UNITED STATES
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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-7422
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STANDARD MICROSYSTEMS CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2234952
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 Arkay Drive, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 631-435-6000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes _X_ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 31, 2005, there were 20,739,000 shares of the registrant's common
stock outstanding.
Standard Microsystems Corporation
Form 10-Q
For the Quarter Ended May 31, 2005
Table of Contents
-----------------
Part I Financial Information
Item 1 Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of May 31, 2005 and February
28, 2005
Condensed Consolidated Statements of Operations for the Three-Month
Periods Ended May 31, 2005 and 2004
Condensed Consolidated Statements of Cash Flows for the Three-Month
Periods Ended May 31, 2005 and 2004
Notes to Condensed Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Item 4 Controls and Procedures
Part II Other Information
Item 1 Legal Proceedings
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits
Signature
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)
May 31, February 28,
2005 2005
------------ --------------
Assets
Current assets:
Cash and cash equivalents $ 19,674 $ 116,126
Short-term investments 101,279 56,519
Accounts receivable, net 29,881 23,788
Inventories 42,303 33,310
Deferred income taxes 16,252 17,701
Other current assets 5,753 4,295
- ----------------------------------------------------------------------------
Total current assets 215,142 251,739
- ----------------------------------------------------------------------------
Property, plant and equipment, net 25,959 22,630
Goodwill 78,912 29,435
Intangible assets, net 49,671 3,584
Deferred income taxes 7,728 7,163
Other assets 3,549 4,708
- ----------------------------------------------------------------------------
$ 380,961 $ 319,259
============================================================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 21,097 $ 15,995
Deferred income on shipments to
distributors 11,126 7,689
Accrued expenses, income taxes
and other liabilities 17,772 13,400
- ----------------------------------------------------------------------------
Total current liabilities 49,995 37,084
- ----------------------------------------------------------------------------
Deferred income taxes 16,658 -
Other liabilities 12,215 12,326
Shareholders' equity:
Preferred stock - -
Common stock 2,273 2,053
Additional paid-in capital 225,515 187,854
Retained earnings 103,639 100,612
Treasury stock, at cost (25,961) (23,799)
Deferred stock-based compensation (3,642) (1,925)
Accumulated other comprehensive income 269 5,054
- ----------------------------------------------------------------------------
Total shareholders' equity 302,093 269,849
- ----------------------------------------------------------------------------
$ 380,961 $ 319,259
============================================================================
See Notes to Condensed Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)
Three Months Ended
May 31,
-------------------------------
2005 2004
------------ ------------
Revenues $ 68,807 $ 53,053
Costs and expenses:
Cost of goods sold 36,492 26,385
Research and development 12,966 10,862
Selling, general and administrative 13,591 11,852
Amortization of intangible assets 1,153 317
In-process research and development 895 -
- --------------------------------------------------------------------------------
Income from operations 3,710 3,637
Interest income 723 466
Other expense, net (47) (32)
- --------------------------------------------------------------------------------
Income before provision for income taxes 4,386 4,071
Provision for income taxes 1,359 1,159
- --------------------------------------------------------------------------------
Net income $ 3,027 $ 2,912
================================================================================
Basic net income per share: $ 0.15 $ 0.16
================================================================================
Diluted net income per share: $ 0.15 $ 0.15
================================================================================
Weighted average common shares outstanding:
Basic 20,066 18,246
Diluted 20,476 19,790
See Notes to Condensed Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended
May 31,
----------------------------------
2005 2004
-------------- ---------------
Cash flows from operating activities:
Cash received from customers and licensees $ 73,735 $ 50,938
Cash paid to suppliers and employees (57,941) (52,240)
Interest received 588 421
Interest paid (21) (39)
Income taxes paid (1,181) (44)
- --------------------------------------------------------------------------------
Net cash provided by (used for) operating
activities 15,180 (964)
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (3,162) (2,902)
Acquisition of Oasis SiliconSystems Holding
AG, net of cash acquired (60,349) -
Sales of long-term investments - 4,000
Purchases of short-term investments (179,886) (134,016)
Sales of short-term investments 135,172 132,238
Other 21 5
- --------------------------------------------------------------------------------
Net cash used for investing activities (108,204) (675)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 21 210
Purchases of treasury stock (2,162) -
Repayments of obligations under capital
leases and notes payable (659) (506)
- --------------------------------------------------------------------------------
Net cash used for financing activities (2,800) (296)
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Effect of foreign exchange rate changes
on cash and cash equivalents (628) (25)
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (96,452) (1,960)
Cash and cash equivalents at beginning of
period 116,126 14,050
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 19,674 $ 12,090
================================================================================
Reconciliation of net income to
net cash provided by (used for) operating
activities:
Net income $ 3,027 $ 2,912
Adjustments to reconcile net income to
net cash provided by (used for) operating
activities:
Depreciation and amortization 3,893 2,756
In-process research and development charge 895 -
Stock-based compensation 232 212
Other adjustments, net 9 44
Changes in operating assets and liabilities,
net of business acquisition impact:
Accounts receivable (732) (7,960)
Inventories 3,221 (48)
Accounts payable, deferred income, accrued
expenses and other liabilities 4,336 425
Current and deferred income taxes 174 1,067
Other changes, net 125 (372)
- --------------------------------------------------------------------------------
Net cash provided by (used for) operating
activities $ 15,180 $ (964)
================================================================================
See Notes to Condensed Consolidated Financial Statements.
STANDARD MICROSYSTEMS CORPORATIONAND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial information of
Standard Microsystems Corporation and subsidiaries, referred to herein as "SMSC"
or "the Company," has been prepared in accordance with generally accepted
accounting principles and the rules and regulations of the Securities and
Exchange Commission (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 for all periods presented.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of sales and revenues and expenses during the
reporting period. Actual results may differ from those estimates, and such
differences may be material to the financial statements. These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements for the year ended February 28, 2005 included
in the Company's annual report on Form 10-K, as filed on May 16, 2005 with the
SEC. The results of operations for the three-month period ended May 31, 2005 are
not necessarily indicative of the results to be expected for any future periods.
