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, 1999 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, 1999 there were 15,621,982 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, 1999 1999 Assets Current assets: Cash and cash equivalents .......................... $ 68,354 $ 68,071 Short-term investments ............................. 2,000 2,000 Accounts receivable, net of allowance for doubtful accounts of $1,151 and $1,111, respectively ...... 21,048 22,608 Inventories ........................................ 17,184 13,785 Deferred tax benefits .............................. 7,681 8,154 Other current assets ............................... 10,971 9,142 --------- --------- Total current assets ............................... 127,238 123,760 ========= ========= Property, plant and equipment: Land ............................................... 3,832 3,832 Buildings and improvements ......................... 30,134 29,846 Machinery and equipment ............................ 64,669 63,890 --------- --------- 98,635 97,568 Less: accumulated depreciation .................... 64,081 62,916 --------- --------- Property, plant and equipment, net ................. 34,554 34,652 --------- --------- Other assets ......................................... 37,639 38,219 Net assets of discontinued operation ................. 5,567 5,336 --------- --------- $ 204,998 $ 201,967 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable ................................... $ 13,370 $ 8,873 Accrued expenses and other liabilities ............. 12,654 14,453 Current portion of obligations under capital leases. 870 852 --------- --------- Total current liabilities .......................... 26,894 24,178 --------- --------- Obligations under capital leases ..................... 2,793 3,017 Other liabilities .................................... 4,925 4,799 Minority interest in subsidiary ...................... 11,540 11,539 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 16,134,000 and 16,045,000 shares, respectively ............................. 1,613 1,605 Additional paid-in capital ......................... 109,138 108,665 Retained earnings .................................. 47,629 47,454 Treasury stock, 521,000 shares, at cost ............ (2,957) (2,957) Accumulated other comprehensive income ............. 3,423 3,667 --------- --------- Total shareholders' equity .......................... 158,846 158,434 --------- --------- $ 204,998 $ 201,967 ========= ========= See Notes to Consolidated Financial Statements. STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share and per share data) Three Months Ended May 31, 1999 1998 - ------------------------------------------------------------------------------ Revenues .............................................. $ 35,430 $ 35,284 Cost of goods sold .................................... 21,791 22,268 -------- -------- Gross profit .......................................... 13,639 13,016 -------- -------- Operating expenses: Research and development ............................ 5,690 3,665 Selling, general and administrative ................. 8,252 6,661 -------- -------- 13,942 10,326 -------- -------- Income (loss) from operations ......................... (303) 2,690 -------- -------- Other income (expense): Interest income ..................................... 646 591 Interest expense .................................... (77) (62) Other income (expense), net ......................... (4) (35) -------- -------- 565 494 -------- -------- Income before provision for income taxes and minority interest ............................... 262 3,184 Provision for income taxes ............................ 86 1,170 Minority interest in net income (loss) of subsidiary .. 1 (4) -------- -------- Income from continuing operations ..................... 175 2,018 -------- -------- Loss from discontinued operation (net of income tax benefit of $885) .................................... - (1,573) -------- -------- Net income ........................................... $ 175 $ 445 ======== ======== Basic and diluted net income per share: Income from continuing operations ................... $ 0.01 $ 0.13 Loss from discontinued operation .................... - (0.10) -------- -------- Basic and diluted net income per share: ............... $ 0.01 $ 0.03 ======== ======== Weighted average common shares outstanding : Basic ............................................... 15,575 15,946 Diluted ............................................. 15,601 16,034 See Notes to Consolidated Financial Statements. STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended May 31, 1999 1998 - --------------------------------------------------------------------------------- Cash flows from operating activities: Cash received from customers ........................... $ 36,956 $ 32,170 Cash paid to suppliers and employees ................... (31,158) (28,256) Interest received ...................................... 529 494 Interest paid .......................................... (77) (62) Income taxes paid ...................................... (1,114) (77) -------- -------- Net cash provided by operating activities .............. 5,136 4,269 -------- -------- Cash flows from investing activities: Capital expenditures ................................... (2,110) (1,067) Sales of machinery and equipment ....................... 207 12 Sales of short-term investments ........................ - 4,603 Other .................................................. (26) (31) -------- -------- Net cash provided by (used for) investing activities ... (1,929) 3,517 -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock ................. 216 242 Repayments of obligations under capital leases ......... (206) (134) -------- -------- Net cash provided by financing activities .............. 10 108 -------- -------- Effect of foreign exchange rate changes on cash and cash equivalents ............................................ (189) (638) -------- -------- Net cash used for discontinued operations ................ (2,745) (3,119) -------- -------- Net increase in cash and cash equivalents ................ 283 4,137 Cash and cash equivalents at beginning of period ......... 68,071 47,155 -------- -------- Cash and cash equivalents at end of period ............... $ 68,354 $ 51,292 ======== ======== Reconciliation of income from continuing operations to net cash provided by operating activities: Income from continuing operations ........................ $ 175 $ 2,018 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization .......................... 2,410 3,016 Other adjustments, net ................................. 221 139 Changes in operating assets and liabilities: Accounts receivable .................................... 1,430 (3,207) Inventories ............................................ (3,441) (1,453) Accounts payable and accrued expenses and other liabilities ..................................... 5,987 4,585 Other changes, net ..................................... (1,646) (829) -------- -------- Net cash provided by operating activities ................ $ 5,136 $ 4,269 ======== ======== See Notes to Consolidated Financial Statements. STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited 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, 1999. 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, 1999. Certain items shown have been reclassified to conform with the fiscal 2000 presentation. 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, 1999 Feb. 28, 1999 -------------------------------------------------------------- Raw Materials ................ $ 548 $ 475 Work in Process .............. 10,223 9,310 Finished Goods ............... 6,413 4,000 ------- ------- $17,184 $13,785 ======= ======= 3. Net Income Per Share Basic net income per share is based upon the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average common shares outstanding during the period plus the dilutive effect of shares issuable through stock options and warrants. The shares used in calculating basic and diluted net income per share are reconciled as follows (in thousands): Three months ended May 31, 1999 1998 ------------------------------------------------------------- Average shares outstanding for basic net income per share ............. 15,575 15,946 Dilutive effect of stock options ........ 26 88 ------ ------ Average shares outstanding for diluted net income per share ........... 15,601 16,034 ====== ====== 4. 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 a long-term equity investment. The components of the Company's comprehensive loss for the three month periods ended May 31, 1999 and 1998 were as follows (in thousands): Three months ended May 31, 1999 1998 --------------------------------------------------------------- Net income ............................... $ 175 $ 445 Other comprehensive income (loss): Currency translation adjustment ......... (325) (981) Unrealized gain (loss) on investment .... 81 (72) ------ ------ Total comprehensive loss $ (69) $ (608) ====== ====== 5. Subsequent Event In March 1999, the Company's Board of Directors approved a plan for the Company to divest its Foundry Business Unit (FBU), which had been experiencing operating losses over the past several years. This divestiture was completed on June 1, 1999, with the Company signing an Asset Purchase Agreement, and related agreements, selling the assets of its Foundry Business Unit to privately held Inertia Optical Technology Applications, Inc. (IOTA) of Newark, NJ. The combined businesses will hereafter operate as Standard MEMS,Inc. (SMI). The transaction was effected through IOTA's purchase of the FBU's assets from SMSC in exchange for 38% of IOTA's outstanding common stock. Standard MEMS, Inc. is accordingly majority owned by the previous shareholders of IOTA. SMSC has committed to reducing its 38% interest in SMI to 19% or less within one year. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Standard Microsystems Corporation (the "Company") is a worldwide supplier of metal-oxide-semiconductor/very-large-scale-integrated (MOS/VLSI) circuits for the personal computer (PC) and related industries. The Company's integrated circuits are developed and sold for applications in PC input/output (I/O), PC connectivity, Local Area Networking (LAN), PC systems logic, and embedded networking. The Company operates in one industry segment in which it designs, develops and markets integrated circuits for the personal computer and related industries. REVENUES Revenues of $35.4 million for the first quarter of fiscal 2000 remained approximately level compared to revenues of $35.3 million for the year-earlier period. During the first quarter of fiscal 2000, the Company's input/output (I/O) products continued to experience declining average selling prices, the impact of which was partially offset by an increase in units shipped. The Company's introduction of its connectivity product line also helped to offset this decline in I/O average selling prices. High-volume shipments of connectivity products began in the second quarter of fiscal 1999. Revenues for the first quarter of fiscal 2000 were adversely impacted by lower shipments to two of the Company's larger customers. Specifically, the previously well-publicized delay in the introduction of the Camino chipset by Intel Corporation has delayed high-volume shipments of SMSC's new family of Enhanced Super I/O products designed for the chipset's Low Pin Count (LPC) bus architecture. Current expectations are that the Camino chipset will be introduced in August or September of this year. The Company's I/O products accounted for 73.2% of the Company's total revenue for the first quarter of fiscal 2000, compared to 83.5% for the year earlier quarter. GROSS PROFIT The Company's gross profit percentage for the first quarter of fiscal 2000 increased to 38.5%, compared to 36.9% reported for the first quarter of fiscal 1999. This improvement can be attributed to the Company's continuing efforts to reduce product costs and the impact of new, higher margined products. OPERATING EXPENSES Research and development expenses increased to $5.7 million in the first quarter of fiscal 2000, compared to $3.7 million for the first quarter of fiscal 1999. This increase reflects increased spending on new product development programs, an increase in the engineering staff, increased engineering test development activity and the impact of a business acquisition executed by the Company's Japanese subsidiary during the second quarter of fiscal 1999. The Company's R&D efforts include new product design, qualification, and a continuous migration to smaller geometries and more advanced semiconductor process technologies. Through these efforts, the Company has been able to introduce new products, and maintain and increase its gross margins while decreasing average selling prices to meet competition. The Company's future product plans include expanding its product line into microprocessor chipsets, and some of the Company's expanded R&D investments reflect this strategy. Selling, general and administrative expenses increased to $8.2 million in the first quarter of fiscal 2000, compared to $6.7 million for the year-earlier quarter. This increase is primarily associated with the elimination of certain administrative cost subsidies received by the Company related to the Company's 1997 sale of its former local area networking business. OTHER INCOME AND EXPENSE Other income and expense increased to $0.6 in the first quarter of fiscal 2000 from $0.5 for the year-earlier period. This increase is predominately due to higher average balances of cash and cash equivalents available for investment during the current year. INCOME TAXES For the three month period ended May 31, 1999 income taxes have been provided at an effective tax rate of 32.8%, compared to 36.7% in the year earlier period. The Company's reduced effective income tax rate in fiscal 2000 primarily reflects the impact of tax-exempt interest income earned on the Company's short-term investments. The Company's effective income tax rate primarily reflects statutory tax rates, income tax credits, and the impact of certain non-deductible expenses and tax exempt income. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments were $70.4 million at May 31, 1999, compared to $70.1 million at February 28, 1999 an increase of $0.3 million during the quarter. Working capital increased to $100.3 million as of May 31, 1999, from $99.6 million at February 28, 1999. In June 1999, the Company completed the sale of a majority interest in its Foundry Business Unit, which had been experiencing operating losses in recent years. This business unit, classified as a discontinued operation, consumed $2.7 million of cash in its operation during the first quarter of fiscal 2000. An increase in the Company's inventory as of May 31, 1999 to $17.2 million, compared to $13.8 million at February 28, 1999, reflects new product introductions expected to occur in the second and third quarters of fiscal 2000. Overall inventory turnover of 5.1 times per year (calculated as of May 31, 1999) is still well within the Company's expectations. The Company has in the past acquired or invested in complementary businesses, technologies and has licensed the right to use intellectual property. The Company has also used equity investments in, prepayments to, or deposits with foundries to secure wafer-manufacturing capacity. The Company will consider similar arrangements in the future if the needs or opportunities arise. The Company believes that existing cash, cash equivalents, and short-term investments, together with cash from operations, and existing lines of credit will be sufficient to meet its cash requirements for the foreseeable future. OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING 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's operating results are subject to general economic conditions and a variety of risks characteristic of the semiconductor and personal computer industries, including cyclical market patterns, price erosion, product development risks, technological change, business conditions and concentrations in Asia, reliance upon foundries and subcontractors, and forecasts of product demand, any of which could cause the Company's operating results to differ materially from past results. For a further discussion of such risks, see "Risk Factors" in Part 2, Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" included within the Company's Annual Report on Form 10-K filed for the fiscal year ended February 28, 1999. The Company maintains several equity investments in non-public companies which operate in the semiconductor or personal computer industry, resulting from strategic business relationships or other investment opportunities, which were deemed beneficial to the Company. These companies are subject to many of the same risks and uncertainties faced by the Company. These investments, which are reported at cost on the Company's Consolidated Balance Sheet, are reviewed regularly for events and circumstances that may effect their current and future value. Within the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. YEAR 2000 DISCUSSION Many computer programs were designed to perform data computations on the last two digits of the numerical value of a year. When computations referencing the year 2000 are performed, these programs may interpret "00" as the year 1900 and could either corrupt the date-related computations or not process them at all. As a result, many software and computer systems may need to be upgraded or replaced in order to comply with such year 2000 requirements. The Company has a comprehensive Year 2000 project designed to identify and assess the risks associated with its information systems, products, operations and suppliers that are not Year 2000 compliant, and to develop, test and implement remediation and contingency plans to mitigate these risks. The Company's Year 2000 project is addressing risks in the areas of business application software, technical infrastructure, end-user computing, engineering and development tools, supplier and service provider compliance, manufacturing tools, facilities infrastructure and the Company's products. In addition, the Company provides its customers with information on its Year 2000 project and progress made towards Year 2000 compliance. Several years ago, the Company installed certain Year 2000 compliant information systems, and has moved a substantial portion of its core business applications to this platform. The Company is currently installing additional new information systems and expects all internal information systems to achieve Year 2000 compliance during the middle of calendar year 1999. The Company is also assessing the impact of the Year 2000 issue on its products, and has not identified, and does not expect to identify, any material issues in that regard. Because most of the Company's information systems achieved Year 2000 compliance with the transition to a new information system several years ago, the Company has not incurred any material expenditures to specifically address Year 2000 issues. Going forward, the Company is committed to expending the resources necessary to address this issue, but at this time, does not anticipate any material expenditures for the resolution of Year 2000 issues relating to either its own information systems or its products. However, the Company could be adversely impacted by Year 2000 issues faced by significant vendors, suppliers and service organizations with which the Company conducts business. Based solely on responses received to date from these parties, the Company has no reason to believe that there will be any material adverse impact on the Company's financial condition or results of operations relating to any Year 2000 issues of such parties. However, if the responses received from these third parties are not accurate or happen to change, then there could be an unforeseen material adverse impact on the Company's financial condition and results of operations. The Company is continuing to reasonably assess the impact, if any, that third parties which may not be Year 2000 compliant may have on its operations, and expects to complete this assessment by the end of June 1999. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K for the year ended February 28, 1999. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 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, 1999 /S/ Eric M. Nowling --------------------------------- (Signature) Eric M. Nowling Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer)