SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended May 31, 1997
OR
[ ] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
80 ARKAY DRIVE, HAUPPAUGE, NEW YORK 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-435-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ____X____ No ________
As of July 14, 1997 there were 15,480,655 shares of the registrant's
common stock outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
May 31, February 28,
1997 1997
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 8,709 $ 8,382
Accounts receivable, net of allowance for doubtful
accounts of $1,936 and $1,761, respectively 32,175 31,182
Inventories 57,526 59,249
Deferred tax benefits 9,825 11,704
Other current assets 26,535 19,624
------- --------
Total current assets 134,770 130,141
-------- --------
Property, plant and equipment:
Land 3,832 3,832
Buildings and improvements 29,051 28,870
Machinery and equipment 124,276 125,022
-------- --------
157,159 157,724
Less: accumulated depreciation 96,682 94,930
-------- --------
Property, plant and equipment, net 60,477 62,794
-------- --------
Other assets 39,748 41,121
-------- --------
$234,995 $234,056
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 22,039 $ 24,753
Accrued expenses and other liabilities 12,721 13,715
Income taxes payable 778 810
-------- --------
Total current liabilities 35,538 39,278
-------- --------
Long-term debt 4,570 7,000
Other liabilities 4,333 4,584
Minority interest in subsidiary 11,402 11,397
Shareholders' equity:
Preferred stock, $.10 par value-
Authorized 1,000,000 shares, none outstanding - -
Common stock, $.10 par value-
Authorized 30,000,000 shares,
outstanding 15,468,000 and 13,876,000
shares, respectively 1,547 1,388
Additional paid-in capital 102,042 87,095
Retained earnings 70,740 78,920
Unrealized holding gain, net of tax 1,054 953
Foreign currency translation adjustment 3,769 3,441
-------- -------
Total shareholders' equity 179,152 171,797
-------- --------
$234,995 $234,056
======== ========
Interim figures are subject to independent year-end audit.
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three Months Ended
----------------------
May 31,
1997 1996
--------- ---------
Revenues $ 65,130 $100,072
Cost of goods sold 50,292 63,196
--------- ---------
Gross profit 14,838 36,876
--------- ---------
Operating expenses:
Research and development 6,400 5,986
Selling, general and administrative 20,106 26,412
Amortization of intangible assets 1,279 1,241
--------- ---------
27,785 33,639
--------- ---------
Income (loss) from operations (12,947) 3,237
--------- ---------
Other income (expense):
Interest income 130 129
Interest expense (89) (93)
Other income (expense), net 130 (24)
--------- ---------
171 12
--------- ---------
Income (loss) before minority interest
and provision for income taxes (12,776) 3,249
Minority interest in net income
of subsidiary 5 -
--------- ---------
Income (loss) before provision
for income taxes (12,781) 3,249
Provision for (benefit from)
income taxes (4,601) 1,332
--------- ----------
Net income (loss) $ (8,180) $ 1,917
========= ==========
Net income (loss) per common and
common equivalent share $ (0.54) $ 0.14
========= =========
Weighted average common and common
equivalent shares outstanding 15,056 13,806
Interim figures are subject to independent year-end audit.
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
------------------
May 31,
1997 1996
---- ----
Cash flows from operating activities:
Cash received from customers $ 64,104 $ 92,392
Cash paid to suppliers and employees (73,475) (109,218)
Interest received 68 127
Interest paid (75) (2)
Income taxes received (paid) 49 (400)
---------- ----------
Net cash used for operating activities (9,329) (17,101)
---------- ----------
Cash flows from investing activities:
Capital expenditures (2,919) (4,647)
Other 20 1
---------- ----------
Net cash used for investing activities (2,899) (4,646)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock 14,769 110
Borrowings under line of credit agreements 14,060 23,950
Repayments of borrowings under line of credit agreements (16,490) (7,700)
---------- ----------
Net cash provided by financing activities 12,339 16,360
---------- ----------
Effect of foreign exchange rate changes
on cash and cash equivalents 216 (231)
---------- ----------
Net increase (decrease) in cash and cash equivalents 327 (5,618)
Cash and cash equivalents at beginning of period 8,382 18,459
---------- ----------
Cash and cash equivalents at end of period $ 8,709 $ 12,841
========== ==========
Reconciliation of net income (loss)
to net cash used for operating activities:
Net income (loss) $ (8,180) $ 1,917
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Depreciation and amortization 5,573 5,447
Other adjustments, net 281 531
Changes in operating assets and liabilities:
Accounts receivable (1,064) (7,685)
Inventories 1,753 (20,477)
Accounts payable and accrued expenses and
other liabilities (2,834) 3,149
Other changes, net (4,858) 17
---------- ----------
Net cash used for operating activities $ (9,329) $ (17,101)
========== ==========
Interim figures are subject to independent year-end audit.