2. Stock-Based Compensation
The Company has in effect several stock-based compensation plans under which
incentive stock options, non-qualified stock options, restricted stock awards
and stock appreciation rights are granted to employees and directors. All stock
options are granted with exercise prices equal to the fair value of the
underlying shares on the date of grant. The Company accounts for stock option
grants in accordance with Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" and accordingly recognizes no
compensation expense for the stock option grants. Additional pro forma
disclosures as required under Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," are
detailed below.
For purposes of the pro forma disclosures required by SFAS No. 123, the
estimated fair market value of the Company's options is amortized as an expense
over the options' vesting periods. The fair value of each option grant, as
defined by SFAS No. 123, is estimated on the date of grant using the
Black-Scholes option-pricing model. The Black-Scholes model, as well as other
currently accepted option valuation models, was developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, that significantly differ from the Company's stock option awards.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of employee stock options.
Had compensation expense been recorded under the provisions of SFAS No. 123, the
Company's net income and net income per share would have been the pro forma
amounts indicated below (in thousands, except per share data):
Three Months Ended
May 31,
------------------------------
2005 2004
- ------------------------------------------------------------------------------
Net income - as reported $ 3,027 $ 2,912
Stock-based compensation expense
included in net income, net of taxes -
as reported 145 141
Stock-based compensation expense
determined using the fair
value method for all awards, net of taxes (2,315) (2,421)
- ------------------------------------------------------------------------------
Net income - pro forma $ 857 $ 632
==============================================================================
Basic net income per share - as reported $ 0.15 $ 0.16
==============================================================================
Diluted net income per share - as reported $ 0.15 $ 0.15
==============================================================================
Basic net income per share - pro forma $ 0.04 $ 0.03
==============================================================================
Diluted net income per share - pro forma $ 0.04 $ 0.03
==============================================================================
3. Acquisition of OASIS SiliconSystems Holding AG
On March 30, 2005, SMSC announced the completion that day of its acquisition of
OASIS SiliconSystems Holding AG (OASIS). Based in Karlsruhe, Germany, OASIS is
engaged in the development and marketing of integrated circuits that enable
networking of multimedia devices for automotive infotainment applications.
The transaction was accounted for as a purchase under accounting principles
generally accepted in the United States of America, whereby the purchase price
for OASIS has been allocated to the net tangible and intangible assets acquired,
based upon their fair values as of March 30, 2005, and the results of OASIS'
operations subsequent to March 30, 2005 have been included in the Company's
consolidated results of operations.
SMSC acquired all of OASIS' outstanding capital stock in exchange for aggregate
consideration of $118.7 million, including approximately 2.1 million shares of
SMSC common stock valued for accounting purposes at $35.8 million, $79.5 million
of cash, and approximately $3.4 million of direct acquisition costs, including
legal, banking, accounting and valuation fees. The tangible assets of OASIS at
March 30, 2005 included approximately $22.4 million of cash and cash
equivalents, resulting in a net cash outlay of approximately $60.5 million.
SMSC's existing cash balances were the source of the cash used in the
transaction. For accounting purposes, the value of the SMSC common stock was
determined using the average of the stock's market value for two days before and
after the date the terms of the acquisition were announced. Under the terms of
the Share Purchase Agreement, approximately 1.2 million of the shares and $1.8
million of the cash issued to the former shareholders of OASIS is being held in
an escrow account as security for certain indemnity obligations of OASIS' former
shareholders. Up to $20.0 million of additional consideration, payable in cash
and SMSC common stock, may be issued to OASIS' former shareholders during fiscal
2007 upon satisfaction of certain future performance goals. Any additional
consideration earned and paid will be recorded as goodwill.
The following table summarizes the components of the purchase price (in
millions):
Cash $ 79.5
SMSC common stock issued 35.8
Transaction costs 3.4
- -----------------------------------------------------------
$ 118.7
===========================================================
The following table summarizes the allocation of the purchase price (in
millions):
Cash and cash equivalents $ 22.4
Accounts receivable 5.8
Inventory 12.9
Other current assets 0.5
Identifiable intangible assets:
Purchased technology 32.4
Customer relationships 10.5
Trademark 5.4
Other 0.6
Property and equipment 2.7
Goodwill 51.9
Deferred income tax benefits 0.6
Accounts payable (1.7)
Accrued expenses and income taxes (6.9)
Deferred income tax liabilities (19.3)
In-process research and development 0.9
- -----------------------------------------------------------
$ 118.7
===========================================================
The majority of OASIS' net assets, including goodwill and identifiable
intangible assets, is located in Europe, and the functional currency of OASIS'
operations in Europe is the euro. Accordingly, these euro-denominated net assets
are translated into U.S. dollars at period-end exchange rates and gains or
losses arising from translation are included as a component of Accumulated other
comprehensive income within Shareholders' equity.
In accordance with the provisions of SFAS No. 141, OASIS' finished goods
inventory has been valued at estimated selling prices less the costs of disposal
and a reasonable profit allowance for the related selling effort;
work-in-process inventory has been valued at estimated selling prices of the
finished goods less costs to complete, costs of disposal, and a reasonable
profit allowance for the completing and selling efforts; and raw materials have
been valued at current replacement costs. These values initially exceed OASIS'
historical inventory cost by approximately $1.7 million. This value was included
within the $12.9 million of fair value assigned to OASIS' inventory at March 30,
2005, and is being recorded as a component of cost of goods sold as the
underlying inventory is sold, $0.6 million of which was recognized during the
quarter ended May 31, 2005.
