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 29, 2004
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 29, 2004
------------------- --------------------------------
Common stock, par value $0.50 per share 179,383,685
NATIONAL SEMICONDUCTOR CORPORATION
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) for
the Three Months and Nine Months Ended February 29, 2004 and
February 23, 2003 3
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited) for the Three Months and Nine Months Ended
February 29, 2004 and February 23, 2003 4
Condensed Consolidated Balance Sheets (Unaudited) as of
February 29, 2004 and May 25, 2003 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months Ended February 29, 2004 and February 23, 2003 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
Part II. Other Information
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
Signature 30
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. 29, Feb. 23, Feb. 29, Feb. 23,
2004 2003 2004 2003
------------ ------------- ------------ ------------
Net sales $ 513.6 $ 404.3 $1,411.9 $1,247.2
Operating costs and expenses:
Cost of sales 249.5 231.8 710.4 711.3
Research and development 86.5 119.7 261.8 337.5
Selling, general and administrative 72.1 66.8 213.3 205.0
Special items (1.9) 17.0 16.7 17.7
------------ ------------- ------------ ------------
Total operating costs and expenses 406.2 435.3 1,202.2 1,271.5
------------ ------------- ------------ ------------
Operating income (loss) 107.4 (31.0) 209.7 (24.3)
Interest income, net 2.1 3.3 7.7 11.0
Other income (expense), net (1.2) (6.2) 1.6 (8.1)
------------ ------------- ------------ ------------
Income (loss) before taxes and cumulative
effect of a change in accounting principle 108.3 (33.9) 219.0 (21.4)
Income tax expense 15.2 2.5 28.5 7.5
------------ ------------- ------------ ------------
Income (loss) before cumulative effect of a
change in accounting principle 93.1 (36.4) 190.5 (28.9)
Cumulative effect of a change in accounting
principle including tax effect of $0.2 million - - (1.9) -
------------ ------------- ------------ ------------
Net income (loss) $ 93.1 $ (36.4) $ 188.6 $ (28.9)
============ ============= ============ ============
Earnings (loss) per share:
Income (loss) before cumulative effect of a
change in accounting principle:
Basic $ 0.52 $ (0.20) $ 1.05 $ (0.16)
Diluted $ 0.48 $ (0.20) $ 0.98 $ (0.16)
Cumulative effect of a change in accounting
principle including tax effect of $0.2 million:
Basic $ - $ - $ 0.01 $ -
Diluted $ - $ - $ 0.01 $ -
Net income (loss):
Basic $ 0.52 $ (0.20) $ 1.04 $ (0.16)
Diluted $ 0.48 $ (0.20) $ 0.97 $ (0.16)
Weighted-average shares used to calculate earnings (loss) per share:
Basic 178.7 182.1 181.1 181.4
Diluted 194.7 182.1 194.0 181.4
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in Millions)
Three Months Ended Nine Months Ended
--------------------------- ------------------------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
2004 2003 2004 2003
------------- ------------- --------------- --------------
Net income (loss) $ 93.1 $ (36.4) $ 188.6 $ (28.9)
Other comprehensive income (loss), net of tax:
Reclassification adjustment for net realized
(gain) on available-for-sale securities
included in net income (loss) - (5.5) - (9.1)
Unrealized gain (loss) on
available-for-sale securities 0.6 (1.2) (1.7) (25.2)
Derivative instruments:
Unrealized gain (loss) on cash flow hedges - (0.3) 0.2 0.2
------------- ------------- --------------- --------------
Comprehensive income (loss) $ 93.7 $ (43.4) $ 187.1 $ (63.0)
============= ============= =============== ==============
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in Millions)
Feb. 29, May 25,
2004 2003
------------------------ ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 632.4 $ 802.2
Short-term marketable investments 160.7 113.2
Receivables, less allowances of $40.2 in fiscal 2004
and $38.2 in fiscal 2003 162.0 137.1
Inventories 186.6 142.2
Deferred tax assets 66.0 66.0
Other current assets 55.7 20.5
------------------------ ---------------------
Total current assets 1,263.4 1,281.2
Net property, plant and equipment 686.3 680.7
Goodwill 173.3 173.3
Other assets 97.2 109.4
------------------------ ---------------------
Total assets $2,220.2 $2,244.6
======================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 22.8 $ 2.3
Accounts payable 122.2 107.0
Accrued expenses 175.9 192.3
Income taxes payable 67.9 49.6
------------------------ ---------------------
Total current liabilities 388.8 351.2
Long-term debt - 19.9
Other noncurrent liabilities 185.9 167.5
------------------------ ---------------------
Total liabilities 574.7 538.6
------------------------ ---------------------
Commitments and contingencies
Shareholders' equity:
Common stock 89.7 91.8
Additional paid-in capital 1,205.8 1,451.3
Retained earnings 465.8 277.2
Accumulated other comprehensive loss (115.8) (114.3)
------------------------ ---------------------
Total shareholders' equity 1,645.5 1,706.0
------------------------ ---------------------
Total liabilities and shareholders' equity $2,220.2 $2,244.6
======================== =====================
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in Millions)
Nine Months Ended
--------------------------------------
Feb. 29, Feb. 23,
2004 2003
--------------- ---------------
Cash flows from operating activities:
Net income (loss) $ 188.6 $ (28.9)
Adjustments to reconcile net income with net cash
provided by operating activities:
Cumulative effect of a change in accounting principle 1.9 -
Depreciation, amortization, and accretion 160.9 172.1
Gain on investments (4.2) -
Share in net losses of equity-method investments 10.8 10.5
Loss on disposal of equipment 6.0 2.1
Impairment of technology licenses - 13.8
Noncash special items 1.4 1.1
Other, net 3.1 0.9
Changes in certain assets and liabilities, net:
Receivables (17.3) (5.4)
Inventories (49.0) (2.9)
Other current assets (35.0) (0.5)
Accounts payable and accrued expenses 3.1 (36.6)
Income taxes payable 18.3 7.3
Other noncurrent liabilities 16.5 9.8
--------------- ---------------
Net cash provided by operating activities 305.1 143.3
--------------- ---------------
Cash flows from investing activities:
Purchase of property, plant and equipment (153.8) (122.0)
Sale and maturity of available-for-sale securities 339.0 577.1
Purchase of available-for-sale securities (386.7) (515.1)
Sale of investments 9.3 16.6
Sale of equipment - 2.3
Business acquisition, net of cash acquired - (11.0)
Investment in nonpublicly traded companies (1.8) (21.0)
Funding of benefit plan (4.8) (3.3)
Other, net (2.3) (1.1)
--------------- ---------------
Net cash used by investing activities (201.1) (77.5)
--------------- ---------------
Cash flows from financing activities:
Repayment of debt (2.1) (4.5)
Payment on time-based CAD licenses (21.0) (12.0)
Issuance of common stock 149.3 28.6
Purchase and retirement of treasury stock (400.0) -
--------------- ---------------
Net cash (used by) provided by financing activities (273.8) 12.1
--------------- ---------------
Net change in cash and cash equivalents (169.8) 77.9
Cash and cash equivalents at beginning of period 802.2 681.3
--------------- ---------------
Cash and cash equivalents at end of period $ 632.4 $ 759.2
=============== ===============
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
25, 2003.
