UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549





FORM 10-Q





T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarterly Period Ended May 31, 2011





OR





o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


Commission File Number 0-7422





STANDARD MICROSYSTEMS CORPORATION
 (Exact Name of Registrant as Specified in Its Charter)





Delaware
11-2234952(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)80 Arkay Drive,

Hauppauge, New York
11788-3728(Address of Principal Executive Offices)
(Zip Code)





(631) 435-6000
 (Registrant’s Telephone Number, Including Area Code)


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. YesTNoo





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesTNoo





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated filer o
Accelerated filer TNon-accelerated filer o
Smaller reporting company o(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YesoNoT





As of May 31, 2011 there were 23,166,811 shares of the registrant’s common stock outstanding.










STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





TABLE OF CONTENTS





PagePART I — FINANCIAL INFORMATIONItem 1.
Financial Statements
1Condensed Consolidated Balance Sheets as of May 31, 2011 and February 28, 2011
1Condensed Consolidated Statements of Operations for the Three-Month Periods Ended May 31, 2011 and 2010
2Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended May 31, 2011 and 2010
3Notes to Condensed Consolidated Financial Statements
4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26Item 3.
Quantitative and Qualitative Disclosures About Market Risk
36Item 4.
Controls and Procedures
37PART II — OTHER INFORMATIONItem 1.
Legal Proceedings
38Item 1A.
Risk Factors
38Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
38Item 3.
Defaults Upon Senior Securities
39Item 4.
Removed and Reserved
39Item 5.
Other Information
39Item 6.
Exhibits
39Signature
40Exhibit 31.1Exhibit 31.2Exhibit 32


Table to Contents


PART I


Item1.— Financial Statements


STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands)





May 31,

2011


February 28,

2011(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
125,929


$
170,387Accounts receivable, net


76,739



64,714Inventories


54,095



47,232Deferred income taxes, net


17,884



31,156Other current assets


18,810



8,047Total current assets


293,457



321,536Property, plant and equipment, net


67,442



67,382Goodwill


117,887



77,273Intangible assets, net


39,655



31,745Long-term investments, net


29,336



29,490Investments in equity securities


2,042



2,042Deferred income taxes, net


6,834



6,074Other assets


3,938



3,550TOTAL ASSETS

$
560,591


$
539,092LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities:Accounts payable

$
30,436


$
27,171Deferred income from distribution


21,667



16,167Accrued expenses and other liabilities


68,671



72,459Total current liabilities


120,774



115,797Deferred income taxes


5,374



4,519Other liabilities


23,769



21,869Commitments and contingenciesShareholders’ equity:Preferred stock


-



-Common stock


2,769



2,749Additional paid-in capital


365,265



359,790Retained earnings


133,468



127,291Treasury stock, at cost


(101,837
)


(101,411
)Accumulated other comprehensive income


11,009



8,488Total shareholders’ equity


410,674



396,907TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY

$
560,591


$
539,092





See Accompanying Notes to Condensed Consolidated Financial Statements


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share data)





Three Months Ended

May 31,2011


2010(Unaudited)Sales and revenues

$
103,495


$
97,159Costs of goods sold


47,710



45,364Gross profit on sales and revenues


55,785



51,795Operating expenses:Research and development


24,527



23,819Selling, general and administrative


23,246



25,353Restructuring charges


343



821Income from operations


7,669



1,802Interest income


118



144Interest expense


(38
)


(29
)Other income (expense), net


142



(156
)Income before income taxes


7,891



1,761Provision for income taxes


1,714



1,134Net income

$
6,177


$
627Net income per share:Basic

$
0.27


$
0.03Diluted

$
0.26


$
0.03Weighted average common shares outstanding:Basic


23,059



22,481Diluted


23,557



22,787


See Accompanying Notes to Condensed Consolidated Financial Statements


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)





Three Months Ended

May 31,2011


2010(Unaudited)Cash flows (used in) provided by operating activities:Net income

$
6,177


$
627Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation and amortization


7,095



5,688Foreign exchange (gain) loss


(115
)


927Excess tax benefits from stock-based compensation


(85
)


(64
)Stock-based compensation


3,113



7,739Deferred income taxes


12,842



(3,714
)Losses on sales of property, plant and equipment


-



47Non cash restructuring charges


73



-(Recoveries of) provision for sales returns and allowances


(92
)


239Changes in operating assets and liabilities, net of effects of business acquisitions:Accounts receivable


(10,960
)


(7,536
)Inventories


(5,586
)


2,045Accounts payable, accrued expenses and other liabilities


(6,008
)


(596
)Deferred income from distribution


5,500



4,642Accrued restructuring charges


(1,783
)


(760
)Income taxes receivable and payable


(12,841
)


3,153Other changes, net


972



(382
)Net cash (used in) provided by operating activities


(1,698
)


12,055Cash flows from investing activities:Capital expenditures


(3,030
)


(3,174
)Acquisition of business, net of cash acquired (BridgeCo)


(40,968
)


-Purchases of short-term and long-term investments


-



(14,900
)Sales and maturities of short-term and long-term investments


175



21,400Net cash (used in) provided by investing activities


(43,823
)


3,326Cash flows from financing activities:Excess tax benefits from stock-based compensation


85



64Proceeds from issuance of common stock


2,064



3,316Purchases of treasury stock


(426
)


-Repayments of obligations under supplier financing arrangements


(1,414
)


(1,190
)Net cash provided by financing activities


309



2,190Effect of foreign exchange rate changes on cash and cash equivalents


754



(1,372
)Net (decrease) increase in cash and cash equivalents


(44,458
)


16,199Cash and cash equivalents at beginning of year


170,387



109,141Cash and cash equivalents at end of year

$
125,929


$
125,340


See Accompanying Notes to Condensed Consolidated Financial Statements


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1. Basis of Presentation


The accompanying unaudited condensed consolidated financial statements and related disclosures of Standard Microsystems Corporation and subsidiaries (“SMSC” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”), reflecting all adjustments (consisting only of normal, recurring adjustments) which in management’s opinion are necessary to present fairly the Company’s financial position as of May 31, 2011, results of operations for the three-month periods ended May 31, 2011 and 2010 and cash flows for the three-month periods ended May 31, 2011 and 2010 (collectively, including accompanying notes and disclosures, the “Interim Financial Statements”). The February 28, 2011 balance sheet information has been derived from audited financial statements, but does not include all information or disclosures required by U.S. GAAP.





The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of sales and revenues and expenses during the reporting period. Actual results may differ from those estimates, and such differences may be material to the Company’s financial statements.





These Interim Financial Statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended February 28, 2011 included in the Company’s Annual Report on Form 10-K, as filed on April 19, 2011 with the SEC (the “Fiscal 2011 Form 10-K”).





Results of operations for interim periods are not necessarily indicative of results to be expected for the full fiscal year or any future periods.


2. Recent Accounting Standards


In December 2010, the FASB issued Accounting Standards Update 2010 - 29, “Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010 - 29”),which specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.The amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The new disclosures required by ASU 2010 – 29 were adopted by SMSC beginning in the first quarter of fiscal 2012. The adoption of ASU 2010 - 29 did not have a material effect on our consolidated financial statements.


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


3. Fair Value of Financial Instruments


The Company’s financial instruments are measured and recorded at fair value. The Company’s non-financial instruments (including: goodwill; intangible assets; property, plant and equipment are measured at fair value when initially recorded for purchase accounting allocation and when an impairment charge is recognized. Contingent consideration on acquisitions is measured at fair value at each reporting period. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, management considers the principal or most advantageous market in which the Company would transact, and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.
 
 The following table details the fair value measurements within the three levels of fair value hierarchy under US GAAP of the Company’s financial assets and liabilities, including investments, equity securities, cash surrender value of life insurance policies, contingent consideration and cash equivalents at May 31 , 2011 (in thousands):


Total Fair Value


Level 1


Level 2


Level 3Assets:Auction rate securities

$
29,336


$
-


$
550


$
28,786Money market funds


57,140



57,140



-



-Other assets-cash surrender value


1,666



-



1,666



-Total Assets

$
88,142


$
57,140


$
2,216


$
28,786Liabilities:Contingent consideration

$
10,205


$
-


$
-


$
10,205Total Liabilities

$
10,205


$
-


$
-


$
10,205


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





The following table details the fair value measurements within the three levels of fair value hierarchy of the Company’s financial assets, including investments, equity securities, cash surrender value of life insurance policies and cash equivalents at February 28, 2011 (in thousands):


Total Fair Value


Level 1


Level 2


Level 3Assets:Auction rate securities

$
29,490


$
-


$
-


$
29,490Money market funds


134,007



134,007



-



-Other assets-cash surrender value


1,666



-



1,666



-Total Assets

$
165,163


$
134,007


$
1,666


$
29,490Liabilities:Contingent consideration

$
2,778


$
-


$
-


$
2,778Total Liabilities

$
2,778


$
-


$
-


$
2,778





At February 28, 2011 and May 31, 2011, the Company grouped money market funds and equity securities using a Level 1 valuation because market prices were readily available. Level 2 financial assets and liabilities represent the fair value of cash surrender value of life insurance and auction rate securities that have been redeemed at par subsequent to the reporting date.





The assets grouped for Level 3 valuation included auction rate securities consisting of AAA rated securities mainly collateralized by student loans guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program (“FFELP”), as well as auction rate preferred securities ($6.1 million at par) which are AAA rated and part of a closed end fund that must maintain an asset ratio of 2 to 1. Level 3 liabilities consist of contingent consideration on acquisitions. See Note 15 —Commitments and Contingencies,for further discussion on contingent consideration arrangements, including fair value disclosures.





When a determination is made to classify a financial instrument within Level 3, the determination is based upon the lack of significance of the observable parameters to the overall fair value measurement. However, the fair value determination for Level 3 financial instruments may consider some observable market inputs.
 
