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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 November 28, 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 November 28, 2004
------------------- --------------------------------
Common stock, par value $0.50 per share 355,305,856
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 Six Months Ended November 28, 2004 and
November 23, 2003 3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
for the Three Months and Six Months Ended November 28, 2004 and
November 23, 2003 4
Condensed Consolidated Balance Sheets (Unaudited) as of
November 28, 2004 and May 30, 2004 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended November 28, 2004 and November 23, 2003 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 29
Part II. Other Information
Item 1. Legal Proceedings 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits 33
Signature 34
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 Six Months Ended
-------------------------- -------------------------
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
2004 2003 2004 2003
------------ ------------- ------------ ------------
Net sales $ 448.9 $ 473.5 $ 996.9 $ 898.3
Operating costs and expenses:
Cost of sales 221.9 236.5 468.3 460.9
Research and development 82.1 84.3 167.8 177.5
Selling, general and administrative 63.9 71.7 131.7 139.0
Special items - (Income) expense, net (19.6) 6.7 (19.9) 11.3
------------ ------------- ------------ ------------
Total operating costs and expenses 348.3 399.2 747.9 788.7
------------ ------------- ------------ ------------
Operating income 100.6 74.3 249.0 109.6
Interest income, net 3.5 2.5 6.1 5.6
Other expense, net (1.2) (2.0) (3.2) (4.5)
------------ ------------- ------------ ------------
Income before taxes and cumulative
effect of a change in accounting principle 102.9 74.8 251.9 110.7
Income tax expense 12.9 9.0 44.2 13.3
------------ ------------- ------------ ------------
Income before cumulative effect of a
change in accounting principle 90.0 65.8 207.7 97.4
Cumulative effect of a change in accounting
principle including tax effect of $0.2 million - - - (1.9)
------------ ------------- ------------ ------------
Net income $ 90.0 $ 65.8 $ 207.7 $ 95.5
============ ============= ============ ============
Earnings per share:
Income before cumulative effect of a
change in accounting principle:
Basic $ 0.25 $ 0.18 $ 0.58 $ 0.27
Diluted $ 0.24 $ 0.17 $ 0.55 $ 0.25
Cumulative effect of a change in accounting
principle including tax effect of $0.2 million:
Basic $ - $ - $ - $ 0.01
Diluted $ - $ - $ - $ 0.01
Net income:
Basic $ 0.25 $ 0.18 $ 0.58 $ 0.26
Diluted $ 0.24 $ 0.17 $ 0.55 $ 0.25
Weighted-average shares used to calculate earnings per share:
Basic 356.0 360.2 356.7 364.6
Diluted 374.2 391.0 378.0 387.4
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (Unaudited)
(In Millions)
Three Months Ended Six Months Ended
--------------------------- ----------------------------
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
2004 2003 2004 2003
------------- ------------- ------------- --------------
Net income $ 90.0 $ 65.8 $ 207.7 $ 95.5
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on
available-for-sale securities (0.5) 0.8 0.2 (2.3)
Unrealized gain on cash flow hedges - 0.1 - 0.2
------------- ------------- ------------- --------------
Comprehensive income $ 89.5 $ 66.7 $ 207.9 $ 93.4
============= ============= ============= ==============
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Millions)
Nov. 28, May 30,
2004 2004
------------------------ ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 751.1 $ 642.9
Short-term marketable investments 139.0 139.3
Receivables, less allowances of $26.9 in fiscal 2005
and $46.7 in fiscal 2004 148.3 198.9
Inventories 201.2 200.1
Other current assets 65.5 64.6
------------------------ ---------------------
Total current assets 1,305.1 1,245.8
Net property, plant and equipment 677.4 699.6
Goodwill 173.3 173.3
Deferred tax assets 73.3 73.3
Other assets 101.1 88.4
------------------------ ---------------------
Total assets $2,330.2 $2,280.4
======================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ 22.1
Accounts payable 83.3 141.0
Accrued expenses 171.6 234.8
Income taxes payable 54.3 63.4
------------------------ ---------------------
Total current liabilities 309.2 461.3
Long-term debt 22.1 -
Other noncurrent liabilities 140.8 138.6
------------------------ ---------------------
Total liabilities 472.1 599.9
------------------------ ---------------------
Commitments and contingencies
Shareholders' equity:
Common stock 177.7 178.8
Additional paid-in capital 1,008.0 1,030.1
Retained earnings 760.6 560.0
Accumulated other comprehensive loss (88.2) (88.4)
------------------------ ---------------------
Total shareholders' equity 1,858.1 1,680.5
------------------------ ---------------------
Total liabilities and shareholders' equity $2,330.2 $2,280.4
======================== =====================
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Millions)
Six Months Ended
--------------------------------------
Nov. 28, Nov. 23,
2004 2003
--------------- ---------------
Cash flows from operating activities:
Net income $ 207.7 $ 95.5
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 98.4 107.3
Gain on investments (0.6) (3.0)
Share in net losses of equity-method investments 3.3 7.7
Tax benefit associated with stock options 3.9 -
Loss on disposal of equipment 0.7 2.2
Noncash special items (18.3) 4.5
Other, net 0.4 2.4
Changes in certain assets and liabilities, net:
Receivables, net 52.3 (21.4)
Inventories (1.2) (29.7)
Other current assets (1.4) (6.3)
Accounts payable and accrued expenses (106.2) (14.6)
Income taxes payable (9.1) 5.0
Other noncurrent liabilities 2.2 11.1
--------------- ---------------
Net cash provided by operating activities 232.1 162.6
--------------- ---------------
Cash flows from investing activities:
Purchase of property, plant and equipment (73.5) (86.1)
Sale and maturity of available-for-sale securities - 314.0
Purchase of available-for-sale securities - (386.7)
Sale of investments 0.6 7.2
Sale of business 10.0 -
Investment in nonpublicly traded companies (0.3) (1.7)
Security deposits on leased equipment (12.9) -
Funding of benefit plan (6.6) (4.5)
Other, net - 1.1
--------------- ---------------
Net cash used by investing activities (82.7) (156.7)
--------------- ---------------
Cash flows from financing activities:
Repayment of debt - (1.8)
Payments on software license obligations (12.2) (12.9)
Issuance of common stock 45.9 120.1
Purchase and retirement of treasury stock (74.9) (400.0)
--------------- ---------------
Net cash used by financing activities (41.2) (294.6)
--------------- ---------------
Net change in cash and cash equivalents 108.2 (288.7)
Cash and cash equivalents at beginning of period 642.9 802.2
--------------- ---------------
Cash and cash equivalents at end of period $ 751.1 $ 513.5
=============== ===============
See accompanying Notes to Condensed Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in the opinion of management, 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 for the full fiscal year. This report should be read in conjunction
with the consolidated financial statements and accompanying notes included in
our annual report on Form 10-K for the fiscal year ended May 30, 2004.
Earnings Per Share:
A reconciliation of the shares used in the computation of basic and diluted
earnings per share follows:
Three Months Ended Six Months Ended
------------------------ -----------------------
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
(In Millions) 2004 2003 2004 2003
------------ ----------- ----------- -----------
Numerator:
Income before cumulative effect of a
change in accounting principle $ 90.0 $ 65.8 $ 207.7 $ 97.4
============ =========== =========== ===========
Net income $ 90.0 $ 65.8 $ 207.7 $ 95.5
============ =========== =========== ===========
Denominator:
Weighted-average common shares outstanding
used for basic earnings per share 356.0 360.2 356.7 364.6
Effect of dilutive securities:
Stock options 18.2 30.8 21.3 22.8
------------ ----------- ----------- -----------
Weighted-average common and potential
common shares outstanding used for
diluted earnings per share 374.2 391.0 378.0 387.4
============ =========== =========== ===========
For the second quarter of fiscal 2005, we did not include options
outstanding to purchase 36.3 million shares of common stock with a
weighted-average exercise price of $21.86 in diluted earnings per share since
their effect was antidilutive because the exercise price of these options
exceeded the average market price of the common stock during the quarter. For
the first six months of fiscal 2005, we did not include options outstanding to
purchase 33.5 million shares of common stock with a weighted-average exercise
price of $22.24 in diluted earnings per share since their effect was
antidilutive because the exercise price of these options exceeded the average
market price of the common stock during the same period. However, these shares
could potentially dilute basic earnings per share in the future.
For the second quarter of fiscal 2004, we did not include options
outstanding to purchase 13.6 million shares of common stock with a
weighted-average exercise price of $29.16 in diluted earnings per share since
their effect was antidilutive because the exercise price of these options
exceeded the average market price of the common stock during the quarter. For
the first six months of fiscal 2004, we did not include options outstanding to
purchase 30.4 million shares of common stock with a weighted-average exercise
price of $22.49 in diluted earnings per share since their effect was
antidilutive because the exercise price of these options exceeded the average
market price of the common stock during the same period. However, these shares
could potentially dilute basic earnings per share in the future.
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 11 to the Consolidated Financial
Statements included in our annual report on Form 10-K for the year ended May 30,
2004.
Pro forma information regarding net income and earnings 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 and earnings
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 second quarter and first six months of fiscal
2005 was $9.75 and $11.78 per share, respectively. The weighted-average fair
value of stock options granted during the second quarter and first six months of
fiscal 2004 was $11.26 and $7.58 per share, respectively. The weighted-average
fair value of rights granted under the stock purchase plan was $6.26 and $5.95
per share for the second quarter and first six months of fiscal 2005,
respectively. The weighted-average fair value of rights granted under the stock
purchase plans was $2.37 and $2.24 per share for the second quarter and first
six months of fiscal 2004, respectively. We estimated the fair value of these
employee stock-based awards using a Black-Scholes option pricing model that uses
the following weighted-average assumptions:
Three Months Ended Six Months Ended
----------------------------- ----------------------------
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
2004 2003 2004 2003
-------------- -------------- ------------- --------------
Stock Option Plans
Expected life (in years) 5.5 5.4 5.2 5.1
Expected volatility 71% 75% 72% 76%
Risk-free interest rate 3.6% 3.3% 3.4% 3.3%
Dividend yield 0.5% - 0.5% -
Stock Purchase Plans
Expected life (in years) 0.4 0.3 0.5 0.3
Expected volatility 49% 48% 46% 50%
Risk-free interest rate 1.3% 0.9% 1.1% 0.9%
Dividend yield 0.5% - 0.5% -
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 Six Months Ended
----------------------------- -----------------------------
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
(In Millions, Except Per Share Amounts) 2004 2003 2004 2003
-------------- -------------- ------------- ---------------
Net income - as reported $ 90.0 $ 65.8 $ 207.7 $ 95.5
Add back: Stock compensation charge included in
net income determined under the intrinsic value
method, net of tax 0.6 0.6 1.2 1.2
Deduct: Total stock-based employee compensation
expense determined under the fair value method,
net of tax (32.5) (38.0) (58.3) (83.2)
-------------- -------------- ------------- ---------------
Net income - pro forma $ 58.1 $ 28.4 $ 150.6 $ 13.5
============== ============== ============= ===============
Basic earnings per share - as reported $ 0.25 $ 0.18 $ 0.58 $ 0.26
Basic earnings per share - pro forma $ 0.16 $ 0.08 $ 0.42 $ 0.04
Diluted earnings per share - as reported $ 0.24 $ 0.17 $ 0.55 $ 0.25
Diluted earnings per share - pro forma $ 0.16 $ 0.07 $ 0.40 $ 0.03
Reclassifications:
Certain amounts reported in fiscal 2004 have been reclassified to conform to the
fiscal 2005 presentation. Net operating results have not been affected by the
reclassification.