The estimated fair value attributed to purchased technology was determined based
upon a discounted forecast of the estimated net future cash flows to be
generated from the technologies, using a discount rate of 25%. The estimated
fair value of purchased technology is being amortized over a period of 8 years
on a straight-line basis, which approximates the pattern in which the economic
benefits of the technology are expected to be realized.
The estimated fair value attributed to customer relationships was determined
based on a discounted forecast of the estimated net future cash flows to be
generated from the relationships, discounted at a rate of 23%. The estimated
fair value of the customer relationships is being amortized over a period of 8
years on a straight-line basis, which approximates the pattern in which the
economic benefits of the customer relationships are expected to be realized.
OASIS owns certain trademarks related to its automotive infotainment technology.
The estimated fair value attributed to these trademarks was determined by
calculating the present value of the royalty savings related to the trademarks
using an assumed royalty rate of 1.5% and a discount rate of 23%. These
trademarks have indefinite lives and are therefore not being amortized. They
will be subject to an impairment test on an annual basis, or when an event or
circumstance occurs indicating a possible impairment in value.
Goodwill represents the excess of the purchase price over the fair values of the
net tangible and intangible assets. This acquisition significantly expands
SMSC's presence in the automotive infotainment market, and is also providing
opportunities for expanded presence in other market segments, including consumer
networking. It also added an assembled workforce of about 150 employees into
SMSC's operations. These factors contributed to recognition of goodwill in the
purchase price. In accordance with SFAS No. 142, goodwill is not amortized but
will be tested for impairment at least annually.
The $0.9 million allocated to in-process research and development represents the
fair value of purchased in-process technology for research projects that, as of
the March 30, 2005 closing date of the acquisition, had not reached
technological feasibility and had no alternative future uses. This value was
based upon discounted cash flows attributable to the projects using a discount
rate of 28%, the estimated time to complete the projects and the levels of risks
involved. These projects are primarily focused on deployment of certain
technology into consumer applications. The $0.9 million estimated fair value of
in-process research and development is reflected within Costs and expenses for
the quarter ended May 31, 2005.
The following unaudited pro forma financial information presents the combined
operating results of SMSC and OASIS as if the acquisition had occurred as of the
beginning of each period presented. Pro forma data is subject to various
assumptions and estimates, and is presented for informational purposes only.
This pro forma data does not purport to represent or be indicative of the
consolidated operating results that would have been reported had the transaction
been completed as described herein, and the data should not be taken as
indicative of future consolidated operating results. Pro forma financial
information for the three-month periods ended May 31, 2005 and 2004 is as
follows (in millions, except per share data):
Three Months Ended
May 31,
-----------------------------
2005 2004
- ----------------------------------------------------------------------
Revenues $ 73.0 $ 65.0
Net income $ 2.5 $ 1.8
Basic net income per share $ 0.13 $ 0.09
Diluted net income per share $ 0.12 $ 0.08
4. Short-Term 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
February 28, 2005 and May 31, 2005.
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, which creates a
highly liquid market for these securities. The Company's intent is not to hold
these securities to maturity, but rather to use the interest rate reset feature
to provide liquidity as necessary. The Company's investment in these securities
provides higher yields than money market and other cash equivalent investments.
For all periods through November 30, 2004, the Company classified auction rate
securities as cash equivalents, reflecting their highly liquid nature. Effective
at February 28, 2005, auction rate securities are being classified as short-term
investments on the Company's consolidated balance sheet for all dates presented,
reflecting recently converging interpretations of the accounting treatment for
these securities. In addition, consistent with this change in classification,
all purchases and sales of auction rate securities are reflected in the
investing activities section of the Company's Consolidated Statements of Cash
Flows for all periods presented. The Company does not consider this change in
classification to be material to its financial condition or cash flows. In
addition, it has no effect on the Company's total current assets, working
capital, total assets, or operating cash flows, and the change in classification
in no way revises or restates the Company's Consolidated Statements of
Operations. For purposes of the Condensed Consolidated Statement of Cash Flows
for the three months ended May 31, 2004, auction rate and other securities at
May 31, 2004 were changed in classification as follows (in thousands):
Cash and Cash Short-Term
Equivalents Investments
- -----------------------------------------------------------------------------
As previously classified $ 130,855 $ 27,260
Change in classification - auction
rate securities (118,505) 118,505
Change in classification - other
securities (260) 260
- -----------------------------------------------------------------------------
As currently classified $ 12,090 $ 146,025
=============================================================================
For the three-month period ended May 31, 2004, $2.3 million of net cash provided
by investing activities, related to activity in auction rate securities, was
previously included in the decrease in cash and cash equivalents in the
Consolidated Statements of Cash Flows.
5. 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, 2005 Feb. 28, 2005
- -------------------------------------------------------------------------------
Raw materials $ 1,667 $ 1,143
Work in process 21,088 16,626
Finished goods 19,548 15,541
- -------------------------------------------------------------------------------
$ 42,303 $ 33,310
===============================================================================
Property, plant and equipment consist of the following (in thousands):
May 31, 2005 Feb. 28, 2005
- -------------------------------------------------------------------------------
Land $ 578 $ 578
Buildings and improvements 12,236 12,064
Machinery and equipment 71,381 68,190
Construction in progress 4,232 1,601
- -------------------------------------------------------------------------------
88,427 82,433
Less: accumulated depreciation 62,468 59,803
- -------------------------------------------------------------------------------
$ 25,959 $ 22,630
===============================================================================
6. 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 Statements of Operations included within this report are
reconciled as follows (in thousands):
Three Months Ended
May 31,
2005 2004
-------------------------
Average shares outstanding for
basic net income per share 20,066 18,246
Dilutive effect of stock options
and unvested restricted stock awards 410 1,544
- ------------------------------------------------------------------------------
Average shares outstanding for
diluted net income per share 20,476 19,790
==============================================================================
Options covering 3.1 million and 0.2 million shares for the three-month periods
ended May 31, 2005 and 2004, respectively, were excluded from the computation of
average shares outstanding for diluted net income per share because their effect
was antidilutive.