 The following tables reflect the activity for the Company’s major classes of assets and liabilities measured at fair value using Level 3 inputs (in thousands):





Assets:

Three Months

Ended

5/31/2011Balance at beginning of period

$
29,490Transfers out to Level 2 (Auction Rate Securities with market inputs)


(550
)Sales of Level 3 investments


(175
)Total (gains) and losses:Unrealized gains included in accumulated other comprehensive income


21Balance as of May 31, 2011

$
28,786





Liabilities:

Three Months

Ended

5/31/2011Balance at beginning of period

$
2,778Level 3 liabilities acquired


8,800Level 3 liabilities settled


(1,390
)Total (gains) and losses:Included in earnings (unrealized)


17Balance as of May 31, 2011

$
10,205





The following table summarizes the composition of the Company’s investments at May 31, 2011 and February 28, 2011(in thousands)


Classification on Balance SheetMay 31, 2011

Cost


Gross Unrealized Losses


Aggregate Fair value


Cash and Cash Equivalents


Long-Term InvestmentsAuction rate securities

$
31,225


$
(1,889
)

$
29,336


$
-


$
29,336Money market funds


57,140



-



57,140



57,140



-$
88,365


$
(1,889
)

$
86,476


$
57,140


$
29,336


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Classification on Balance SheetFebruary 28, 2011

Cost


Gross Unrealized Losses


Aggregate Fair value


Cash and Cash Equivalents


Long-Term InvestmentsAuction rate securities

$
31,400


$
(1,910
)

$
29,490


$
-


$
29,490Money market funds


134,007



-



134,007



134,007



-$
165,407


$
(1,910
)

$
163,497


$
134,007


$
29,490


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





The Company classifies all marketable debt and equity securities with remaining contractual maturities of greater than one year as long-term investments. As of May 31, 2011 the Company held approximately $29.3 million of investments in auction rate securities (net of $1.9 million in gross unrealized losses) with maturities ranging from 11 years to 31 years, all classified as available-for-sale. Auction rate securities are long-term variable rate bonds tied to short-term interest rates that were, until February 2008, reset through a “Dutch auction” process. As of May 31, 2011, all of the Company’s auction rate securities were “AAA” rated by one or more of the major credit rating agencies.
 
 Historically, the carrying value (par value) of the auction rate securities approximated fair market value due to the frequent resetting of variable interest rates. Beginning in February 2008, however, the auctions for auction rate securities began to fail and were largely unsuccessful. As a result, the interest rates on the investments reset to the maximum rate per the applicable investment offering statements. The types of auction rate securities generally held by the Company have historically traded at par and are callable at par at the option of the issuer.





The par (invested principal) value of the auction rate securities associated with these failed auctions will not be accessible to the Company until a successful auction occurs, a buyer is found outside of the auction process, the securities are called or the underlying securities have matured. In light of these liquidity constraints, the Company performed a valuation analysis to determine the estimated fair value of these investments. The fair value of these investments was based on a trinomial discount model. This model considers the probability of three potential occurrences for each auction event through the maturity date of the security. The three potential outcomes for each auction are (i) successful auction/early redemption, (ii) failed auction and (iii) issuer default. Inputs in determining the probabilities of the potential outcomes include, but are not limited to, the security’s collateral, credit rating, insurance, issuer’s financial standing, contractual restrictions on disposition and the liquidity in the market. The fair value of each security was then determined by summing the present value of the probability weighted future principal and interest payments determined by the model. The discount rate was determined using a proxy based upon the current market rates for successful auctions within the AAA rated auction rate securities market. The expected term was based on management’s estimate of future liquidity. The illiquidity discount was based on the levels of federal insurance or FFELP backing for each security as well as considering similar preferred stock securities ratings and asset backed ratio requirements for each security.





As a result, as of May 31, 2011, the Company recorded an estimated cumulative unrealized loss of $1.9 million (net of tax) related to the temporary impairment of the auction rate securities, which was included in accumulated other comprehensive income within shareholders’ equity. The Company deemed the loss to be temporary because the Company does not plan to sell any of the auction rate securities prior to maturity at an amount below the original purchase value and, at this time, does not deem it probable that it will receive less than 100% of the principal and accrued interest from the issuer. Further, the auction rate securities held by the Company are AAA rated, and the Company considers the credit risk to be negligible. The Company continues to liquidate investments in auction rate securities as opportunities arise. In the three-month period ended May 31, 2011, $0.2 million in auction rate securities were liquidated at par in connection with issuer calls. Subsequent to May 31, 2011, an additional $0.6 million in auction rate securities were also liquidated at par, also as a consequence of issuer calls.





The Company does not believe it will be necessary to access these investments to support current working capital requirements. However, the Company may be required to record additional unrealized losses in accumulated other comprehensive income or through income in future periods based on then current facts and circumstances. Specifically, if the credit rating of the security issuers deteriorates, or if active markets for such securities are not reestablished, the Company may be required to adjust the carrying value of these investments through impairment charges recorded in the consolidated statements of operations, and any such impairment adjustments may be material.


4. Comprehensive Income (Loss)


The Company’s other comprehensive income (loss) consists of foreign currency translation adjustments from those subsidiaries whose functional currency is other than the U.S. dollar (“USD”) and unrealized gains and losses on investments classified as available-for-sale.





The components of the Company’s comprehensive income (loss) for the three-month periods ended May 31, 2011 and 2010 were as follows(in thousands):





Three Months ended May 312011


2010Net income

$
6,177


$
627Other comprehensive income:Change in foreign currency translation adjustments


2,534



(3,646
)Change in unrealized loss on marketable equity securities


(13
)


521Total comprehensive income (loss)

$
8,698


$
(2,498
)


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





The components of the Company’s accumulated other comprehensive income were as follows(in thousands):


May 31, 2011


February 28, 2011Unrealized losses on investments, net of tax

$
(1,877
)

$
(1,864
)Foreign currency translation


13,301



10,767Minimum pension liability adjustment, net of tax


(415
)


(415
)Accumulated other comprehensive income

$
11,009


$
8,488





5. Net Income Per Share


Basic net income per share is calculated using the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated using the sum of weighted-average number of common shares outstanding during the period, plus the dilutive effect of 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 312011


2010Weighted average shares outstanding for basic net income per share


23,059



22,481Dilutive effect of stock options


498



306Weighted average shares outstanding for diluted net income per share


23,557



22,787





Options covering approximately 1.5 million and 1.7 million shares for the three month periods ended May 31, 2011 and 2010 were excluded from the computation of average shares outstanding for diluted net income per share because their effects were antidilutive.


6. Business Combinations
 
 BridgeCo


On May 19, 2011 SMSC completed the acquisition of BridgeCo, Inc. (“BridgeCo”), a leader in wireless networked audio technologies. BridgeCo's JukeBlox(TM) technology connects tablets, smartphones, PCs, Macs and other consumer electronics products by enabling consumers to access their local or cloud-based music library from any device and from any room in the home. Its JukeBlox software platform, with integrated WiFi® support, enables music streaming to virtually all home audio equipment including home theater systems, A/V receivers, radios, wireless speakers and portable music player docking stations. BridgeCo's technology has been adopted by some of the largest consumer electronics brands in the world including Pioneer, Philips, Denon, Marantz, JBL, B&W and Harmon/Kardon.
 
 The majority of BridgeCo’s assets are located in the United States. BridgeCo also has operations in India and Japan. The functional currency of BridgeCo’s operations in India is the Indian Rupee and in Japan, the Japanese Yen.
 
 SMSC made an initial investment of $41.0 million in cash (net of cash acquired). The terms of the purchase agreement provide for potential earnout payments of up to $5 million in 2012 and up to $22.5 million in 2013 to former BridgeCo shareholders, dependent on BridgeCo reaching certain revenue goals in calendar years 2011 and 2012.
 
 In addition, an employee incentive bonus plan was established as part of the merger agreement in which a portion of the earnout payment due to shareholders was apportioned to employees contingent upon continuous future employment as of the specified payout dates established by the plan. This portion of the earnout was not included as part of the contingent consideration liability but is being charged to earnings over the required service period as earned.
 
 The fair value of the contingent consideration at acquisition of $8.8 million was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, and are therefore level 3 inputs. Key assumptions include a discount rate of 19% and a probability-adjusted level of quarterly revenues.


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





The following table summarizes the components of the purchase price at fair value (in thousands):





Cash acquired

$
(374
)Cash consideration paid


41,342Liability for contingent consideration


8,800Total consideration

$
49,768





The following table summarizes the allocation of the purchase price at fair value (in thousands):





Receivables

$
601Inventories


950Other current assets


629Property, plant and equipment


442Intangible assets


9,370Goodwill (all non-deductible for tax purposes)


40,304Deferred tax assets


306Other non current assets


258Non-interest bearing liabilities


(2,402
)Deferred tax liabilities


(690
)Net assets

$
49,768


The results of BridgeCo’s operations subsequent to May 19, 2011 have been included in the Company’s consolidated results of operations. In the three month period ended May 31, 2011, BridgeCo contributed $0.8 million in revenue.





The following unaudited pro forma financial information presents the combined operating results of SMSC and BridgeCo as if the acquisition had occurred as of the beginning of the comparative prior annual reporting period only. 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.


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Pro forma financial information is presented in the following table(in thousands):


Three Months ended May 31,2011


2010Sales and revenues

$
106,492


$
98,247Net income (loss)

$
3,899


$
(747
)





Symwave





On November 12, 2010 SMSC completed the acquisition of Symwave, Inc. (“Symwave”), a global fabless semiconductor company supplying high-performance analog/mixed-signal connectivity solutions utilizing proprietary technology, IP and silicon design capabilities. Symwave is headquartered in Laguna Niguel, California, with design centers in San Diego, California and Shenzhen, China.  Symwave had approximately 90 employees, of which over 60 were in Asia. The functional currency of Symwave’s operations in the United States is the U.S. dollar (“USD”) and in China is the Chinese Yuan Renminbi (“CNY”).





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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


SMSC made an initial $5.2 million equity investment in Symwave in fiscal 2010, resulting in an equity stake of approximately 14 percent, and in fiscal 2011 provided $3.1 million in bridge financing to Symwave. At acquisition, the initial equity investment was revalued to $2.0 million and an impairment loss of $3.2 million was recorded within income from operations. The terms of the purchase agreement provide for quarterly cash payments to former Symwave shareholders upon achievement of certain revenue and gross profit margin goals. As a result, no cash was paid at acquisition and SMSC recorded a $3.1 million liability for contingent consideration. The fair value of the initial equity investment of $2.0 million was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, and are therefore level 3 inputs. Key assumptions include a discount rate of 15 percent and a probability-adjusted level of quarterly revenues and gross profit margins.





The following table summarizes the components of the purchase price at fair value (in thousands):





Fair value of initial investment in Symwave

$
2,030Assumption of liability for overdue accounts payable


4,062Assumption of liability for notes payable


3,212Liability for contingent consideration


3,094$
12,398





The following table summarizes the allocation of the purchase price at fair value (in millions):





Cash and cash equivalents

$
1,517Inventories


3,441Accounts receivable


3,338Other current assets


343Fixed assets


1,989Customer relationships


290Trade name


150Technology


3,600Goodwill (all non-deductible for tax purposes)


1,498Deferred tax assets


1,678Accounts payable and accrued liabilities


(5,446
)$
12,398





The results of Symwave’s operations subsequent to November 12, 2010 have been included in the Company’s consolidated results of operations. In the three months ended May 31, 2011, Symwave contributed $1.4 million in revenue.