Note 2. Consolidated Financial Statement Details
Balance sheets:
Nov. 28, May 30,
(In Millions) 2004 2004
----------------------------- ----------------------------
Inventories:
Raw materials $ 17.0 $ 13.9
Work in process 121.7 122.6
Finished goods 62.5 63.6
----------------------------- ----------------------------
Total inventories $ 201.2 $ 200.1
============================= ============================
Statements of operations
Three Months Ended Six Months Ended
--------------------------- -------------------------
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
2004 2003 2004 2003
(In Millions) -------------- ------------ ------------ ------------
Special items - (Income) expense
Release of litigation accrual $ (10.0) $ - $ (10.0) $ -
Sale of business (8.8) - (8.8) -
Net intellectual property income (0.8) - (2.3) (7.3)
Cost reduction charges - 6.7 1.2 18.6
-------------- ------------ ------------ ------------
Total special items - (Income) expense, net $ (19.6) $ 6.7 $ (19.9) $ 11.3
============== ============ ============ ============
Interest income, net
Interest income $ 3.8 $ 2.7 $ 6.9 $ 5.9
Interest expense (0.3) (0.2) (0.8) (0.3)
-------------- ------------ ------------ ------------
Interest income, net $ 3.5 $ 2.5 $ 6.1 $ 5.6
============== ============ ============ ============
Other expense, net
Net gain on investments $ 0.5 $ 0.7 $ 0.6 $ 3.0
Share in net losses of equity-method
investments (1.7) (2.9) (3.3) (7.7)
Other - 0.2 (0.5) 0.2
-------------- ------------ ------------ ------------
Total other expense, net $ (1.2) $ (2.0) $ (3.2) $ (4.5)
============== ============ ============ ============
Note 3. Consolidated Statement of Cash Flows Information
Six Months Ended
-----------------------------------------
Nov. 28, Nov. 23,
(In Millions) 2004 2003
--------------------- -------------------
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest $ 0.8 $ 0.3
Income taxes $ 51.5 $ 10.0
Supplemental Schedule of Non-cash Investing
and Financing Activities:
Issuance of stock for employee benefit plans - $ 0.9
Issuance of common stock to directors $ 0.4 $ 0.4
Unearned compensation relating to restricted stock issuance $ 0.6 $ 1.9
Restricted stock cancellation $ 0.7 $ 0.8
Change in unrealized gain on cash flow hedges - $ 0.2
Change in unrealized (gain) loss on available-for-sale securities $ 0.2 $ (2.3)
Acquisition of software license under long-term contracts - $ 11.0
Repurchase of common stock upon settlement of an advance
repurchase contract $ 30.0 -
Dividends declared but not yet paid $ 7.1 -
Note 4. Cost Reduction Programs and Restructuring of Operations
During the second quarter of fiscal 2005, we recorded a gain of $8.8 million
upon completion of the sale of certain intellectual property, inventory and
equipment of our imaging business to Eastman Kodak Company in September 2004.
The carrying value of the assets sold was $0.9 million. As part of the
transaction, Kodak also hired 47 former National employees. The divestiture of
this business is consistent with our ongoing effort to focus on our core analog
areas that generate higher gross margins and produce higher returns on invested
capital. Since an intangible asset and certain employees that directly supported
the imaging business were not included in the sale, we incurred cost reduction
charges for severance for those employees and for the impairment of the asset at
the time we announced the sale of the imaging business in late August 2004.
Operating results for the first six months of fiscal 2005 include a $1.2 million
charge to special items for the imaging severance and impairment loss as well as
severance charges related to other cost reduction actions in the first quarter.
There were no cost reduction charges recorded in the second quarter of fiscal
2005. Further detail related to cost reduction charges is presented in the
following table:
Analog
(In Millions) Segment All Others Total
------------------------------------------
Six months ended November 28, 2004:
Severance costs $ 0.3 $ 0.4 $ 0.7
Asset write-off 0.5 - 0.5
------------- ------------- --------------
Total cost reduction charges $ 0.8 $ 0.4 $ 1.2
============= ============= ==============
Noncash charges of $0.5 million included in the above table relate to the
write-off of the intangible asset that was a part of the imaging business. In
connection with the sale transaction, we also entered into separate agreements
with Kodak where we will manufacture product for them at prices specified by the
terms of the agreement, which we believe approximate market prices, and provide
certain transition services at rates that approximate fair market value. These
agreements are effective for one year unless terminated earlier as permitted
under their terms.
The following table provides a summary of the activities for the six months
ended November 28, 2004 related to our cost reduction and restructuring actions
that are included in accrued liabilities:
Fiscal 2005 Cost Cost Reduction Actions in
Reduction Actions Prior Years
--------------------- ------------------------
Other Other
Exit Exit
(In Millions) Severance Costs Severance Costs Total
------------ -------- -------------- --------- ------------
Balance at
May 30, 2004 $ - $ - $ 3.4 $ 7.5 $ 10.9
Cost reduction
charges 0.7 - - - 0.7
Cash payments (0.3) - (2.0) (1.2) (3.5)
------------ -------- -------------- --------- ------------
Balance at
November 28,
2004 $ 0.4 $ - $ 1.4 $ 6.3 $ 8.1
============ ======== ============== ========= ============
During the first six months of fiscal 2005 we paid severance to 37
employees in connection with workforce reductions related to actions that
occurred in fiscal 2005 and 2004. Amounts paid for other exit-related costs
during the first six months of fiscal 2005 were primarily for payments under
lease obligations associated with actions taken in prior years.
Note 5. Long term Debt
On August 25, 2004, we amended an existing credit agreement with a bank to
extend the due date of our unsecured promissory note denominated in Japanese yen
($21.9 million at November 28, 2004). Under the terms of the amended agreement,
the promissory note will become due in August 2007 and bears interest based on
1.375 percent over the 3-month Japanese LIBOR rate and is reset quarterly. We
are also required to comply with the covenants set forth under our multicurrency
credit agreement, which was renewed on October 20, 2004.
Note 6. Defined Benefit Pension Plans
Net periodic pension costs for fiscal 2005 for our defined benefit pension plans
maintained in the U.K., Germany, Japan and Taiwan are presented in the following
table:
Three Months Ended Six Months Ended
--------------------------- -------------------------
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
(In Millions) 2004 2003 2004 2003
-------------- ------------ ------------ ------------
Service cost of benefits earned during the period $ 1.5 $ 1.3 $ 3.0 $ 2.7
Plan participant contributions (0.4) (0.2) (0.7) (0.4)
Interest cost on projected benefit obligation 3.3 2.6 6.4 5.4
Expected return on plan assets (2.5) (1.4) (4.9) (2.9)
Net amortization and deferral 1.3 1.3 2.5 2.7
-------------- ------------ ------------ ------------
Net periodic pension cost $ 3.2 $ 3.6 $ 6.3 $ 7.5
============== ============ ============ ============
Total contributions paid to these plans during fiscal 2005 were $0.9
million in the second quarter and $1.7 million in the first six months. We
currently expect our fiscal 2005 contribution to be at least $4.0 million.
Note 7. Shareholder's Equity
o Dividends
In October 2004, our Board of Directors declared a cash dividend of $0.02 per
outstanding share of common stock. The dividend was payable on January 5, 2005
to all shareholders of record at the close of business on December 15, 2004.