7. Comprehensive Income
The Company's other comprehensive income consists of foreign currency
translation adjustments from those subsidiaries not using the U.S. dollar as
their functional currency, and unrealized gains and losses on equity investments
classified as available-for-sale. The components of the Company's comprehensive
income for the three-month periods ended May 31, 2005 and 2004 were as follows
(in thousands):
Three Months Ended
May 31,
2005 2004
---------------------------
Net income $ 3,027 $ 2,912
Other comprehensive income (loss):
Change in foreign currency translation adjustments (4,819) (53)
Change in unrealized gain (loss) on marketable
equity securities, net of taxes 34 (4)
- --------------------------------------------------------------------------------
Total comprehensive income (loss) $ (1,758) $ 2,855
================================================================================
8. Business Restructuring
In December 2001, the Company announced a restructuring plan for its exit from
the PC chipset business.
The Company's reserve related to this restructuring declined from $0.5 million
at February 28, 2005 to $0.4 million at May 31, 2005, reflecting payments
against previously reserved non-cancelable lease obligations, which will
continue through their respective lease terms through August 2008.
9. 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 $51.9 million. The 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.
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.
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, 2005 and February 28, 2005, the
Company's identifiable intangible assets consisted of the following (in
thousands):
May 31, 2005 February 28, 2005
- --------------------------------------------------------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
- --------------------------------------------------------------------------------
Purchased technologies $ 37,759 $ 3,747 $ 6,179 $ 2,832
Customer relationships
and contracts 10,330 306 326 89
- --------------------------------------------------------------------------------
Total - finite-lived
intangible assets 48,089 4,053 6,505 2,921
- --------------------------------------------------------------------------------
Trademark and other 5,635 - - -
- --------------------------------------------------------------------------------
$ 53,724 $ 4,053 $ 6,505 $ 2,921
================================================================================
Total amortization expense recorded for finite-lived intangible assets was $1.1
million and $0.3 million for the three-month periods ended May 31, 2005 and
2004, respectively.
Estimated future finite-lived intangible asset amortization expense for the
remainder of fiscal 2006 and thereafter is as follows (in thousands):
Period Amount
- ---------------------------------------------------
Remainder of fiscal 2006 $ 5,128
Fiscal 2007 6,261
Fiscal 2008 6,261
Fiscal 2009 5,488
Fiscal 2010 5,231
Fiscal 2011 and thereafter 15,667
===================================================
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. The following table
sets forth the components of the consolidated net periodic pension expense for
the three-month periods ended May 31, 2005 and 2004, respectively (in
thousands):
Three Months Ended
May 31,
-------------------------
2005 2004
- -----------------------------------------------------------------------------
Service cost - benefits earned $ 86 $ 72
Interest cost on projected benefit obligations 98 106
Net amortization and deferral 67 72
- -----------------------------------------------------------------------------
Net periodic pension expense $ 251 $ 250
=============================================================================
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
The Company maintains a common stock repurchase program, as approved by its
Board of Directors, which authorizes the Company to repurchase up to three
million shares of its common stock on the open market or in private
transactions. Under this program, the Company repurchased approximately 150,000
shares of its common stock at a cost of $2.2 million during the first quarter of
fiscal 2006. No shares were repurchased during the first quarter of fiscal 2005.
The Company currently holds repurchased shares as treasury stock. As of May 31,
2005, the Company has repurchased a total of approximately 2.0 million shares of
its common stock, at a cost of $26.0 million, under this program.
12. Industry Segment Information
The Company's operating segments conform to aggregation criteria set forth in
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," and their operating results are therefore aggregated into one
reportable operating segment - the design, development and marketing of
semiconductor integrated circuits.
13. Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 151, "Inventory Costs, An Amendment of ARB No. 43, Chapter 4." SFAS No. 151
clarifies that abnormal inventory costs such as costs of idle facilities, excess
freight and handling costs, and wasted materials (spoilage) are required to be
recognized as current period charges. The provisions of SFAS No. 151 are
effective for fiscal years beginning after June 15, 2005. The Company is
currently evaluating the provisions of SFAS No. 151 and does not expect that its
adoption will have a material impact on its consolidated financial condition,
results of operations and cash flows.
In December 2004, the FASB issued SFAS No. 123R (Revised 2004), "Share-Based
Payment." The scope of SFAS No. 123R includes a wide range of share-based
compensation arrangements including stock options, restricted stock plans,
performance-based awards, stock appreciation rights, and employee stock purchase
plans. SFAS No. 123R replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that statement permitted the option of
continuing to apply the guidance in APB Opinion 25, provided that the footnotes
to the consolidated financial statements disclosed pro forma net income and net
income per share, as if the preferable fair-value-based method had been applied.
SFAS No. 123R requires that compensation costs relating to share-based payment
transactions be recognized in the consolidated financial statements.
Compensation costs will be measured based on the fair value of the equity or
liability instruments issued. SFAS No. 123R is effective for the first annual
reporting period that begins after June 15, 2005. The Company is currently
evaluating the impact of SFAS No. 123R and believes that the adoption of this
statement could have a material impact on its consolidated financial position
and results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," an amendment of APB Opinion No. 29. SFAS No. 153 addresses the
measurement of exchanges of nonmonetary assets and redefines the scope of
transactions that should be measured based on the fair value of the assets
exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges in fiscal
periods beginning after June 15, 2005. The Company does not expect the adoption
of SFAS No. 153 to have a material impact on its consolidated financial
position, results of operations and cash flows.