Earnings Per Share:
A reconciliation of the shares used in the computation of basic and diluted
earnings (loss) per share follows:
Three Months Ended Nine Months Ended
------------------------ -----------------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
(In Millions) 2004 2003 2004 2003
------------ ----------- ----------- -----------
Numerator:
Income (loss) before cumulative effect of a
change in accounting principle $ 93.1 $ (36.4) $ 190.5 $ (28.9)
============ =========== =========== ===========
Net income (loss) $ 93.1 $ (36.4) $ 188.6 $ (28.9)
============ =========== =========== ===========
Denominator:
Weighted-average common shares outstanding
used for basic earnings (loss) per share 178.7 182.1 181.1 181.4
Effect of dilutive securities:
Stock options 16.0 - 12.9 -
------------ ----------- ----------- -----------
Weighted-average common and potential
common shares outstanding used for
diluted earnings (loss) per share 194.7 182.1 194.0 181.4
============ =========== =========== ===========
For the third quarter of fiscal 2004, we did not include options outstanding to
purchase 6.6 million shares of common stock with a weighted-average exercise
price of $58.32 in diluted earnings per share since their effect was
antidilutive because the exercise price of these options exceeded the average
market price during the quarter. These shares could, however, potentially dilute
basic earnings per share in the future. For the first nine months of fiscal
2004, we did not include options outstanding to purchase 14.1 million shares of
common stock with a weighted-average exercise price of $45.86 in diluted
earnings per share since their effect was also antidilutive because the exercise
price of these options exceeded the average market price during the same period.
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 the diluted loss per share since their effect was
antidilutive due to the reported loss. 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 the diluted loss per
share since their effect was antidilutive due to the reported loss.
Employee Stock Plans
We account for our employee stock option and stock purchase plans in accordance
with the intrinsic method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." For more complete information on our
stock-based compensation plans, see Note 10 to the Consolidated Financial
Statements included in our annual report on Form 10-K for the year ended May 25,
2003.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure." This information illustrates the effect on net income (loss) and
earnings (loss) per share as if we had accounted for stock-based awards to
employees under the fair value method specified by SFAS No. 123. The
weighted-average fair value of stock options granted during the third quarter
and first nine months of fiscal 2004 was $24.54 and $17.23 per share,
respectively. The weighted-average fair value of stock options granted during
the third quarter and first nine months of fiscal 2003 was $8.33 and $9.30 per
share, respectively. The weighted-average fair value of rights granted under the
stock purchase plans was $7.48 and $5.15 per share for the third quarter and
first nine months of fiscal 2004, respectively. The weighted-average fair value
of rights granted under the stock purchase plans was $3.00 and $5.60 per share
for the third quarter and first nine months of fiscal 2003, respectively. We
estimated the fair value of these employee stock-based awards using a
Black-Scholes option pricing model that assumes no expected dividends and uses
the following weighted-average assumptions:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
2004 2003 2004 2003
-------------- -------------- ------------- ---------------
Stock Option Plans
Expected life (in years) 5.4 5.0 5.2 5.0
Expected volatility 74% 77% 76% 77%
Risk-free interest rate 3.1% 2.7% 3.2% 2.7%
Stock Purchase Plans
Expected life (in years) 0.3 0.3 0.3 0.3
Expected volatility 41% 54% 48% 54%
Risk-free interest rate 1.0% 1.1% 0.9% 1.1%
For pro forma purposes, the estimated fair value of employee stock-based awards
is amortized on a straight-line basis over the options' vesting period for
options and the three-month purchase period for stock purchases under the stock
purchase plans. The pro forma information follows:
Three Months Ended Nine Months Ended
-------------- -------------- ------------- ---------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
(In Millions, Except Per Share Amounts) 2004 2003 2004 2003
-------------- -------------- ------------- ---------------
Net income (loss) - as reported $ 93.1 $ (36.4) $ 188.6 $ (28.9)
Add back: Stock compensation charge included
in net income (loss) determined under the
intrinsic value method, net of tax 0.6 - 1.8 0.7
Deduct: Total stock-based employee compensation
expense determined under the fair value
method, net of tax (42.6) (45.4) (125.8) (136.6)
-------------- -------------- ------------- ---------------
Net income (loss) - pro forma $ 51.1 $ (81.8) $ 64.6 $(164.8)
============== ============== ============= ===============
Basic earnings (loss) per share - as reported $ 0.52 $ (0.20) $ 1.04 $ (0.16)
Basic earnings (loss) per share - pro forma $ 0.29 $ (0.45) $ 0.36 $ (0.91)
Diluted earnings (loss) per share - as reported $ 0.48 $ (0.20) $ 0.97 $ (0.16)
Diluted earnings (loss) per share - pro forma $ 0.26 $ (0.45) $ 0.33 $ (0.91)
New Accounting Pronouncements:
In December 2003, the Financial Accounting Standards Board issued SFAS No. 132
(Revised 2003), "Employers' Disclosures about Pensions and Other Postretirement
Benefits," relating to financial statement disclosures for defined benefit
plans. The new Statement does not change the measurement or recognition of those
plans that is required by SFAS No. 87, "Employers' Accounting for Pensions,"
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits" and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." The
Statement retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
it replaces and also requires additional disclosures about the assets,
obligations, cash flows and net periodic benefit cost of defined benefit pension
plans and other defined benefit postretirement plans. The required information
needs to be provided separately for pension plans and for other postretirement
benefit plans. SFAS No. 132 is effective for our fiscal year ending May 30,
2004. The interim-period disclosures are effective for our fiscal 2005 first
quarter ending August 29, 2004. Disclosure of certain information about foreign
plans is not effective until our fiscal 2005 year ending May 29, 2005. We do not
believe the adoption of SFAS No. 132 will have a material impact on our
financial condition or results of operations.
In December 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (Revised December 2003), "Consolidation of Variable
Interest Entities," originally issued in January 2003. FIN 46 requires an
investor with a majority of the variable interests (primary beneficiary) in a
variable interest entity (VIE) to consolidate the entity and also requires
majority and significant variable interest investors to provide certain
disclosures. A VIE is an entity in which the voting equity investors do not have
a controlling interest, or the equity investment at risk is insufficient to
finance the entity's activities without receiving additional subordinated
financial support from other parties. We currently do not have any financial
interest in variable interest entities that would require consolidation or any
significant exposure to VIEs that would require disclosure. Therefore, the
provisions of this Interpretation do not have a material impact on our financial
position or results of operations.
At the beginning of fiscal 2004, we adopted 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. The impact from the adoption
of this statement is discussed in Note 5 to the condensed consolidated financial
statements.
Reclassifications:
Certain amounts reported in fiscal 2003 have been reclassified to conform to the
fiscal 2004 presentation. Net operating results have not been affected by the
reclassification.
Note 2. Consolidated Financial Statement Details
Balance sheets (in Millions):
Feb. 29, May 25,
2004 2003
--------------------- ---------------------
Inventories:
Raw materials $ 9.2 $ 8.1
Work in process 119.9 89.2
Finished goods 57.5 44.9
--------------------- ---------------------
Total inventories $186.6 $142.2
===================== =====================
Statements of operations (in Millions):
Three Months Ended Nine Months Ended
--------------------------- -------------------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
2004 2003 2004 2003
-------------- ------------ ------------ ------------
Special items
Cost reduction items (See Note 4) $ (1.9) $ 17.0 $ 16.7 $ 17.0
In-process research and development charge - - - 0.7
-------------- ------------ ------------ ------------
Total special items $ (1.9) $ 17.0 $ 16.7 $ 17.7
============== ============ ============ ============
Interest income, net
Interest income $ 2.6 $ 3.7 $ 8.5 $ 12.3
Interest expense (0.5) (0.4) (0.8) (1.3)
-------------- ------------ ------------ ------------
Interest income, net $ 2.1 $ 3.3 $ 7.7 $ 11.0
============== ============ ============ ============
Other income (expense), net
Net intellectual property income $ 0.7 $ 0.1 $ 8.7 $ 4.2
Net gain (loss) on investments 1.2 (0.5) 4.2 -
Share in net losses of equity-method
investments (3.1) (4.4) (10.8) (10.5)
Other - (1.4) (0.5) (1.8)
-------------- ------------ ------------ ------------
Total other income (expense), net $ (1.2) $ (6.2) $ 1.6 $ (8.1)
============== ============ ============ ============
Note 3. Consolidated Statement of Cash Flows Information (in Millions)
Nine Months Ended
-----------------------------------------
Feb. 29, Feb. 23,
2004 2003
--------------------- -------------------
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest $ 0.8 $ 1.4
Income taxes $ 12.4 $ 14.3
Supplemental Schedule of Non-cash Investing
and Financing Activities:
Issuance of stock for employee benefit plans $ 0.9 $ 0.8
Issuance of common stock to directors $ 0.4 $ 0.3
Unearned compensation relating to restricted stock issuance $ 2.1 $ 0.2
Restricted stock cancellation $ 1.1 $ 1.6
Change in unrealized gain on cash flow hedges $ 0.2 $ 0.2
Change in unrealized gain on available-for-sale securities $ (1.7) $ (34.3)
Acquisition of software license under long-term contracts $ 20.7 $ 15.4
Note 4. Restructuring of Operations and Cost Reduction Programs
During the third quarter of fiscal 2004, we substantially completed all cost
reduction activities related to our strategic profit-improvement actions that
were initially launched in February 2003. As a result, we recorded a net credit
of $1.9 million, which includes a $3.9 million credit for the release of
severance and other exit-related cost accruals no longer required. A large
portion of the accruals for severance costs was for employees in the information
appliance and cellular baseband businesses, but the actual severance costs were
lower than originally expected because of some voluntary terminations and more
employees eventually hired by Advanced Micro Devices, Inc. in the information
appliance disposition (see below) than originally expected. The credit was
reduced by a $2.0 million charge for supplemental actions that were incurred
during the quarter for additional lease obligations and severance, as well as
some asset write-offs.
Cost reduction charges for the first nine months of fiscal 2004 include
$14.6 million for supplemental profit-improvement actions during the first two
quarters of fiscal 2004, primarily for work force reductions in various
manufacturing, product development and support areas. This charge includes
severance costs, as well as asset write-offs and lease obligations we incurred
upon vacating certain manufacturing and design center facilities during the
period upon closure of those operations. In late August 2003, we also completed
the exit and sale of our information appliance business. This included the sale
to AMD of certain intellectual property and assets of the information appliance
business. As part of the transaction, AMD hired 125 former National employees
who were mostly located in Longmont, Colorado. However, certain information
appliance assets were not included in the sale and certain employees that were
directly supporting the information appliance business were not hired by AMD.
The corresponding severance and asset impairments that were incurred resulted in
a charge of $5.3 million. This charge was reduced by proceeds of $10.1 million
from the sale of assets that had a carrying value of $7.5 million less
transaction costs of $1.3 million. To date a total of 200 employees have been
terminated in fiscal 2004 as a combined result of the exit from the information
appliance business and the other supplemental actions.
Total charges (credits) related to cost reduction actions, including the
exit of the information appliance business, are presented in the following
tables:
Enterprise Enhanced
Analog Networking Solutions
(In Millions) Segment Segment Segment All Others Total
-------------- ---------------- ---------------- ---------------- ------------
Three months ended February 29, 2004:
Severance costs (credit) $ (0.4) $ 0.2 $ - $ (2.7) $ (2.9)
Exit related costs (credit) (0.2) - - 0.8 0.6
Asset write-off (credit) (0.2) - - 0.6 0.4
-------------- ---------------- ---------------- ---------------- ------------
$ (0.8) $ 0.2 $ - $ (1.3) $ (1.9)
============== ================ ================ ================ ============
Enterprise Enhanced
Analog Networking Solutions
(In Millions) Segment Segment Segment All Others Total
-------------- ---------------- ---------------- -------------- --------------
Nine months ended February 29, 2004:
Severance costs $ 3.3 $ 0.2 $ - $ 3.8 $ 7.3
Exit related costs 2.9 - - 2.0 4.9
Asset write-off 1.1 - - 4.7 5.8
-------------- ---------------- ---------------- -------------- --------------
$ 7.3 $ 0.2 $ - $ 10.5 $ 18.0
============== ================ ================ ============== ==============
Noncash charges included in the tables above relate to the write-off of assets,
primarily equipment and a technology license that were dedicated to the
information appliance and cellular baseband businesses. The cellular baseband
business was closed at the end of fiscal 2003 as part of our profit-improvement
plan. In connection with the sale transaction to AMD discussed above, we also
entered into a separate supply agreement where we will manufacture product for
AMD at prices specified by the terms of the agreement, which we believe
approximate market prices. This agreement is effective for three years unless
terminated earlier as permitted under the terms of the agreement.
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 29, 2004:
(In Millions) Severance Other Exit Costs Total
------------------ ----------------- -----------------
Balance at beginning of fiscal year $ 17.5 $ 7.8 $ 25.3
Cash payments (21.7) (5.4) (27.1)
Fiscal 2004 cost reduction charges, net 7.3 4.9 12.2
------------------ ----------------- -----------------
Ending balance $ 3.1 $ 7.3 $ 10.4
================== ================= =================
Payments for the remaining severance obligations are expected to be
completed by the end of fiscal 2004. The remaining other exit costs, primarily
lease obligations, are expected to be paid through lease expiration dates that
range from August 2004 through January 2009.
During the first nine months of fiscal 2004 we paid severance to 403
employees in connection with workforce reductions announced in fiscal 2003 and
the first nine months of fiscal 2004. Amounts paid for other exit-related costs
during the first nine months of fiscal 2004 were primarily for payments under
lease obligations associated with previous restructuring and cost reduction
actions.
Note 5. Accounting for Asset Retirement Obligations
We adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," at the
beginning of fiscal 2004. This statement requires that the fair value of a legal
liability for an asset retirement obligation be recorded in the period in which
it is incurred if a reasonable estimate of fair value can be made. Upon
recognition of a liability, the asset retirement cost is recorded as an increase
in the carrying value of the related long-lived asset and then depreciated over
the life of the asset. Our asset retirement obligations arise primarily from
contractual commitments to decontaminate machinery and equipment used at our
manufacturing facilities at the time we dispose of or replace them. We also have
leased facilities where we have asset retirement obligations from contractual
commitments to remove leasehold improvements and return the property to a
specified condition when the lease terminates. As a result, we recorded a $2.1
million noncurrent liability for asset retirement obligations and a $0.4 million
increase in the carrying value of the related assets, net of $1.0 million of
accumulated depreciation. The cumulative effect recorded in the first quarter of
fiscal 2004 upon the adoption of this accounting standard was a charge of $1.9
million, including a tax effect of $0.2 million.
We did not recognize any asset retirement obligations associated with the
closure or abandonment of the manufacturing facilities we own. We currently
intend to operate these facilities indefinitely and are therefore unable to
reasonably estimate the fair value of any legal obligations we may have because
of the indeterminate closure dates.
The following table presents the activity for the asset retirement
obligations for the nine months ended February 29, 2004:
(In Millions)
Balance at beginning of fiscal 2004 $ 2.1
Liability incurred for assets acquired 0.2
Accretion expense 0.1
-----------------------
Ending balance $ 2.4
=======================
The following table presents net income and earnings (loss) per share for
the third quarter and first nine months of fiscal 2004 and 2003, as if the
provisions of SFAS No. 143 had been applied in fiscal 2003:
Three Months Ended Nine Months Ended
--------------------------- ------------------------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
(In Millions, Except Per Share Amounts) 2004 2003 2004 2003
------------- ------------- --------------- --------------
Net income (loss), as reported $ 93.1 $ (36.4) $ 188.6 $ (28.9)
Add back:
Cumulative effect of a change in accounting
principle including tax effect of $0.2 million - - 1.9 -
Deduct:
Accretion and depreciation in fiscal 2003, net of tax - (0.1) - (0.2)
------------- ------------- --------------- --------------
Net income (loss), as adjusted $ 93.1 $ (36.5) $ 190.5 $ (29.1)
============= ============= =============== ==============
Net income (loss) per share, as adjusted:
Basic $ 0.52 $ (0.20) $ 1.05 $ (0.16)
Diluted $ 0.48 $ (0.20) $ 0.98 $ (0.16)
Note 6. Stock Repurchase
During the second quarter of fiscal 2004, we repurchased 12.7 million shares of
our common stock for $400.0 million in connection with a stock repurchase
program announced in July 2003. A portion (7.5 million shares) of the total was
purchased through a privately negotiated transaction with a major financial
institution and the remainder was purchased in the open market.
Note 7. Segment Information
The following tables present information related to our reportable segments:
Enterprise Enhanced
Analog Networking Solutions
(In Millions) Segment Segment Segment All Others Eliminations Total
------------ -------------- ------------- ------------ --------------- -------------
Three months ended February 29, 2004:
Sales to unaffiliated customers $ 419.8 $ 3.8 $ 13.6 $ 76.4 $ 513.6
============ ============== ============= ============ =============== =============
Segment income (loss) before income taxes and
cumulative effect of a change in accounting
principle: $ 110.7 $ (4.7) $ 4.1 $ (1.8) - $ 108.3
============ ============== ============= ============ =============== =============
Three months ended February 23, 2003:
Sales to unaffiliated customers $ 307.4 $ 5.6 $ 12.3 $ 79.0 $ 404.3
============ ============== ============= ============ =============== =============
Segment income (loss) before income taxes: $ 3.0 $ (13.1) $ 4.5 $ (28.3) - $ (33.9)
============ ============== ============= ============ =============== =============
Nine months ended February 29, 2004:
Sales to unaffiliated customers $1,141.1 $ 14.2 $ 42.1 $ 214.5 $ 1,411.9
============ ============== ============= ============ =============== =============
Segment income (loss) before income taxes and
cumulative effect of a change in accounting
principle: $ 251.8 $ (14.7) $ 14.7 $ (32.8) - $ 219.0
============ ============== ============= ============ =============== =============
Nine months ended February 23, 2003:
Sales to unaffiliated customers $ 957.6 $ 15.4 $ 37.1 $ 237.1 $ 1,247.2
============ ============== ============= ============ =============== =============
Segment income (loss) before income taxes: $ 32.2 $ (33.3) $ 13.5 $ (33.8) - $ (21.4)
============ ============== ============= ============ =============== =============
The GeodeTM family of integrated processor products was the primary component of
the Information Appliance segment, which was formerly a reportable segment. It
was sold to AMD in late August 2003 as part of our disposition of the
information appliance business (See Note 4). Beginning in the second quarter of
fiscal 2004, the other aggregated operating segments that comprised our
Information Appliance reportable segment no longer met the requirements of a
reportable segment and have since been included in "All Other." Prior period
amounts, including the GeodeTM family, have been reclassified to conform with
the current year presentation.
Note 8. Commitments and Contingencies
Commitments
During the third quarter of fiscal 2004 we entered into a master operating lease
agreement for capital equipment under which individual operating lease
agreements are executed as the delivery and acceptance of scheduled equipment
occurs. As of February 29, 2004, future minimum lease payments under these
operating leases are $0.1 million in fiscal 2004, $0.5 million in fiscal 2005,
$0.5 million in fiscal 2006, $0.5 million in fiscal 2007 and $0.1 million in
fiscal 2008.
The master lease also provide for guarantees of the equipment's residual
value at the end of the lease term for up to a maximum of $3.4 million. The fair
value of the lease guarantees, which is immaterial, has been recorded as a
liability.
Contingencies - Legal Proceedings
o Environmental Matters
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 (RWQCB), acting as an agent for
the Federal Environmental Protection Agency. We have agreed 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 (PRP) by international,
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 in the case
of the PRP cases, claims have been asserted against a number of other entities
for the same cost recovery or other relief as is sought from us. We accrue costs
associated with environmental matters when they become probable and can be
reasonably estimated. 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 fiscal
periods covered in these condensed consolidated financial statements.
As part of our 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 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. To date,
the costs associated with the liabilities we have retained in these dispositions
have not been material and there have been no related legal proceedings.
o Tax Matters
Our tax returns for certain years are under examination in the U.S. by the IRS
and in other countries by local authorities. The IRS has completed examining our
tax returns for fiscal years 1997 through 2000 and on July 29, 2003 issued a
notice of proposed adjustment seeking additional taxes of approximately $19
million (exclusive of interest) for those years. The issues giving rise to most
of the proposed adjustments relate to R&D credits, inventory and depreciation
deductions. We are contesting the adjustments administratively. We believe we
have made adequate tax payments and/or accrued adequate amounts in our
consolidated financial statements to cover the amounts sought by the IRS, as
well as any other deficiencies that other governmental agencies may find in
their audits.
o Other Matters
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. In November 2003, the court
denied the plaintiffs' motion for certification of a medical monitoring class.
Discovery in the case is continuing.
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 $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 upon
appeal, the appeals court reversed the lower court's dismissal. Our petition to
the U.S. Supreme Court for a writ of certiorari was denied in October 2003. The
case is now in discovery in the trial court, where we intend to contest it
through all available means.