Included in accrued expenses as of November 28, 2004 are dividends payable of
$7.1 million.
o Stock Repurchase Program
We have a $400 million stock repurchase program which we continued into the
second quarter of fiscal 2005. In June 2004, we repurchased 1.5 million shares
of our common stock for $30.0 million upon the settlement of an advance
repurchase contract we entered into with a financial institution in April 2004.
We also repurchased another 4.9 million shares of our common stock in the open
market for $74.9 million during September and October 2004. As of November 23,
2004, we had $152.6 million remaining for future common stock repurchases under
this program.
Note 8. Segment Information
The following table presents information related to our reportable segments:
Analog
(In Millions) Segment All Others Total
-------------- ------------ -------------
Three months ended November 28, 2004:
Sales to unaffiliated customers $ 379.2 $ 69.7 $ 448.9
============== ============ =============
Segment income before income taxes $ 75.8 $ 27.1 $ 102.9
============== ============ =============
Three months ended November 23, 2003:
Sales to unaffiliated customers $ 400.1 $ 73.4 $ 473.5
============== ============ =============
Segment income (loss) before income taxes $ 82.1 $ (7.3) $ 74.8
============== ============ =============
Six months ended November 28, 2004:
Sales to unaffiliated customers $ 847.5 $ 149.4 $ 996.9
============== ============ =============
Segment income before income taxes $ 217.3 $ 34.6 $ 251.9
============== ============ =============
Six months ended November 23, 2003:
Sales to unaffiliated customers $ 748.0 $ 150.3 $ 898.3
============== ============ =============
Segment income (loss) before income taxes and
cumulative effect of a change in accounting
principle $ 133.0 $ (22.3) $ 110.7
============== ============ =============
Note 9. Income Taxes
On October 22, 2004 the American Jobs Creation Act (AJCA) was signed into law.
The AJCA provides for a deduction of 85% of certain non-U.S. earnings that are
repatriated, as defined in the AJCA. We may elect to apply this provision to
qualifying earnings repatriations in either fiscal 2005 or 2006. We have started
an evaluation of the effects of the repatriation provision; however, we do not
expect to complete this evaluation until after Congress and the U.S. Treasury
Department provide additional clarifying language on key elements of the
provision. We expect to complete our evaluation within a reasonable period of
time following the publication of the additional clarifying language. The range
of possible amounts that we are considering for repatriation under this
provision is between zero and $500 million. The potential range of related
income tax that may be incurred as a result of the repatriation is between zero
and $45 million.
Note 10. 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 in principle with
the RWQCB to a site remediation plan and we are conducting remediation and
cleanup efforts at the site. 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 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, we also agreed to retain liability for current
remediation projects and environmental matters arising from our prior operation
of certain Fairchild plants while Fairchild agreed to arrange for and perform
the remediation and cleanup. We prepaid to Fairchild the estimated costs of the
remediation and cleanup and we 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
The IRS has completed the field examinations of 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 $19.1 million (exclusive of interest)
for those years. We are contesting the adjustments through the IRS'
administrative process. Our tax returns are audited in the U.S. by state
agencies and at international locations by local tax authorities from time to
time. During the quarter, we resolved a tax audit at one of our international
locations, which resulted in a $4.2 million reduction of income tax expense in
the second quarter of fiscal 2005. We believe we have made adequate tax payments
and/or accrued adequate amounts in our financial statements to cover tax amounts
sought by the IRS, as well as any other deficiencies that other governmental
agencies may find in the 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. Plaintiffs' efforts to certify
a medical monitoring class were denied by the court. 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. We have completed discovery in the case in the district court. In June
2004, the Securities and Exchange Commission proposed clarifying amendments to
its section 16(b) rules which we believe would be dispositive of the case. In
September 2004, the district court ordered a stay of the case pending the SEC's
adoption of the proposed amendments. We intend to continue to contest the case
through all available means should the SEC's proposed amendments not resolve the
case.
In April 2002, ZF Micro Solutions, Inc. brought suit against us alleging a
number of contract and tort claims related to an agreement we had entered into
in 1999 to design and manufacture a custom integrated circuit device for ZF
Micro Devices. ZF Micro Devices ceased business operations in February 2002 and
the case was brought by ZF Micro Solutions as successor to ZF Micro Devices.
Trial began in May 2004 and a verdict was rendered in June 2004. The jury found
for ZF Micro Solutions, Inc. on a claim of intentional misrepresentation,
awarding damages of $28.0 million, and on a claim of breach of the implied
covenant of good faith and fair dealing, awarding damages of $2.0 million. The
jury found for us on seven other of the plaintiff's claims and also found for us
on our cross-claim for breach of contract, awarding us damages of $1.1 million.
In response to our post-trial motions challenging the verdicts against us, the
court ordered the case to be retried in its entirety. A new trial date of
February 22, 2005 was set by the court. Subsequently, a settlement conference
was held on December 16, 2004 and the case was settled. We have agreed to pay
the plaintiff the sum of $20.0 million, which has been paid into an escrow
account. In addition, we have agreed to grant the plaintiff a royalty free
license for the manufacture and sale of the custom device at issue in the case.
All claims will be released by the parties and the case dismissed once the
settlement documents have been completed and the settlement funds released to
the plaintiff. We originally recorded a loss accrual of $30.0 million in fiscal
2004 representing our best estimate at that time of the loss we could incur. As
a result of this settlement, we have recorded a credit of $10.0 million included
in special items for the second quarter of fiscal 2005 to adjust the loss
accrual to equal the settlement amount that has been agreed upon.
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 any legal matters,
including 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.
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,
acquisitions and investments in other companies and are indicated by words or
phrases such as "anticipate," "expect," "outlook," "foresee," "believe,"
"could," "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; risks of
international operations; our success in integrating acquisitions and achieving
operating improvements with acquisitions; legislative and regulatory changes;
the outcome of legal, administrative and other proceedings that we are involved
in; the results of our programs to control and 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 30, 2004.
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. We record a provision for estimated future returns
at the time of shipment. Approximately 46 percent of our semiconductor
product sales were made through distributors in the first six months
of fiscal 2005. 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. 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.
Service revenues, which are included in net sales, are recognized
as the services are provided or as milestones are achieved, depending
on the terms of the arrangement.