The following unaudited pro forma financial information presents the combined operating results of SMSC and Symwave as if the acquisition had occurred as of the beginning of the comparable prior annual reporting period only.  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.




During the fourth quarter of fiscal 2011 the Company initiated a plan to reduce costs and investments, including reducing investment in the former Symwave business (see Note 13 — Restructuring).


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 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Pro forma financial information for three months ended May 31, 2011and 2010 is presented in the following table (in thousands):
 
 Three Months Ended May 31,2011


2010Sales and revenues

$
103,495


$
97,963Net income (loss)

$
6,177


$
(293
)


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


7. Investments


Long-term investments consist of AAA rated auction rate securities (most of which are backed by the U.S. Federal or state and municipal government guarantees) and other marketable debt and equity securities held as available-for-sale investments. As of November 30, 2007 and prior period-end dates, investments in auction rate securities were classified as short-term in nature. In the fourth quarter of fiscal 2008, such investments became subject to adverse market conditions, and the liquidity typically associated with the financial markets for such instruments became restricted as auctions began to fail. Given the circumstances, these securities were subsequently classified as long-term (or short-term if stated maturity dates were within one year of the reported balance sheet date), reflecting the restrictions on liquidity and the Company’s intent to hold until maturity (or until such time as the principal investment could be recovered through other means, such as issuer calls and redemptions). See Note 3 —Fair Valuefor further discussion on related issues and matters, including fair valuation.





On November 23, 2010, the Company invested $2.0 million in EqcoLogic, N.V. (“EqcoLogic”), a privately held Belgian corporation based in Brussels, Belgium. SMSC holds approximately 18.0% of the total outstanding equity of EqcoLogic on a fully diluted basis. The purchase of the equity shares has been accounted for as a cost-basis investment and is included in the Investments in equity securities caption on the Company’s condensed consolidated balance sheet.


8. Goodwill and Intangible Assets


Changes in the carrying amount of goodwill by reporting unit consists of the following (in thousands):


Three Months Ended May 31, 2011

Analog/Mixed Signal


Wireless


AIS


TotalGross balance, beginning of year

$
33,394


$
24,530


$
71,649


$
129,573Accumulated impairment losses


-



-



(52,300
)


(52,300
)Balance, beginning of year


33,394



24,530



19,349



77,273Goodwill acquired


-



40,304



-



40,304Foreign exchange rate impact


10



117



183



310Gross balance, end of year


33,404



64,951



71,832



170,187Accumulated impairment


-



-



(52,300
)


(52,300
)Balance, end of year

$
33,404


$
64,951


$
19,532


$
117,887


On May 19, 2011 SMSC completed the acquisition of BridgeCo, a leader in wireless networked audio technologies. Goodwill related to this acquisition is included within the wireless reporting unit.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





As of May 31, 2011 and February 28, 2011, the Company’s intangible assets consisted of the following (in thousands):


As of May 31, 2011


As of February 28, 2011Cost


Accumulated Amortization


Cost


Accumulated AmortizationPurchased technologies

$
56,518


$
34,507


$
48,151


$
32,353Customer relationships and contracts


20,815



11,350



18,291



10,268Other


2,249



761



2,096



642Total – finite-lived intangible assets


79,582



46,618



68,538



43,263Trademarks and trade names


6,691



-



6,470



-$
86,273


$
46,618


$
75,008


$
43,263





Purchased technologies have been assigned estimated useful lives of between six and nine years, with a weighted-average useful life of approximately eight years. Customer relationships and contracts have been assigned useful lives of between one and fifteen years, with a weighted-average useful life of approximately seven years. Certain trade names related to the acquired businesses are amortized over a period of one year and included in other in the table above.





Total amortization expense recorded for finite-lived intangible assets was as follows (in thousands):


Three Months ended May 312011


2010Amortization expense

$
2,391


$
1,765





Estimated future finite-lived intangible asset amortization expense is as follows (in thousands):





Period

AmountRemainder of Fiscal 2012

$
8,067Fiscal 2013

$
9,853Fiscal 2014

$
4,479Fiscal 2015

$
3,944Fiscal 2016

$
3,171Fiscal 2017 and thereafter

$
3,450$
32,964


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


9. Other Balance Sheet Data


Other balance sheet data is as follows (in thousands):


May 31, 2011


February 28, 2011Inventories:Raw materials

$
2,712


$
2,413Work-in-process


18,414



14,329Finished goods


32,969



30,490$
54,095


$
47,232Property, plant and equipment:Land

$
578


$
578Buildings and improvements


36,816



36,164Machinery and equipment


138,631



133,778176,025



170,520Less: Accumulated depreciation and amortization


(108,583
)


(103,138
)$
67,442


$
67,382Accrued expenses, income taxes and other liabilities:Employee compensation, incentives and benefits

$
14,242


$
15,910Stock appreciation rights


28,176



28,259Supplier financing – current


6,230



4,934Restructuring charges (see Note 13)


1,038



2,821Accrued rent obligations


2,867



2,944Income taxes payable


480



2,545Accrued contingent consideration--current


5,455



1,445Other accrued


10,183



13,601$
68,671


$
72,459Other liabilities:Retirement benefits

$
8,802


$
8,799Income taxes


5,451



5,225Supplier financing – non-current


3,986



5,406Accrued contingent consideration--non-current


4,750



1,401Other liabilities


780



1,038$
23,769


$
21,869


10. Deferred Income from Distribution


Certain of the Company’s products are sold to electronic component distributors under agreements providing for price protection and rights to return unsold merchandise. Accordingly, recognition of revenue and associated gross profit on shipments to a majority of the Company’s distributors is deferred until the distributors resell the products. At the time of shipment to distributors, the Company records a trade receivable for the selling price, relieves inventory for the carrying value of goods shipped, and records the gross margin as deferred income from distribution on the consolidated balance sheets. This deferred income represents the gross margin on the initial sale to the distributor; however, the amount of gross margin recognized in future consolidated statements of operations will typically be less than the originally recorded deferred income as a result of price allowances. Price allowances offered to distributors are recognized as reductions in product sales when incurred, which is generally at the time the distributor resells the product. Shipments made by the Company’s Japanese subsidiary to distributors in Japan are made under agreements that permit limited stock return and no price protection privileges. Revenue for shipments to distributors in Japan is recognized as title passes to such distributors upon delivery.





Deferred income on shipments to distributors consists of the following ( in thousands ):


May 31, 2011


February 28, 2011Deferred revenue

$
31,643


$
26,609Deferred cost of goods sold


(5,760
)


(4,904
)Provisions for sales returns


720



757Advances to distributors for price allowances


(4,936
)


(6,295
)$
21,667


$
16,167


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


11. Other Expense, Net


The components of the Company’s other expense, net consisted of the following(in thousands):


Three Months ended May 312011


2010Realized and unrealized foreign currency transaction gains (losses)

$
140


$
(96
)Losses on disposal of property


(10
)


(47
)Other miscellaneous income (expense), net


12



(13
)$
142


$
(156
)





12. Income Taxes


The provision for income taxes for the three-month period ended May 31, 2011 was $1.7 million, or an effective income tax rate of 21.7%. The provision includes a net deferred tax benefit of $1.4 million related to a change in the effective rate for state deferred tax assets and liabilities and $0.3 million of qualified research and development credits. In addition, the tax provision includes expense of $0.6 million for uncertain tax positions and $0.1 million of accrued interest and penalties.





The provision for income taxes for the three-month period ended May 31, 2010 was $1.1 million, or an effective income tax rate of 64.4%. The provision includes the impact of certain losses in various jurisdictions that could not be benefitted. In addition, as the research and development tax credit expired on December 31, 2009 there is no such tax credit included in the tax provision for the period ended May 31, 2010.





The difference between the effective tax rates of 21.7% for the three months ended May 31, 2011 compared to effective tax rate of 64.4% for the three months ended May 31, 2010 is primarily attributable to certain losses incurred in fiscal year 2011 which could not be benefited. In addition, a benefit related to a change in the effective rate for state deferred tax assets and liabilities and a credit for research and development was recorded in the three months ended May 31, 2011 which was not available in the three months ended May 31, 2010.





The Company had an increase of its liabilities for uncertain tax positions for the three month period ending May 31, 2011 of $0.8 million consisting of increases of $0.6 million of reserves, $0.1 million relating to acquisition related matters and $0 .1 million of interest and penalties. At this time, the Company does not anticipate that liabilities for uncertain tax positions will significantly increase or decrease on or prior to May 31, 2012. All liabilities for uncertain tax positions are classified as long term and included in Other Liabilities in the condensed consolidated balance sheet.
 
 The Company files U.S. federal, U.S. state, and foreign tax returns, and is generally no longer subject to tax examinations for fiscal years prior to 2008 (in the case of certain foreign tax returns, calendar year 2006).


13. Restructuring


During the fourth quarter of fiscal 2011, the Company initiated a plan to reduce costs and investments in certain businesses. As a result, approximately 80 positions worldwide, including approximately 50 positions at its subsidiary in Shenzhen China, were eliminated as part of the plan to substantially reduce investment in storage solutions acquired as part of the acquisition of Symwave, Inc. (“Symwave”).





The remaining positions eliminated consist of certain administrative positions, certain positions in its subsidiary in Canada as part of its plan to converge the wireless audio products roadmap from the acquisitions of Kleer Corporation and Kleer Semiconductor Corporation (collectively, “Kleer”) and Wireless Audio IP B.V. (“STS”) and to rationalize worldwide resources working on wireless audio products, and certain engineering positions.An additional $0.3 million was incurred in the first quarter of fiscal 2012 for additional severance and termination benefits and asset impairment charges relating to this restructuring plan. Costs incurred as result of this action will result in cash payments to be completed in the second quarter of fiscal 2012.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


In the second quarter of fiscal 2011, the Company initiated a restructuring plan for severance and termination benefits for 9 employees. The Company expects the payments on these obligations to be completed in the third quarter of fiscal 2012.





In the fourth quarter of fiscal 2010, the Company initiated a restructuring plan for severance and termination benefits for 5 employees. The payments on these obligations were completed in the first quarter of fiscal 2012.
 
 In the second quarter of fiscal 2010, the Company announced a plan to reduce its workforce by sixty-four employees in connection with the relocation of certain of its test floor activities from Hauppauge, New York to third party offshore facilities (Sigurd Microelectronics Corporation) in Taiwan. The payments on these obligations were completed in the first quarter of fiscal 2012.
 