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 in our consolidated
financial statements will be incurred in amounts that would be material to our
consolidated financial position or results of operations.
o Contingencies - Other
In connection with our past divestitures, 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. To date we have incurred
minimal losses associated with these indemnification obligations and as a
result, we have not recorded any liabilities in our consolidated financial
statements.
Note 9. Subsequent Event
In March 2004, we announced that our board of directors had authorized the
repurchase of up to $400 million of our common stock. This is in addition to the
repurchase program of $400 million that was completed in the second quarter of
fiscal 2004. As of the date of this filing, we have completed the repurchase in
the open market of approximately 2.7 million shares for approximately $111.0
million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains 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. These statements relate to, among other things,
sales, gross margins, operating expenses, capital expenditures, R&D efforts and
acquisitions and investments in other companies and are indicated by words or
phrases such as "anticipate," "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 that could cause
actual results to differ materially from expectations. These forward-looking
statements should not be relied upon as predictions of future events as we
cannot assure you that the events or circumstances reflected in these statements
will be achieved or will occur. 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 in various markets such as wireless, PC, displays and networks;
pricing pressures and competitive factors; delays in the introduction of new
products or lack of market acceptance for new products; our success in
integrating acquisitions and achieving operating improvements with acquisitions;
risks of international operations; legislative and regulatory changes; the
outcome of legal, administrative and other proceedings that we are involved in;
the results of our programs to control or reduce costs; and the general
worldwide geopolitical situation. For a discussion of some of the factors that
could cause actual results to differ materially from our forward-looking
statements, see the discussion on Risk Factors that appears below and other
risks and uncertainties detailed in this and our other reports and filings with
the Securities and Exchange Commission. 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 25, 2003.
o Critical Accounting Policies and Estimates
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 a provision for estimated future returns at the time of shipment.
Approximately 50 percent of our semiconductor product sales are currently
made through distributors. We have agreements with our distributors that
cover 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
reasonably assured and no further obligations to the other party exist.
2. Valuation of 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 about 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 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
developed technology we have acquired, 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
Our impairment evaluation of long-lived assets 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.
Our impairment evaluation of goodwill 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, power management and data conversion
business units, which are operating segments within our Analog reportable
segment, our Enterprise Networking business unit, which is a separate
reportable segment, and our device connectivity business unit, which is an
operating segment included in "All Others." Our estimates 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 sustain improvement, 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 net equity and results of operations.
4. Deferred Income Taxes
We determine deferred tax liabilities and assets based on the future tax
consequences that can be attributed to net operating loss and credit
carryovers and differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases, using
the tax rate expected to be in effect when the taxes are actually paid or
recovered. The recognition of deferred tax assets is reduced by a valuation
allowance if it is more likely than not that the tax benefits will not be
realized. The ultimate realization of deferred tax assets depends upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. We consider past performance,
expected future taxable income and prudent and feasible tax planning
strategies in assessing the amount of the valuation allowance. Our forecast
of expected future taxable income is based over those future periods that
we believe can be reasonably estimated. Changes in market conditions that
differ materially from our current expectations and changes in future tax
laws in the U.S. and international jurisdictions may cause us to change our
judgments of future taxable income. These changes, if any, may require us
to adjust our existing tax valuation allowance higher or lower than the
amount we currently have recorded.
o Overview
We began fiscal 2004 as a stronger company with a renewed focus on achieving
greater profitability, better return on our invested capital and an increased
emphasis on our higher-margin analog business. During the first nine months of
fiscal 2004, we continued to take steps consistent with the objectives of the
strategic profit-improvement actions that were first announced in February 2003.
In late August 2003, we completed the exit and sale of our information appliance
business, consisting primarily of the GeodeTM family of integrated processor
products (See Note 4). We have completed other cost reduction activities that
are also aimed at improving profitability. We are concentrating our research and
development investments on analog capabilities and focusing on growing our
analog sales and increasing our return on invested capital. As a result, we
believe we are well positioned for improvement in our overall financial results
and our third quarter results are consistent with this expectation.
In reviewing our performance we consider several key financial measures.
When reviewing our net sales performance, we look at sales growth rates, new
order rates (including turns orders), average selling prices, revenue from new
products and market share in the Standard Linear category as defined by World
Semiconductor Trade Statistics. We define new products as those introduced
within the last three years. We gauge our operating income performance by gross
margin trends, product mix, average selling prices, factory utilization rates
and operating expenses relative to sales. We are focused on generating a more
consistently higher return on invested capital for the benefit of our
shareholders. The items we focus on in order to improve our return on invested
capital are operating income, working capital management and cash management. To
improve our operating income we are focused on gross margin expansion and more
efficient operating expense ratios. The following discussion provides an
understanding of our operating performance in the current fiscal year and the
recently completed third quarter.
Three Months Ended Nine Months Ended
------------------------------------- -----------------------------------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
2004 % Change 2003 2004 % Change 2003
---------- -------------- ----------- ------------- --------------- -----------
Sales $513.6 27% $404.3 $1,411.9 13% $1,247.2
Operating
income (loss) $107.4 $ (31.0) $ 209.7 $
(24.3)
As a % of sales 21% (8%) 15% (2%)
Net income (loss) $ 93.1 $ (36.4) $ 188.6 $
(28.9)
As a % of sales 18% (9%) 13% (2%)
For the third quarter and first nine months of fiscal 2004, net sales were
greater than in the corresponding periods of fiscal 2003. The increases came
from higher demand as business conditions for the semiconductor industry have
improved from a year ago and our market share gains in key Standard Linear
markets, particularly for power management products. The improvement in net
income was driven by higher gross margin on higher sales and lower operating
expenses.
Net income for the third quarter of fiscal 2004 included a $1.9 million
credit for special items relating to prior cost reduction actions (See Note 4).
For the first nine months of fiscal 2004, net income included a charge of $16.7
million for special items. The credit for special items in the third quarter
reduced $18.6 million of charges related to cost reduction actions and the exit
and sale of the information appliance business recorded in the first-half of the
fiscal year (See Note 4). Net income in the first nine months of fiscal 2004
also included a $1.9 million charge (including a tax effect of $0.2 million) for
the cumulative effect of a change in accounting principle as a result of the
adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations" (See
Note 5). In comparison, net loss in the third quarter of fiscal 2003 included
special items of $17.0 million, representing charges for cost reduction actions
related to the strategic profit-improvement plan announced in February 2003.
Special items of $17.7 million included in net loss for the first nine months of
fiscal 2003 included an additional $0.7 million charge for in-process R&D
related to the acquisition in the second quarter of fiscal 2003 of DigitalQuake.
o Sales
- ----------
Three Months Ended Nine Months Ended
-------------------------------------- --------------------------------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
2004 % Change 2003 2004 % Change 2003
---------- -------------- ------------ ------------ ------------ ------------
Analog $419.8 37% $307.4 $1,141.1 19% $ 957.6
As a % of sales 82% 76% 81% 77%
Enterprise Networking 3.8 (32%) 5.6 14.2 (8%) 15.4
As a % of sales 1% 1% 1% 1%
Enhanced Solutions 13.6 11% 12.3 42.1 13% 37.1
As a % of sales 2% 3% 3% 3%
All Others 76.4 (3%) 79.0 214.5 (10%) 237.1
As a % of sales 15% 20% 15% 19%
---------- ------------ ------------ ------------
Total sales $513.6 $404.3 $1,411.9 $1,247.2
========== ============ ============ ============
100% 100% 100% 100%
The chart above and 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 25, 2003.
