect on the Company.
Item 1.A. —Risk Factors
Readers of this Quarterly Report onForm 10-Q should carefully consider the risks described in the Company’s other reports filed or furnished with the SEC, including the Company’s prior and subsequent reports onForms 10-K,10-Q and8-K, in connection with any evaluation of the Company’s financial position, results of operations and cash flows.
The risks and uncertainties described in the Company’s most recent Annual Report onForm 10-K, filed with the SEC as of April 30, 2007, are not the only ones facing the Company. Additional risks and uncertainties not presently known or those that are currently deemed immaterial may also affect the Company’s operations. Any of the risks, uncertainties, events or circumstances described below could cause the Company’s future financial condition, results of operations or cash flows to be adversely affected.
Item 2. — | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) None.
(b) None.
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(c) Issuer Purchases of Equity Securities.
None.
Item 3. — | Defaults Upon Senior Securities |
None.
Item 4. — | Submission of Matters to a Vote of Security Holders |
None.
Item 5. — | Other Information |
None.
Item 6. — | Exhibits |
31 | .1 | — | Certification of Chief Executive Officer pursuant toRule 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 toRule 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. |
* | Indicates a management or compensatory plan or arrangement. |
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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
By: | /s/ Joseph S. Durko |
(Signature)
Joseph S. Durko
Vice President, Corporate Controller and Chief
Accounting Officer (duly authorized officer)
DATE: June 27, 2007
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EXHIBIT INDEX
Exhibit | ||||||
No. | Description | |||||
31 | .1 | — | Certification of Chief Executive Officer pursuant toRule 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 toRule 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. |
* | indicates a management or compensatory plan or arrangement. |