 In the fourth quarter of fiscal 2009, the Company announced a restructuring plan that included a supplemental voluntary retirement program and involuntary separations that would result in approximately a ten percent reduction in employee headcount and expenses worldwide. The payments on these obligations were completed in the first quarter of fiscal 2012.
 
 The following table summarizes the activity related to the accrual for restructuring charges for the three months ended May 31, 2011 and the twelve months ended February 28, 2011(in thousands):





Balance as of March 1, 2011


Severance & Benefits Charges


Assets Impairment


Payments


Non-Cash Items


Balance as of May 31, 2011Q4 Fiscal 2009 Restructuring Plan

$
2


$
-


$
-


$
(2
)

$
-


$
-Q2 Fiscal 2010 Restructuring Plan


15



-



-



(15
)


-



-Q4 Fiscal 2010 Restructuring Plan


27



-



-



(27
)


-



-Q2 Fiscal 2011 Restructuring Plan


348



-



-



(97
)


-



251Q4 Fiscal 2011 Restructuring Plan


2,429



270



73



(1,927
)


(73
)


772Balance as of May 31, 2011

$
2,821


$
270


$
73


$
(2,068
)

$
(73
)

$
1,023


Balance as of March 1, 2010


Severance &

Benefits

Charges


Assets Impairment


Payments


Reclasses


Non-Cash Items


Balance as of February 28, 2011Q4 Fiscal 2009 Restructuring Plan

$
210


$
-


$
-


$
(212
)

$
-


$
4


$
2Q2 Fiscal 2009 Restructuring Plan


101



-



-



(86
)


-



-



15Q4 Fiscal 2010 Restructuring Plan


780



822



-



(1,440
)


(24
)


(111
)


27Q2 Fiscal 2011 Restructuring Plan


-



348



-



-



-



-



348Q4 Fiscal 2011 Restructuring Plan


-



2,489



1,044



-



-



(1,104
)


2,429Balance as of February 28, 2011

$
1,091


$
3,659


$
1,044


$
(1,738
)

$
(24
)

$
(1,211
)

$
2,821


14. Benefit and Incentive Plans (including Share-Based Payments)


The Company has several stock-based compensation plans in effect under which incentive stock options and non-qualified stock options (collectively “stock options”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and stock appreciation rights have been granted to employees and directors. In July 2009, the shareholders approved the 2009 Long Term Incentive Plan (the “LTIP”). The Company has ceased issuing stock options and restricted stock awards under previously established stock option and restricted stock plans, and has ceased issuing SARs, and instead is using the LTIP to issue stock options and RSUs. The Compensation Committee and management continue to evaluate means to effectively promote share ownership by employees and directors while offering industry-competitive compensation packages, including appropriate use of stock-based compensation awards.





Long Term Incentive Plan


Under the LTIP, the Compensation Committee of the Board of Directors is authorized to grant awards of stock options, restricted stock or restricted stock units, or other stock-based awards. The Committee is authorized under the LTIP to delegate its authority in certain circumstances. The purpose of this plan is to promote the interests of the Company and its shareholders by providing officers, directors and key employees with additional incentives and the opportunity, through stock ownership, to better align their interests with the Company’s and enhance their personal interest in its continued success. The maximum number of shares that may be delivered pursuant to awards granted under the LTIP is 1,000,000 plus: (i) any shares that have been authorized but not issued pursuant to previously established plans of the Company as of June 30, 2009, up to a maximum of an additional 500,000 shares; (ii) any shares subject to any outstanding options or restricted stock grants under any plan of the Company that were outstanding as of June 30, 2009 and that subsequently expire unexercised, or are otherwise forfeited, up to a maximum of an additional 3,844,576 shares. The maximum number of incentive stock options that may be granted under the LTIP is 1,500,000. No participant may receive awards under the LTIP in any calendar year for more than 1,000,000 shares equivalents. As of May 31, 2011, awards amounting to 402,601 share equivalents are available for grant under the LTIP.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Employee and Director Stock Option Plans


Under the Company’s various plans, the Compensation Committee of the Board of Directors had been authorized to grant options to purchase shares of common stock. Stock options under inducement plans were offered only to new employees, and all options were granted at prices not less than the fair market value on the date of grant. The grant date fair values of stock options are recorded as compensation expense ratably over the vesting period of each award, as adjusted for forfeitures of unvested awards. Stock options generally vest over four or five-year periods, and expire no later than ten years from the date of grant. Following shareholder approval of the LTIP, the Company ceased issuing awards under previously established stock option plans.
 
 Stock option plan activity is summarized below(in thousands, except per share data):





Shares


Weighted Average Exercise Price per Share


Weighted Average Contractual Term

(in yrs.)


Aggregate Intrinsic ValueOptions outstanding, March 1, 2011


3,075


$
22.75Granted


148


$
25.00Exercised


(60
)

$
16.57Canceled, forfeited or expired


(85
)

$
31.02Options outstanding, May 31, 2011


3,078


$
22.75



5.8


$
15,500Options exercisable, May 31, 2011


2,002


$
22.47



4.5


$
10,951





The following table summarizes information relating to outstanding and exercisable options as of May 31, 2011 (shares in thousands):





Range of Exercise Prices


Weighted Average Remaining Lives


Options Outstanding


Weighted Average Exercise Prices


Options Exercisable


Weighted Average Exercise Prices$10.56 - $17.62



4.8



816


$
16.33



649


$
16.40$18.29 - $22.35



5.2



906


$
20.50



628


$
20.61$22.40 - $29.70



7.6



829


$
25.80



324


$
26.81$29.72 - $36.13



5.5



527


$
31.74



401


$
31.705.8



3,078


$
22.75



2,002


$
22.47


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





The following table summarizes information relating to currently outstanding and exercisable options:


2011


2010Aggregate intrinsic value of options outstanding (in thousands)

$
15,500


$
9,893Aggregate intrinsic value of options exercisable (in thousands)

$
10,950


$
6,967Total intrinsic value of options exercised (in thousands)

$
577


$
763Total fair value of options vested (in thousands)

$
1,629


$
1,956Total remaining unrecognized compensation cost (in thousands)

$
8,773


$
12,873Compensation expense recognized (in thousands)

$
1,398


$
1,360Weighted average grant-date fair value per share

$
10.27


$
11.46Weighted average remaining contractual term of options exercisable (in years)


4.5



4.4Weighted average period over which cost is expected to be recognized (in years)


1.6



1.8





The fair value of stock options granted in connection with the Company’s stock incentive plans have been estimated utilizing the following assumptions:


Three Months ended May 312011


2010Dividend yield


-



-Expected volatility


44
%


47
%Risk-free interest rates


2.1
%


2.6
%Expected lives (in years)


5.0



5.0





Restricted Stock Awards/Restricted Stock Units


The Company provides common stock awards to certain officers and key employees. The Company previously granted restricted stock awards, at its discretion, and as part of the Company’s management incentive plan, from the shares available under its 2001 and 2003 Stock Option and Restricted Stock Plans and its 2005 Inducement Stock Option and Restricted Stock Plan. The shares awarded were typically earned in 25%, 25% and 50% increments on the first, second and third anniversaries of the award, respectively, and are distributed provided the employee has remained employed by the Company through such anniversary dates; otherwise the unvested shares are forfeited. The grant date fair value of these shares at the date of award is recorded as compensation expense ratably on a straight-line basis over the related vesting periods, as adjusted for estimated forfeitures of unvested awards. Restricted stock shares are no longer being granted from previously established restricted stock award plans. Instead, restricted stock units are currently being granted from the LTIP. Restricted stock units are typically earned in 33% increments on the first, second and third anniversaries of the award, respectively, and are distributed provided the employee remains employed by the Company through such anniversary dates; otherwise the unvested shares are forfeited. The grant date fair value of these shares at the date of award is recorded as compensation expense ratably on a straight-line basis over the related vesting periods, as adjusted for estimated forfeitures of unvested awards.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Restricted stock activity for the three-months ended May 31, 2011 and 2010 is set forth below (shares in thousands) :


Shares


Weighted Average Grant-Date Fair ValueRestricted stock shares/units outstanding, March 1, 2011


424


$
23.79Granted


169


$
25.19Canceled or expired


(17
)

$
27.83Vested


(58
)

$
26.18Restricted stock shares/units outstanding, May 31, 2011


518


$
23.85





The following table summarizes information relating to RSAs and RSUs activity:


Three months ended May 31,2011


2010Total pretax intrinsic value of shares vested (in thousands)

$
1,558


$
416Total fair value of shares vested (in thousands)

$
1,526


$
431Total pretax intrinsic value of all outstanding shares (in thousands)

$
13,893


$
5,197Total unrecognized compensation cost (in thousands)

$
10,623


$
4,898Weighted average period over which cost is expected to be recognized (in years)


1.6



1.8





Stock Appreciation Rights Plans


In September 2004 and September 2006, the Company’s Board of Directors approved Stock Appreciation Rights (“SAR”) Plans (the “Plans”), the purpose of which are to attract, retain, reward and motivate employees and consultants to promote the Company’s best interests and to share in its future success. The Plans authorize the Board’s Compensation Committee to grant up to six million SAR awards to eligible officers, employees and consultants (after amendment to the 2006 SARs Plan, effective April 30, 2008). Each award, when granted, provides the participant with the right to receive payment in cash, upon exercise, for the appreciation in market value of a share of SMSC common stock over the award’s exercise price. On July 11, 2006, the Company’s Board of Directors approved the 2006 Director Stock Appreciation Rights Plan. The Company can grant up to 200,000 Director SARs under this plan. On April 9, 2008, the Board of Directors authorized an increase in the number of SARs issuable pursuant to this plan from 200,000 to 400,000. The exercise price of a SAR is equal to the closing market price of SMSC stock on the date of grant. SAR awards generally vest over four or five-year periods, and expire no later than ten years from the date of grant. The Company has currently ceased issuing SARs to employees and Directors and is using the LTIP instead.





The Company recognizes compensation expense for SARs using a graded vesting methodology, adjusting for changes in fair value from period to period. Compensation expense also includes adjustments for any exercises of SARs to record any differences between total cash paid at settlement and previously recognized compensation expenses. Prior to the adoption of guidance now codified as ASC Topic 718, “Compensation — Stock Compensation” (“ASC 718”), the Company recognized compensation expense for SARs based on the excess of the award’s market value over its exercise price over the term of the award.
 
 The total unrecognized compensation cost related to SMSC’s stock appreciation rights plan is $11.4 million as of May 31, 2011. The weighted average period over which the cost is expected to be recognized is 3.2 years.
 
 Activity under the Plans is summarized below (in thousands, except per share data) :





Shares


Weighted Average Exercise Price per Share


Weighted Average Contractual Term

(in yrs.)


