UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 25, 2002
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File Number: 1-6453
NATIONAL SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2095071
(State of incorporation) (I.R.S. Employer Identification Number)
2900 Semiconductor Drive, P.O. Box 58090
Santa Clara, California 95052-8090
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 721-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title of Each Class Outstanding at August 25, 2002
------------------- ------------------------------
Common stock, par value $0.50 per share 180,939,806
NATIONAL SEMICONDUCTOR CORPORATION
INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) for the
Three Months Ended August 25, 2002 and August 26, 2001 3
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
for the Three Months Ended August 25, 2002 and August 26, 2001 4
Condensed Consolidated Balance Sheets (Unaudited) as of
August 25, 2002 and May 26, 2002 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended August 25, 2002 and August 26, 2001 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19-20
Signature 21
Certifications 22-23
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except per share amounts)
Three Months Ended
Aug. 25, Aug. 26,
2002 2001
------------ -------------
Net sales $ 420.6 $ 339.3
Operating costs and expenses:
Cost of sales 238.3 229.2
Research and development 110.7 109.0
Selling, general and administrative 69.9 62.5
Special items - 1.1
------------ -------------
Total operating costs and expenses 418.9 401.8
------------ -------------
Operating income (loss) 1.7 (62.5)
Interest income, net 4.1 7.0
Other income (expense), net (1.5) 3.4
------------ -------------
Income (loss) before income taxes 4.3 (52.1)
Income tax expense 3.0 2.5
------------ -------------
Net income (loss) $ 1.3 $ (54.6)
============ =============
Earnings (loss) per share:
Basic $ 0.01 $ (0.31)
Diluted $ 0.01 $ (0.31)
Weighted-average shares:
Basic 180.7 174.9
Diluted 187.1 174.9
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS (Unaudited)
(in millions)
Three Months Ended
Aug. 25, Aug. 26,
2002 2001
-------------- ---------------
Net income (loss) $ 1.3 $(54.6)
Other comprehensive income (loss), net of tax:
Reclassification adjustment for net realized
gain on available-for-sale securities
included in net income (loss) (0.7) (5.6)
Unrealized loss on available-for-sale securities(28.1) (8.3)
Derivative instruments:
Unrealized gain (loss) on cash flow hedges 0.4 (0.1)
-------------- ---------------
Comprehensive loss $(27.1) $(68.6)
============== ===============
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions)
Aug. 25, May 26,
2002 2002
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 719.0 $ 681.3
Short-term marketable investments 8.0 18.1
Receivables, less allowances of $38.6
in 2003 and $37.8 in 2002 143.8 131.7
Inventories 158.6 145.0
Deferred tax assets 58.7 58.7
Other current assets 48.4 38.3
---------------- --------------
Total current assets 1,136.5 1,073.1
Property, plant and equipment, net 746.8 737.1
Long-term marketable debt securities 71.6 145.0
Goodwill 173.3 173.3
Other assets 136.9 160.3
---------------- --------------
Total assets $2,265.1 $2,288.8
================ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4.4 $ 5.5
Accounts payable 124.1 123.7
Accrued expenses 214.0 226.7
Income taxes payable 46.3 47.9
---------------- --------------
Total current liabilities 388.8 403.8
Long-term debt 21.8 20.4
Other noncurrent liabilities 88.0 83.5
---------------- --------------
Total liabilities 498.6 507.7
---------------- --------------
Commitments and contingencies
Shareholders' equity:
Common stock 90.5 90.2
Additional paid-in capital 1,414.7 1,402.5
Retained earnings 311.8 310.5
Accumulated other comprehensive loss (50.5) (22.1)
---------------- --------------
Total shareholders' equity 1,766.5 1,781.1
---------------- --------------
Total liabilities and shareholders' equity $2,265.1 $2,288.8
================ ==============
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
Three Months Ended
Aug. 25, Aug. 26,
2002 2001
-------------------------------
Cash flows from operating activities:
Net income (loss) $ 1.3 $(54.6)
Adjustments to reconcile net income (loss)
with net cash provided by (used by)
operating activities:
Depreciation and amortization 55.5 56.9
Gain on investments (0.7) (5.6)
Loss on disposal of equipment 1.2 0.3
Noncash special items - 1.1
Other, net 2.4 -
Changes in certain assets and
liabilities, net:
Receivables (12.1) 10.2
Inventories (13.6) 12.7
Other current assets (13.6) (10.6)
Accounts payable and accrued expenses (11.5) (58.2)
Current and deferred income taxes payable (1.6) 22.3
Other noncurrent liabilities 4.5 1.7
-------------------------------
Net cash provided by (used by)