Intellectual property income is not classified as sales. This
income is classified as a component of special items in the
consolidated statement of operations 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 inventory down
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. 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. Amortizable intangible assets subject
to this evaluation include developed technology we have acquired,
patents and technology licenses. 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. 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 on
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 our 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, and our enterprise
networking and device connectivity business units, which are not
reportable segments and are 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 assets and liabilities 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 enacted tax rate expected to be
applied 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 on 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 have progressed through fiscal 2005 with a continued emphasis on our analog
product capabilities, particularly in the standard linear segments. The World
Semiconductor Trade Statistics (WSTS) define "standard linear" as amplifiers,
data converters, regulators and references (power management products), and
interface. We are continuing to focus our investments on our core analog areas
that generate higher gross margins and produce higher returns on invested
capital. Consistent with this focus, we completed the sale of our imaging
business in September 2004. We achieved higher gross margins and profits in the
first two quarters of fiscal 2005 over the same periods last year, despite some
market weakness in the wireless handset and displays areas. This improved
performance reflects our shift toward a richer analog product mix, combined with
ongoing cost controls. As we move through fiscal 2005, we expect to continue to
focus on our gross margin performance relative to the level of sales we achieve.
We intend research and development investments to continue to be aimed primarily
at high value analog growth areas.
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), blended-average selling prices, sales of
new products and market share in the standard linear category as defined by
WSTS. We generally define new products as those introduced within the last three
years. We gauge our operating income performance based on gross margin trends,
product mix, blended-average selling prices, factory utilization rates and
operating expenses relative to sales. We are focused on generating a return on
invested capital that consistently exceeds our cost of capital by concentrating
on operating income, working capital management, capital expenditures and cash
management. We determine return on invested capital based on net operating
income after tax divided by invested capital, which generally consists of total
assets less goodwill and non-interest bearing liabilities.
We continued our stock repurchase program during the second quarter of
fiscal 2005. So far in fiscal 2005 in connection with the $400 million stock
repurchase program announced in March 2004, we have repurchased a total of 6.4
million shares of our common stock for $104.9 million, of which 1.5 million
shares were repurchased for $30.0 million in June 2004 upon the settlement of an
advance repurchase contract entered into with a financial institution in April
2004. We repurchased another 4.9 million shares of our common stock in the open
market for $74.9 million during September and October 2004. This stock
repurchase program is one element of our overall effort to increase our return
on invested capital, which we believe improves shareholder value. As of November
28, 2004, there was $152.6 million remaining for future common stock repurchases
under this program. In October 2004, we announced that our Board of Directors
had declared a cash dividend of $0.02 per outstanding share of common stock. The
dividend was payable on January 5, 2005 to shareholders of record at the close
of business on December 15, 2004.
The following table and discussion provides an overview of our operating
results for the current fiscal year and recently completed second quarter:
------------------------------------- -----------------------------------------
Three Months Ended Six Months Ended
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
2004 % Change 2003 2004 % Change 2003
---------- -------------- ----------- ------------- --------------- -----------
Sales $ 448.9 (5%) $ 473.5 $ 996.9 11% $ 898.3
Operating
income $ 100.6 $ 74.3 $ 249.0 $ 109.6
---------- ----------- ------------- -----------
As a % of sales 22% 16% 25% 12%
Net income $ 90.0 $ 65.8 $ 207.7 $ 95.5
========== =========== ============= ===========
As a % of sales 20% 14% 21% 11%
Sales for the first half of fiscal 2005 were higher than sales for the
first half of fiscal 2004 due to overall higher industry demand and our market
share gains in key standard linear markets, particularly for power management
products. Nevertheless, we have seen distributors and customers reduce inventory
levels and end demand not growing as rapidly as it was in the first half of
calendar year 2004. As a result, we experienced a drop in sales both
sequentially and year-over-year in the second quarter of fiscal 2005 as our
distributors and certain OEM customers reduced their inventory levels and
adjusted their backlogs as the post-holiday period approaches. Sales in the
second quarter of fiscal 2005 were down from sales in the second quarter of
fiscal 2004. For the company overall, our unit shipments were up slightly in the
first six months of fiscal 2005 over the first six months for fiscal 2004, but
were down 15 percent when comparing quarter-to-quarter. However, our
blended-average selling prices were up in fiscal 2005 by approximately 12
percent in the second quarter and approximately 10 percent in the first six
months over the corresponding periods of fiscal 2004. This blended-average is
affected by product mix as well as actual changes in product prices. The
improvement in net income was driven by these higher blended-average selling
prices, higher gross margin and lower operating expenses.
Net income for fiscal 2005 includes credits from special items of $19.6
million in the second quarter and $19.9 million in total for the first half. In
September, we completed the sale of the imaging business, which had been
announced in late August 2004 (See Note 4 to the Condensed Consolidated
Financial Statements). Special items for the second quarter include a gain of
$8.8 million from the sale of assets associated with the imaging business and
$0.8 million of net intellectual property income. Special items for the second
quarter also include a credit of $10.0 million to adjust the loss accrual
related to the ZF Micro Solutions, Inc. litigation that was settled in December
2004 (See Note 10 to the Condensed Consolidated Financial Statements). Special
items for the first six months of fiscal 2005 include an additional $0.3
million, comprised of $1.5 million of net intellectual property income, offset
by a $1.2 million charge for cost reduction actions.
Net income for the second quarter of fiscal 2004 included a $6.7 million
charge from special items, comprised of a charge of $6.0 million for cost
reduction actions and $0.7 million for an intellectual property settlement.
Special items for the first six months of fiscal 2004 included an additional
$12.6 million for charges connected with cost reduction actions and the impact
of the exit and sale of the information appliance business completed in August
2003, which were partially offset by $8.0 million of net intellectual property
income. Net income for the first six 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."
o Sales
-----
-------------------------------------- --------------------------------------
Three Months Ended Six Months Ended
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
2004 % Change 2003 2004 % Change 2003
---------- -------------- ------------ ------------ ------------ ------------
Analog $ 379.2 (5%) $ 400.1 $ 847.5 13% $ 748.0
As a % of sales 84% 84% 85% 83%
All others 69.7 (5%) 73.4 149.4 (1%) 150.3
---------- ------------ ------------ ------------
As a % of sales 16% 16% 15% 17%
Total sales $ 448.9 $ 473.5 $ 996.9 $ 898.3
========== ============ ============ ============
100% 100% 100% 100%
The chart above and the following discussion are based on our reportable
segments described in Note 14 to the Consolidated Financial Statements included
in our annual report on Form 10-K for the year ended May 30, 2004.