The growth in Analog segment sales for the third quarter and first nine
months of fiscal 2004 over sales for the corresponding periods of fiscal 2003
was the primary driver behind our overall sales growth. Analog segment sales
increased because of growth in end demand for products such as cellular phones,
laptop computers, and because of a general trend towards increasing content of
analog semiconductors in a broad variety of electronic products. The increases
were driven by higher volume as unit shipments increased 31 percent for the
third quarter of fiscal 2004 and 21 percent for the first nine months of fiscal
2004 over the corresponding periods of fiscal 2003. Average selling prices in
the third quarter of fiscal 2004 grew slightly at 4 percent over the fiscal 2003
third quarter. Higher average selling prices in the fiscal 2004 third quarter
also reflect a richer mix of products as we continue our efforts to increase
revenue from high value analog products and de-emphasize sales from commodity
products. At the same time, average selling prices for the first nine months of
fiscal 2004 were flat compared to the same period of fiscal 2003 as unit mix in
the first two quarters of fiscal 2004 included more lower priced, higher margin
products and prices had declined modestly from previous year prices. Within the
Analog segment, sales of power management products led the growth in sales with
increases of 75 percent for the third quarter of fiscal 2004 over sales for the
same quarter of fiscal 2003 as we continued to gain market share. Sales for
these products in the first nine months of fiscal 2004 grew 57 percent over
sales for the corresponding nine-month period of fiscal 2003. Applications for
wireless handsets largely drove the sales growth in power management products.
In addition, sales of application-specific wireless (including radio frequency
building blocks) and audio products increased by 44 percent and 39 percent in
the third quarter of fiscal 2004, respectively, over sales in the third quarter
of fiscal 2003. Sales of these products for the first nine months of fiscal 2004
increased 25 percent and 28 percent, respectively, over sales for the first nine
months of fiscal 2003.
The GeodeTM family of integrated processor products, the primary component
of the Information Appliance segment, was sold to Advanced Micro Devices, Inc.
in late August 2003 as part of our disposition of the information appliance
business (See Note 4). As a result, the remaining aggregated operating segments
that were in our Information Appliance reportable segment no longer meet the
requirements of a reportable segment and beginning in the second quarter of
fiscal 2004 are included in "All Other." As part of the Geode disposition, we
also entered into a separate supply agreement where we will manufacture product
for AMD at prices specified under the terms of the agreement, which we believe
approximate market prices. The sales of these products to AMD are included as a
part of our foundry business unit, which is a separate operating segment
included in "All Other." These sales to date have been immaterial.
o Gross Margin
- -----------------
Three Months Ended Nine Months Ended
------------------------------------ ----------------------------------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
2004 % Change 2003 2004 % Change 2003
---------- -------------- ---------- ----------- -------------- -------------
Sales $513.6 27% $404.3 $1,411.9 13% $1,247.2
Cost of sales 249.5 8% 231.8 710.4 0% 711.3
---------- ---------- ----------- -------------
Gross margin $264.1 $172.5 $ 701.5 $ 535.9
========== ========== =========== =============
As a % of sales 51% 43% 50% 43%
The increases in gross margin for the third quarter and first nine months of
fiscal 2004 over gross margin for the comparable periods of fiscal 2003 were
driven by a combination of higher factory utilization and improvement in product
mix. Wafer fabrication capacity utilization during the first nine months of
fiscal 2004 was 92 percent, based on wafer starts, compared to 67 percent for
the first nine months of fiscal 2003 when production activity was lower under
weaker business conditions. As discussed in the Sales section above, our product
mix has improved through active efforts to increase the portion of our business
that comes from high value analog products, which are more proprietary in nature
and generally sell at higher margins than commodity products. Analog segment
sales grew to 81 percent of total sales in the first three quarters of fiscal
2004 from 77 percent of total sales in the comparable period of fiscal 2003.
This trend also positively impacted our gross margins because our analog
products generally have higher margins than non-analog products.
o Research and Development
- -----------------------------
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
2004 % Change 2003 2004 % Change 2003
---------- -------------- ---------- ----------- -------------- --------------
Research and
development $86.5 (28%) $119.7 $261.8 (22%) $337.5
As a % of sales 17% 30% 19% 27%
Lower research and development expenses for the third quarter and first nine
months of fiscal 2004 over expenses for the comparable periods of fiscal 2003
reflect the impact of actions we initially launched in February 2003 to reduce
our research and development expenses as a percentage of sales. These actions
included exits of businesses, headcount reductions and restructuring of a
licensing agreement with TSMC. Ongoing research and development spending is
heavily focused on our analog products and our underlying analog capabilities.
Total company spending through the first nine months of fiscal 2004 for new
product development was down 17 percent, and for process and support technology
was down 41 percent, from the first nine months of fiscal 2003 primarily because
we have no expenditures in the business areas we have exited. Although research
and development spending is down as a whole and as a percentage of sales,
research and development spending for our Analog Segment increased as we
continue to invest in the development of new analog and mixed-signal
technology-based products for applications such as wireless handsets, displays,
notebook PCs, other portable devices and other applications in the broader
markets requiring analog technology. A significant portion of our research and
development is directed at power management technology, which is a rapidly
growing area for us.
o Selling, General and Administrative
- ----------------------------------------
Three Months Ended Nine Months Ended
------------------------------------ -----------------------------------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
2004 % Change 2003 2004 % Change 2003
---------- -------------- ---------- ----------- -------------- --------------
Selling, general and
administrative $72.1 8% $66.8 $213.3 4% $205.0
As a % of sales 14% 17% 15% 16%
The increases in selling, general and administrative expenses for the third
quarter and first nine months of fiscal 2004 over expenses for the comparable
periods of fiscal 2003 were mainly due to higher costs in fiscal 2004 related to
employee compensation and benefits, as well as some incremental costs for
outside services. Despite the increase in selling, general and administrative
expenses, we are continuing to focus on controlling headcount and discretionary
spending consistent with our profit improvement objectives. Although sales
levels have increased substantially in the last two quarters, we are continuing
to focus on controlling our cost structure in a way that allows sales to rise
faster than expenses.
o Interest Income and Interest Expense
- -----------------------------------------
Three Months Ended Nine Months Ended
-------------------------- -------------------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
2004 2003 2004 2003
------------- ------------ ------------ ------------
Interest income $ 2.6 $ 3.7 $ 8.5 $12.3
Interest expense (0.5) (0.4) (0.8) (1.3)
------------- ------------ ------------ ------------
Interest income, net $ 2.1 $ 3.3 $ 7.7 $11.0
============= ============ ============ ============
The decreases in interest income, net for the third quarter and first nine
months of fiscal 2004 compared to the third quarter and first nine months of
fiscal 2003 were due to lower average interest rates on lower average cash
balances in fiscal 2004. Although we have generated positive cash flow from
operations, our cash balances in fiscal 2004 are lower mainly as a result of the
repurchase of 12.7 million shares of our common stock for $400.0 million.