In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004." The American Jobs
Creation Act introduces a special one-time dividends received deduction on the
repatriation of certain foreign earnings to U.S. companies, provided certain
criteria are met. FSP No. 109-2 provides accounting and disclosure guidance on
the impact of the repatriation provision on a company's income tax expense and
deferred tax liability. The Company is currently studying the impact of the
one-time favorable foreign dividend provision and intends to complete the
analysis by the end of fiscal 2006. Accordingly, the Company has not recorded
any adjustments to its income tax expense or deferred income taxes to reflect
the tax impact of any repatriation of non-U.S. earnings it may make.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations." Interpretation No. 47 clarifies that
an entity must record a liability for a "conditional" asset retirement
obligation if the fair value of the obligation can be reasonably estimated.
Interpretation No. 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. Interpretation No. 47 is effective no later than the end of the
fiscal year ending after December 15, 2005. The Company does not expect the
adoption of Interpretation No. 47 to have a material impact on its consolidated
financial position, results of operations and cash flows.
ITEM 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto contained in this report.
Portions of this report may contain forward-looking statements about expected
future events and financial and operating results that involve risks and
uncertainties. Words such as "believe," "expect," "anticipate" and similar
expressions identify forward-looking statements. Such statements are qualified
in their entirety by the inherent risks and uncertainties surrounding future
expectations and may not reflect the potential impact of any future
acquisitions, mergers or divestitures. All forward-looking statements speak only
as of the date hereof and are based upon the information available to SMSC at
this time. Such information is subject to change, and the Company may not
inform, or be required to inform, investors of such changes.
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.
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 SEC. Investors are advised to read the
Company's Annual Report on Form 10-K and quarterly reports on Form 10-Q filed
with the SEC, particularly those sections entitled "Other Factors That May
Affect Future Operating Results," for a more complete discussion of these and
other risks and uncertainties. Other cautionary statements and risks and
uncertainties may also appear elsewhere in this report.
Overview
- --------
Description of Business
Many of the world's global technology companies rely upon SMSC as a go-to
resource for semiconductor system solutions that span analog, digital and
mixed-signal technologies. Leveraging intellectual property, integration
expertise and a comprehensive 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 mobile and desktop PCs, consumer electronics, automotive infotainment
and industrial applications. The Company has developed leadership positions in
its select markets by providing application specific solutions such as
mixed-signal PC system controllers, non-PCI Ethernet, ARCNET, MOST, Hi-Speed USB
and other high-speed serial communications.
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.
Key Indicators
Management measures the condition and performance of the Company's business in
numerous ways. Among the key quantitative indicators generally used in this
regard are bookings, sales and revenues, gross profit and operating expenses
relative to revenues. The Company also carefully monitors the progress of its
product development efforts.
Critical Accounting Policies and 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 sales and revenues and expenses during the
reporting period.
The Company believes that the critical accounting policies and estimates listed
below are important to the portrayal of the Company's financial condition and
operating results, and require critical management judgments and estimates about
matters that are inherently uncertain. Although management believes that its
judgments and estimates are appropriate and reasonable, actual future results
may differ from these estimates, and to the extent that such differences are
material, future reported operating results may be affected.
o Revenue recognition
o Inventory valuation
o Determination of the allowance for doubtful accounts receivable
o Valuation of long-lived assets
o Accounting for deferred income taxes
o Legal contingencies
Further information regarding these policies appears within the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Company's annual report on Form 10-K for the fiscal year ended
February 28, 2005 filed with the SEC on May 16, 2005. During the three-month
period ended May 31, 2005, there were no significant changes to any critical
accounting policies or to the related estimates and judgments involved in
applying these policies.
Business Acquisition
- --------------------
On March 30, 2005, SMSC announced the completion that day of its acquisition of
OASIS SiliconSystems Holding AG (OASIS). Based in Karlsruhe, Germany, OASIS is
engaged in the development and marketing of integrated circuits that enable
networking of multimedia devices for automotive infotainment applications. OASIS
is a leading provider of Media Oriented Systems Transport (MOST(R)) technology,
which enables the seamless transport of digital audio, video, and packet-based
data, along with control information, within automobiles.
SMSC acquired all of OASIS' outstanding capital stock in exchange for aggregate
consideration of $118.7 million, including approximately 2.1 million shares of
SMSC common stock valued for accounting purposes at $35.8 million, $79.5 million
of cash, and approximately $3.4 million of direct acquisition costs, including
legal, banking, accounting and valuation fees. The tangible assets of OASIS at
March 30, 2005 included approximately $22.4 million of cash and cash
equivalents, resulting in a net cash outlay of approximately $60.5 million.
SMSC's existing cash balances were the source of the cash used in the
transaction.
The results of OASIS' operations subsequent to March 30, 2005 have been included
in the Company's consolidated results of operations.
Up to $20.0 million of additional consideration, payable in cash and SMSC common
stock, may be issued to OASIS' former shareholders during fiscal 2007 upon
satisfaction of certain future performance goals.
Results of Operations
- ---------------------
Revenues
Effective in fiscal 2006, SMSC is tracking revenues shipped into three vertical
markets. For the first quarter of fiscal 2006, total revenues included
approximately 53%, or $36.4 million, from mobile and desktop PCs; 28%, or $19.2
million, from consumer electronics & infotainment; and 19%, or $13.2 million,
from industrial and other sources. It was not practicable to develop revenue
data for shipments into these three vertical markets for the three months ended
May 31, 2004. Therefore, the following year-over-year comparisons are structured
based on our historical discussion of PC I/O and non-PC I/O revenues.
Revenues for the three months ended May 31, 2005 were $68.8 million, compared to
revenues of $53.1 million for the year earlier period, an increase of
approximately 30%. Included in the current quarter's revenues are $9.3 million
of revenues associated with the acquisition of OASIS. These revenues reflect
shipments subsequent to March 30, 2005, representing approximately two months of
activity, in the current quarter.