The trend we have seen in sales for the company overall in the second
quarter and first six months of fiscal 2005 was primarily attributable to the
Analog segment, which represents 85 percent of our total sales through the first
half of fiscal 2005. Analog segment sales for the first half of fiscal 2005
remained higher than sales for first half of fiscal 2004, driven by higher
consumer demand for products such as wireless handsets and notebook computers,
and a general trend towards increased analog semiconductor content in a variety
of electronic products. However, efforts by distributors and customers to reduce
inventories combined with lower than expected demand patterns caused sales in
the second quarter to decrease from the level in the corresponding quarter of
fiscal 2004. In connection with these inventory adjustments, demand for our
analog products was weak in the Asian wireless handset market and flat-panel
displays market. Distributors and OEM customers also adjusted their backlog as
they approached the post-holiday period. Analog unit shipments were up slightly
in the first six months of fiscal 2005 over the first six months of fiscal 2004,
but declined by 16 percent in the second quarter of fiscal 2005 from the second
quarter of fiscal 2004. Blended-average analog selling prices were up by 12
percent in the second quarter and first six months of fiscal 2005 over the same
fiscal 2004 periods, reflecting both a mix of higher value products as well as
some actual price improvements, as we have been striving to increase our sales
of high value, high performance analog products. Within the Analog segment,
sales of product by the power management business unit continued to grow with
increases of 8 percent in the second quarter and 28 percent in the first six
months over the same periods of fiscal 2004. Increased activity in wireless
handsets largely drove the sales growth in power management products. Sales of
product by the audio amplifier business unit also grew in the same periods over
sales in fiscal 2004 by 4 percent in the second quarter and 22 percent in the
first six months. Sales of products by the data conversion, application-specific
wireless (including radio frequency building blocks) and non-audio amplifier
business units all declined in the second quarter of fiscal 2005 from the
corresponding quarter of fiscal 2004 by 6 percent, 24 percent and 14 percent,
respectively. In the first six months of fiscal 2005, sales of products by the
data conversion business unit increased 16 percent and the wireless business
unit increased 11 percent over sales in the corresponding period of fiscal 2004.
Sales of products by the non-audio amplifier business unit for the first half of
fiscal 2005 remained flat with last year.
o Gross Margin
------------
------------------------------------ --------------------------------------
Three Months Ended Six Months Ended
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
2004 % Change 2003 2004 % Change 2003
---------- -------------- ---------- ----------- -------------- -----------
Sales $ 448.9 (5%) $ 473.5 $ 996.9 11% $ 898.3
Cost of sales 221.9 (6%) 236.5 468.3 2% 460.9
---------- ---------- ----------- -----------
Gross margin $ 227.0 $ 237.0 $ 528.6 $ 437.4
========== ========== =========== ===========
As a % of sales 51% 50% 53% 49%
The increase in the gross margin percentage for the second quarter and first six
months of fiscal 2005 compared to the same periods of fiscal 2004 was mainly
driven by improvement in product mix and actual selling prices. In an effort to
reduce some manufacturing costs to mitigate the unfavorable impact from lower
factory utilization, which declined significantly in the second fiscal quarter,
we scheduled mandatory factory shutdowns. Wafer fabrication capacity utilization
during the first six months of fiscal 2005 was 79 percent, based on wafer
starts, compared to 90 percent for the first six months of fiscal 2004. 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, higher performance analog products, which are more proprietary in nature
and can generate higher margins than products that are less proprietary or are
multi-sourced. Since these analog products generally have higher margins than
non-analog products, the growth in Analog segment sales to 85 percent of total
net sales in the first half of fiscal 2005 from 83 percent of total net sales in
the first half of fiscal 2004 also positively impacted gross margin.
o Research and Development
------------------------------------ --------------------------------------
Three Months Ended Six Months Ended
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
2004 % Change 2003 2004 % Change 2003
---------- -------------- ---------- ----------- -------------- -----------
Research and
development $ 82.1 (3%) $ 84.3 $ 167.8 (5%) $ 177.5
As a % of sales 18% 18% 17% 20%
Lower research and development expenses in the second quarter and first six
months of fiscal 2005 compared to the same periods of fiscal 2004 largely
reflect reduced spending that is the result of our sale and exit of the
information appliance business in August 2003 and the completion in fiscal 2004
of other actions aimed at reducing our research and development expenses as a
percentage of sales. R&D expenses in the second quarter of fiscal 2005 also
reflect reductions due to the sale of the imaging business. At the same time,
ongoing research and development spending is heavily focused on our analog
products and our underlying analog capabilities. Total company spending through
the first half of fiscal 2005 for new product development was down 6 percent,
and for process and support technology was down 2 percent from the first half of
fiscal 2004. Although research and development spending is down as a whole and
as a percentage of sales, research and development spending on our key focus
areas in the Analog segment increased as we continue to invest in the
development of new analog and mixed-signal technology-based products for
wireless handsets, displays, notebook PCs, other portable devices, as well as
applications for the broader markets requiring analog technology. A significant
portion of our research and development is directed at power management
technology.
o Selling, General and Administrative
-----------------------------------
------------------------------------ --------------------------------------
Three Months Ended Six Months Ended
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
2004 % Change 2003 2004 % Change 2003
---------- -------------- ---------- ----------- -------------- -----------
Selling, general and
administrative $ 63.9 (11%) $ 71.7 $ 131.7 (5%) $ 139.0
As a % of sales 14% 15% 13% 15%
The reductions in selling, general and administrative expenses for the second
quarter and first six months of fiscal 2005 compared to the same periods of last
fiscal year reflect our efforts to manage our cost structure. We also continue
to focus on reducing expenses through the implementation and maintenance of
discretionary cost control programs in recognition of the current unsettled
business environment.
o Interest Income and Interest Expense
------------------------------------
-------------------------- -------------------------
Three Months Ended Six Months Ended
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
2004 2003 2004 2003
------------- ------------ ------------ ------------
Interest income $ 3.8 $ 2.7 $ 6.9 $ 5.9
Interest expense (0.3) (0.2) (0.8) (0.3)
------------- ------------ ------------ ------------
Interest income, net $ 3.5 $ 2.5 $ 6.1 $ 5.6
============= ============ ============ ============
The increase in interest income, net, for the second quarter and first six
months of fiscal 2005 compared to the same periods of fiscal 2004 was due to an
increase in interest income from higher average cash balances and higher
interest rates over the same periods. Interest expense in fiscal 2005 also
includes the accretion of interest associated with software license obligations.