operating activities 11.8 (23.8)
-------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (60.9) (42.4)
Sale and maturity of available-for-sale
securities 130.8 10.0
Purchase of available-for-sale securities (47.5) (50.0)
Sale of investments 1.1 6.7
Business acquisition, net of cash acquired - (27.5)
Purchase of nonmarketable investments (7.2) (0.1)
Funding of benefit plan (2.5) (13.3)
Other, net 3.3 6.5
------------------------------
Net cash provided by (used by)
investing activities 17.1 (110.1)
------------------------------
Cash flows from financing activities:
Repayment of debt (2.1) (4.6)
Issuance of common stock, net 10.9 21.8
------------------------------
Net cash provided by financing activities 8.8 17.2
------------------------------
Net change in cash and cash equivalents 37.7 (116.7)
Cash and cash equivalents at beginning
of period 681.3 817.8
------------------------------
Cash and cash equivalents at end of period $719.0 $701.1
==============================
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
In the opinion of our management, the accompanying condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position and results of operations of National Semiconductor
Corporation and our majority-owned subsidiaries. You should not expect interim
results of operations to be indicative of the results to be expected for the
full year. This report should be read in conjunction with the consolidated
financial statements and the accompanying notes included in our annual report on
Form 10-K for the fiscal year ended May 26, 2002.
Earnings Per Share:
A reconciliation of the shares used in the computation of basic and diluted
earnings per share follows (in millions):
Three Months Ended
Aug. 25, Aug. 26,
2002 2001
------------- -------------
Net income (loss) used for basic and
diluted earnings (loss) per share $1.3 $(54.6)
============= ==============
Number of shares:
Weighted average common shares outstanding used
for basic earnings per share 180.7 174.9
Effect of dilutive securities:
Stock options 6.4 -
------------- --------------
Weighted average common and potential common
shares outstanding used for diluted earnings
per share 187.1 174.9
============= ==============
On August 25, 2002, we had options outstanding to purchase 26.1 million shares
of common stock with a weighted-average exercise price of $37.90. These options
were not included in diluted earnings per share since their effect was
antidilutive, but they could potentially dilute basic earnings per share in the
future. On August 26, 2001, we had options outstanding to purchase 37.7 million
shares of common stock with a weighted-average exercise price of $27.34. These
options were also not included in diluted earnings per share since their effect
was antidilutive, but they could also potentially dilute basic earnings per
share in the future.
Note 2. Consolidated Financial Statements Detail
Balance sheets (in millions):
Aug. 25, May 26,
2002 2002
-------------------------------
Inventories:
Raw materials $ 12.2 $ 6.4
Work in process 93.5 86.9
Finished goods 52.9 51.7
-------------------------------
Total inventories $158.6 $145.0
===============================
Statements of operations (in millions):
Three Months Ended
Aug. 25, Aug. 26,
2002 2001
----------- -----------
Special items:
In-process research and development charge $ - $1.1
Interest income, net:
Interest income $ 4.5 $ 8.2
Interest expense (0.4) (1.2)
----------- -----------
Interest income, net $ 4.1 $ 7.0
=========== ===========
Other income (expense), net:
Net intellectual property income $ 1.6 $1.3
Gain (loss) on investments, net (3.1) 2.1
----------- -----------
Total other income (expense), net $(1.5) $3.4
=========== ===========
Note 3. Statement of Cash Flows Information (in millions)
Three Months Ended
Aug. 25, Aug. 26,
2002 2001
-------------------------
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest $ 0.5 $ 0.3
Income taxes $ 5.6 $ 4.2
Supplemental Schedule of Non-cash Investing
and Financing Activities:
Issuance of stock for employee benefit plans $ 0.8 $ 4.3
Unearned compensation relating to restricted
stock issuance $ 0.2 $ 0.6
Issuance of common stock upon conversion of
convertible subordinated promissory note $ - $ 10.0
Change in unrealized gain (loss) on cash flow hedges $ 0.4 $ (0.1)
Change in unrealized gain on available-for-sale
securities $ (28.8) $ (13.9)
Note 4. Restructuring of Operations and Cost Reduction Programs
During the first quarter of fiscal 2003, we paid severance of $7.0 million to
132 employees as part of the cost reduction action we announced in May 2002. We
also paid $0.8 million for other costs, primarily costs related to exiting of
businesses, as part of the actions announced in May 2002 and restructuring
actions announced in fiscal 1999.