Aggregate Intrinsic ValueStock appreciation rights outstanding, March 1, 2011


4,249


$
24.96Granted


-


$
-Exercised


(92
)

$
17.03Canceled or expired


(86
)

$
27.46Stock appreciation rights outstanding, May 31, 2011


4,071


$
25.08



6.3


$
16,729Stock appreciation rights exercisable, May 31, 2011


2,847


$
26.08



5.9


$
9,929


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Activity under the Stock Appreciation Rights Plan is summarized below:


Three months ended May 31,2011


2010Aggregate intrinsic value (in thousands)

$
16,729


$
12,154Total fair value of SARs vested (in thousands)

$
4,504


$
4,749Total cash paid in connection with SARs (in thousands)

$
879


$
774Compensation expense recognized (in thousands)

$
795


$
6,184Weighted average period over which cost is expected to be recognized (in years)


3.2



3.7Weighted average grant-date fair value per share

$
-


$
-Weighted average remaining contractual life of SARs outstanding (years)


6.3



7.3Weighted average remaining contractual life of SARs exercisable (years)


5.9



6.5Total unrecognized compensation cost

$
11,421


$
18,446





The fair value of SARs granted in connection with the Plans have been estimated utilizing the following assumptions:


Three Months ended May 312011


2010Dividend yield


-



-Expected volatility


28 - 46
%


38-48
%Risk-free interest rates


0.1 - 1.7
%


0.2-2.8
%Expected lives (in years)


0.5 - 4.7



0.4-5.6


Employee Stock Purchase Plan


The Company’s 2010 Employee Stock Purchase Plan (the “Purchase Plan”), effective November 1, 2010, provides for the issuance of up to 1,100,000 shares of common stock to eligible employees. The Purchase Plan provides for eligible employees to purchase whole shares of common stock at a price of 85% of the lesser of: (a) the fair market value of a share of common stock on the first date of the purchase period or (b) the fair market value of a share of common stock on the last date of the purchase period. Stock-based compensation expense for the Purchase Plan is recognized over the vesting period of six months on a straight-line basis. As of May 31, 2011 the Company issued 54,933 shares and had 1,045,067 shares available for future grants and issuances under the Purchase Plan. The Company recognized expense of $0.1 million in the three months ended May 31, 2011.


Stock-Based Compensation Expense


The following table summarizes the compensation expense for stock options, restricted stock awards and stock appreciation rights at fair value as measured per the provisions of ASC Topic 718, “Compensation — Stock Compensation” (“ASC 718”) included in our condensed consolidated statements of operations(in thousands):





Three Months Ended

May 31,2011


2010Costs of goods sold

$
324


$
831Research and development


1,055



2,279Selling, general and administrative


2,037



4,812Stock-based compensation expense, before income taxes


3,416



7,922Tax provision


1,230



2,852Stock-based compensation expense, after income taxes

$
2,186


$
5,070


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Retirement Plans


The Company maintains an unfunded Supplemental Executive Retirement Plan to provide certain members of 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 (in thousands) :


Three Months Ended

May 31,2011


2010Service cost – benefits earned during the period

$
79


$
84Interest cost on projected benefit obligations


91



96Net periodic pension expense

$
170


$
180





The following table sets forth the amounts (gross, before tax) recognized in accumulated other comprehensive income (in thousands) :





As of May 31,

2011


As of February 28,

2011Transition obligation

$
1


$
1Net actuarial loss


659



659Total amount recognized in accumulated other comprehensive loss

$
660


$
660





Annual benefit payments under these plans are expected to be approximately $0.7 million in fiscal 2012, to be funded as general corporate obligations with available cash and cash equivalents. Additionally, the Company is the beneficiary of life insurance policies that have been purchased as a method of partially financing longer-term benefits payable under the Supplemental Executive Retirement Plan. In November 2009, the Compensation Committee of SMSC’s Board of Directors froze benefits under the Supplemental Executive Retirement Plan for existing participants, and there will be no further eligibility for participation in this plan. The effect of this action is expected to be immaterial to SMSC’s future results of operations.


15. Commitments and Contingencies
 
 Contingent Consideration — BridgeCo Acquisition


The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of BridgeCo. The maximum amount of contingent consideration that can be earned by the sellers was $27.5 million as set forth in the purchase agreement. This liability was valued at $8.8 million as of May 31, 2011 based on the likelihood of achieving the performance goals.





The fair value of the contingent consideration arrangement was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, and are therefore Level 3 inputs. Key assumptions include a discount rate of 19% and a probability-adjusted level of annual revenues. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Contingent Consideration — Symwave Acquisition





The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of Symwave on November 12, 2010 at the estimated fair value of $3.1 million. The contingent consideration arrangement requires the Company to pay the former owners of Symwave an earnout amount equal to one times revenue (less certain agreed upon adjustments), depending on the achievement of certain revenue and gross profit margin performance goals, for each of the four quarterly periods from January 1,2011 until December 31,2011. No earnout payments shall be payable for any period after December 31, 2011. No liability was recorded as of February 28, 2011 and May 31, 2011 based on the likelihood of achieving the performance goals.


Contingent Consideration — STS Acquisition





The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of STS. The contingent consideration arrangement requires the Company to pay the former owners of STS an earnout amount of $3.0 million for the period from January 1,2011 until December 31,2011 provided that revenue meets performance goals set forth in the purchase agreement. No earnout payments shall be payable for any period after December 31, 2011. No liability was recorded as of February 28, 2011 and May 31, 2011 based on the likelihood of achieving the performance goals.





Contingent Consideration — Kleer Acquisition


The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of Kleer. The maximum amount of contingent consideration that can be earned by the sellers was $2.0 million as set forth in the purchase agreement. No liability was recorded as of February 28, 2011 and May 31, 2011 based on the likelihood of achieving the performance goals.





Contingent Consideration — K2L Acquisition


The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of K2L GmbH (“K2L”). The maximum amount of contingent consideration that can be earned by the sellers is 2.1 million Euro. Fifty percent of the contingent consideration was earned in calendar year 2010 and fifty percent is available to be earned in calendar year 2011 based on the level of achievement of revenue as set forth in the purchase agreement. On March 31, 2011, 1.1 million Euro in stock and cash was paid to the former owners of K2L for meeting calendar year 2010 performance targets. This liability was revalued to $1.4 million as of May 31, 2011 based on the likelihood of achieving the performance goals.





The fair value of the contingent consideration arrangement was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, and are therefore Level 3 inputs. Key assumptions include a discount rate of 16% and a probability-adjusted level of annual revenues. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Litigation


From time to time as a normal incidence of doing business, various claims and litigation may be asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages and/or invalidate its proprietary rights. Any lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management’s time and attention, and an adverse outcome of any significant matter could have a material adverse effect on the Company’s consolidated results of operations or cash flows in the quarter or annual period in which one or more of these matters are resolved.





On October 18, 2010, AFTG-TG, L.L.C. and Phillip M. Adams & Associates, L.L.C. (collectively, "Adams") filed a lawsuit in the United States District Court for the District of Wyoming (“District Court”) against the Company and other semiconductor companies. Adams' Complaint alleges that the Company's products infringe twelve patents related to floppy disk controllers and that the Company misappropriated trade secrets related to detecting computer-related defects. The Complaint seeks unspecified damages (including treble damages for willful infringement and disgorgement of profits), attorneys’ fees and injunctive relief. On December 3, 2010, the Company filed a Motion to Dismiss for failure to state a claim upon which relief may be granted or, in the alternative, for improper joinder. On March 17, 2011, the District Court granted the Company's motion in part, ruling that Adams' complaint failed to meet the minimum pleading requirements to sustain a claim against the Company. The District Court further ruled that it would dismiss Adams' complaint unless Adams files an amended complaint by March 31, 2011. Adams did not file an amended complaint; instead on March 31, 2011, Adams filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit. Adams subsequently withdrew the appeal. On April 11, 2011, the District Court dismissed Adams’ complaint against SMSC without prejudice and subsequently denied the Company’s motion for reconsideration to make the dismissal with prejudice.


16. Supplemental Cash Flow Disclosures


The information below summarizes the Company’s supplemental cash flow disclosures (in thousands):


Three months ended May 31,2011


2010Design tools acquired under supplier financing

$
664


$
360Cash payments made - federal, state, and foreign income taxes

$
115


$
2,100


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STANDARD MICROSYSTEMS CORPORATION AND SUBSIDIARIES





QUARTERLY REPORT ON FORM 10-Q
 FOR THE QUARTERLY PERIOD ENDED May 31, 2011


Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 General


The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying notes included in Part I Item 1. —Financial Statements, of this Quarterly Report on Form 10-Q (“Quarterly Report” or “10-Q”) of Standard Microsystems Corporation (the “Company” or “SMSC”).


Forward-Looking Statements


Portions of this Quarterly Report may contain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management’s beliefs and assumptions, current expectations, estimates and projections. Such statements, including statements relating to the Company’s expectations for future financial performance, are not considered historical facts and are considered forward-looking statements under federal securities laws. Words such as “believe,” “expect,” “anticipate” and similar expressions identify forward-looking statements. Risks and uncertainties may cause the Company’s actual future results to be materially different from those discussed in forward-looking statements. The Company’s risks and uncertainties include (but are not limited to): the timely development and market acceptance of new products; the impact of competitive products and pricing; the Company’s ability to procure capacity from suppliers and the timely performance of their obligations; commodity prices; potential investment losses as a result of liquidity conditions; the effects of changing economic and political conditions in the market domestically and internationally and on its customers; relationships with and dependence on customers and growth rates in the personal computer, consumer electronics and embedded and automotive markets and within the Company’s sales channel; changes in customer order patterns, including order cancellations or reduced bookings; the effects of tariff, import and currency regulation; potential or actual litigation; and excess or obsolete inventory and variations in inventory valuation, among others. In addition, SMSC competes in the semiconductor industry, which has historically been characterized by intense competition, rapid technological change, cyclical market patterns, price erosion and periods of mismatched supply and demand.





The Company’s forward looking statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations and may not reflect the potential impact of any future acquisitions, mergers, equity investments 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 periodic and current reports as filed with the United States Securities and Exchange Commission (the “SEC”). Readers are advised to review the Company’s most recent Annual Report on Form 10-K and quarterly reports on Form 10-Q as filed subsequently with the SEC, particularly those sections entitled “ Risk Factors ,” for a more complete discussion of these and other risks and uncertainties. Other cautionary statements concerning risks and uncertainties may also appear elsewhere in this Quarterly Report.