STANDARD MICROSYSTEMS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The interim financial statements furnished reflect all adjustments
(consisting of only normal and recurring adjustments) which are,
in the opinion of management, necessary to present a fair statement
of the Company's financial position and results of operations for the
three month period ended May 31, 1997. The financial
statements should be read in conjunction with the summary of
significant accounting policies and notes to consolidated financial
statements included in the Company's annual report on Form 10-K filed
with the Securities and Exchange Commission for the fiscal year ended
February 28, 1997.
2. Inventories
Inventories are valued at the lower of first-in, first- out cost or
market and consist of the following (in thousands):
May 31, 1997 Feb. 28, 1997
Raw Materials $11,624 $10,161
Work in Process 30,223 33,356
Finished Goods 15,679 15,732
------- -------
$57,526 $59,249
======= =======
3. New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board
issued "Statement of Financial Accounting Standards No.128,
Earnings per Share." This statement changes the method of
calculating and presenting earnings per share and will require the
Company to restate all prior periods to conform with this new
standard. This statement is effective for financial statements
with periods ending after December 15, 1997. The Company
plans to adopt this new pronouncement in its fourth quarter of
fiscal 1998, as earlier implementation is not allowed.
Statement No. 128 will require the Company to show a dual
presentation (basic and diluted) of earnings per share, where
the Company currently shows a single earnings per share calculation
under a simple capital structure. Neither the basic nor diluted
earnings per share are expected to differ materially from the current
presentation of earnings per share.
4. Long-term Debt
The Company maintains a $25 million line of credit with several
banks which permits the Company to borrow funds on a revolving basis
primarily to finance working capital needs. In May 1997, the Company
and its banks renegotiated the terms of the credit line, extending
the agreement through July 1998. This agreement provides the bank
with a general security interest in the Company's trade accounts
receivable and inventory.
5. Equity Investment
In March 1997, the Company and Intel Corporation (Intel) entered into
a Common Stock and Warrant Purchase Agreement (the Agreement)
whereby Intel acquired approximately 1,543,000 of newly issued shares
of the Company's common stock for $9.50 per share, or approximately
$14,564,000, and received a three-year warrant to purchase an
additional 1,543,000 shares at a price per share which increases
from $10.45, to $11.40, and then to $12.35 on March 18, 1997, 1998
and 1999, respectively. In addition, in June 1997, the Company and
Intel entered into a separate agreement whereby (i) Intel agreed to
integrate the Company's current and future devices into a specific
number of Intel's motherboard designs, and will consider integrating
such devices into additional motherboard designs, and (ii) the Company
granted Intel certain manufacturing rights should the Company be unable
to perform its obligations as a supplier of such devices.
The Agreement provides Intel with certain rights, including a right
of first refusal upon certain proposed sales of common stock by the
Company, demand and other registration rights with respect to the shares
acquired under the Agreement, a right for Intel to designate a
representative to serve on the Company's board of directors and
anti-dilution rights.
