SMSC Announces Second Quarter Fiscal 2008 Results

SMSC (Nasdaq: SMSC) today announced second quarter fiscal 2008 sales and revenues of $97.5 million, compared to $96.7 million in last fiscal year's second quarter. On a GAAP basis, second quarter fiscal 2008 net income was $9.3 million, an increase of 62% from $5.7 million in the same period last year, and net income per diluted share was $0.38 versus $0.25 in the second quarter of fiscal 2007. SMSC also presents non-GAAP financial measures to provide additional insight into underlying operating performance on a comparable basis. Non-GAAP measures exclude charges and credits for Stock Appreciation Rights (SARs) and stock options as recorded pursuant to SFAS 123R, and the amortization of acquired intangible assets. On a non-GAAP basis, for the three months ended August 31, 2007, net income was $14.2 million, an increase of 59% from $8.9 million in the same period last year, and net income per diluted share was $0.59 as compared to $0.39 last year. Included in both the GAAP and non-GAAP results for the second quarter of fiscal 2008 is a reduction in income tax expense of $2.1 million to adjust deferred tax liabilities due to the reduced German statutory income tax rates enacted in July 2007. Excluding this income tax benefit, non-GAAP net income per diluted share would have been $0.50 for the three months ended August 31, 2007. Second quarter sales and revenues in the Consumer Electronics & Infotainment, Mobile & Desktop PC and Industrial & Other markets were $37.1 million, $43.5 million and $16.9 million, or 38%, 45% and 17% of total sales and revenues, respectively. Cash and short-term investments at August 31, 2007 were $181.7 million, up from $169.8 million as of May 31, 2007, and the company has no bank debt. During the quarter the company repurchased 267,818 shares of common stock for $9.3 million, or $34.67 per share. Steven J. Bilodeau, Chairman and Chief Executive Officer, said, "Revenues and earnings for the second quarter significantly exceeded our prior expectations. SMSC’s sales into notebook PCs were particularly strong. In addition, Consumer Electronics & Infotainment sales were up 20 percent from last quarter. "We are also pleased to report that we achieved another key goal by exceeding a 15% operating margin on a non-GAAP basis for the quarter, actually delivering 16.1%. In the third quarter, we expect revenues and gross margins to increase and with continued leverage of expenses, non-GAAP operating margins should grow to even higher levels." A management teleconference to discuss second quarter results, the outlook for the third quarter and an update on SMSC's business model is scheduled for Tuesday, September 25th at 5:00 P.M. EDT. Sales and revenues in the fiscal third quarter are expected to be in the range of $98 to $101 million and earnings per diluted share are expected to be in the range of $0.49 to $0.53 per share. Guidance is presented on a non-GAAP basis only, given that the GAAP basis charges for equity-based compensation related to SARs cannot be projected reasonably. Slide presentation materials containing additional disclosure regarding results and future earnings expectations, and a link to a webcast of the teleconference will be accessible from the investor relations section of SMSC's website at www.smsc.com. Use of Non-GAAP Financial Information: Included within the press release are non-GAAP financial measures that supplement the Company’s Consolidated Statements of Operations prepared under generally accepted accounting principles (GAAP). These non-GAAP financial measures adjust the Company's actual results prepared under GAAP to exclude certain charges. In the schedules attached to this press release, the non-GAAP measures have been reconciled to and should be considered together with the Consolidated Statements of Operations. Reconciliations of GAAP to non-GAAP measures for the period for the current and prior fiscal year are provided in schedules accompanying this release. These non-GAAP measures are not meant as a substitute for GAAP, but are included solely for informational and comparative purposes. The Company's management believes that this information assists in evaluating operational trends, financial performance, and cash generating capacity. Management believes these non-GAAP measures allow investors to evaluate SMSC’s financial performance using some of the same measures as management. However, the non-GAAP financial measures should not be regarded as a replacement for corresponding, similarly captioned, GAAP measures. Forward Looking Statements: SMSC’s quarterly results of operations have not been audited by the Company’s independent accountants. Except for historical information contained herein, the matters discussed in this announcement are forward-looking statements about expected future events and financial and operating results that involve risks and uncertainties. These uncertainties may cause our actual future results to be materially different from those discussed in forward-looking statements. Our risks and uncertainties include the timely development and market acceptance of new products; the impact of competitive products and pricing; our ability to procure capacity from our suppliers and the timely performance of their obligations, the effects of changing economic conditions domestically and internationally and on our customers; our relationships with and dependence on customers and growth rates in the personal computer, consumer electronics and embedded and automotive markets and within our sales channel; changes in customer order patterns, including order cancellations or reduced bookings; the effects of tariff, import and currency regulation; potential or actual litigation; and excess or obsolete inventory and variations in inventory valuation, among others. In addition, SMSC competes in the semiconductor industry, which has historically been characterized by intense competition, rapid technological change, cyclical market patterns, price erosion and periods of mismatched supply and demand. Our forward looking statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations and may not reflect the potential impact of any future acquisitions, mergers or divestitures. All forward-looking statements speak only as of the date hereof and are based upon the information available to SMSC at this time. Such statements are subject to change, and the Company does not undertake to update such statements, except to the extent required under applicable law and regulation. These and other risks and uncertainties, including potential liability resulting from pending or future litigation, are detailed from time to time in the Company's reports filed with the 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 Securities and Exchange Commission, particularly those sections entitled "Other Factors That May Affect Future Operating Results” or "Risk Factors” for a more complete discussion of these and other risks and uncertainties. About SMSC: Many of the world’s most successful global technology companies rely upon SMSC as a go-to resource for semiconductor system solutions that span analog, digital and mixed-signal technologies. Leveraging substantial 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 consumer electronics, automotive infotainment, PC and industrial applications. The Company has developed leadership positions in its select markets by providing application specific solutions such as mixed-signal embedded controllers, non-PCI Ethernet, ARCNET, MOST and Hi-Speed USB. SMSC is headquartered in Hauppauge, New York with operations in North America, Asia and Europe. Engineering design centers are located in Arizona, New York, Texas and Karlsruhe, Germany. Additional information is available at www.smsc.com. SMSC is a registered trademark of Standard Microsystems Corporation. STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (Unaudited) (in thousands, except per share amounts)     Three Months Ended   Six Months Ended August 31, August 31,     2007 2006 2007 2006   Sales and revenues $ 97,522 $ 96,663 $ 179,069 $ 182,807   Costs and expenses: Costs of goods sold 47,879 52,359 86,730 97,273 Research and development 18,192 17,142 36,181 32,310 Amortization of intangible assets 1,652 1,591 3,293 3,160 Selling, general and administrative 21,718 18,159 41,990 31,962   Income from operations 8,081 7,412 10,875 18,102   Interest income 1,665 1,173 3,067 2,319 Interest expense (89) (111) (174) (144) Other expense, net 52 9 410 (53)   Income before provision for income taxes 9,709 8,483 14,178 20,224   Provision for income taxes 428 2,756 1,695 5,864   Net income $ 9,281 $ 5,727 $ 12,483 $ 14,360   Basic net income per share: $ 0.40 $ 0.26 $ 0.54 $ 0.66 Diluted net income per share: $ 0.38 $ 0.25 $ 0.52 $ 0.62   Weighted average common shares outstanding: Basic 23,097 21,904 22,939 21,864 Diluted 24,160 22,784 24,010 23,005 STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands)     August 31,   February 28, 2007 2007 Assets Current assets: Cash and cash equivalents $ 31,384 $ 36,255 Short-term investments 150,328 123,768 Accounts receivable, net 55,286 48,014 Inventories 42,646 50,873 Deferred income taxes 19,229 19,312 Other current assets 9,013 8,751 Total current assets 307,886 286,973 Property, plant and equipment, net 56,383 58,020 Goodwill 99,976 98,259 Intangible assets, net 37,824 40,256 Deferred income taxes 6,772 7,094 Other assets 3,265 3,037 Total assets $ 512,106 $ 493,639 Liabilities and shareholders' equity Current liabilities: Accounts payable $ 22,071 $ 25,617 Deferred income on shipments to distributors 15,452 12,752 Accrued expenses, income taxes and other liabilities 33,071 36,378 Total current liabilities 70,594 74,747 Deferred income taxes 8,087 10,100 Other liabilities 14,509 16,850 Shareholders' equity: Preferred stock -- -- Common stock 2,586 2,511 Additional paid-in capital 295,846 276,701 Retained earnings 153,628 139,657 Treasury stock, at cost (41,325) (32,038) Accumulated other comprehensive income 8,181 5,111 Total shareholders' equity 418,916 391,942 Total liabilities and shareholders' equity $ 512,106 $ 493,639 STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES Supplemental Reconciliation of GAAP Results to Non-GAAP Financial Measures (in thousands, except per share amounts)   Three Months Ended August 31, 2007   2006   Income from operations – GAAP basis (a) $ 8,081 $ 7,412   Non-GAAP adjustments: Stock-based compensation included in: (b) Costs of goods sold 622 270 Research and development 1,972 1,186 Selling, general and administrative   3,394   1,683 5,988 3,139 Amortization of intangible assets (c)   1,652   1,591 Income from operations – non-GAAP basis (d) $ 15,721 $ 12,142   Net income – GAAP basis $ 9,281 $ 5,727 Non-GAAP adjustments (as scheduled above) 7,640 4,730 Tax effect of non-GAAP adjustments (e)   (2,750)   (1,537) Net income – non-GAAP basis $ 14,171 $ 8,920   GAAP Net income per share – diluted $ 0.38 $ 0.25 Non-GAAP Net income per share – diluted (f) $ 0.59 $ 0.39 Management believes that non-GAAP financial measures assist it in evaluating operational trends, financial performance, and cash generating capacity, and that these non-GAAP measures allow investors to evaluate SMSC's financial performance using some of the same measures as management. However, the non-GAAP financial measures should not be regarded as a replacement for corresponding, similarly captioned, GAAP measures. (a) 8.3% and 7.7% of total sales and revenues, respectively. (b) To eliminate compensation expense for Stock Appreciation Rights ("SARs”) and stock options as recorded under GAAP applicable in each period presented. Cash paid in connection with exercises of SARs totaled $679k and $13k, in the three month periods ended August 31, 2007 and 2006, respectively. The Company does not include charges related to restricted stock awards in these non-GAAP adjustments, as they are issued primarily in connection with the Company’s annual employee incentive compensation program. (c) To eliminate the amortization of intangible assets acquired in the fiscal 2006 acquisition of OASIS and the fiscal 2003 acquisition of Gain Technology Corporation. (d) 16.1% and 12.6% of total sales and revenues, respectively. (e) To adjust the provision for income taxes related to the adjustments described in notes (b) and (c) above, based on applicable incremental tax rates. (f) Computed using average number of GAAP-equivalent diluted shares outstanding for each period presented. STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES Supplemental Reconciliation of GAAP Results to Non-GAAP Financial Measures (in thousands, except per share amounts)   Six Months Ended August 31, 2007   2006   Income from operations – GAAP basis (a) $ 10,875 $ 18,102   Non-GAAP adjustments: Stock-based compensation included in: (b) Costs of goods sold 948 (218) Research and development 3,600 652 Selling, general and administrative   5,674   (395) 10,222 39 Amortization of intangible assets (c)   3,293   3,160 Income from operations – non-GAAP basis (d) $ 24,390 $ 21,301   Net income – GAAP basis $ 12,483 $ 14,360 Non-GAAP adjustments (as scheduled above) 13,515 3,199 Tax effect of non-GAAP adjustments (e)   (4,865)   (1,078) Net income – non-GAAP basis $ 21,133 $ 16,481   GAAP Net income per share – diluted $ 0.52 $ 0.62 Non-GAAP Net income per share – diluted (f) $ 0.88 $ 0.72 Management believes that non-GAAP financial measures assist it in evaluating operational trends, financial performance, and cash generating capacity, and that these non-GAAP measures allow investors to evaluate SMSC's financial performance using some of the same measures as management. However, the non-GAAP financial measures should not be regarded as a replacement for corresponding, similarly captioned, GAAP measures. (a) 6.1% and 9.9% of total sales and revenues, respectively. (b) To eliminate compensation expense for Stock Appreciation Rights ("SARs”) and stock options as recorded under GAAP applicable in each period presented. Cash paid in connection with exercises of SARs totaled $1,420K and $44k, in the six month periods ended August 31, 2007 and 2006, respectively. The Company does not include charges related to restricted stock awards in these non-GAAP adjustments, as they are issued primarily in connection with the Company’s annual employee incentive compensation program. (c) To eliminate the amortization of intangible assets acquired in the fiscal 2006 acquisition of OASIS and the fiscal 2003 acquisition of Gain Technology Corporation. (d) 13.6% and 11.7% of total sales and revenues, respectively. (e) To adjust the provision for income taxes related to the adjustments described in notes (b) and (c) above, based on applicable incremental tax rates. (f) Computed using average number of GAAP-equivalent diluted shares outstanding for each period presented.