Description of Business


SMSC designs and sells a wide range of silicon-based integrated circuits that utilize analog and mixed-signal technologies. The Company’s integrated circuits and systems provide a wide variety of connectivity products that are incorporated by its globally diverse customers into numerous end products in the Consumer Electronics, Personal Computing (“PC”), Automotive and Industrial markets. These products generally provide connectivity, networking, or input/output control solutions including hardware, software, and firmware, for a variety of high-speed communication, computer and related peripheral, consumer electronics, industrial control systems or automotive information applications. The market for these solutions is increasingly diverse, and the Company’s technologies are increasingly used in various combinations and in alternative applications. SMSC has operations in the United States, Canada, Germany, Bulgaria, Sweden, India, Japan, China, Korea, Singapore and Taiwan. Major engineering design centers are located in North America, Asia and Europe.


26
 Table to Contents
  Critical Accounting Policies & Estimates


The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and SEC rules and regulations 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.


Information regarding SMSC’s critical accounting policies and estimates appear 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, 2011, as filed with the SEC on April 19, 2011. During the three-month period ended May 31, 2011, there were no significant changes to any critical accounting policies or to the related estimates and judgments involved in applying those policies.


SMSC believes critical accounting policies and estimates are important to the portrayal of the Company’s financial condition, results of operations and cash flows, 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.


Recent Accounting Standards


In December 2010, the FASB issued Accounting Standards Update 2010 - 29, “Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010 - 29”),which specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.The amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The new disclosures required by ASU 2010 – 29 were adopted by SMSC beginning in the first quarter of fiscal 2012. The adoption of ASU 2010 - 29 did not have a material effect on our consolidated financial statements.


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Results of Operations
 
 Overview


Sales and revenues, gross profit on sales and revenue, income from operations, and net income were as follows(in thousands):





For the Three Months

Ended May 312011


2010


Inc./Dec. $


Inc./Dec. %Sales and revenues

$
103,495


$
97,159


$
6,336



6.5
%Gross profit

$
55,785


$
51,795


$
3,990



7.7
%Gross profit as percentage of sales and revenues


53.9
%


53.3
%Operating income

$
7,669


$
1,802


$
5,867



N/M
*Operating income as percentage of sales and revenues


7.4
%


1.9
%Net income

$
6,177


$
627


$
5,550



N/M
**N/M – Not meaningful





Sales and revenues increased primarily due to improvements in global demand for goods that incorporate the Company’s products in the Consumer Electronics end markets and incremental sales and revenues related to acquisitions. The acquisitions of Wireless Audio IP B.V. (“STS”), BridgeCo. Inc. (“BridgeCo”) and Symwave Inc. (“Symwave”) contributed to the year over year improvement. This was partially offset by the impact of the Japan earthquake and tsunami.





The following table summarizes the stock-based compensation expense for stock options, restricted stock awards, restricted stock units, employee stock purchase plan shares and stock appreciation rights included in results of operations (in thousands):


Three Months Ended

May 31,2011


2010Costs of goods sold

$
324


$
831Research and development


1,055



2,279Selling, general and administrative


2,037



4,812Stock-based compensation expense, before income taxes

$
3,416


$
7,922





Gross profit on sales and revenue increased mainly due to the rise in sales and revenues and the shift in product mix towards higher margin Industrial products, as well as lower test costs and a decrease in stock compensation expenses mainly associated with the Company’s Stock Appreciation Rights (“SARs”). The decrease in stock compensation expense is attributable to the relative smaller increase in the Company’s common stock market price during the three months ended May 31, 2011 as compared to the three months ended May 31, 2010.
 
 The increase in income from operations is primarily attributable to an increase in gross profit on sales and a decrease in stock compensation expense. Stock compensation expense decreased $4.5 million compared to the prior year period.


Sales and Revenues


Sales and revenues by end market were as follows(in thousands):


For the Three Months

Ended May 312011


2010


Inc./Dec. $


Inc./Dec. %PCs

$
37,178


$
36,469


$
709



1.9
%Consumer electronics


28,062



24,153



3,909



16.2
%Industrial


18,944



17,871



1,073



6.0
%Automotive


19,311



18,666



645



3.5
%Total

$
103,495


$
97,159


$
6,336



6.5
%





The increase in sales and revenues was primarily due to sales and revenue generated by acqusitions and improved demand in the enterprise PC, Consumer electronics, Industrial and Automotive end markets, partially offset by the decline in consumer PC end market demand. Consumer electronics increased due to the acquisitions of STS, BridgeCo and Symwave.. This was partially offset by the impact of the Japan earthquake and tsunami.


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Gross profit, operating expenses and income from operations were as follows(in thousands):


For the Three Months

Ended May 31,2011


2010


Inc./Dec. $


Inc./Dec. %Gross profit on sales and revenues

$
55,785


$
51,795


$
3,990



7.7
%Gross profit as percentage of sales and revenues


53.9
%


53.3
%Operating expenses:Research and development

$
24,527


$
23,819


$
708



3.0
%Selling, general and administrative


23,246



25,353



(2,107
)


-8.3
%Restructuring charges


343



821



(478
)


N/M
*Income from operations

$
7,669


$
1,802


$
5,867



N/M
**N/M – Not meaningful





Gross Profit


The increase in gross profit was primarily due to sales and revenue increases as discussed above. The rise in gross profit as a percentage of sales and revenue is attributable to the shift in product mix, with a strong rebound in higher margin Industrial products, as well as a decrease in test costs due to the use of more efficient test equipment beginning in the first quarter of fiscal 2012. The decrease of $0.5 million in stock compensation charges also contributed to the increase in gross profit. This was partially offset by an increase of $0.5 million in amortization of purchased technology.


Research and Development Expenses (“R&D”)


The increase in R&D expenses was primarily due to increases in masks, prototypes and other costs of $1.0 million and depreciation of $0.7 million, partially offset by a decrease of $1.2 million in stock based compensation expenses, as previously mentioned.
 
 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 including acquisitions. The acquisitions of Tallika Corporation and Tallika Technologies Private Limited (collectively, “Tallika”), K2L GmbH (“K2L”), Kleer Corporation and Kleer Semiconductor Corporation (collectively, “Kleer”), STS, Symwave and BridgeCo have added additional engineering talent and capabilities.


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 Table to Contents


Selling, General and Administrative Expenses (“SG&A”)


The decrease in SG&A expenses was primarily the result of a $2.8 million decrease in stock based compensation charges, as mentioned previously. This was partially offset by increases in various SG&A expenses associated with the acquisition of BridgeCo.


Restructuring Charges


Restructuring charges were as follows(in thousands):


For the Three Months

Ended May 31,2011


2010Employee Severance and Benefits Charges

$
270


$
821Asset Impairment Charges


73



-$
343


$
821





During the fourth quarter of fiscal 2011 the Company initiated a plan to reduce costs and investments in certain businesses. As a result, approximately 80 positions worldwide, including approximately 50 positions at its subsidiary in Shenzhen China, were eliminated as part of the plan to substantially reduce investment in storage solutions acquired as part of the Symwave acquisition.





The positions eliminated consist of certain administrative positions, certain positions in its subsidiary in Canada as part of its plan to converge the wireless audio products roadmap from the Kleer and STS acquisitions and certain engineering positions. An additional $0.3 million was incurred in the first quarter of fiscal 2012 for additional severance and termination benefits and asset impairment charges relating to this restructuring plan.




Restructuring charges of $0.8 million were incurred in the three month period ended May 31, 2010, relating to a restructuring plan initiated in the fourth quarter of fiscal 2010 in connection with the integration and reorganization of engineering and corporate overhead resources, primarily for severance obligations and termination benefits for certain employees.


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Interest and Other (Expense) Income, Net


Interest and other income (expense) were as follows (in thousands) :


For the Three Months

Ended May 31,2011


2010


Inc./Dec. $


Inc./Dec. %Interest income

$
118


$
144


$
(26
)


-18.1
%Interest expense


(38
)


(29
)


(9
)


31.0
%Other income (expense), net


142



(156
)


298



-191.0
%$
222


$
(41
)

$
263



-641.5
%





Interest income decreased primarily due to reduced investment in auction rate securities, as the Company continues to liquidate its positions as opportunities arise. Funds from liquidated auction rate securities investments as well as funds generated through operating activities are currently being invested in high grade money market accounts, at lower average rates of return.





Other income (expenses), net primarily consist of unrealized foreign exchange gains and losses on net U.S. dollar monetary assets held by the Company’s foreign affiliates.


Provision for Income Taxes


The Company’s effective income tax rate reflects statutory federal, state and foreign tax rates, the impact of certain permanent differences between the book and tax treatment of certain expenses, and the impact of tax-exempt income and various income tax credits.





The provision for income taxes for the three-month period ended May 31, 2011 was $1.7 million, or an effective income tax rate of 21.7%. The provision includes a net deferred tax benefit of $1.4 million related to a change in the effective rate for state deferred tax assets and liabilities and $0.3 million of qualified research and development credits. In addition, the tax provision includes expense of $0.6 million for uncertain tax position and $0.1 million of accrued interest and penalties. At this time, the Company does not anticipate liabilities for uncertain tax positions to significantly increase or decrease on or prior to May 31, 2012.





The provision for income taxes for the three-month period ended May 31, 2010 was $1.1 million, or an effective income tax rate of 64.4%. The provision includes the impact of certain losses in various jurisdictions that could not be benefitted. In addition, as the research and development tax credit expired on December 31, 2009 there is no such tax credit included in the tax provision for the period ended May 31, 2010.





The difference between the effective tax rates of 21.7% for the three months ended May 31, 2011 compared to effective tax rate of 64.4% for the three months ended May 31, 2010 is primarily attributable to certain losses incurred in FY 2011 which could not be benefited. In addition, a benefit related to a change in the effective rate for state deferred tax assets and liabilities and a credit for research and development was recorded in the three months ended May 31, 2011 which was not available in the three months ended May 31, 2010.


Business Outlook


Our future results of operations and other matters comprising the subject of forward-looking statements contained in this Form 10-Q, included within this MD&A, involve a number of risks and uncertainties — in particular, current economic uncertainty, including tight credit markets, as well as future economic conditions, our goals and strategies, new product introductions, plans to cultivate new businesses, divestitures or investments, revenue, pricing, gross margin and costs, capital spending, depreciation, R&D expense levels, selling, general and administrative expense levels, potential impairment of investments, our effective tax rate, pending legal proceedings, ability to realize the benefits of recent acquisitions, and other operating parameters. In addition to the various important factors discussed above, a number of other important factors could cause actual results to differ materially from our expectations. See the risks described in Part II — Item 1.A. —Risk Factors.





The Company reported strong first quarter revenue and expects revenue to grow sequentially with revenue growth from wireless audio and the automotive end market. Wireless audio includes revenue from the recent acquisition of BridgeCo.