The Agreement also imposes certain restrictions upon Intel, including
a limitation on Intel's ability to acquire additional shares of the
Company's common stock (referred to as a standstill arrangement),
and restrictions on the transfer of shares acquired pursuant to
the Agreement. The standstill arrangement would terminate in the
event of certain third-party tender offers for the Company's
common stock.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Results of Operations by Industry Segment
The following table presents the Company's revenues and operating
income by industry segment for the three month periods ended
May 31, 1997 and 1996 (in millions):
Three months ended May 31, 1997 1996
Component products
Integrated circuit revenues $29.2 $50.1
Foundry device revenues 1.6 5.9
Total component products revenues $30.8 $56.0
Operating income(loss) (1.6) 12.1
System products
Adapter revenues $21.4 $30.7
Hub and switch revenues 8.7 8.8
Total system products revenues $30.1 $39.5
Operating loss (6.9) (3.4)
Toyo Microsystems Corporation
Revenues $ 4.2 $ 4.5
Operating income - -
General, corporate and other
Operating expenses and other ($ 4.5) ($ 5.5)
Standard Microsystems Corporation conducts its operations primarily through
the Component Products Division and the System Products Division. The
Component Products Division designs, produces and markets very-large-
scale-integrated circuits, mainly for control of various personal computer
functions, and specialized semiconductor-related products that are produced
in SMC's own foundry. The System Products Division designs, produces
and markets products that connect personal computers to, and allow
communications over, local area networks (LANs). The Company's
subsidiary, Toyo Microsystems Corporation (TMC), sells component
and system products in the Japanese market.
Revenue transfers between industry segments are excluded from the above
figures. The majority of these transfers consist of component and system
products shipped to TMC for resale in Japan.
Revenues
The Company's revenues of $65.1 million for the first quarter of fiscal 1998
declined 34.9% from the year-earlier level of $100.1 million. The Components
Products Division (CPD) reported revenues of $30.8 million, a decline of
45.0% from the year-earlier level of $56.0 million. CPD experienced revenue
declines in both of its business segments,
integrated circuits and foundry devices. The
decrease in integrated circuits' revenue was the result of competitive
market conditions for its personal computer (PC) input/output (I/O) devices
in the first quarter of fiscal 1998, compared to the previous year. These
competitive conditions led to aggressive pricing by the Company's
competitors and lower quantities shipped by the Company. Foundry
device revenues declined to $1.6 million in the first quarter of
fiscal 1998, a decrease of 72.9%, compared to $5.9 million for the prior years
first quarter, primarily the result of a significant reduction in orders
from the Foundry's largest customer. Component products accounted for 47.3%
of consolidated revenues in the first quarter of fiscal 1998, a decline
from 55.9% from the previous years first quarter.
The System Products Division (SPD) revenues of $30.1 million declined 23.8%
from the $39.5 million reported in the previous years' first quarter. This
was due to an industry reduction in demand for older Ethernet products and
significant price reductions announced in February 1997 for Fast Ethernet
adapters. SPD's revenues accounted for 46.2% of the consolidated
revenues in the first quarter of fiscal 1998, compared to 39.5% in the
previous year's first quarter.
Revenues of Toyo Microsystems Corporation (TMC), the Company's
Japanese subsidiary, declined to $4.2 million, compared
to $4.5 million from the year-earlier first quarter.
The following table presents the Company's revenues by geographic area as
percentages of total revenues from unaffiliated customers. Within the
category Revenues outside the United States, all but Japan (TMC) revenues
are considered export revenues from U.S. operations.
Three months ended May 31, 1997 1996
United States 43.9% 42.8%
Asia and Pacific Rim 26.9 37.3
Europe 18.0 11.7
Canada 1.2 2.0
Other 3.5 1.7
Export revenues 49.6 52.7
Japan (TMC) 6.5 4.5
Revenues outside the United States 56.1 57.2
Total Revenues 100.0% 100.0%
United States revenues increased 1.1% in the first quarter of fiscal 1998
over year-earlier levels. Export revenues declined 3.1% and sales
by TMC increased by 2.0% over the previous years first quarter.