The Company achieved growth in revenues from both PC I/O and non-PC I/O products
(exclusive of OASIS revenues) in the current-year quarter, compared to the
prior-year quarter, with increases of approximately 11% and 16%, respectively.
The increase in PC I/O revenues was driven by a 31% increase in revenues from
mobile I/O products, reflecting strong market demand in mobile computing
applications, partially offset by a 6% decline in revenues from desktop I/O
products. The increase in non-PC I/O revenues was the result of growth in the
Company's connectivity and environmental monitoring and control (EMC) product
lines, both of which benefited from broader product offerings in the
current-year quarter. Revenues from networking products remained level in the
current-year quarter, compared to the prior-year quarter.
The Company's revenues for the three-month periods ended May 31, 2005 and 2004
are summarized in the following table (in millions):
Three Months Ended
May 31,
2005 2004
- ----------------------------------------------------------------------
PC I/O products $ 33.4 $ 30.2
Non-PC I/O products * 23.5 20.2
AIS products and services 9.3 -
I.P revenues and other 2.6 2.7
- ----------------------------------------------------------------------
$ 68.8 $ 53.1
======================================================================
* Includes networking, connectivity, EMC products and other non-PC I/O products
Revenues from customers outside of North America accounted for approximately 85%
and 83% of the Company's consolidated revenues for the three-month periods ended
May 31, 2005 and 2004, respectively. While the largest portion of the Company's
revenues continues to be derived from the Asia region, the acquisition of OASIS
has significantly increased the Company's revenues in Europe. The Company's
revenues in Europe, including the impact of OASIS, were about $9.5 million in
the current-year quarter, compared to just under $3 million in the prior-year
quarter. The Company expects that international shipments, particularly to the
Asia region, will continue to represent a significant portion of its revenues.
Cost of Goods Sold
Cost of goods sold for the quarter ended May 31, 2005 was $36.5 million, which
resulted in a gross profit at 47.0% of revenues, compared to $26.4 million, and
gross profit at 50.3% of revenues, for the three months ended May 31, 2004. For
purposes of this discussion, gross profit is defined as revenues minus cost of
goods sold, before amortization of intangibles. The decline in gross profit
percentage in the current-year period, compared to the prior-year period,
results from a combination of (1) a lower gross profit percentage realized on
desktop I/O products, driven by higher unit costs and lower average selling
prices on certain devices; (2) a $0.6 million charge associated with sales of
inventory that was acquired from OASIS and valued in the acquisition above its
historical cost; and (3) a higher proportion of intellectual property revenues
in the prior-year quarter. The higher unit costs reflect the impact of higher
wafer costs on inventory built in the latter part of fiscal 2005 and sold during
the first quarter of fiscal 2006.
Research and Development Expenses
Research and development (R&D) expenses consist primarily of salaries and
related costs of employees engaged in research, design and development
activities, costs related to engineering design tools and computer hardware,
subcontractor costs and device prototyping costs. The Company's R&D activities
are performed by highly-skilled and experienced engineers and technicians, and
are primarily directed towards the design of new integrated circuits and the
development of new software drivers, firmware and design tools and blocks of
logic, as well as ongoing cost reductions and performance improvements in
existing products.
The Company intends to continue its efforts to develop innovative new products
and technologies and believes that an ongoing commitment to R&D is essential in
order to maintain product leadership and compete effectively. Therefore, the
Company expects to continue to make significant R&D investments in the future.
R&D expenses were $13.0 million, or approximately 19% of revenues, for the three
months ended May 31, 2005, compared to $10.9 million, or approximately 20% of
revenues, for the three months ended May 31, 2004. The increase in the current
year's three-month period, compared to the prior year's three-month period, is
primarily due to the addition of R&D expenses associated with the operations of
OASIS, which impacted two months of the current quarter's operating results.
OASIS' staff includes approximately 90 engineers and technicians. The remainder
of the increase resulted from higher depreciation expenses associated with
investments in advanced semiconductor design tools and higher device prototype
expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $13.6 million, or
approximately 20% of revenues, for the quarter ended May 31, 2005, compared to
$11.9 million, or approximately 22% of revenues, for the quarter ended May 31,
2004. The increase in the current year's first quarter, compared to the prior
year's first quarter, is primarily due to the addition of expenses associated
with the operations of OASIS, with the remainder of the increase primarily
reflecting higher direct selling expenses, including sales commissions
associated with the higher current quarter revenues.
Amortization of Intangible Assets
For the three-month period ended May 31, 2005, the Company recorded $0.9 million
of amortization expenses for finite-lived intangible assets acquired in the
OASIS transaction, as well as $0.3 million of amortization for finite-lived
intangible assets associated with the acquisition of Gain Technology Corporation
(Gain) during fiscal 2003. Amortization expense of $0.3 million for the Gain
intangible assets was recorded in the prior-year's first quarter.
In-Process Research and Development
The $0.9 million in-process research and development expense recorded in the
first quarter of fiscal 2006 represents the fair value of in-process technology
for OASIS research projects that, as of the March 30, 2005 closing date of the
OASIS acquisition, had not reached technological feasibility and had no
alternative future uses. These projects are primarily focused on deployment of
certain technology into consumer applications. The estimated fair value of this
in-process research and development was recorded as an expense in the quarter
ended May 31, 2005.
Other Income and Expense
The increase in interest income, from $0.5 million in the three-month period
ended May 31, 2004, to $0.7 million in the three-month period ended May 31,
2005, primarily reflects the impact of higher average interest rates, partially
offset by a lower average level of investments, during the current-year period.