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Liquidity & Capital Resources


The Company currently finances its operations through a combination of existing working capital resources and cash generated by operations. The Company had no bank debt during fiscal 2012 or 2011. The Company may 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 and cash flows from operations will be sufficient to finance the Company’s operating and capital requirements through the next twelve months.


Cash Flow


Three Months Ended

May 31,2011


2010(in thousands)Cash flows from operating activities:Net income

$
6,177


$
627Adjustments to reconcile net income to net cash (used for) provided by operating activities, net:


28,331



15,504Changes in operating assets and liabilities, net of effects of business acquisitions:


(36,206
)


(4,076
)Net cash (used for) provided by operating activities


(1,698
)


12,055Cash flows from investing activities:Net cash (used for) provided by investing activities


(43,823
)


3,326Cash flows from financing activities:Net cash provided by financing activities


309



2,190Effect of foreign exchange rate changes on cash and cash equivalents


754



(1,372
)Net (decrease) increase in cash and cash equivalents

$
(44,458
)

$
16,199





The decrease in operating cash flows reflects increases in accounts receivable and inventories, commensurate with the increase in sales and revenues. Accounts receivable increased primarily due to the temporary disruption to our order to cash process as a result of business process re-engineering and implementation of our new international structure in mid April. Inventories increased mainly due to additional inventory build in response to the threat of potential component shortage as a result of the earthquake and tsunami in Japan.. Increases in assets were partially offset by higher accounts payable related to the acquisition of BridgeCo and inventory purchases.





Cash used for investing activities increased primarily as a result of the $41.0 million acquisition of BridgeCo (including extinguishment of debt, net of cash acquired), as well as the reduction in net auction rate securities redemptions from $6.5 million in the prior year quarter to $0.2 million in the current year quarter.





The decrease in net cash generated from financing activities is primarily due to a decrease of $1.2 million in proceeds from stock option exercises, as well as increases in repayments of obligations under supplier financing arrangements of $0.2 million and purchases of treasury shares to fund employee tax withholdings on restricted share vesting of $0.4 million.





In addition, the Company also made non-cash capital investments of $0.7 million and $0.4 million in the three-month periods ended May 31, 2011 and 2010, respectively, for advanced design tools acquired under long-term supplier financing arrangements (typically three years). Payments under these agreements are reported within cash flows from financing activities on the consolidated cash flow statements.


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Working Capital


The Company’s current assets and liabilities and net working capital were as follows(in thousands):


May 31,

2011


February 28,

2011


Inc./Dec. $


Inc./Dec. %Current assets:Cash and cash equivalents

$
125,929


$
170,387


$
(44,458
)


-26.1
%Accounts receivable, net


76,739



64,714



12,025



18.6
%Inventories


54,095



47,232



6,863



14.5
%Deferred income taxes, net


17,884



31,156



(13,272
)


-42.6
%Other current assets


18,810



8,047



10,763



133.8
%Total current assets

$
293,457


$
321,536


$
(28,079
)


-8.7
%Current liabilities:Accounts payable

$
30,436


$
27,171


$
3,265



12.0
%Deferred income from distribution


21,667



16,167



5,500



34.0
%Accrued expenses, income taxes and other liabilities


68,671



72,459



(3,788
)


-5.2
%Total current liabilities

$
120,774


$
115,797


$
4,977



4.3
%$
172,683


$
205,739


$
(33,056
)


-16.1
%




The Company’s total cash and cash equivalents decreased primarily due to the $41.0 million (including extinguishment of debt, net of cash acquired) paid for the acquisition of BridgeCo. Accounts receivable increased as a result of disruption caused by business process re-engineering as discussed above. Inventories increased mainly in response to the threat of potential component shortage as a result of the earthquake and tsunami in Japan as discussed above. Increases in assets were partially offset by higher accounts payable related to the acquisition of BridgeCo and inventory purchases .





As of May 31, 2011, the Company held approximately $88.1 million in financial instruments measured at fair value, including investments, non-marketable equity investments, cash surrender value of life insurance policies and cash equivalents. Auction rate securities are long-term variable rate bonds tied to short-term interest rates that were, until February 2008, reset through a “Dutch auction” process. As of May 31, 2011, 100% of the Company’s auction rate securities were “AAA” rated by one or more of the major credit rating agencies, mainly collateralized by student loans guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program (“FFELP”), as well as auction rate preferred securities ($6.1 million at par) which are AAA rated and part of a closed end fund that must maintain an asset ratio of 2 to 1. Non-marketable equity investments consist of the fiscal 2011 investment in EqcoLogic, a development-stage enterprise accounted for as a cost-basis investment and included in the investments in equity securities caption of the consolidated balance sheet.


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Historically, the carrying value (par value) of the auction rate securities approximated fair market value due to the frequent resetting of variable interest rates. Beginning in February 2008, however, the auctions for auction rate securities began to fail and were largely unsuccessful. As a result, the interest rates on the investments reset to the maximum rate per the applicable investment offering statements. The types of auction rate securities generally held by the Company had historically traded at par and are callable at par at the option of the issuer.





The par (invested principal) value of the auction rate securities associated with these failed auctions will not be accessible to the Company until a successful auction occurs, a buyer is found outside of the auction process, the securities are called or the underlying securities have matured. In light of these liquidity constraints and the lack of market-based data, the Company performed a valuation analysis to determine the estimated fair value of these investments. The fair value of these investments is based on a trinomial discount model. This model considers the probability of three potential occurrences for each auction event through the maturity date of the security. The three potential outcomes for each auction are (i) successful auction/early redemption, (ii) failed auction and (iii) issuer default. Inputs in determining the probabilities of the potential outcomes include, but are not limited to, the security’s collateral, credit rating, insurance, issuer’s financial standing, contractual restrictions on disposition and the liquidity in the market. The fair value of each security is determined by summing the present value of the probability weighted future principal and interest payments determined by the model. The discount rate was determined using a proxy based upon the current market rates for successful auctions within the AAA rated auction rate securities market. The expected term was based on management’s estimate of future liquidity. The illiquidity discount was based on the levels of federal insurance or FFELP backing for each security as well as considering similar preferred stock securities ratings and asset backed ratio requirements for each security.





As a result, as of May 31, 2011, the Company recorded an estimated cumulative unrealized loss of $1.9 million (net of tax) related to the temporary impairment of the auction rate securities, which was included in accumulated other comprehensive income within shareholders’ equity. The Company deemed the loss to be temporary because the Company does not plan to sell any of the auction rate securities prior to maturity at an amount below the original purchase value and, at this time, does not deem it probable that it will receive less than 100%t of the principal and accrued interest from the issuer. Further, the auction rate securities held by the Company are AAA rated. The Company continues to liquidate investments in auction rate securities as opportunities arise. In the three-month period ended May 31, 2011, $0.2 million in auction rate securities were liquidated at par in connection with issuer calls. Subsequent to May 31, 2011, an additional $0.6 million in auction rate securities were also liquidated at par, also as a consequence of issuer calls.





Given its sufficient cash reserves and normally positive cash flow from operations, the Company does not believe it will be necessary to access these investments to support current working capital requirements. However, the Company may be required to record additional unrealized losses in accumulated other comprehensive income in future periods based on then current facts and circumstances. Further, if the credit rating of the security issuers deteriorates, or if active markets for such securities are not reestablished, the Company may be required to adjust the carrying value of these investments through impairment charges recorded in the condensed consolidated statements of operations, and any such impairment adjustments may be material.


Commitments and Contingencies
 
 Contingent Consideration — BridgeCo Acquisition


The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of BridgeCo. The maximum amount of contingent consideration that can be earned by the sellers was $27.5 million as set forth in the purchase agreement A liability of $8.8 million was recorded as of May 31, 2011 based on the likelihood of achieving the performance goals.


The fair value of the contingent consideration arrangement was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, and are therefore Level 3 inputs. Key assumptions include a discount rate of 19% and a probability-adjusted level of annual revenues. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.


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Contingent Consideration — Symwave Acquisition





The Company recorded a liability for contingent consideration as part of the purchase price of Symwave at acquisition on November 12, 2010 at the estimated fair value of $3.1 million. The contingent consideration arrangement requires the Company to pay the former owners of Symwave an earnout amount equal to one times revenue (less certain agreed upon adjustments), depending on the achievement of certain revenue and gross profit margin performance goals, for each of the four quarterly periods from January 1,2011 until December 31,2011. No earnout payments shall be payable for any period after December 31, 2011. No liability was recorded as of February 28, 2011 and May 31, 2011 based on the likelihood of achieving the performance goals.


Contingent Consideration — STS Acquisition





The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of STS. The contingent consideration arrangement requires the Company to pay the former owners of STS an earnout amount of $3.0 million for the period from January 1,2011 until December 31,2011 provided that revenue meets performance goals set forth in the purchase agreement. No earnout payments shall be payable for any period after December 31, 2011. No liability was recorded as of February 28, 2011 and May 31, 2011 based on the likelihood of achieving the performance goals.





Contingent Consideration — Kleer Acquisition


The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of Kleer. The maximum amount of contingent consideration that can be earned by the sellers was $2.0 million as set forth in the purchase agreement. No liability was recorded as of February 28, 2011 and May 31, 2011 based on the likelihood of achieving the performance goals.





Contingent Consideration — K2L Acquisition


The Company recorded a liability for contingent consideration as part of the purchase price for the acquisition of K2L. The maximum amount of contingent consideration that can be earned by the sellers is 2.1 million Euro. Fifty percent of the contingent consideration was earned in calendar year 2010 and fifty percent is available to be earned in 2011 based on the level of achievement of revenue as set forth in the purchase agreement. On March 31, 2011, 1.1 million Euro in stock and cash was paid to the former owners of K2L for calendar year 2010 performance targets. This liability was revalued to $1.4 million as of May 31, 2011 based on the likelihood of achieving the performance goals.





The fair value of the contingent consideration arrangement was estimated by applying the income approach. That measure is based on significant inputs that are unobservable in the market, and are therefore Level 3 inputs. Key assumptions include a discount rate of 16%and a probability-adjusted level of annual revenues. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.


Litigation


From time to time as a normal incidence of doing business, various claims and litigation may be asserted or commenced against the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages and/or invalidate its proprietary rights. Any lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management’s time and attention, and an adverse outcome of any significant matter could have a material adverse effect on the Company’s consolidated results of operations or cash flows in the quarter or annual period in which one or more of these matters are resolved.