The change in the percentage of revenue by geographic location for
Asia and the Pacific Rim, and Europe, for the quarter ended for May 31,
1997, compared to the prior year's first quarter, is predominantly due to a
shift in the Company's divisional sales mix. As revenues shift between
components products and system products, with each having its major customers
located in different geographic areas, the Company's geographic revenue
distribution shifts accordingly.
Gross Profit
Gross profit margin decreased to 22.8% for the first quarter of fiscal 1998
from 36.8% for the first quarter of fiscal 1997. The principal factors
contributing to the gross margin decrease were:
- sharply reduced average selling prices on PC I/O products compared
to the prior first quarter.
- a decline in foundry products revenues, and the consequent decrease
in the ability to cover manufacturing overhead.
- price decreases for the system products without
comparable offsetting manufacturing cost decreases.
Operating Expenses
Research and development expenses increased 6.7% to $6.4 million in the first
quarter of fiscal 1998 from $6.0 million in the year-earlier period. This
growth occurred in the Component Products Division, and reflects expanded
engineering staff. The System Products Division reported a small research
and development expense decline from the previous year's first quarter.
Selling, general and administrative expenses declined 23.9% to $20.1 million
in the first quarter of fiscal 1998, compared to $26.4 million in the
year-earlier period. Compared to the year-earlier quarter, these lower
selling, general and administrative expenses reflected lower sales
commissions resulting and other variable expenses resulting from lower
revenues, and a reduction of staff in the System Products Division and
in shared corporate resources.
Income Taxes
In the first quarter of fiscal 1998 there was a benefit from income taxes of
$4.6 million compared to a provision for taxes of $1.3 million from the prior
year. The Tax benefit for the first quarter of fiscal 1998 was recorded
at an effective rate of 36.0%, compared to the provision for taxes at a
rate of 41.0% for the year-earlier first quarter. The Company's effective
income tax rate primarily reflects the statutory rate and
non-deductible goodwill amortization.
Liquidity and Capital Resources
For the first three months of fiscal 1998, net cash used by operating
activities was $9.3 million, investing activities used $2.9 million and
cash provided by financing activities was $12.3 million. For the first
quarter of fiscal 1998, the Company's primary source of cash was provided
from its sale of common stock to Intel Corporation of Santa Clara,
California. In March 1997, Intel made a $14.6 million equity investment in
Standard Microsystems Corporation, acquiring a 19.9% equity interest.
The Company's working capital increased $8.3 million to $99.2 million as of
May 31, 1997, from $90.9 million at the end of fiscal 1997. The increase
in working capital primarily reflected an increase of $6.9 million in other
current asset. This increase in other current assets for the first quarter of
fiscal 1998 is primarily due to an increase of $6.5 million in income tax
refunds receivable. As of May 31, 1997 income tax refunds receivable was
$14.5 million, up from $8.0 million at February 28, 1997, primarily
the result of the Company's first quarter operating loss.
The Company maintains a $25 million line of credit with several banks,
which permits the Company to borrow funds on a revolving basis, primarily
to finance working capital needs. In May 1997, the company and its banks
renogotiated the terms of the credit line, extending the agreement through
July 1998. This agreement provides the banks with a general security
interest in the Company's trade accounts receivable and inventory. During
the first quarter of fiscal 1998, the Company repaid long-term debt of
$2.4 million, and has a balance of $4.6 million as of May 31, 1997,
down from $7.0 million as of February 28, 1997.
The nature of the computer industry makes it difficult to predict future
short-term and long-term cash, liquidity and capital requirements. The
Company believes that its current cash, working capital, capital resources
and existing line of credit will be sufficient to meet requirements for the
next twelve months.
Factors That May Affect Future Results
Certain statements and information contained in this quarterly
report, constitute "forward-looking statements" within the meaning of the
Federal Securities laws. These forward-looking statements involve risks
and uncertainties which may cause actual results and performance to be
different from those expressed or implied in such statements.
The Company competes in the personal computer semiconductor and local
area networking markets, both of which are characterized by intense
competition, rapid changes in technology and price erosion. Many of the
competitors in these markets are larger and have significantly greater
financial and other resources than the Company.
The Company's quarterly and annual operating results may be influenced
by factors, including, among other things; worldwide demand for personal
computers, the ability to introduce competitive products on a timely basis,
constraints on the availability and fluctuations in the cost of subcontract
manufacturing, the ability to forecast market and customer demand and new
products and technologies introduced by competitors.
Sales of most of the Company's products depend largely on sales of
personal computers. Reductions in the rate of growth in the PC market
could adversely affect the Company's operating results. In addition, as a
component supplier to PC manufacturers, the Company's Component Products
Division often experiences a greater magnitude of demand fluctuation than
the Division's customers themselves experience. Also, some of the Company's
products are used in PCs for the consumer market, which tends to be more
volatile than other segments of the PC marketplace.
The Company's success is highly dependent upon its ability to develop new
products, bring them to the market ahead of its competitors and induce
customers to select its products for their needs. In an environment of
accelerating changes in technology and short product life cycles, these
factors have become increasingly challenging and important.
The vast majority of the Company's products are manufactured, assembled
and tested by independent foundries and subcontract manufacturers. This
reliance upon foundries and subcontractors involves certain risks,
including potential lack of manufacturing availability, reduced control
over delivery schedules, availability of advanced process technologies,
changes in manufacturing yields and potential cost fluctuations. Most of
the Company's LAN products are currently manufactured by two separate
subcontractors, increasing the potential risk of interruptions in LAN
manufacturing availability.
The Company generally must order inventory to be built by its foundries and
subcontract manufacturers well in advance of product shipments. Because
the Company's markets are volatile, there is risk that the Company may
forecast incorrectly and produce excess or insufficient inventories. This
inventory risk is increased by the recent trend for customers to place
orders with increasingly shorter lead times.
A significant number of the Company's foundries and subcontractors are
located in Asia. Many of the Company's customers also manufacture in
Asia or subcontract their manufacturing to Asian companies. This
concentration of manufacturing and selling activity in Asia poses risks
that could affect demand for and supply of the Company's products,
including currency exchange rate fluctuations, economic and trade
policies and the Asian political environment.
The Company's performance is inherently dependent upon hiring and
retaining employees with specific skills. The inability to hire and
retain such employees could hinder the Company's product development and
ability to manufacture, market and sell its products.
A limited number of customers account for a significant portion of the
Company's revenues. The Company's revenues from any one customer can
fluctuate from period to period depending upon market demand for that
customer's products, the customer's inventory management and the overall
financial condition of the customer.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the Company's Form 10-K for the year ended February
28, 1998, in May 1997, Cabletron Systems, Inc. and Cabletron Systems
Acquisition, Inc. (together, Cabletron) commenced legal action
in the Superior Court for the Commonwealth of Massachusetts,
against the Company claiming violation of the non-competition
clause included in the January 1996 Asset Purchase Agreement
among the Company and Cabletron. The action seeks an injunction and
unspecified damages. Cabletron's motion for preliminary injunctive
relief was denied in May 1997. The Company firmly believes that
this claim is without merit and intends to vigorously defend
against it.
Item 2. Changes in Securities
During the quarter covered by this report, registrant sold to Intel
Corporation 1,542,506 shares of SMC Common Stock for $14,653,807
and issued to Intel a three-year warrant to purchase 1,542,606
shares at $10.45 per share until March 18, 1998, $11.40 per share
between March 18, 1998 and March 18, 1999 and $12.35 per share
between March 18, 1999 and March 18, 2000. Exemption from
registration is claimed under Section 4(2) of the Securities Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Amended and Restated Credit Agreement, dated
as of May 23, 1997
Subsidiaries Security Agreement, dated as of
May 23, 1997
Amended and Restated Guarantee, dated as of
May 23, 1997
Borrower Security Agreement, dated as of
May 23, 1997
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K.
None.
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
(Registrant)
DATE: JULY 14, 1997 /S/ Eric M. Nowling
Eric M. Nowling
Vice President and Controller
(Principal Financial and Accounting Officer)