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 Company's $1.4 million provision for income taxes for the three-month period
ended May 31, 2005 reflects an expected fiscal 2006 effective tax rate of
approximately 31%. The provision for income taxes for the first quarter of the
prior fiscal year was $1.2 million, which resulted in an effective income tax
rate of approximately 28%. The higher projected effective tax rate for fiscal
2006, compared to the effective tax rate for the first quarter of fiscal 2005,
reflects the lower proportionate effective tax rate impact of income tax credits
and tax-exempt interest income which results from a higher current-year pre-tax
income expectation.
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 liquid investments were $121.0 million
at May 31, 2005, compared to $172.6 million at February 28, 2005, a decrease of
$51.6 million.
Operating activities generated $15.2 million of cash during the first three
months of fiscal 2006, compared to a consumption of $1.0 million during the
first three months of fiscal 2005. Operating cash flows during the current-year
period reflect a decrease in inventories (excluding the impact of the OASIS
acquisition), and an increase in accrued liabilities, while the prior year's
operating cash flows were burdened by an $8.0 million increase in accounts
receivable. The current-year period's operating activities include $5.0 million
of non-cash charges, including depreciation, amortization, in-process research
and development and stock-based compensation, compared to $3.0 million in the
prior-year period.
Investing activities consumed $108.2 million of cash during the first quarter of
fiscal 2006, due principally to $60.3 million used for the acquisition of OASIS,
a net increase of $44.7 million in short-term investments, and $3.2 million of
capital expenditures. The $60.3 million of cash used for the acquisition of
OASIS includes $79.5 million of cash paid to the former OASIS shareholders as
part of the transaction's consideration, $3.4 million of transaction costs ($0.2
million of which were paid prior to the current-year quarter), partially offset
by $22.4 million of cash acquired from OASIS. Investing activities consumed $0.7
million of cash during the first quarter of fiscal 2005, due principally to $2.9
million of capital expenditures, partially offset by a net increase of $2.2
million in short-term and long-term investments.
Net cash of $2.8 million used for financing activities during the first quarter
of fiscal 2006 included $2.2 million of treasury stock purchases and $0.7
million of debt repayments. Financing activities consumed $0.3 million of cash
during the first quarter of fiscal 2005, including $0.5 million of debt
repayments, partially offset by $0.2 million of proceeds from exercises of stock
options.
The Company's inventories were $42.3 million at May 31, 2005, compared to $33.3
million at February 28, 2005. This increase includes $11.5 million of OASIS
product inventories at May 31, 2005, partially offset by a net decline in PC
I/O, networking and connectivity device inventories.
Accounts receivable increased from $23.8 million at February 28, 2005 to $29.9
million at May 31, 2005, an increase of $6.1 million. Of this increase, $5.7
million reflects the accounts receivable of OASIS.
Total current liabilities increased from $37.1 million at February 28, 2005 to
$50.0 million at May 31, 2005, including $9.0 million of current liabilities
associated with the operations of OASIS, as well as a $3.4 million increase in
deferred income on shipments to distributors. The increase in deferred income
reflects an increase in distributor inventories in advance of anticipated
product demand during the Company's second quarter ending August 31, 2005.
Capital expenditures for the three-month period ended May 31, 2005 were $3.2
million, and were predominantly for facility expansion, production test
equipment, advanced semiconductor design tools and investments in intellectual
property. Capital expenditures were $2.9 million for the three-month period
ended May 31, 2004.
The Company anticipates that capital expenditures in fiscal 2006 will exceed
those incurred during fiscal 2005, due in part to the Company's in-progress
construction of an addition to its primary facility in Hauppauge, New York,
which will expand the facility from its current 80,000 square feet to
approximately 200,000 square feet, and which will allow consolidation of the
Company's Hauppauge operations into a single facility, currently expected to
occur during fiscal 2007. The Company currently expects the cost of this
building expansion to be approximately $20 million, of which $4.2 million has
been expended, and is classified as construction in progress, at May 31, 2005.
The majority of the expenditures for this project are expected to occur during
fiscal 2006. There were no other material commitments for capital expenditures
as of May 31, 2005.
SMSC maintains a common stock repurchase program, as approved by its Board of
Directors, which authorizes the Company to repurchase up to three million shares
of its common stock on the open market or in private transactions. Under this
program, the Company repurchased approximately 150,000 shares of its common
stock at a cost of $2.2 million during the first quarter of fiscal 2006. No
shares were repurchased during the first quarter of fiscal 2005. The Company
currently holds repurchased shares as treasury stock. As of May 31, 2005, the
Company has repurchased a total of approximately 2.0 million shares of its
common stock, at a cost of $26.0 million, under this program.
In connection with the March 2005 acquisition of OASIS, up to $20.0 million of
additional consideration, payable in cash and SMSC common stock, may be issued
to OASIS' former shareholders during fiscal 2007 upon satisfaction of certain
future performance goals.
The Company has considered in the past, and will continue to consider, various
possible transactions to secure necessary foundry manufacturing capacity,
including equity investments in, prepayments to, or deposits with foundries, in
exchange for guaranteed capacity or other arrangements which address the
Company's manufacturing requirements. The Company may also consider utilizing
cash to acquire or invest in complementary businesses or products or to obtain
the right to use complementary technologies. From time to time, in the ordinary
course of business, the Company may evaluate potential acquisitions of or
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 borrowing capacity will be sufficient to
finance the Company's operating and capital requirements for at least the next
twelve months and for the foreseeable future thereafter.
Recent Accounting Pronouncements
- --------------------------------
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 151, "Inventory Costs, An Amendment of ARB No. 43, Chapter 4." SFAS No. 151
clarifies that abnormal inventory costs such as costs of idle facilities, excess
freight and handling costs, and wasted materials (spoilage) are required to be
recognized as current period charges. The provisions of SFAS No. 151 are
effective for fiscal years beginning after June 15, 2005. The Company is
currently evaluating the provisions of SFAS No. 151 and does not expect that its
adoption will have a material impact on its consolidated financial condition,
results of operations and cash flows.
In December 2004, the FASB issued SFAS No. 123R (Revised 2004), "Share-Based
Payment." The scope of SFAS No. 123R includes a wide range of share-based
compensation arrangements including stock options, restricted stock plans,
performance-based awards, stock appreciation rights, and employee stock purchase
plans. SFAS No. 123R replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that statement permitted the option of
continuing to apply the guidance in APB Opinion 25, provided that the footnotes
to the consolidated financial statements disclosed pro forma net income and net
income per share, as if the preferable fair-value-based method had been applied.
SFAS No. 123R requires that compensation costs relating to share-based payment
transactions be recognized in the consolidated financial statements.
Compensation costs will be measured based on the fair value of the equity or
liability instruments issued. SFAS No. 123R is effective for the first annual
reporting period that begins after June 15, 2005. The Company is currently
evaluating the impact of SFAS No. 123R and believes that the adoption of this
statement could have a material impact on its consolidated financial position
and results of operations.
In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary
Assets," an amendment of APB Opinion No. 29. SFAS No. 153 addresses the
measurement of exchanges of nonmonetary assets and redefines the scope of
transactions that should be measured based on the fair value of the assets
exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges in fiscal
periods beginning after June 15, 2005. The Company does not expect the adoption
of SFAS No. 153 to have a material impact on its consolidated financial
position, results of operations and cash flows.
In December 2004, the FASB issued FASB Staff Position (FSP) No. 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004." The American Jobs
Creation Act introduces a special one-time dividends received deduction on the
repatriation of certain foreign earnings to U.S. companies, provided certain
criteria are met. FSP No. 109-2 provides accounting and disclosure guidance on
the impact of the repatriation provision on a company's income tax expense and
deferred tax liability. The Company is currently studying the impact of the
one-time favorable foreign dividend provision and intends to complete the
analysis by the end of fiscal 2006. Accordingly, the Company has not recorded
any adjustments to its income tax expense or deferred income taxes to reflect
the tax impact of any repatriation of non-U.S. earnings it may make.
In March 2005, the Financial Accounting Standards Board issued Interpretation
No. 47, "Accounting for Conditional Asset Retirement Obligations."
Interpretation No. 47 clarifies that an entity must record a liability for a
"conditional" asset retirement obligation if the fair value of the obligation
can be reasonably estimated. Interpretation No. 47 also clarifies when an entity
would have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. Interpretation No. 47 is effective no later than
the end of the fiscal year ending after December 15, 2005. The Company does not
expect the adoption of Interpretation No. 47 to have a material impact on its
consolidated 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, 2005, the Company's $101.3 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. If market interest rates were to increase immediately and uniformly by
10% from levels at May 31, 2005, 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, 2005.
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 2005 or the first three months of fiscal
2006, and there are no obligations under any such contracts as of May 31, 2005.
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. As of May 31, 2005, OASIS has foreign currency contracts to
convert an aggregate of $3.2 million into euros in varying monthly amounts
through December 31, 2005. Gains and losses on these contracts, as well as 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, 2005.
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
changes and cyclical business patterns. Except for the historical information
contained herein, the matters discussed in this report are forward-looking
statements. The Company faces a variety of risks and uncertainties in conducting
its business, some of which are out of its control, and any of which, were they
to occur, could impair the Company's operating performance. For a more detailed
discussion of risk factors, please refer to the Company's annual report on Form
10-K for the fiscal year ended February 28, 2005 filed with the SEC on May 16,
2005.
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, 2005, the disclosure
controls and procedures are effective to provide reasonable assurance that
information required to be disclosed in the reports the Company files under the
Exchange Act is recorded, processed, summarized, and reported as and when
required.
There 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.
SMSC completed the acquisition of OASIS on March 30, 2005, as more fully
described in Note 3 to the Financial Statements in this Form 10Q. As part of its
ongoing integration activities, SMSC is in the process of incorporating its
controls and procedures into OASIS.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
As of May 31, 2005, SMSC was not a party to any legal proceedings, claims,
disputes or litigation that are expected to have a material adverse effect on
the Company's results of operations or financial condition.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
The disclosures regarding unregistered sales of equity securities are hereby
incorporated by reference to the information appearing within Item 3.02 included
in the Company's report on Form 8-K filed on April 5, 2005.
Purchases of Equity Securities by the Issuer
In October 1998, the Company's Board of Directors approved a plan authorizing
the repurchase up to one million shares of the Company's common stock in the
open market or in private transactions. The Board of Directors increased the
authorization from one million shares to two million shares in July 2000, and
from two million shares to three million shares in July 2002. The plan has no
specified expiration date. Shares of common stock purchased pursuant to the
repurchase plan are held as treasury stock.
Activity under this plan during the period covered by this report was as follows
(shares in thousands):
Total Number Average Total Number of Maximum Number of
of Shares Price Shares Purchased Shares that May Yet
Purchased Paid per as Part of Publicly Be Purchased Under
Period Share Announced Plans the Plans or Programs
- --------------------------------------------------------------------------------
March 2005 - - - 1,158
April 2005 100 $ 14.32 100 1,058
May 2005 50 $ 14.53 50 1,008
- ---------------------------------------------------------
First Quarter,
Fiscal 2006 150 $ 14.39 150
=========================================================
All purchases during this period were open market transactions.
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 to Rule 13a-14(a) (17
CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (17
CFR 240.13a-14(a)), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 - Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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 11, 2005 By: /s/ Andrew M. Caggia
-------------------------
(Signature)
Andrew M. Caggia
Senior Vice President (duly
authorized officer) and
Chief Financial Officer
(principal financial officer)