Offsetting interest expense is lower during fiscal 2004 compared to fiscal 2003
as we continued to reduce our outstanding debt.
o Other Income (Expense), Net
- --------------------------------
Three Months Ended Nine Months Ended
-------------------------- -------------------------
Feb. 29, Feb. 23, Feb. 29, Feb. 23,
2004 2003 2004 2003
------------- ------------ ------------ ------------
Net intellectual property income $ 0.7 $ 0.1 $ 8.7 $ 4.2
Net gain (loss) on investments 1.2 (0.5) 4.2 -
Share in net losses of equity-method
investments (3.1) (4.4) (10.8) (10.5)
Other - (1.4) (0.5) (1.8)
------------- ------------ ------------ ------------
Total other income (expense), net $(1.2) $(6.2) $ 1.6 $ (8.1)
============= ============ ============ ============
The components of our other income (expense), net are primarily derived from our
equity investments and intellectual property licensing activities. Net
intellectual property income for the first nine months of fiscal 2004 included
$6.8 million from two licensing agreements with two unrelated companies. For the
first nine months of fiscal 2003, net intellectual property income included $3.9
million from a single licensing agreement with an unrelated company. The
remaining amounts of intellectual property income reported in each of the
periods presented above are from a number of individually small agreements. Our
share in net losses of equity-method investments was lower in the third quarter
of fiscal 2004 than the comparable third quarter of fiscal 2003 as we had fewer
equity-method investments in nonpublic companies in fiscal 2004 than in fiscal
2003. However, for the first nine months of fiscal 2004, our share in net losses
of equity-method investments was slightly higher since we recognized a higher
share of net losses from investments during the first two quarters of fiscal
2004 compared to fiscal 2003.
o Income Tax Expense
- -----------------------
We recorded income tax expense of $15.2 million for the third quarter of fiscal
2004 and $28.5 million for the first nine months of fiscal 2004 on income before
taxes and cumulative effect of a change in accounting principle. This compares
to income tax expense of $2.5 million and $7.5 million for the corresponding
periods of fiscal 2003, when our income before taxes was much lower. The fiscal
2004 estimated annual effective tax rate is approximately 14 percent. Fiscal
2004 tax expense consists primarily of U.S. income tax, net of net operating
losses and tax credits, and non-U.S. income taxes. The fiscal 2003 tax expense
represents non-U.S. income taxes on international income. We did not incur U.S.
income taxes in fiscal 2003.
o Liquidity and Capital Resources
- ------------------------------------
Fiscal 2004 Fiscal 2003
------------------------------------ ------------------------------------
Feb. 29, Change May 25, Feb. 23, Change May 26,
2004 2003 2003 2002
---------- ------------ ------------ ------------ ---------- ------------
Net cash provided by
operating activities $ 305.1 $ 143.3
Net cash used by
investing activities (201.1) (77.5)
Net cash (used by) provided
by financing activities (273.8) 12.1
------------ ----------
Cash & cash equivalents $ 632.4 ($ 169.8) $ 802.2 $ 759.2 $ 77.9 $ 681.3
============ ==========
The primary factors contributing to the changes in cash and cash equivalents
during the first nine months of fiscal 2004 compared to the first nine months of
fiscal 2003 are described below:
For the first nine months of fiscal 2004, cash was generated from operating
activities primarily from net income, adjusted for noncash items (primarily
depreciation and amortization), net of the negative impact that came from
changes in working capital components. These changes in working capital
components were mainly driven by the overall higher levels of business activity
we have experienced during the first nine months of fiscal 2004. Cash from
operating activities for the first nine months of fiscal 2003 was also generated
because the positive impact from the net loss, when adjusted for noncash items
(primarily depreciation and amortization), was greater than the negative impact
from changes in working capital components.
Major uses of cash for investing activities for the first nine months of
fiscal 2004 included investment in property, plant and equipment of $153.8
million, primarily for machinery and equipment, and net purchases of
available-for-sale securities of $47.7 million. Major uses of cash for investing
activities in the first nine months of fiscal 2003 included investment in
property, plant and equipment of $122.0 million, primarily for machinery and
equipment, the acquisition of DigitalQuake for $11.0 million (net of cash
acquired) and investment in nonpublicly traded companies of $21.0 million,
offset by net sale and maturity of marketable securities of $62.0 million.
The primary use of cash from our financing activities in the first nine
months of fiscal 2004 came from our repurchase of 12.7 million shares of our
common stock for $400.0 million and payments of $21.0 million on time-based CAD
licenses. A portion (7.5 million shares) of the stock repurchase was transacted
directly with a major financial institution and the remainder in the open
market. These cash uses were partially offset by proceeds of $149.3 million from
the issuance of common stock under employee benefit plans. The primary source of
cash from financing activities for the first nine months of fiscal 2003 was from
the issuance of common stock under employee benefit plans of $28.6 million,
which was partially offset by payments of $12.0 million on time-based CAD
licenses and a $4.5 million repayment of our outstanding debt balances.
In March 2004, we announced that the Board of Directors approved another
$400 million stock repurchase program similar to the $400 million stock
repurchase program completed in September and October 2003. The new stock
repurchase program is consistent with our current business model which focuses
on higher-value analog products and, therefore, is less capital intensive than
it has been historically. This stock repurchase program is one element of an
overall effort to increase our return on invested capital, which we believe
improves shareholder value.
We foresee continuing cash outlays for plant and equipment in fiscal 2004,
with our primary focus on extending our analog capacity and capabilities at our
existing sites. We are continuing with the construction of an assembly and test
facility in China that was begun in fiscal 2003 as part of our effort to
increase assembly and test capacity, as well as expand our business presence in
Asian markets. We currently expect our fiscal 2004 capital expenditure amount to
be greater than the fiscal 2003 amount. However, we continue to manage capital
expenditures within our targeted goals for return on invested capital and 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 in fiscal 2004 and the following twelve months, as well as
the stock repurchase program.
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
29, 2004:
Fiscal Year: 2009 and
(In Millions) 2004 2005 2006 2007 2008 thereafter Total
--------------- ---------- --------- --------- -------- ------------- --------------
Contractual obligations and
recorded as liabilities:
Debt obligations $ - $22.8 $ - $ - $ - $ - $ 22.8
CAD software licensing
agreements 1.9 21.3 10.0 8.2 - - 41.4
Other contractual
obligations under:
Noncancellable
operating leases 6.3 20.6 16.6 13.4 8.9 8.2 74.0
Fairchild manufacturing
agreement 1.6 - - - - - 1.6
Other 0.6 2.4 1.7 1.0 - - 5.7
--------------- ---------- --------- --------- -------- ------------- --------------
Total $ 10.4 $67.1 $28.3 $22.6 $ 8.9 $ 8.2 $145.5
=============== ========== ========= ========= ======== ============= ==============
Commercial Commitments:
Standby letters of credit
under bank multicurrency
agreement $ 8.5 - - - - - $ 8.5
=============== ========== ========= ========= ======== ============= ==============
In addition, as of February 29, 2004, capital purchase commitments were
$67.0 million. Dates of actual contractual obligations for these commitments are
dependent on the actual capital delivery dates.