On October 18, 2010, AFTG-TG, L.L.C. and Phillip M. Adams & Associates, L.L.C. (collectively, "Adams") filed a lawsuit in the United States District Court for the District of Wyoming against the Company and other semiconductor companies. Adams' Complaint alleges that the Company's products infringe twelve patents related to floppy disk controllers and that the Company misappropriated trade secrets related to detecting computer-related defects. The Complaint seeks unspecified damages (including treble damages for willful infringement and disgorgement of profits), attorneys’ fees and injunctive relief. On December 3, 2010, the Company filed a Motion to Dismiss for failure to state a claim upon which relief may be granted or, in the alternative, for improper joinder. On March 17, 2011, the District Court granted the Company's motion in part, ruling that Adams' complaint failed to meet the minimum pleading requirements to sustain a claim against the Company. The District Court further ruled that it would dismiss Adams' complaint unless Adams files an amended complaint by March 31, 2011. Adams did not file an amended complaint; instead on March 31, 2011 Adams filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit. Adams subsequently withdrew the appeal. On April 11, 2011, the District Court dismissed Adams’ complaint against SMSC without prejudice and subsequently denied the Company’s motion for reconsideration to make the dismissal with prejudice.


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Item3.— Quantitative and Qualitative Disclosures About Market Risk


Interest Rate and Investment Liquidity Risk— The Company’s exposure to interest rate risk relates primarily to its investment portfolio (i.e. with respect to interest income). 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, 2011, the Company’s $29.3 million of long-term investments consisted primarily of investments in U.S. government agency backed AAA rated auction rate securities. From time to time, the Company has also held 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 until recently had been reset every 90 days or less at auction, at which time the securities could also typically be repurchased or sold.





In February 2008, the Company began to experience failed auctions on some of its auction rate securities. Based on the failure rate of these auctions, the frequency and extent of the failures, and due to the lack of liquidity in the current market for the auction rate securities, the Company determined that the estimated fair value of the auction rate securities no longer approximates par value. The Company used a discounted cash flow model to determine the estimated fair value of these investments as of May 31, 2011, and recorded an unrealized loss of $1.9 million, (net of tax) related to the temporary impairment of the auction rate securities, which is included in accumulated other comprehensive income within shareholders’ equity on the consolidated balance sheet.





Assuming all other assumptions disclosed in Part I — Item 1 —Financial Statements— Note 3 of this Report, being equal, an increase or decrease in the liquidity risk premium (i.e. the discount rate) of 100 basis points as used in the model would decrease or increase, respectively, the fair value of the auction rate securities by approximately $0.8 million. In addition, an increase or decrease in interest rates of 100 basis points would increase interest income in the three month ended May 31, 2011 by $0.3 million or decrease interest income to a negligible amount.





Equity Price Risk— The Company is not exposed to any significant equity price risks at May 31, 2011.





Foreign Currency Risk— The Company has international operations and is therefore subject to certain foreign currency rate exposures, principally the euro and Japanese Yen. The Company also 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.





The Company’s most significant foreign subsidiaries, SMSC Japan and SMSC Europe, purchase a significant amount of their products for resale in U.S. dollars, and from time to time have entered into forward exchange contracts to hedge against currency fluctuations associated with these product purchases. Gains or losses on these contracts are intended to offset the gains or losses recorded for statutory and U.S. GAAP purposes from the remeasurement of certain assets and liabilities from U.S. dollars into local currencies. No such contracts were executed during fiscal 2010, and there are no obligations under any such contracts as of May 31, 2011. However, the Company has purchased currencies from time to time throughout the current fiscal year in anticipation of more significant foreign currency transactions, in order to optimize effective rates associated with those settlements.





Operating activities in Europe include transactions conducted in both euros and U.S. dollars. The euro is the functional currency for the Company’s European subsidiaries.Gains recorded from the remeasurement of U.S. dollar denominated assets and liabilities into euros were a negligible amount for the three-months period ending May 31, 2011, compared with losses of $0.2 million for the three-months period ending May 31, 2010. Losses recorded from the remeasurement of U.S. dollar denominated assets and liabilities into Yen were negligible amounts for the three-month periods ending May 31, 2011 and 2010.





Commodity Price Risk— The Company routinely uses precious metals in the manufacturing of its products. Supplies for such commodities may from time-to-time become restricted, or general market factors and conditions may affect pricing of such commodities. In the latter part of fiscal 2008, particularly in the fourth quarter, and in fiscal 2010, the price of gold increased precipitously, and certain of our supply chain partners began and continue to assess surcharges to compensate for the resultant increase in manufacturing costs. The Company is engaged in a project to replace gold with copper in certain of its parts to reduce this exposure. While the Company continues to attempt to mitigate the risk of similar increases in commodities-related costs, there can be no assurance that the Company will be able to successfully safeguard against potential short-term and long-term commodities price fluctuations.


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Item4.— Controls and Procedures


The Company has carried out an evaluation under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal 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 Principal Executive Officer and Principal Financial Officer have concluded that, as of May 31, 2011, the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports the Company files under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to the Company’s management, including the Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure.





There have been no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II


Item1. — Legal Proceedings


From time to time as a normal consequence of doing business, various claims and litigation may be asserted or commenced against the Company. In particular, the Company in the ordinary course of business may receive claims that its products infringe the intellectual property of third parties, or that customers have suffered damage as a result of defective products allegedly supplied by the Company. Due to uncertainties inherent in litigation and other claims, the Company can give no assurance that it will prevail in any such matters, which could subject the Company to significant liability for damages and/or invalidate its proprietary rights. Any lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management’s time and attention, and an adverse outcome of any significant matter could have a material adverse effect on the Company’s consolidated results of operations or cash flows in the quarter or annual period in which one or more of these matters are resolved.





On October 18, 2010, AFTG-TG, L.L.C. and Phillip M. Adams & Associates, L.L.C. (collectively, "Adams") filed a lawsuit in the United States District Court for the District of Wyoming (“District Court”) against the Company and other semiconductor companies. Adams' Complaint alleges that the Company's products infringe twelve patents related to floppy disk controllers and that the Company misappropriated trade secrets related to detecting computer-related defects. The Complaint seeks unspecified damages (including treble damages for willful infringement and disgorgement of profits), attorneys’ fees and injunctive relief. On December 3, 2010, the Company filed a Motion to Dismiss for failure to state a claim upon which relief may be granted or, in the alternative, for improper joinder. On March 17, 2011, the District Court granted the Company's motion in part, ruling that Adams' complaint failed to meet the minimum pleading requirements to sustain a claim against the Company. The District Court further ruled that it would dismiss Adams' complaint unless Adams files an amended complaint by March 31, 2011. Adams did not file an amended complaint; instead on March 31, 2011, Adams filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit. Adams subsequently withdrew the appeal. On April 11, 2011, the District Court dismissed Adams’ complaint against SMSC without prejudice and subsequently denied the Company’s motion for reconsideration to make the dismissal with prejudice.


Item1.A.— Risk Factors


Readers of this Quarterly Report on Form 10-Q should carefully consider the risks described in the Company’s other reports filed or furnished with the SEC, including the Company’s prior and subsequent reports on Forms 10-K, 10-Q and 8-K, in connection with any evaluation of the Company’s financial position, results of operations and cash flows.





The risks and uncertainties described in the Company’s most recent Annual Report on Form 10-K, filed with the SEC as of April 19, 2011, are not the only risks facing the Company. Additional risks and uncertainties not presently known, currently deemed immaterial, or those otherwise discussed in this Quarterly Report on Form 10-Q may also affect the Company’s operations. Any of these risks, uncertainties, events or circumstances could cause the Company’s future financial condition, results of operations or cash flows to be adversely affected.


Item2.— Unregistered Sales of Equity Securities and Use of Proceeds


(a)The Company issued 21,096 unregistered shares of its common stock at a cost of $0.5 million to the former shareholders of K2L on March 31, 2011 in connection with the K2L business combination. See Part I — Item 1. — Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 6 — Business Combinationsfor additional information regarding these business combinations. These issuances were exempt from registration under the Securities Act of 1933, as amended as a private placement under Section 4(2) of the Securities Act or as offshore transactions under regulations under the Securities Act of 1933.





(b) None.





(c) Issuer Purchases of Equity Securities.





In October 1998, the Company’s Board of Directors approved a common stock repurchase program, allowing the Company to repurchase up to one million shares of its common stock on the open market or in private transactions. The Board of Directors authorized the repurchase of additional shares in one million share increments in July 2000, July 2002, November 2007 and April 2008, and another two million shares in April 2011, bringing the total authorized repurchases to seven million shares as of May 31, 2011. As of May 31, 2011, the Company has repurchased approximately 4.5 million shares of its common stock at a cost of $101.2 million under this program, including 1,084,089 shares repurchased at a cost of $28.5 million in fiscal 2009, 1,165,911 shares repurchased at a cost of $40.6 million in fiscal 2008 and 253,300 shares repurchased at a cost of $6.1 million in fiscal 2007.


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Period

Total Number of Shares Purchased *


Average Price per Share


Total Number of Shares Purchased as Part of Publicly Announced Plans


Maximum Number of Shares that may Yet be PurchasedMarch 2011


1,005


$
25.12



-



495,077April 2011


14,979



26.72



-



2,480,098May 2011


49



27.80



-



2,480,049Total


16,033


$
26.62



-Note:* The Company purchased 16,033 shares at a cost of $0.4 million in the three month periods ending May 31, 2011, as part of an ongoing program in which the Company will purchase shares withheld from employees to fund tax withholdings required on restricted shares vesting each period. The Company purchased 8,834 shares at a cost of $0.2 million in fiscal 2011 as part of this program.





Item3.— Defaults Upon Senior Securities


None.


Item 4. — Removed and Reserved
 
 Item5.— Other Information


None.


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Item6.— Exhibits


2.1
—
Agreement and Plan of Merger, by and among Standard Microsystems Corporation, Comet Acquisition Corp., BridgeCo, Inc. and BCOA Nominees Limited, as Rights Holder Representative, dated as of May 19, 2011 incorporated by reference to Exhibit 2.1 to the registrant’s Form 8-K filed on May 20, 2011.31.1
—
Certification of Principal 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 Principal 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 Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





STANDARD MICROSYSTEMS CORPORATIONBy:
/s/ Kris Sennesael(Signature)Kris SennesaelVice President and Chief Financial Officer(Principal Financial and Accounting Officer)





Date: June 30, 2011


EXHIBIT INDEX


Exhibit

No.

Description2.1
—
Agreement and Plan of Merger, by and among Standard Microsystems Corporation, Comet Acquisition Corp., BridgeCo, Inc. and BCOA Nominees Limited, as Rights Holder Representative, dated as of May 19, 2011 incorporated by reference to Exhibit 2.1 to the registrant’s Form 8-K filed on May 20, 2011.31.1
—
Certification of Principal 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 Principal 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 Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.






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