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 February 23, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 February 23, 2003.
Common stock, par value $0.50 per share 182,456,701
NATIONAL SEMICONDUCTOR CORPORATION
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) for 3
the Three Months and Nine Months Ended February 23, 2003 and
February 24, 2002
Condensed Consolidated Statements of Comprehensive Loss 4
(Unaudited) for the Three Months and Nine Months Ended
February 23, 2003 and February 24, 2002
Condensed Consolidated Balance Sheets (Unaudited) as of 5
February 23, 2003 and May 26, 2002
Condensed Consolidated Statements of Cash Flows (Unaudited) 6
for the Nine Months Ended February 23, 2003
and February 24, 2002
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-13
Item 2. Management's Discussion and Analysis of Financial 14-21
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 22
About Market Risk
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23-24
Signature 25
Certifications 26-27
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 Nine Months Ended
Feb. 23, Feb. 24, Feb. 23, Feb. 24,
2003 2002 2003 2002
------- -------- --------- --------
Net sales ......................... $404.3 $369.5 $1,247.2 $1,075.3
Operating costs and expenses:
Cost of sales .................... 231.8 236.2 711.3 702.4
Research and development ......... 119.7 110.3 337.5 329.7
Selling, general and administrative 66.8 64.5 205.0 193.8
Special items .................... 17.0 -- 17.7 1.1
------- -------- --------- -------
Total operating costs and expenses . 435.3 411.0 1,271.5 1,227.0
------- -------- --------- --------
Operating loss ..................... (31.0) (41.5) (24.3) (151.7)
Interest income, net ............... 3.3 4.3 11.0 16.8
Other income (expense), net ........ (6.2) 1.9 (8.1) 3.4
------- -------- --------- --------
Loss before income taxes ........... (33.9) (35.3) (21.4) (131.5)
Income tax expense ................. 2.5 2.5 7.5 7.5
------- -------- --------- -------
Net loss ........................... $(36.4) $(37.8) $ (28.9) $ (139.0)
======= ======== ========= ========
Net loss per share:
Basic ......................... $(0.20) $(0.21) $(0.16) $ (0.79)
Diluted ....................... $(0.20) $(0.21) $(0.16) $ (0.79)
Weighted-average shares:
Basic ......................... 182.1 178.4 181.4 176.7
Diluted ....................... 182.1 178.4 181.4 176.7
Net loss used in basic and diluted
net loss per share calculation $(36.4) $(37.8) $(28.9) $ (139.0)
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE LOSS (Unaudited)
(in millions)
Three Months Ended Nine Months Ended
Feb. 23, Feb. 24, Feb. 23,Feb. 24,
2003 2002 2003 2002
------------- -------------
Net loss ......................................$ (36.4) $(37.8) $(28.9) $(139.0)
Other comprehensive income (loss) components,
net of tax:
Reclassification adjustment for net realized
(gain) on available-for-sale securities
included in net loss ..................... (5.5) (1.5) (9.1) (6.9)
Unrealized gain (loss) on
available-for-sale securities ............ (1.2) 28.4 (25.2) 22.9
Derivative instruments:
Unrealized gain (loss) on cash flow hedges (0.3) (0.1) 0.2 --
----- ----- ----- ------
Comprehensive loss .............................$(43.4) $(11.0) $(63.0) $(123.0)
===== ===== ===== ======
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions)
Feb. 23, May 26,
2003 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents .................... $ 759.2 $ 681.3
Short-term marketable investments ............ 100.2 153.1
Receivables, less allowances of $37.6 in
2003 and $37.8 in 2002 ..................... 137.2 131.7
Inventories .................................. 147.9 145.0
Deferred tax assets .......................... 58.7 58.7
Other current assets ......................... 26.7 38.3
-------- --------
Total current assets ......................... 1,229.9 1,208.1
Net property, plant and equipment ............... 707.7 737.1
Long-term marketable debt securities ............ -- 10.0
Goodwill ........................................ 173.3 173.3
Other assets .................................... 128.0 160.3
-------- --------
Total assets .................................... $ 2,238.9 $ 2,288.8
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............ $ 3.2 $ 5.5
Accounts payable ............................. 96.5 123.7
Accrued expenses ............................. 220.4 226.7
Income taxes payable ......................... 55.2 47.9
-------- --------
Total current liabilities .................... 375.3 403.8
Long-term debt .................................. 19.9 20.4
Other noncurrent liabilities .................... 95.2 83.5
-------- --------
Total liabilities ............................ 490.4 507.7
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock ................................. 91.2 90.2
Additional paid-in capital ................... 1,431.9 1,402.5
Retained earnings ............................ 281.6 310.5
Accumulated other comprehensive loss ......... (56.2) (22.1)
-------- --------
Total shareholders' equity ................... 1,748.5 1,781.1
-------- --------
Total liabilities and shareholders' equity ...... $ 2,238.9 $2,288.8
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
Nine Months Ended
Feb, 23 Feb. 24,
2003 2002
------------------------
Cash flows from operating activities:
Net loss ......................................... $ (28.9)$ (139.0)
Adjustments to reconcile net loss
with net cash provided by operating activities:
Depreciation, amortization and accretion ...... 172.1 171.5
Net (gain) loss on investments ................ 1.8 (6.9)
Impairment of technology licenses ............. 13.8 --
Loss on disposal of equipment ................. 2.1 3.1
Noncash special items ......................... 1.1 1.1
Other, net .................................... 0.9 0.2
Changes in certain assets and liabilities, net:
Receivables ................................ (5.4) (1.9)
Inventories ................................ (2.9) 50.0
Other current assets ....................... (0.5) (3.7)
Accounts payable and accrued expenses ...... (33.5) (71.9)
Current income taxes payable ............... 7.3 25.7
Other noncurrent liabilities ............... 9.8 5.6
------ ------
Net cash provided by operating activities ........ 137.7 33.8
------ ------
Cash flows from investing activities:
Purchase of property, plant and equipment ........ (137.1) (106.2)
Sale and maturity of available-for-sale securities 577.1 39.5
Purchase of available-for-sale securities ........ (515.1) (160.1)
Sale of investments .............................. 16.6 8.7
Sale of equipment ................................ 2.3 --
Business acquisition, net of cash acquired ....... (11.0) (27.5)
Purchase of nonmarketable investments ............ (16.3) (13.1)
Funding of benefit plan .......................... (3.3) (14.7)
Other, net ....................................... 2.9 2.8
------ ------
Net cash used by investing activities ............ (83.9) (270.6)
------ ------
Cash flows from financing activities:
Repayment of debt ................................ (4.5) (14.1)
Issuance of common stock, net .................... 28.6 87.2
------ ------
Net cash provided by financing activities ........ 24.1 73.1
------ ------
Net change in cash and cash equivalents .......... 77.9 (163.7)
Cash and cash equivalents at beginning of period . 681.3 817.8
------ ------
Cash and cash equivalents at end of period ....... $ 759.2 $ 654.1
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Interim Financial Statements:
In the opinion of our management, the accompanying unaudited 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 necessarily be indicative of the results
to be expected for the full fiscal 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 net
loss per share follows (in millions):
Three Months Ended Nine Months Ended
Feb. 23, Feb. 24, Feb. 23, Feb. 24,
2003 2002 2003 2002
--------------- ---------------
Net loss used for basic and
diluted net loss per share ............. $ (36.4)$ (37.8)$ (28.9)$ (139.0)
====== ====== ====== ======
Number of shares:
Weighted-average common shares outstanding
used for basic net loss per share ...... 182.1 178.4 181.4 176.7
Effect of dilutive securities:
Stock options .......................... -- -- -- --
------ ------ ------ ------
Weighted-average common and potential
common shares outstanding used for
diluted net loss per share ............. 182.1 178.4 181.4 176.7
====== ====== ====== ======
For the third quarter of fiscal 2003, we did not include options outstanding to
purchase 45.0 million shares of common stock with a weighted-average exercise
price of $27.76 in diluted earnings per share since their effect was
antidilutive due to the reported loss. These shares could, however, potentially
dilute basic earnings per share in the future. For the first nine months of
fiscal 2003, we did not include options outstanding to purchase 43.8 million
shares of common stock with a weighted-average exercise price of $28.27 in
diluted earnings per share since their effect was antidilutive due to the
reported loss. For the third quarter of fiscal 2002, we did not include options
outstanding to purchase 35.4 million shares of common stock with a
weighted-average exercise price of $27.71 in diluted earnings per share since
their effect was antidilutive due to the reported loss. For the first nine
months of fiscal 2002, we did not include options outstanding to purchase 36.6
million shares of common stock with a weighted-average exercise price of $27.51
in diluted earnings per share since their effect was antidilutive due to the
reported loss.
New Accounting Pronouncements:
o In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Although SFAS No. 144
retains the basic requirements of SFAS No. 121 regarding when and how to
measure an impairment loss, it provides additional implementation guidance.
SFAS No. 144 also supersedes the provisions of APB Opinion No. 30,
"Reporting Results of Operations," pertaining to discontinued operations.
Separate reporting of a discontinued operation is still required, but SFAS
No. 144 expands the presentation to include a component of an entity,
rather than strictly a business segment. This statement is effective for
our fiscal year 2003. The adoption of this statement did not have a
material impact on our financial position or results of operations.
o In April 2002, the Financial Accounting Standard Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, 64, Amendment of FASB No. 13, and
Technical Corrections." Among other provisions, SFAS No. 145 rescinds SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt."
Accordingly, gains or losses from extinguishment of debt shall not be
reported as extraordinary items unless the extinguishment qualifies as an
extraordinary item under the criteria of APB No. 30. Gains or losses from
extinguishment of debt that do not meet the criteria of APB No. 30 should
be reclassified to income from continuing operations in all prior periods
presented. This statement is effective for our fiscal year 2003. The
adoption of this statement did not have a material impact on our financial
position or results of operations.
o 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 concerns the recognition of a liability for costs
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. This Statement is effective in fiscal 2003 for exit or disposal
activities that are initiated after December 31, 2002. The adoption of this
statement did not have a material impact on our financial position or
results of operations.
o In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others."
This Interpretation requires a guarantor to include disclosure of certain
guarantees that it has issued and if applicable, at inception of the
guarantee, to recognize a liability for the fair value of the obligation
undertaken in issuing a guarantee. The recognition and measurement
requirements of this Interpretation are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. As of February
23, 2003, we had not issued or modified any agreements that included
guarantees subject to the recognition and measurement provisions of this
Interpretation. The disclosure requirements are effective for our third
quarter ended February 23, 2003 and are described below:
In connection with divestitures we have done in the past, we have routinely
provided indemnities to cover the indemnified party for matters such as
environmental, tax, product and employee liabilities. We also routinely
include intellectual property indemnification provisions in our terms of
sale, development agreements and technology licenses with third parties.
Since maximum obligations are not explicitly stated in these
indemnification provisions, the potential amount of future maximum payments
cannot be reasonably estimated. As a result, we have not recorded any
liability in our consolidated financial statements.
We typically warrant that our products conform to specifications and
therefore permit product returns. We provide a provision for these returns
as part of our sales returns allowance based on historic trend.
o In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities." This
Interpretation requires that if a business enterprise has a controlling
financial interest in a variable interest entity, the assets, liabilities
and results of the activities of the variable interest entity should be
included in consolidated financial statements of the business enterprise.
This Interpretation applies immediately to variable interest entities
created after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of this Interpretation
must be applied beginning in our third quarter of fiscal 2003. We currently
do not have any financial interest in variable interest entities.
Therefore, the adoption of this Interpretation did not have a material
impact on our financial position or results of operations.
Reclassifications:
Certain amounts reported in the previous year have been reclassified to conform
to the fiscal 2003 presentation. Net operating results have not been affected by
the reclassifications.
Note 2. Consolidated Financial Statement Details
Balance sheets (in millions):
Feb. 23, May 26,
2003 2002
-----------------------
Inventories:
Raw materials $ 7.2$ 6.4
Work in process 96.5 86.9
Finished goods 44.2 51.7
------ ------
Total inventories $ 147.9$ 145.0
====== ======
Statements of operations (in millions):
Three Months Ended Nine Months Ended
Feb. 23,Feb. 24, Feb. 23, Feb. 24,
2003 2002 2003 2002
---------------- ----------------
Special items:
In-process research and development charge $-- $-- $ 0.7 $ 1.1
Cost reduction charge (See Note 4) ....... 17.0 -- 17.0 --
----- ----- ----- -----
$17.0 $-- $17.7 $ 1.1
===== ==== ===== =====
Interest income, net:
Interest income .......................... $ 3.7 $ 5.3 $12.3 $20.1
Interest expense ......................... (0.4) (1.3) (3.3) (1.0)
----- ----- ----- -----
Interest income, net ....................... $ 3.3 $ 4.3 $11.0 $16.8
===== ===== ===== =====
Other income (expense), net:
Net intellectual property income ......... $ 0.1 $ 1.0 $ 4.2 $ 2.7
Net gain (loss) on investments ........... (1.9) 1.5 (1.8) 6.9
Share of profit (loss) from equity-method
investments ............................ (4.4) (0.6) (10.5) (5.6)
Other .................................... -- -- (0.6) --
----- ----- ----- -----
Total other income (expense), net .......... $(6.2) $ 1.9 $(8.1) $ 3.4
===== ===== ===== =====
Note 3. Statement of Cash Flows Information (in millions)
Nine Months Ended
Feb. 23, Feb. 24,
2003 2002
-------------------
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest ............................................. $ 1.4 $ 3.2
Income taxes ......................................... $ 14.3 $ 9.7
Supplemental Schedule of Non-cash Investing
and Financing Activities:
Issuance of stock for employee benefit plans .............. $ 0.8 $ 4.3
Issuance of common stock to directors ..................... $ 0.3 $ 0.2
Unearned compensation relating to restricted stock issuance $ 0.2 $ 2.1
Restricted stock cancellation ............................. $ 1.6 $ 0.1
Issuance of common stock upon conversion of convertible
$ -- $ 10.0
subordinated promissory note
Change in unrealized gain on cash flow hedges ............. $ 0.2 $ --
Change in unrealized gain on available-for-sale securities $ (34.3)$ 16.0
Note 4. Restructuring of Operations and Cost Reduction Programs
On February 20, 2003, we announced a series of strategic profit-improvement
actions designed to improve our return on investments and streamline our cost
structure. As a key part of this effort to increase our return on R&D spending,
we are seeking to sell our information appliance business, primarily consisting
of the GeodeTM family of products, and our cellular baseband business. We expect
to complete the sales within the next 3 to 6 months. Once the transactions are
completed, we expect our R&D spending on projects, which in our current view
require a longer time frame to achieve acceptable return, will be significantly
reduced. We also restructured our existing technology licensing agreement, and
entered into a new long-term technology and manufacturing agreement, with Taiwan
Semiconductor Manufacturing Corporation. The new arrangement establishes TSMC as
our supplier of wafers for products with feature sizes at and below 0.15-micron.
Under the new arrangement, we no longer are required to pay TSMC any further
licensing fees for access to their process technologies. As part of the overall
plan to streamline our cost structure, we also realigned personnel resources in
various manufacturing, product development and support areas. The realignment
resulted in the reduction of 424 employees from our worldwide workforce. These
workforce reductions, none of which result from our plans to sell the
information appliance and cellular baseband businesses, should be completed in
the fourth quarter of fiscal 2003. In connection with the realignment effort, we
recorded special items of $17.0 million, which included $16.6 million for
severance and a $0.4 million noncash charge for the write-off of abandoned
assets. We also recorded a $5.0 million charge included in R&D expenses for
impairment of licensed technology associated with the TSMC technology licensing
agreement that was restructured. Because of the revision, we no longer intend to
transfer the related process from TSMC to our Maine manufacturing facility.
During the third quarter of fiscal 2003 we paid severance of $1.8 million to 52
employees as part of the workforce reduction announced in February 2003 and we
paid severance of $0.7 million to 8 employees as part of the workforce reduction
announced in May 2002. We also paid an additional $0.5 million during the third
quarter of fiscal 2003 for other costs, which are costs primarily related to
exiting of certain business activities, as part of the cost reduction announced
in May 2002 and restructuring announced in fiscal 1999. During the first nine
months of fiscal 2003, we have paid a total of $10.4 million for severance to
209 employees and $2.0 million for other restructuring costs.
The following table provides a summary of the activities related to our cost
reduction and restructuring actions included in accrued liabilities for the nine
months ended February 23, 2003:
Balance at beginning of fiscal year $ 16.4
Cash payments (12.4)
February 2003 cost reduction charge 16.6
-------------
Ending balance $ 20.6
=============
The balance at February 23, 2003 includes $14.8 million associated with the
February 2003 cost reduction for actions that are not yet completed. The
remainder primarily represents lease obligations related to other previously
announced cost reduction and restructuring actions that are expected to continue
through December 2007.
Note 5. Acquisitions
In late August 2002, we completed the acquisition of DigitalQuake, Inc., a
development stage enterprise engaged in the development of digital display
products located in Campbell, California. We expect the addition of
DigitalQuake's digital display products, which include a fourth-generation
scaling solution, a triple analog-to-digital converter and an advanced digital
video interface with encryption/decryption technologies, to help us provide a
broad range of system solutions for flat panel monitors.
The purchase was completed through a step-acquisition where during the six
months prior to the closing we acquired approximately a 30 percent equity
interest through investments totaling $6.4 million. In August 2002, the
remaining equity interest was acquired for additional consideration of $14.8
million. Of this amount, we paid $12.7 million upon the closing of the
transaction and recorded the remaining liability of $2.1 million to be paid in 2
installments over the next two years. We allocated approximately $18.6 million
of the total purchase price to developed technology, $1.9 million to net
tangible assets, and $0.7 million to in-process research and development. The
in-process research and development was expensed upon completion of the
acquisition and is included as a component of special items in the consolidated
statement of operations for fiscal 2003. No amounts were allocated to goodwill
since this development stage enterprise was not considered a business. The
developed technology is an intangible asset that is being amortized ratably over
its estimated useful life of six years.
Employees and former shareholders of DigitalQuake will also receive additional
contingent consideration of up to $9.9 million if certain revenue targets are
achieved over the 24 months following the acquisition. The contingent
consideration will be recognized when it is probable that the revenue targets
will be achieved. Of the total contingent consideration, $5.7 million is also
contingent on future employment and will be treated as compensation expense. The
remainder will be treated as an additional part of the purchase price.
Note 6. Segment Information
The following tables present information related to our reportable segments (in
millions):
Information Enterprise Total
Analog Appliance Networking All Consoli-
Segment Segment Segment Others dated
-------------------------------------------
Three months ended February 23, 2003:
Sales to unaffiliated customers .....$311.5 $ 54.3 $ 7.5 $ 31.0 $ 404.3
====== ====== ====== ====== ========
Segment income (loss) before
income taxes ................$ 2.6 $(17.0) $(12.2) $ (7.3)$ (33.9)
====== ====== ====== ====== ========
Three months ended February 24, 2002:
Sales to unaffiliated customers .....$282.6 $ 45.1 $ 5.8 $ 36.0 $ 369.5
====== ====== ====== ====== ========
Segment loss before income taxes ... $ (3.5) $(22.3) $(10.9) $ 1.4 $ (35.3)
====== ====== ====== ====== ========
- ----------------------------------------- ------ ------ ------ ------ --------
Nine months ended February 23, 2003:
Sales to unaffiliated customers .....$958.4 $162.1 $ 22.1 $104.6 $1,247.2
====== ====== ====== ====== ========
Segment income (loss) before
income taxes $ 37.1 $(35.1) $(30.9) $ 7.5 $ (21.4)
====== ====== ====== ====== ========
Nine months ended February 24, 2002:
Sales to unaffiliated customers .....$810.5 $141.7 $ 18.9 $104.2 $1,075.3
====== ====== ====== ====== ========
Segment loss before income taxes ....$(39.3) $(68.1) $(33.8) $ 9.7 $(131.5)
====== ====== ====== ====== ========
Note 7. Contingencies - 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,
the 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 third quarter and first nine months 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 Fairchilds 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 the automatic
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 us 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 and in
December 2002, the U.S. Court of Appeals for the Third Circuit reversed the
district court's grant of our motion to dismiss and remanded the case to the
district court for further proceedings consistent with the appeals court
decision. We filed a petition in February 2003 for a panel rehearing and/or
rehearing en banc with the U.S. Court of Appeals for the Third Circuit and we
intend to continue to vigorously contest the action.
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 the Form 10-Q for the quarter ended August 25, 2002).
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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Such statements relate to, among other
things, sales, gross margins, operating expenses, capital expenditures, and
acquisitions and investments in other companies and are indicated by words or
phrases such as "expect," "outlook," "foresee," "we believe," "we intend," and
similar words or phrases. These statements are based on our current plans and
expectations and involve risks and uncertainties. The following are among the
principal factors that could cause actual results to differ materially from the
forward-looking statements: general business and economic conditions in the
semiconductor industry and the growth rate in the wireless, PC and information
infrastructure industries; pricing pressures and competitive factors; delays in
the introduction of new products or lack of market acceptance for new products;
the ability to integrate any companies we acquire and achieve operating
improvements at those companies; risks of international operations; changes in
legislation and regulation; the outcome of legal, administrative and other
proceedings to which we are a party; and the results of our programs to control
or reduce costs. Consequently, actual events and results may vary significantly
from those included in or contemplated or implied by such statements. We
undertake no obligation to update forward-looking statements to reflect
developments or information obtained after the date hereof and disclaim any
obligation to do so.
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.
We maintain a provision for warranty returns as part of a sales return
allowance, which is based on historic trend. 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. At this time,
approximately 49 percent of our semiconductor product sales are made
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 materially
consistent with the provisions we have 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, the fee is fixed or determinable, collection of the fee is
probable 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 with the ability to
make reliable estimates. To date the actual amount of obsolete or
unmarketable inventory has been materially consistent with previously
estimated write-downs we have actually recorded. We also evaluate the
carrying value of inventory for lower-of-cost-or-market on an individual
product basis, and these evaluations are intended to identify any
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
acquired developed technology, patents 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 current economic climate, 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. 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 perform an annual review for goodwill impairment in our fiscal fourth
quarter or whenever potential indicators of impairment exist. During the
third quarter of fiscal 2003, we tested our wireless reporting unit for
goodwill impairment based on the decision to sell the cellular baseband
business, a component of that reporting unit. No impairment was found to
exist. 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 Enterprise Networking
reportable segment. 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 $404.3 million for the third quarter of fiscal 2003 and
$1,247.2 million for the first nine months of fiscal 2003. This represented
increases of 9 percent from sales of $369.5 million for the third quarter of
fiscal 2002 and 16 percent from sales of $1,075.3 million for the first nine
months of fiscal 2002. The sales increase comes from higher demand, particularly
from customers in our wireless handset market, one of our target markets, as we
have seen business conditions for the semiconductor industry slowly improve from
a year ago. We recorded a net loss of $36.4 million for the third quarter of
fiscal 2003 and a net loss of $28.9 million for the first nine months of fiscal
2003. This compares to a net loss of $37.8 million in the third quarter of
fiscal 2002 and a net loss of $139.0 million for the first nine months of fiscal
2002. The third quarter net loss for fiscal 2003 included a special item of
$17.0 million related to cost reduction actions announced in February 2003 (See
Note 4) and $13.8 million of charges included in R&D expenses for the writedown
of technology licenses (See the Research and Development section below). In
addition to these items, the net loss for the first nine months of fiscal 2003
included a special item of $0.7 million for an in-process R&D charge related to
the acquisition in the second quarter of DigitalQuake. In comparison, no special
items were included in the net loss for the third quarter of fiscal 2002.
However, the net loss for the first nine months of fiscal 2002 included a
special item of $1.1 million for an in-process R&D charge related to the
acquisition in the first quarter of Wireless Solutions Sweden AB.
o Sales
The following discussion is based on our reportable 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 10 percent for the third quarter and 18 percent for the
first nine months of fiscal 2003 compared to the corresponding periods of fiscal
2002. The increases were due to higher volume as unit shipments rose faster than
sales mostly due to a shift in unit mix toward lower priced products combined
with some modest price declines. A significant portion of the increased mix of
lower priced products came from a variety of high performance analog products
that are offered in very small form factors due to our advanced chip-packaging
technologies. Although these products may be relatively lower in price, their
gross margins are relatively higher within our portfolio of products. Within the
Analog segment, sales of power management, audio and amplifier products were up
in the third quarter of fiscal 2003 by 41 percent, 43 percent and 24 percent
from the same period last year. For the first nine months in fiscal 2003, sales
of these products were up by 44 percent, 46 percent and 28 percent from sales
for the first nine months of fiscal 2002. The sales growth in power management
products was largely driven by products for wireless handsets. Sales of
application-specific wireless products, primarily radio frequency building
blocks, declined 18 percent for the third quarter of fiscal 2003 compared to
sales for the same quarter of fiscal 2002 and increased 1 percent for the first
nine months of fiscal 2003 over the same period of fiscal 2002.
Sales in the third quarter and first nine months of fiscal 2003 for the
Information Appliance segment increased 21 percent and 15 percent from sales for
the comparable periods of fiscal 2002. The increases were primarily due to
higher volume of GeodeTM integrated processor products and integrated DVD
products. Average selling prices declined slightly for GeodeTM products but
increased for integrated DVD products. The GeodeTMfamily of products represents
the primary component of the information appliance business we are seeking to
sell.
o Gross Margin
Gross margin as a percentage of sales increased to 43 percent for both the third
quarter and the first nine months of fiscal 2003, from gross margin of 36
percent for the third quarter of fiscal 2002 and 35 percent for the first nine
months of fiscal 2002. The increase in gross margin was primarily driven by
higher factory utilization. Wafer fabrication capacity utilization during the
first nine months of fiscal 2003 was 67 percent, compared to 49 percent in the
first nine months of fiscal 2002 when production activity was much lower due to
weaker business conditions in the semiconductor industry. The impact of actual
price declines on selected products was offset by improvement in overall product
mix and lower manufacturing costs.
o Research and Development
Our research and development expenses for the third quarter and first nine
months of fiscal 2003 increased 9 percent and 2 percent from R&D expenses for
the comparable periods of fiscal 2002. These R&D expenses exclude amounts of
$0.7 million for the first nine months of fiscal 2003 and $1.1 million for the
first nine months of fiscal 2002 for in-process R&D charges related to
acquisitions. The in-process R&D charges are separately included as a component
of special items in the condensed consolidated statement of operations. R&D
expenses for the third quarter and first nine months of fiscal 2003 also
included $13.8 million of charges for the writedown of technology licenses. Of
this total, $5.0 million came from the technology license with TSMC that became
impaired when we restructured the agreement and entered into a new agreement to
utilize TSMC as our supplier of wafers for products with feature sizes of
0.15-micron and below. In addition, we reached alternative arrangements with two
other R&D partners during the third quarter of fiscal 2003 that resulted in the
impairment of additional technology licenses for the remaining $8.8 million
charge. Excluding these charges, R&D expenses for the third quarter and first
nine months of fiscal 2003 decreased 4 percent and 2 percent from R&D expenses
for the comparable periods of fiscal 2002. Slightly lower R&D expenses reflect
our effort to control the level of expenditures and prioritize spending toward
more critical projects in light of current business conditions. Through the
first nine months of fiscal 2003, we devoted approximately 77 percent of our R&D
effort towards new product development and 23 percent toward the development of
process and support technology. Compared to the first nine months of fiscal
2002, this represents a 4 percent increase in spending for new product
development and a 2 percent decrease in spending for process and support
technology. We will continue to invest in the development of new analog and
mixed-signal technology-based products for applications in wireless handsets,
displays, other portable devices and information infrastructure markets.
o Selling, General and Administrative
Our selling, general and administrative expenses in the third quarter and first
nine months of fiscal 2003 increased 4 percent and 6 percent from SG&A expenses
for the comparable periods of fiscal 2002. The overall increase in SG&A expenses
was mainly from higher payroll and employee benefit expenses. The expenses for
the first nine months of fiscal 2003 also reflect higher expenses from foreign
currency remeasurement losses of $4.1 million compared to $1.3 million for the
first nine months of fiscal 2002.
o Interest Income and Interest Expense
For the third quarter and first nine months of fiscal 2003, we earned net
interest income of $3.3 million and $11.0 million compared to $4.3 million and
$16.8 million for the comparable periods of fiscal 2002. The overall decrease in
net interest income was primarily due to lower average interest rates during
fiscal 2003 compared to fiscal 2002 while average cash balances remained
relatively constant with last year. Offsetting interest expense was slightly
lower for fiscal 2003 as we continued to reduce our outstanding debt balances.
o Other Income (Expense), Net
We recorded other expense, net, of $6.2 million and $8.1 million for the third
quarter and first nine months of fiscal 2003. This compares to other income,
net, of $1.9 million and $3.4 million for the third quarter and first nine
months of fiscal 2002. The components of other expense, net, for the third
quarter of fiscal 2003 included $0.1 million of net intellectual property
income, which was offset by a $1.9 million net loss from investments and a $4.4
million charge for our share of net losses from equity-method investments. The
components of other income, net, for the third quarter of fiscal 2002 included
$1.0 million of net intellectual property income, a $1.5 million net gain on
investments and a $0.6 million charge for our share of net losses from
equity-method investments. For the first nine months of fiscal 2003, other
expense, net, included $4.2 million of net intellectual property income offset
by a $1.8 million net loss from investments and a $10.5 million charge for our
share of net losses from equity-method investments. For the first nine months of
fiscal 2002, other income, net, included $2.7 million of net intellectual
property income, a $6.9 million net gain on investments, a $5.6 million charge
for our share of net losses from equity-method investments and $0.6 million of
miscellaneous losses.
o Income Tax Expense
We recorded income tax expense of $2.5 million and $7.5 million for the third
quarter and first nine months of fiscal 2003, which are the same amounts we
recorded for the respective corresponding periods of fiscal 2002. The fiscal
2003 and 2002 tax expense represents non-U.S. income taxes on international
income. We did not incur U.S. income taxes during these periods.
o Liquidity and Capital Resources
During the first nine months of fiscal 2003, cash and cash equivalents increased
$77.9 million compared to a decrease of $163.7 million for the first nine months
of fiscal 2002. The primary factors contributing to these changes are described
below:
Operating activities generated cash of $137.7 million for the first nine months
of fiscal 2003, compared to $33.8 million for the first nine months of fiscal
2002. Cash was generated from operating activities because the positive impact
from net loss, when adjusted for noncash items (primarily depreciation and
amortization), was greater than the negative impact that came from changes in
working capital components. The negative changes from working capital components
for fiscal 2003 came primarily from decreases in accounts payable and accrued
expenses. For fiscal 2002, the net loss for the first nine months significantly
reduced cash generated from operating activities, while a net positive change in
working capital components had minimal impact. The positive effect from a
decrease in inventories and increase in income taxes payable was mostly offset
by the negative effect from decreases in accounts payable and accrued expenses.
Our investing activities used cash of $83.9 million for the first nine months of
fiscal 2003, compared to $270.6 million used for the first nine months of fiscal
2002. Major uses of cash in the first nine months of fiscal 2003 included the
acquisition of DigitalQuake for $11.0 million (net of cash received) and
investment in property, plant and equipment of $137.1 million, primarily for
machinery and equipment, which were offset by net sale and maturity of
marketable securities of $62.0 million. Major uses of cash in the first nine
months of fiscal 2002 included investment in property, plant and equipment of
$106.2 million, primarily for machinery and equipment, combined with by net
purchases of marketable securities of $120.6 million and the acquisition of
Wireless Solutions Sweden AB for $27.5 million.
Our financing activities generated cash of $24.1 million for the first nine
months of fiscal 2003 and $73.1 million for the first nine months of fiscal
2002. The primary source of cash came from the issuance of common stock under
employee benefit plans in the amount of $28.6 million in fiscal 2003 compared to
$87.2 million in fiscal 2002. This was slightly offset by repayment of
outstanding debt balances of $4.5 million in the first nine months of fiscal
2003 and $14.1 million in the first nine months of fiscal 2002.
We foresee substantial cash outlays for plant and equipment throughout the
remainder of fiscal 2003 and going into the first half of fiscal 2004, with
primary focus on new capabilities that support our target growth markets, as
well as improvements to provide more capacity in selected areas and improved
manufacturing efficiency and productivity. During the second quarter of fiscal
2003, we began construction of an assembly and test facility in China to expand
our business presence in the Asia markets. As a result, 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 capital investments remaining for
fiscal 2003 and into the first half of fiscal 2004.
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 could lead to deterioration in the quality of
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 and commercial commitments as of February 23,
2003:
(in millions) Fiscal year: 2008 and
2003 2004 2005 2006 2007 thereafter Total
----- ----- ----- ----- ---- ----- ------
Contractual obligations:
Debt obligations ......... $-- $23.1 $-- $-- $-- $-- $ 23.1
Noncancellable
operating leases ....... 5.3 19.0 14.6 9.7 8.3 10.6 67.5
Licensing agreements ..... 2.7 20.7 21.6 2.1 -- -- 47.1
Manufacturing agreements . 1.5 3.5 0.3 0.3 0.3 0.5 6.4
----- ----- ----- ----- ---- ----- ------
Total .................... $ 9.5 $66.3 $36.5 $12.1 $8.6 $11.1 $144.1
===== ===== ===== ===== ==== ===== ======
Commercial Commitments:
Standby letters of credit
under bank multicurrency
agreement .............. $11.9 -- -- -- -- -- $ 11.9
===== ===== ===== ===== ==== ===== ======
In addition, as of February 23, 2003, material capital purchase commitments were
approximately $27.0 million.
o Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
Statement will be effective for our fiscal year 2004. We are currently analyzing
this statement and have not yet determined its impact on our consolidated
financial statements.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure an amendment
of FASB Statement No. 123." This Statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
provisions under this Statement are effective for our fourth quarter and fiscal
year ending May 25, 2003. We account for our stock option plans and our employee
stock purchase plans in accordance with the intrinsic method of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
adoption of SFAS No. 148 should not have an impact on our financial position and
results of operations for fiscal 2003.
o Outlook
Although overall economic conditions remain uncertain, demand levels in the
third quarter of fiscal 2003 continued to be better than they were at this time
a year ago. New orders grew over the preceding second quarter, especially for
our Analog segment where orders for power management, amplifer and audio
products experienced the greatest increases. As a result, our opening 13-week
backlog going into our fiscal fourth quarter was higher than it was at the
beginning of the third quarter. Meanwhile our turns orders, which are orders
received with delivery requested in the same quarter, were lower in the third
quarter. This decline reflected the typical impact of the holiday season on our
customers and distributors, who were cautious about their inventory levels. The
rate of turns orders returned to a more normal level as we exited the third
quarter. Based on these factors and our view on the likely level of future turns
orders, our current outlook is for fourth-quarter fiscal 2003 sales to increase
by 4 to 7 percent over the recently completed third quarter. Historically our
fiscal fourth quarter sales have, more often than not, been higher than the
third quarter. If either the level of turns orders we expect is not achieved or
the rate of new orders declines, we may be unable to achieve this level of sales
expected for the fourth quarter of fiscal 2003. We also expect gross margin to
improve by 1 to 2 percent in the fourth quarter as wafer fabrication capacity
utilization is expected to run above 70 percent based on our current outlook of
a sales range of $420-$432 million. We believe we have the ability to quickly
adjust the level of production activity in our manufacturing facilities to align
with changes in order levels and economic conditions during the quarter, if
necessary. However, there is no assurance that the mix of product available will
exactly match the mix of product requested on a short-term basis. Operating
expenses will be lower reflecting savings as a result of the workforce
reductions and the revised arrangement with TSMC and most of these savings will
be reflected in our R&D expenses.
As part of the series of strategic profit-improvement actions announced in
February 2003, we are seeking to sell our information appliance business,
consisting primarily of the GeodeTM family of products, and our cellular
baseband business. The completion of both of these transactions should further
reduce operating expenses by approximately $14 to $18 million per quarter. Sales
generated from these businesses represent less than 5 percent of our total
sales. Therefore, the expense savings we expect to achieve will substantially
outweigh any reduction in gross margin contribution from losing these sales. The
net impact on future operating results is dependent on the successful completion
of these dispositions, which we expect to complete within the next 3 to 6
months. If we fail to find an acceptable buyer for either of these businesses,
we may be forced to decide to shut down one or both of these business units. In
the meantime we will continue to incur expenses associated with supporting these
businesses.
As noted in our discussion of planned capital expenditures, as part of our
efforts to expand our business presence in the Asia markets, we began
construction of an assembly and test facility in China's Suzhou Industrial Park
in the Jiangsu Province of China during the second quarter of fiscal 2003. The
facility is expected to provide products quickly and cost effectively to our
customers in China, as well as other regions as necessary. The facility also
will increase our overall assembly and test capacity to support increasing
product volume. Increases in product volume are dependent upon demand from our
customers. If we are unable to increase product volume, lower than expected
factory utilization, which results in higher manufacturing cost per unit, will
unfavorably impact operating results. In addition, unexpected start-up expenses,
inefficiencies and delays in the start of production in the facility may reduce
our expected future gross margin.
o Risk Factors
Set forth below and elsewhere in this Form 10-Q and in other documents we file
with the SEC are risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this Form 10-Q.
Conditions inherent in the semiconductor industry cause periodic fluctuations in
our operating results. Rapid technological change and frequent introduction of
new technology leading to more complex and more integrated products characterize
the semiconductor industry. The result is a cyclical environment with short
product life cycles, price erosion and high sensitivity to the overall business
cycle. Substantial capital and R&D investment are also required to support
products and manufacturing processes. As a result of these industry conditions,
we have experienced in the past and expect to experience in the future periodic
fluctuations in our operating results. Shifts in product mix toward, or away
from, higher margin products can also have a significant impact on our operating
results. As a result of these and other factors, our financial results can
fluctuate significantly from period to period.
Our business will be harmed if we are unable to compete successfully in our
markets. Competition in the semiconductor industry is intense. We compete with a
number of major corporations in the high-volume segment of the industry. These
include several multinational companies whose semiconductor business may be only
part of their overall operations, such as IBM, Motorola, Koninklijke (Royal)
Philips Electronics, NEC and Toshiba. We also compete with a large number of
corporations that target particular markets such as Texas Instruments, ST
Microelectronics, Maxim, Analog Devices and Linear Technology. Competition is
based on design and quality of products, product performance, price and service,
with the relative importance of these factors varying among products and
markets.
We cannot assure you that we will be able to compete successfully in the future
against existing or new competitors or that our operating results will not be
adversely affected by increased price competition. We may also compete with
several of our customers, particularly customers in the networking and personal
systems markets.
WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS, MANY OF WHICH ARE BEYOND OUR
CONTROL. We conduct a substantial portion of our operations outside the United
States, and our business is subject to risks associated with many factors beyond
our control. These factors include:
- - fluctuations in foreign currency rates;
- - instability of foreign economies;
- - emerging infrastructures in foreign markets;
- - support required abroad for demanding manufacturing requirements;
- - foreign government instability and changes; and
- - U.S. and foreign laws and policies affecting trade and investment.
Although we did not experience any materially adverse effects from our foreign
operations as a result of these factors in the last year, one or more of these
factors has had an adverse effect on us in the past and we could be adversely
affected by them in the future. In addition, although we seek to hedge our
exposure to currency exchange rate fluctuations, our competitive position
relative to non-U.S. suppliers can be affected by the exchange rate of the U.S.
dollar against other currencies, particularly the Japanese yen and euro.
IF DEVELOPMENT OF NEW PRODUCTS IS DELAYED OR MARKET ACCEPTANCE IS BELOW
EXPECTATIONS, FUTURE OPERATING RESULTS MAY BE UNFAVORABLY AFFECTED. We believe
that continued focused investment in research and development, especially the
timely development and market acceptance of new products, is a key factor to our
successful growth and our ability to achieve strong financial performance. We
will continue to invest resources to develop more highly integrated solutions
and building block products, both primarily based on our analog capabilities.
These products will continue to be targeted towards markets for wireless
handsets, displays, other portable devices and information infrastructure.
ACQUISITIONS. We have made and will continue to make strategic business
acquisitions and investments in order to gain access to key technologies that we
believe augment our existing technical capability or enable us to achieve faster
time to market. These acquisitions and investments can involve risks and
uncertainties that may unfavorably impact our future financial performance. We
cannot assure you that we will be able to integrate and develop acquired
technologies as expected. If the technology is not developed in a timely manner,
we may be unsuccessful in penetrating target markets. In addition, with any
acquisition there are risks that future operating results may be unfavorably
affected by acquisition related costs, including in-process R&D charges and
incremental R&D spending.
TAXES. From time to time, we have received notices of tax assessments from
certain governments of countries in which we operate. We cannot assure you that
these governments or other government entities will not serve future notices of
assessments on us, or that the amounts of such assessments or our failure to
favorably resolve such assessments would not have a material adverse effect on
our financial condition or results of operations.
CURRENT WORLD EVENTS. The current war in Iraq, the September 2001 terrorist
attacks on the U.S. and other acts of violence have resulted in additional
uncertainty on the overall state of the U.S. economy. There is no assurance that
the consequences from these events will not disrupt our operations either in the
U.S. or other regions of the world where we have operations.
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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
We maintain disclosure controls and procedures that are intended to ensure
that the information required to be disclosed in our Exchange Act filings
is properly and timely recorded and reported. We have formed a disclosure
controls committee comprised of key individuals from a variety of
disciplines in the company that are involved in the disclosure and
reporting process. The committee meets periodically to ensure the
timeliness, accuracy and completeness of the information required to be
disclosed in our filings. The committee also meets with the Chief Executive
Officer and the Chief Financial Officer to review the required disclosures
and the effectiveness of the design and operation of our disclosure
controls and procedures. Within 90 days prior to the filing date of this
report, the committee performed an evaluation, with the participation of
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation and their supervision of
and participation in the process, the Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and
procedures were effective.
In designing and evaluating our disclosure controls and procedures, our
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and our management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
(b) Changes in internal controls.
There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and
procedures subsequent to the date of the evaluation described above.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 2000, a derivative action was filed in the U.S. District Court in
Delaware against us, Fairchild Semiconductor International, Inc. and Sterling
Holding Company, LLC by Mark Levy, a Fairchild stockholder. The action was
brought under Section 16(b) of the Securities Exchange Act of 1934 and the rules
issued under that Act by the Securities and Exchange Commission. The plaintiff
seeks disgorgement of alleged short-swing insider trading profits. We originally
acquired Fairchild common and preferred stock in March 1997 at the time we
disposed of the Fairchild business. Prior to its initial public offering in
August 1999, Fairchild amended its certificate of incorporation to provide that
all Fairchild preferred stock would automatically convert to common stock upon
completion of the initial public offering. As a result, our shares of preferred
stock converted to common stock in August 1999. Plaintiff has alleged that this
acquisition of common stock through the conversion constituted an acquisition
that should be "matched" against our sale in January 2000 of Fairchild common
stock for purposes of computing short-swing trading profits. The action seeks to
recover from us on behalf of Fairchild 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 that is
exempt from the scope of Section 16(b). Plaintiff appealed the dismissal of the
case and in December 2002, the U.S. Court of Appeals for the Third Circuit
reversed the district court's grant of our motion to dismiss and remanded the
case to the district court for further proceedings consistent with the appeals
court decision. We filed a petition in February 2003 for a panel rehearing
and/or rehearing en banc with the U.S. Court of Appeals for the Third Circuit
and we intend to continue to vigorously contest the action.
You should also refer to the Legal Proceedings section in our Form 10-K for the
fiscal year ended May 26, 2003 and in our Form 10-Q for the quarters ended
August 25, 2002 and November 24, 2002 for a complete description of our other
existing material legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
(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: Executive
Preventive Health Program, January 2003.
10.2 Management Contract or Compensatory Plan or Agreement: Severance Benefit
Plan amended and restated as of January 1, 2003.
99.1 Additional Exhibit: Section 906 certifications.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the third quarter of fiscal
2003.
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: April 3, 2003
\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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors and material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 3, 2003 \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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors and material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 3, 2003 \s\ Lewis Chew
Lewis Chew
Senior Vice President, Finance
and Chief Financial Officer