o Outlook
- ------------
Although overall economic conditions continue to be somewhat difficult to
predict, demand levels throughout the first nine months of fiscal 2004
strengthened as we saw market conditions in the semiconductor industry improve
from a year ago. New orders received during the fiscal 2004 third quarter were
stronger than expected and higher than in the preceding second quarter. New
orders also increased at a faster rate than sales. This was mainly due to
stronger order patterns from our distribution channels, which tend to serve
broader markets beyond wireless handset and PCs. Distributors also began to
place orders with longer lead times, which improves our backlog visibility. Our
opening 13-week backlog entering the fourth quarter of fiscal 2004 is noticeably
higher than it was entering the third quarter of fiscal 2004. Turns orders,
which are orders received with delivery requested in the same quarter, were
seasonally lower in the third quarter of fiscal 2004 compared to the level in
the second quarter. In general, as we gain longer visibility into order backlogs
from our customers, we anticipate less dependency on turns orders. Considering
all factors, including those discussed above, we expect sales for the fourth
quarter of fiscal 2004 to be 7 to 10 percent above the fiscal 2004 third
quarter. However, if backlog orders are cancelled, the rate of new orders
declines or the anticipated level of turns orders is not achieved, we may not be
able to achieve this increase. We also anticipate our gross margin percentage in
the fourth quarter of fiscal 2004 to be higher by 1 to 2 percentage points than
the gross margin achieved in the fiscal 2004 third quarter. Because wafer
fabrication utilization should continue running at high levels during the fourth
quarter, we anticipate that we will be able to continue to improve the mix and
the overall pricing of the products we sell.
Our operating expenses, consisting of research and development and selling,
general and administrative, have benefited from significant actions we took in
calendar 2003. This is partially offset by incremental programs, as well as
certain external factors such as foreign currency exchange rate fluctuations.
For the fourth quarter of fiscal 2004, we anticipate research and development
expenses will range from $86-$89 million with continued emphasis on improving
our analog capabilities, while selling, general and administrative expenses will
range from $71-$73 million. We expect our investment in property, plant and
equipment in total for fiscal 2004 to be greater than fiscal 2003. See
"Liquidity and Capital Resources."
o Risk Factors
- -----------------
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 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. 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. Our major
competitors include Texas Instruments, ST Microelectronics, Maxim, Analog
Devices and Linear Technology that sell competing products into some of the same
markets that we target. 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 some of our customers in certain markets, such as displays and wireless
handsets.
The wireless handset market continues to be important to our future growth
plans. New products are being developed to address new features and
functionality in handsets, such as color displays, advanced audio, lighting
features and image capture. Due to high levels of competition, as well as
complex technological requirements, there is no assurance that we will continue
to be successful in this targeted market. Although the worldwide handset market
is large, near-term growth trends are uncertain and difficult to predict with
accuracy. Delayed introduction of next-generation wireless base stations also
negatively impacts potential growth in the wireless handset market.
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 analog products, is a key factor
to our successful growth and our ability to achieve strong financial
performance. Successful development and introduction of new products are
critical to our ability to maintain a competitive position in the marketplace.
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 applications such as
wireless handsets, displays, notebook PCs, other portable devices and other
applications that require analog.
INVESTMENTS AND ACQUISITIONS. We have made and will continue to consider making
strategic business investments and alliances and acquisitions we consider
necessary to gain access to key technologies that we believe augment our
existing technical capability or enable us to achieve faster time to market.
Acquisitions and investments involve risks and uncertainties that may
unfavorably impact our future financial performance. We may not be able to
integrate and develop the technologies we acquire 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.
EXPANSION OF OUR BUSINESS IN THE ASIAN MARKETS. As noted in our discussion of
planned capital expenditures, as part of our efforts to expand our business
presence in the Asian 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. We expect the facility to provide
analog products quickly and cost effectively to our customers in Asia, as well
as other regions as necessary. The facility will also increase our overall
assembly and test capacity to support increasing product volume. Product volume
increases are dependent upon customer demand. If our product volume does not
increase, lower 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 expected future gross margin.
WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS. 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 they could
adversely affect us in the future. In addition, although we try 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.
TAXES. From time to time, we have received notices of tax assessments from
certain governments of countries in which we operate. These governments or other
government entities may serve future notices of assessments on us and the
amounts of these assessments or our failure to favorably resolve such
assessments may have a material adverse effect on our financial condition or
results of operations.
CURRENT WORLD EVENTS. Recent unrest in many parts of the world including the
continuing hostilities in Iraq and terrorist activities worldwide have resulted
in additional uncertainty on the overall state of the world 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. Although the SARS illness appears to have been contained, if it or
other pandemic illness emerges in Asia, our business there could be adversely
affected. The spread of such illnesses beyond Asia could also negatively impact
other aspects of our 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 25, 2003 and to
the subheading "Financial Market Risks" under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 26 of our Annual Report on Form 10-K for the year ended May 25, 2003 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 2003 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, processed, summarized and reported. In
designing and evaluating our disclosure controls and procedures, our
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and that management necessarily is required
to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Since we have investments in certain
unconsolidated entities which we do not control or manage, our disclosure
controls and procedures with respect to such entities are necessarily
substantially more limited than those we maintain for our consolidated
subsidiaries.
We have 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 regularly to ensure
the timeliness, accuracy and completeness of the information required to be
disclosed in our filings. The committee reviewed this Form 10-Q and also
met with the Chief Executive Officer and the Chief Financial Officer to
review this Form 10-Q and the required disclosures and the effectiveness of
the design and operation of our disclosure controls and procedures. As
required by SEC Rule 13a-15(b), the committee performed an evaluation,
under the supervision and 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 as of the end of the quarter covered by this report. Based on
that evaluation and their supervision of and participation in the process,
our Chief Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures were effective at the reasonable
assurance level.
(b) Changes in internal controls.
There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
You should refer to the Legal Proceedings section in our Form 10-K for the
fiscal year ended May 25, 2003 in our Form 10-Q's for the fiscal quarters ended
August 24, 2003 and November 23, 2003 for a description of our existing material
legal proceedings. There have been no material developments in these legal
proceedings since the Form 10-Q for the quarter ended November 23, 2003 was
filed in January 2004.
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).
31. Rule 13a - 14(a)/15d - 14(a) Certifications
32. Section 1350 Certifications
(b) Reports on Form 8-K
-------------------
During the quarter ended February 29, 2004, we filed the following report
on Form 8-K:
1. A report on Form 8-K was filed on December 4, 2003 furnishing under
item 12 to the Securities and Exchange Commission our press release
issued on December 4, 2003 announcing our earnings for the quarter
ended November 23, 2003. The news release contained Financial
Statements consisting of Condensed Consolidated Statements of
Operations, Balance Sheets and Statements of Cash Flows prepared in
accordance with GAAP. Certain operating results information that was
not prepared in accordance with GAAP was also included in the press
release.
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 5, 2004
\s\ Robert E. DeBarr
--------------------
Robert E. DeBarr
Controller
Signing on behalf of the registrant and as
principal accounting officer