o Other Income (Expense), Net
---------------------------
-------------------------- -------------------------
Three Months Ended Six Months Ended
Nov. 28, Nov. 23, Nov. 28, Nov. 23,
2004 2003 2004 2003
------------- ------------ ------------ ------------
Net gain (loss) on investments $ 0.5 $ 0.7 $ 0.6 $ 3.0
Share in net losses of equity-method
investments (1.7) (2.9) (3.3) (7.7)
Other - 0.2 (0.5) 0.2
------------- ------------ ------------ ------------
Total other income (expense), net $ (1.2) $ (2.0) $ (3.2) $ (4.5)
============= ============ ============ ============
The components of other expense, net are primarily derived from activities
related to our investments. The share of net losses in equity-method investments
was lower in the second quarter and first six months of fiscal 2005 than the
corresponding fiscal 2004 periods as we now hold fewer equity-method investments
in nonpublic companies. Net gain on investments in the second quarter of fiscal
2005 relates to the sale of shares in a nonpublicly traded company and for the
first six months of fiscal 2005 includes the sale of a marketable investment.
The net gain on investments in the second quarter and first six months of fiscal
2004 is from the sale of shares in nonpublicly traded companies.
o Income Tax Expense
------------------
We recorded income tax expense of $12.9 million in the second quarter of fiscal
2005 compared to $9.0 million in the second quarter of fiscal 2004 and $44.2
million in the first 6 months of fiscal 2005 compared to $13.3 million in the
first 6 months of fiscal 2004 on income before income taxes and cumulative
effect of a change in accounting principle. The effective tax rate for the
second quarter of fiscal 2005 is approximately 13 percent compared to
approximately 12 percent for the second quarter of fiscal 2004. The fiscal 2005
tax expense consists primarily of U.S. alternative minimum tax, net of tax
credit carryforwards, and non-U.S. income taxes. The fiscal 2005 tax expense
also includes a benefit of $4.2 million recorded in the second quarter from the
resolution of a contingency reached in the second quarter related to a foreign
tax matter and a $1.8 million tax expense on the gain from sale of a business.
The fiscal 2004 tax expense consisted primarily of U.S. alternative minimum tax,
net of operating loss and credit carryforwards, and non-U.S. income taxes.
o Liquidity and Capital Resources
-------------------------------
------------------------------------
Six Months Ended
Nov. 28, Nov. 23,
2004 2003
---------- ------------ ------------
Net cash provided by
operating activities $ 232.1 $ 162.6
Net cash used by
investing activities (82.7) (156.7)
Net cash used by
financing activities (41.2) (294.6)
---------- ------------
Net change in cash
and cash equivalents $ 108.2 $(288.7)
========== ============
The primary factors contributing to the changes in cash and cash equivalents in
the first six months of fiscal 2005 and 2004 are described below:
The improvement in net income has been the primary contributor to the
increase in cash generated from operating activities in fiscal 2005. In the
first six months of fiscal 2005, cash from operating activities was generated
primarily from net income, adjusted for noncash items (primarily depreciation
and amortization), which substantially offset the negative impact that came from
changes in working capital components, primarily from decreases in accounts
payable and accrued expenses. The decrease in the allowance for receivables in
the first six months of fiscal 2005 is attributable to activity under
distributor incentive programs and lower receivables from the reduced level of
sales in the period. We also generated cash from operating activities in the
first six months of fiscal 2004. The positive impact from net income, when
adjusted for noncash items (primarily depreciation and amortization), was
greater than the negative impact from changes in working capital components in
the first six months of fiscal 2004.
Major uses of cash for investing activities during the first six months of
fiscal 2005 included investment in property, plant and equipment of $73.5
million, primarily for the purchase of machinery and equipment, and the payment
of $12.9 million for security deposits on leased equipment, which was offset by
proceeds of $10.0 million from the sale of assets. Major uses of cash for
investing activities for the first six months of fiscal 2004 included investment
in property, plant and equipment of $86.1 million, primarily for the purchase of
machinery and equipment, and net purchases of available-for-sale securities of
$72.7 million.
The primary use of cash from our financing activities in the first six
months of fiscal 2005 came from our repurchase of 4.9 million shares of our
common stock in the open market for $74.9 million and payments of $12.2 million
on software license obligations. These amounts were partially offset by proceeds
of $45.9 million from the issuance of common stock under employee benefit plans.
The primary use of cash from financing activities in the first six months of
fiscal 2004 came from our repurchase of 25.4 million shares of our common stock
for $400.0 million and payments of $12.9 million on software license
obligations. These amounts were partially offset by proceeds of $120.1 million
from the issuance of common stock under employee benefit plans.
In March 2004, we announced that our Board of Directors had approved a $400
million stock repurchase program similar to the $400 million stock repurchase
program completed in the second quarter of fiscal 2004. The 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. There was $152.6 million remaining for future common stock
repurchases under this program as of November 28, 2004. In October 2004, we
announced that our Board of Directors had declared a cash dividend of $0.02 per
outstanding share of common stock. The dividend was payable on January 5, 2005
to shareholders of record at the close of business on December 15, 2004.
We foresee continuing cash outlays for plant and equipment in fiscal 2005,
with our primary focus on analog capabilities at our existing sites. We
currently expect our fiscal 2005 capital expenditure amount to be less than the
fiscal 2004 amount. Our capital expenditures do not include internal-use
software acquired under long-term obligations or equipment acquired for use
under operating leases. Consistent with the recent decline in sales and the
corresponding reduction in our capacity utilization, we are reducing the level
of capital expenditures. Our capital expenditure activity for the remainder of
the fiscal year will be dependent upon business conditions. We expect existing
cash and investment balances, together with existing lines of credit and cash
generated by operations, to be sufficient to finance the capital investments
currently planned for in fiscal 2005, as well as the dividend and 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
most likely cause reductions in our cash equivalents and marketable investments.