The following table provides a summary of the activities related to our cost
reduction and restructuring actions included in accrued liabilities through
August 25, 2002:
Balance at beginning of quarter $16.4
Cash payments (7.8)
-----------
Ending balance $ 8.6
===========
The balance at August 25, 2002 includes $4.3 million related to the May 2002
cost reduction action for activities that were not yet completed. The remaining
amounts primarily represent lease obligations related to other previously
announced actions.
Note 5. Segment Information
The following table presents information related to our reportable segments (in
millions):
Information
Analog Appliance All Elimi- Total
Segment Segment Others nations Consolidated
---------- ----------- ---------- --------- ------------
Three months ended
August 25, 2002:
Sales to unaffiliated
customers $325.3 $ 53.4 $41.9 $- $420.6
=========== =========== ========== ========= ===========
Segment income (loss)
before income taxes $ 15.9 $(11.2) $(0.4) $- $ 4.3
=========== =========== ========== ========= ===========
Three months ended
August 26, 2001:
Sales to unaffiliated
customers $252.0 $ 43.7 $43.6 $- $339.3
=========== =========== ========== ========= ===========
Segment income (loss)
before income taxes $(22.8) $(29.8) $ 0.5 $- $(52.1)
=========== =========== ========== ========= ===========
Note 6. Contingencies - Legal Proceedings
As we reported in our annual report on Form 10-K for the fiscal year ended May
26, 2002, we face the following material contingencies in the form of legal
proceedings:
We have been named to the National Priorities List for our Santa Clara,
California, site and have completed a remedial investigation/feasibility study
with the Regional Water Quality Control Board, acting as an agent for the
Federal Environmental Protection Agency. We have agreed in principle with the
RWQCB to a site remediation plan.
In addition to the Santa Clara site, from time to time we have been
designated as a potentially responsible party by federal and state agencies for
certain environmental sites with which we may have had direct or indirect
involvement. These designations are made regardless of the extent of our
involvement. These claims are in various stages of administrative or judicial
proceedings and include demands for recovery of past governmental costs and for
future investigations and remedial actions. In many cases, the dollar amounts of
the claims have not been specified, and with respect to a number of the PRP
claims, have been asserted against a number of other entities for the same cost
recovery or other relief as was sought from us. We accrue costs associated with
environmental matters when they become probable and reasonably estimable. The
amount of all environmental charges to earnings, including charges for the Santa
Clara site remediation, (excluding potential reimbursements from insurance
coverage), were not material during the first quarter of fiscal 2003.
As part of the disposition in fiscal 1996 of the Dynacraft assets and
business, we retained responsibility for environmental claims connected with
Dynacraft's Santa Clara, California, operations and for other environmental
claims arising from our conduct of the Dynacraft business prior to the
disposition. As part of the Fairchild disposition in fiscal 1997, we also agreed
to retain liability for current remediation projects and environmental matters
arising from our prior operation of Fairchild's plants in South Portland, Maine;
West Jordan, Utah; Cebu, Philippines; and Penang, Malaysia; and Fairchild agreed
to arrange for and perform the remediation and cleanup. We prepaid to Fairchild
the estimated costs of the remediation and cleanup and remain responsible for
costs and expenses incurred by Fairchild in excess of the prepaid amounts.
In January 1999, a class action suit was filed against us and our chemical
suppliers by former and present employees claiming damages for personal
injuries. The complaint alleges that cancer and reproductive harm were caused to
employees exposed to chemicals in the workplace. Plaintiffs presently seek a
certification of a medical monitoring class, which we oppose. Discovery in the
case is proceeding.
In November, 2000, a derivative action was brought against us and other
defendants by a shareholder of Fairchild Semiconductor International, Inc.
Plaintiff seeks recovery of alleged "short-swing" profits under section 16(b) of
the Securities Exchange Act of 1934 from the sale by the defendants in January
2000 of Fairchild common stock. The complaint alleges that Fairchild's
conversion of preferred stock held by the defendants at the time of Fairchild's
initial public offering in August 1999 constitutes a "purchase" that must be
matched with the January 2000 sale for purposes of computing the "short-swing"
profits. Plaintiff seeks from National alleged recoverable profits of
approximately $14.1 million. In February, 2002, the judge in the case granted
the motion to dismiss filed by us and our co-defendants and dismissed the case,
ruling that the conversion was done pursuant to a reclassification which is
exempt from the scope of Section 16(b). Plaintiff appealed the dismissal of the
case in March 2002.
Our tax returns for certain years are under examination in the U.S. by the
IRS (See Note 8 to our financial statements in our annual report on Form 10-K
for the year ended May 26, 2002 and the information provided in response to item
1 of Part II of this Form 10-Q).
In addition to the foregoing, we are a party to other suits and claims that
arise in the normal course of business. Based on current information, we do not
believe that it is probable that losses associated with the proceedings
discussed above that exceed amounts already recognized will be incurred in
amounts that would be material to our financial position or results of
operations.
Item 2. MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in the outlook section and in certain other sections of
management's discussion and analysis are forward-looking based on current
expectations and management's estimates. Actual results may differ materially.
The forward-looking statements may include discussion of specific risks and
uncertainties. Other risks and uncertainties that could affect us include, but
are not limited to, the general economy, the changing environment of the
semiconductor industry, competitive products and pricing, growth in the
wireless, PC and communications infrastructure industries, regulatory and
international conditions, the effects of legal and administrative cases and
proceedings, and other risks and uncertainties that we may detail from time to
time in our reports and filings with the SEC.
This discussion should be read in conjunction with the consolidated
financial statements and the accompanying notes included in this Form 10-Q and
in our annual report on Form 10-K for the fiscal year ended May 26, 2002.
o Critical Accounting Policies
We believe the following critical accounting policies are those policies that
have a significant effect on the determination of our financial position and
results of operations. These policies also require us to make our most difficult
and subjective judgments:
1. Revenue Recognition
We recognize revenue from the sale of semiconductor products upon shipment,
provided title and risk of loss have passed to the customer, the amount is fixed
or determinable and collection of the revenue is reasonably assured. Service
revenues are recognized as the services are provided or as milestones are
achieved, depending on the terms of the arrangement. We record at the time of
shipment a provision for estimated future returns. Approximately 52 percent of
our semiconductor product sales are sold through distributors. We have
agreements with our distributors for various programs, including pricing
adjustments based on resales, scrap allowances and volume incentives. The
revenue we record for these distribution sales is net of estimated provisions
for these programs. When determining this net distribution revenue, we must make
significant judgments and estimates. Our estimates are based upon historical
experience rates, inventory levels in the distribution channel, current economic
trends and other related factors. To date the actual distributor activity has
been consistent with the provisions we made based on our estimates. However,
because of the inherent nature of estimates, there is always a risk that there
could be significant differences between actual amounts and our estimates. Our
financial condition and operating results are dependent on our ability to make
reliable estimates and we believe that our estimates are reasonable. However,
different judgments or estimates could result in variances that might be
significant to reported operating results.
Intellectual property income is not classified as revenue. This income is
classified as non-operating income and is recognized when the license is
delivered and no further obligations to the other party exist.
2. Inventories
Inventories are stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out basis, or market. We reduce the carrying value of
inventory for estimated obsolescence or unmarketable inventory by an amount that
is the difference between its cost and the estimated market value based upon
assumptions about future demand and market conditions. Our products are
classified as either custom, which are those products manufactured with
customer-specified features or characteristics, or non-custom, which are those
products that do not have customer-specified features or characteristics. We
evaluate obsolescence by analyzing the inventory aging, order backlog and future
customer demand on an individual product basis. If actual demand were to be
substantially lower than what we have estimated, we may be required to
write-down inventory below the current carrying value. While our estimates
require us to make significant judgments and assumptions regarding future
events, we believe our relationships with our customers, combined with our
understanding of the end-markets we serve, provide us the ability to make
reliable estimates. We also evaluate the carrying value of inventory for lower
of cost or market on an individual product basis, and these evaluations are
based on the difference between net realizable value and standard cost. Net
realizable value is determined as the selling price of the product less the
estimated cost of disposal. When necessary, we reduce the carrying value of
inventory to net realizable value. If actual market conditions and resulting
product sales were to be less favorable than what we have projected, additional
inventory write-downs may be required.
3. Impairment of Goodwill, Intangible Assets and Other Long-lived Assets
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that their carrying value may not be recoverable from the
estimated future cash flows expected to result from their use and eventual
disposition. Our long-lived assets subject to this evaluation include property,
plant and equipment and amortizable intangible assets. We assess the impairment
of goodwill annually in our fourth fiscal quarter and whenever events or changes
in circumstances indicate that it is more likely than not that an impairment
loss has been incurred. Intangible assets other than goodwill are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value may not be fully recoverable. Other intangible assets subject to
this evaluation include patents we have acquired and technology licenses. We are
required to make judgments and assumptions in identifying those events or
changes in circumstances that may trigger impairment. Some of the factors we
consider include:
o Significant decrease in the market value of an asset
o Significant changes in the extent or manner for which the asset is being
used or in its physical condition
o A significant change, delay or departure in our business strategy related
to the asset
o Significant negative changes in the business climate, industry or economic
conditions
o Current period operating losses or negative cash flow combined with a
history of similar losses or a forecast that indicates continuing losses
associated with the use of an asset
In view of the generally weak economic climate that currently exists, we
are periodically evaluating whether an impairment of our amortizable intangible
assets and other long-lived assets has occurred. Our evaluation includes an
analysis of estimated future undiscounted net cash flows expected to be
generated by the assets over their remaining estimated useful lives. If the
estimated future undiscounted net cash flows are insufficient to recover the
carrying value of the assets over the remaining estimated useful lives, we will
record an impairment loss in the amount by which the carrying value of the
assets exceeds the fair value. We determine fair value based on discounted cash
flows using a discount rate commensurate with the risk inherent in our current
business model. If, as a result of our analysis, we determine that our
amortizable intangible assets or other long-lived assets have been impaired, we
will recognize an impairment loss in the period in which the impairment is
determined. Any such impairment charge could be significant and could have a
material adverse effect on our financial position and results of operations, if
and when the impairment is recorded. Major factors that influence our cash flow
analysis are our estimates for future revenue and expenses associated with the
use of the asset. Different estimates could have a significant impact on the
results of our evaluation.
We performed a goodwill impairment review upon initial adoption of the new
accounting rules for goodwill as of the beginning of fiscal 2002. We also
performed an annual review for goodwill impairment in our fourth quarter of
fiscal 2002 and plan to perform another review in the fourth quarter of fiscal
2003. Our impairment review is based on comparing the fair value to the carrying
value of the reporting units with goodwill. The fair value of a reporting unit
is measured at the business unit level using a discounted cash flow approach
that incorporates our estimates of future revenues and costs for those business
units. Reporting units with goodwill include our wireless, displays and power
business units that are operating segments within our Analog reportable segment
and our wired communications group that is reported within other operating
segments. The estimates we have used are consistent with the plans and estimates
that we are using to manage the underlying businesses. If we fail to deliver new
products for these business units, or if the products fail to gain expected
market acceptance, or market conditions for these businesses fail to improve,
our revenue and cost forecasts may not be achieved and we may incur charges for
goodwill impairment, which could be significant and could have a material
adverse effect on our financial position and results of operations.
o Overview
We recorded net sales of $420.6 million for the first quarter of fiscal 2003.
This represents a 24 percent increase from sales of $339.3 million for the first
quarter of fiscal 2002. The increase in sales resulted from higher demand,
particularly from customers in our target markets such as wireless handsets and
displays, as we saw business conditions for the semiconductor industry slowly
improve since a year ago. For the first quarter of fiscal 2003, we earned net
income of $1.3 million, while we had a net loss of $54.6 million for the first
quarter of fiscal 2002. The improvement in operating results was primarily due
to the higher sales. Net income for the first quarter of fiscal 2003 had no
special items while the net loss for the first quarter of fiscal 2002 included a
special item of $1.1 million for an in-process R&D charge related to the
acquisition of Wireless Solutions Sweden AB.
o Sales
The following discussion is based on our operating segments described in Note 13
to the consolidated financial statements included in our Annual Report on Form
10-K for the year ended May 26, 2002.
The Analog segment, which represents 77 percent of our total sales, recorded an
increase in sales of 29 percent for the first quarter of fiscal 2003 over sales
for the first quarter of fiscal 2002. The increase was mostly due to an increase
in unit volume, offset partially by some decreases in average selling prices.
The decrease in average selling prices was caused by mix changes as well as
actual declines in prices. Within the Analog segment, sales of
application-specific wireless products, including radio frequency building
blocks, and sales of display products increased by 12 percent and 124 percent,
respectively, in the first quarter of fiscal 2003 over sales in the first
quarter of fiscal 2002. In the broad-based analog markets, sales of power
management and amplifier products were up in the first quarter of fiscal 2003 by
55 percent and 34 percent, respectively, from the same period last year.
Sales in the first quarter of fiscal 2003 for the Information Appliance
segment increased 22 percent from sales in the first quarter of fiscal 2002, due
to higher volume of GeodeTM integrated processor products and integrated DVD
products. Average selling prices declined slightly for GeodeTM products but
increased slightly for integrated DVD products due to improved mix.
o Gross Margin
Gross margin as a percentage of sales increased to 43 percent for the first
quarter of fiscal 2003 from gross margin of 32 percent for the first quarter of
fiscal 2002. The increase in gross margin was primarily driven by higher factory
utilization. Wafer fabrication capacity utilization for the first quarter of
fiscal 2003 averaged 74 percent, compared with 47 percent in the same quarter
last year, when production activity was much lower due to the weakened business
conditions in the semiconductor industry. The impact of actual price declines on
selected products was offset by improvement in the company's overall product
mix.
o Research and Development
Our research and development expenses for the first quarter of fiscal 2003 were
$110.7 million, or 26 percent of sales, compared to $109.0 million, or 32
percent of sales, in the same period last year. The fiscal 2002 amount excludes
$1.1 million for in-process R&D charges related to the acquisition of Wireless
Solutions Sweden AB. The in-process R&D charges are included as a component of
special items in the condensed consolidated statement of operations. Slightly
higher R&D expenses for the first quarter of fiscal 2003 result mainly from
increased product development spending for new products in key target markets
and include the integration of Fincitec OY and ARSmikro OU acquired at the end
of fiscal 2002. During the first quarter of fiscal 2003, we devoted
approximately 77 percent of our R&D effort towards new product development and
23 percent towards the development of process and support technology. Compared
to fiscal 2002, this represents a 4 percent increase in spending for new product
development and a 10 percent decrease in spending for process and support
technology. We continue to invest in the development of new analog and
mixed-signal technology-based products for applications in the wireless
handsets, displays, information appliances and information infrastructure
markets. We also continue to devote resources towards developing new cores and
integrating those cores with other technological capabilities to create
system-on-a-chip solutions.
o Selling, General and Administrative
Our selling, general and administrative expenses in the first quarter of fiscal
2003 were $69.9 million, or 17 percent of sales, compared to $62.5 million, or
18 percent of sales in the first quarter of fiscal 2002. The increase in SG&A
expenses was mainly from higher payroll and employee benefit expenses and was
also impacted by higher expenses from foreign currency translation losses of
$2.9 million in fiscal 2003 while expenses in the first quarter of fiscal 2002
included foreign currency translation gains of $0.5 million.
o Interest Income and Interest Expense
For the first quarter of fiscal 2003, we earned net interest income of $4.1
million, compared to $7.0 million for the first quarter of fiscal 2002. The
decrease in net interest income was primarily due to lower average interest
rates on lower average cash balances in the first quarter of fiscal 2003
compared to the first quarter of fiscal 2002. Offsetting interest expense was
slightly lower for fiscal 2003 as we continued to reduce our outstanding debt
balances.
o Other Income (Expense), Net
Other expense, net was $1.5 million for the first quarter of fiscal 2003
compared to other income, net of $3.4 million for the first quarter of fiscal
2002. The components of other expense, net for the first quarter of fiscal 2003
included a $3.1 million net loss from equity investments, which was partially
offset by $1.6 million of net intellectual property income. By comparison, the
components of other income, net for the first quarter of fiscal 2002 included a
$2.1 million net gain from equity investments and $1.3 million of net
intellectual property income.
o Income Tax Expense
We recorded income tax expense of $3.0 million for the first quarter of fiscal
2003 compared to $2.5 million for the first quarter of fiscal 2002. The fiscal
2003 and 2002 tax expense represents non-U.S. income taxes on international
income. We have not incurred U.S. income taxes during these respective periods.
o Liquidity and Capital Resources
During the first quarter of fiscal 2003, cash and cash equivalents increased
$37.7 million compared to a decrease of $116.7 million for the first quarter of
fiscal 2002. The primary factors contributing to these changes are described
below:
Operating activities generated cash of $11.8 million in the first quarter of
fiscal 2003, while using cash of $23.8 million in the first quarter of fiscal
2002. Cash was generated from operating activities because net income, when
adjusted for noncash items (primarily depreciation and amortization) was greater
than the negative impact from changes in working capital components. The
negative impact from working capital components for fiscal 2003 came from
increases in receivables, inventories and other current assets combined with
decreases in accounts payable and accrued expenses. For fiscal 2002, the first
quarter use of operating cash came from the net loss adjusted for non-cash items
and changes in working capital components. Changes in working capital components
for fiscal 2002 were negative as decreases in income taxes payable, accounts
payable, accrued expenses and increases in other current assets more than offset
decreases in receivables and inventories and increases in current and deferred
income taxes payable.
Our investing activities generated cash of $17.1 million in the first
quarter of fiscal 2003, compared to $110.1 million used in the first quarter of
fiscal 2002. The cash generated in fiscal 2003 came from $83.3 million in the
maturity of marketable investments, net of purchases, which was offset by
investment in property, plant and equipment of $60.9 million. Major uses of cash
in fiscal 2002 included investment in property, plant and equipment of $42.4
million, net purchases of marketable securities of $40.0 million and the
acquisition of Wireless Solutions Sweden AB for $27.5 million.
Our financing activities generated cash of $8.8 million in the first
quarter of fiscal 2003 and $17.2 million in the first quarter of fiscal 2002.
The primary source of cash was from the issuance of common stock under employee
benefit plans in the amount of $10.9 million in fiscal 2003 compared to $21.8
million in fiscal 2002. This was slightly offset by repayment of outstanding
debt balances of $2.1 million in the first quarter of fiscal 2003 and $4.6
million in the first quarter of fiscal 2002.
We foresee substantial cash outlays for plant and equipment throughout
fiscal 2003, with primary focus on new capabilities that support our target
growth markets, as well as improvements to provide more capacity in selected
areas and also better manufacturing efficiency and productivity. The fiscal 2003
capital expenditure level is expected to be higher than the fiscal 2002 level.
However, we will continue to manage capital expenditures in light of business
conditions. We expect existing cash and investment balances, together with
existing lines of credit, to be sufficient to finance planned fiscal 2003
capital investments.
Our cash and investment balances are dependent on continued collection of
customer receivables and the ability to sell inventories. Although we have not
experienced major problems with our customer receivables, significant declines
in overall economic conditions would probably impact sales and could lead to
problems with customer receivables. In addition, major declines in financial
markets would likely cause reductions in our cash equivalents and marketable
investments.
The following table provides a summary of the effect on liquidity and cash flows
from our contractual obligations as of August 25, 2002:
(in millions) FiscalYear: 2008 &
there-
2003 2004 2005 2006 2007 after Total
-------- -------- ------- ------- ------ ------ --------
Contractual obligations:
Debt obligations $ 3.3 $ 22.9 $ - $ - $ - $ - $ 26.2
Noncancellable
operating leases 13.7 15.6 12.6 8.2 6.7 10.7 67.5
Fairchild manufacturing
agreement 17.7 - - - - - 17.7
Licensing agreements:
TSMC 24.0 32.0 32.0 19.0 - - 107.0
Other 17.7 19.5 10.0 2.4 0.3 0.6 50.5
-------- -------- ------- ------- ------ ------ --------
Total $ 76.4 $ 90.0 $ 54.6 $ 29.6 $ 7.0 $ 11.3 $268.9
======== ======== ======= ======= ====== ====== ========
Commercial Commitments:
Standby letters of credit
under bank multicurrency
agreement $ 19.0 - - - - - $ 19.0
======== ======== ======= ======= ====== ====== ========
o Recently Issued Accounting Standards
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
establishes standards of accounting and reporting for costs associated with exit
or disposal activities. It supercedes EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." One of the
principal differences between SFAS No. 146 and EITF Issue No. 94-3 relates to
the recognition of a liability for a cost associated with an exit or disposal
activity. SFAS No. 146 requires that a liability be recognized for those costs
only when the liability is incurred. Under EITF Issue No. 94-3, a liability for
such costs was recognized as of the date of the commitment to an exit plan. SFAS
No. 146 also requires that an exit or disposal liability be initially measured
at fair value. We are currently analyzing this Statement and have not yet
determined its impact on our consolidated financial statements. This Statement
will be effective in fiscal 2003 for exit or disposal activities that are
initiated after December 31, 2002.
o Outlook
While demand levels are better than they were at this same time a year ago, we
experienced a slowdown in orders in the first quarter of fiscal 2003 from the
immediately preceding fourth quarter of 2002. Order levels in the first quarter
were higher in July and August compared to June, but an increasing amount of
those orders was placed by our customers for delivery further out in time. This
caused a drop in the level of turns orders, which are orders received with
delivery requested in the same quarter. We do not anticipate that there will be
any notable increase in turns orders in the second quarter. This is based on our
assessment of current economic conditions, including end demand in the various
markets we serve. This also is somewhat in contrast to a historical norm where
we have seen a positive impact on business volume stimulated by the holiday
season. Based on our opening 13-week backlog and our current expectations on
turns orders, our current outlook is for second-quarter fiscal 2003 sales to be
sequentially flat to down 5 percent from sales for the first quarter. We also
expect gross margin to be slightly down due to lower factory utilization.
Operating expenses will be up slightly and net results will include a relatively
small charge for in-process research and development in connection with our
acquisition of a small privately held company that was completed early in the
second quarter of fiscal 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market
Risk, in our Annual Report on Form 10-K for the year ended May 26, 2002 and to
the subheading "Financial Market Risks" under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 25 of our Annual Report on Form 10-K for the year ended May 26, 2002 and in
Note 1, "Summary of Significant Accounting Policies," and Note 2, "Financial
Instruments," in the Notes to the Consolidated Financial Statements included in
Item 8 of our 2002 Form 10-K. There have been no material changes from the
information reported in these sections.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
o Tax Matters
The IRS is in the process of examining our tax returns for fiscal years 1997
through 2000. We have settled with the IRS all outstanding issues relating to
our federal tax liability for the 1986 - 1996 fiscal years. We have paid the tax
deficiency of approximately $3.4 million and the calculation of the interest has
been finalized, so the matter is now concluded. We believe we have made adequate
tax payments and/or accrued adequate amounts in our financial statements to
cover any liability due the IRS.
o Other Matters
Refer to the Legal Proceedings section in our Form 10-K for the fiscal year
ended May 26, 2002 for a complete description of other existing material legal
proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
3.1 Second Restated Certificate of Incorporation of the Company as amended
(incorporated by reference from the Exhibits to our Registration Statement
on Form S-3 Registration No. 33-52775, which became effective March 22,
1994); Certificate of Amendment of Certificate of Incorporation dated
September 30, 1994 (incorporated by reference from the Exhibits to our
Registration Statement on Form S-8 Registration No. 333-09957, which became
effective August 12, 1996); Certificate of Amendment of Certificate of
Incorporation dated September 22, 2000 (incorporated by reference from the
Exhibits to our Registration Statement on Form S-8 Registration No.
333-48424, which became effective October 23, 2000).
3.2 By Laws of the Company, as amended effective October 30, 2001 (incorporated
by reference from the Exhibits to our Form 10-K for the year ended May 26,
2002 filed August 16, 2002).
4.1 Form of Common Stock Certificate (incorporated by reference from the
Exhibits to our Registration Statement on Form S-3 Registration No.
33-48935, which became effective October 5, 1992).
4.2 Rights Agreement (incorporated by reference from the Exhibits to our
Registration Statement on Form 8-A filed August 10, 1988); First Amendment
to the Rights Agreement dated as of October 31, 1995 (incorporated by
reference from the Exhibits to our Amendment No. 1 to the Registration
Statement on Form 8-A filed December 11, 1995); Second Amendment to the
Rights Agreement dated as of December 17, 1996 (incorporated by reference
from the Exhibits to our Amendment No. 2 to the Registration Statement on
Form 8-A filed January 17, 1997).
10.1 Management Contract or Compensatory Plan or Arrangement: Fiscal Year 2003
Executive Officer Incentive Plan Agreement.
10.2 Management Contract or Compensatory Plan or Arrangement: 2003 Key Employee
Incentive Plan.
10.3 Equity Compensation Plan not approved by Stockholders: Option and Agreement
and Plan of Merger by and among National Semiconductor Corporation, Nintai
Acquisition Sub, Inc., DigitalQuake, Inc. and Paul A. Lessard and Michael
G. Fung dated as of February 8, 2002; First Amendment to Option and
Agreement and Plan of Merger; Letter Agreement with Jackson Tung; Letter
Agreement with Michael Fung; Letter Agreement with Anil Kumar; Letter
Agreement with Paul Lessard; Letter Agreement with Duane Oto.
(b) Reports on Form 8-K
We filed two reports on Form 8-K during the first quarter of fiscal 2003,
as follows:
1. A Form 8-K containing the sworn statements signed by our Chief
Executive Officer and Chief Financial Officer in response to the SEC's
order under Section 21(a)(i) of the Securities Exchange Act of 1934
was filed August 16, 2002.
2. A Form 8-K containing the certifications signed by our Chief Executive
Officer and Chief Financial Officer as required by Section 906 of the
Sarbanes-Oxley Act of 2002 was filed August 16, 2002.
Neither Form 8-K contained any financial statements.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL SEMICONDUCTOR CORPORATION
Date: September 30, 2002
\s\Robert E. DeBarr
-------------------
Robert E. DeBarr
Controller
Signing on behalf of the registrant
and as principal accounting officer
CERTIFICATION
I, Brian L. Halla, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National
Semiconductor Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 30, 2002
\s\Brian L. Halla
-----------------
Brian L. Halla
President and Chief Executive Officer
CERTIFICATION
I, Lewis Chew, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National
Semiconductor Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 30, 2002
\s\Lewis Chew
-------------
Lewis Chew
Senior Vice President, Finance
and Chief Financial Officer