The following table provides a summary of the effect on liquidity and cash
flows from our contractual obligations as of November 28, 2004:
Fiscal Year: 2010 and
(In Millions) 2005 2006 2007 2008 2009 thereafter Total
-------------- ---------- ---------- ---------- ---------- ----------- -------------
Contractual obligations
recorded as liabilities:
Debt obligations $ - $ - $ - $ 21.9 $ - $ 0.2 $ 22.1
CAD software licensing
agreements 4.3 10.0 8.2 - - - 22.5
Other contractual
obligations under:
Noncancellable
operating leases 16.2 28.8 22.4 11.1 5.8 6.0 90.3
Fairchild manufacturin
agreement 0.3 - - - - - 0.3
Other 1.3 2.4 0.7 0.3 0.2 - 4.9
-------------- ---------- ---------- ---------- ---------- ----------- -------------
Total $ 22.1 $ 41.2 $ 31.3 $ 33.3 $ 6.0 $ 6.2 $ 140.1
============== ========== ========== ========== ========== =========== =============
Commercial Commitments:
Standby letters of credit
under bank multicurrency
agreement $ 9.2 - - - - - $ 9.2
============== ========== ========== ========== ========== =========== =============
In addition, as of November 28, 2004, capital purchase commitments were
$11.7 million.
We do not currently have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which might be established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. We do not engage in trading activities involving non-exchange
traded contracts. As a result, we do not believe that we are materially exposed
to financing, liquidity, market or credit risk that could arise if we had
engaged in these relationships.
o Recently Issued Accounting Pronouncements
-----------------------------------------
In July 2004, the Financial Accounting Standards Board reached a consensus on
Emerging Issues Task Force Issue No. 02-14, "Whether an Investor Should Apply
the Equity Method of Accounting to Investments Other Than Common Stock." The
Task Force's consensus was that when an investor has the ability to exercise
significant influence over the operating and financial policies of an investee,
the investor should apply the equity method of accounting only when it has an
investment in common stock and/or an investment that is in-substance common
stock. The Task Force also reached a consensus on the definition of in-substance
common stock and related guidance. EITF 02-14 is effective for our fiscal 2005
third quarter ending February 27, 2005. We are currently evaluating the
requirements of EITF 02-14 and have not yet fully determined its impact on our
consolidated financial statements. Our investments subject to this EITF
represent substantially less than 1 percent of total assets and the majority of
those investments are currently accounted for under the equity method of
accounting.
In March 2004, the Financial Accounting Standards Board reached a consensus
on Emerging Issues Task Force Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
EITF 03-1 provides new guidance for evaluating impairment losses on debt and
equity investments, as well as new disclosure requirements for investments that
are determined to be other-than-temporarily impaired. In September 2004, the
Financial Accounting Standards Board approved the issuance of a FASB Staff
Position which delays the requirement to record impairment losses under EITF
03-1. The delay applies to all securities within the scope of EITF 03-1 and is
expected to end when new guidance is issued and comes into effect. Pending
issuance of new guidance, we have not yet evaluated the requirements of EITF
03-1 nor determined its impact on our consolidated financial statements.
In November 2004, the Financial Accounting Standards Board issued SFAS No.
151, "Inventory Costs, an amendment of ARB 43, Chapter 4," which amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing." This Statement is the
result of a broader effort by the FASB working with the International Accounting
Standards Board to reduce differences between U.S. and international accounting
standards. SFAS No. 151 eliminates the "so abnormal" criterion in ARB No. 43 and
companies will no longer be permitted to capitalize inventory costs on their
balance sheets when the production defect rate varies significantly from the
expected rate. It also makes clear that fixed overhead should be allocated based
on "normal capacity." The provisions of this Statement are effective for
inventory costs incurred during our fiscal year 2007. We are currently analyzing
this statement and have not yet determined its impact on our consolidated
financial statements.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised 2004), "Share-Based Payment." This Statement is a revision of SFAS
No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS No. 123(R) requires that compensation cost
relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. This statement is effective beginning with our
fiscal 2006 second quarter ending November 27, 2005. We are currently evaluating
the requirements of SFAS No. 123(R) and although we believe the impact to our
financial statements will be in a similar range as the amounts presented in our
pro forma financial results required to be disclosed under the current SFAS No.
123, we have not yet fully determined its impact on our consolidated financial
statements.
In December 2004, The Financial Accounting Standards Board issued SFAS No.
153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 20,
Accounting for Nonmonetary Transactions." The amendments made by this Statement
are based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. This Statement also
eliminates the exception for nonmonetary exchanges of similar productive assets
and replaces it with a broader exception for exchanges of nonmonetary assets
that do not have commercial substance. The Statement is effective for
nonmonetary asset exchanges beginning in our fiscal year 2007 and we will apply
its provisions prospectively upon adoption.
o Outlook
-------
Although sales levels for the first half of fiscal 2005 were higher than they
were from the first half of fiscal 2004, overall economic conditions in the
semiconductor industry continue to be difficult to predict. Our business over
the first six months of fiscal 2005 has been affected by slower orders than we
originally anticipated, particularly from our distribution channel. The order
slowdown was caused by a combination of shorter lead times and higher than
desired inventory levels at our distributors and customers. We also saw a
slowdown in demand for our products in the Asian handset market and the
flat-panel displays market. Turns orders, which are orders received with
delivery requested in the same quarter, have been unusually low relative to past
history. While orders for near term delivery were very low in the first two
months of the quarter, they picked up in November, but not sufficiently enough
to offset the earlier weak activity. As a result, our opening 13-week backlog
entering the third quarter of fiscal 2005 was lower than it was when we began
the second quarter of fiscal 2005. The late pick-up in turns order activity
appears to suggest that order levels, especially in the distribution channel
where our distributors have indicated that they are close to reaching their
targeted inventory levels, may be returning to a more normal pattern. Although
turns orders are typically lower in our fiscal third quarter due to lower build
activity by manufacturers that generally occurs after the holiday season, we
anticipate turns orders in the third quarter to be higher than in the previous
second quarter. This is because we expect the inventory reductions by our
distributors and customers that had such a negative impact on turns orders in
the second quarter will not have such an impact in the third quarter. It should
also be noted that the fiscal 2004 third quarter included 14 weeks instead of
the normal 13 weeks since fiscal 2004 was a 53-week year. Considering all
factors, including those discussed above, we expect net sales for the third
quarter of fiscal 2005 to be flat to slightly down from the level achieved in
our fiscal 2005 second quarter. However, if backlog orders are cancelled or if
the level of turns orders is less than expected, actual net sales will decline
more. We anticipate our gross margin percentage in the third quarter of fiscal
2005 to be at a level comparable to that achieved in the second quarter. In
response to lower demand, we have slowed our production volumes in order to
manage inventory levels. As a result, wafer fabrication capacity utilization
declined to the mid-60 percent range in the second quarter and is not expected
to change substantially in the near term.
On January 6, 2005, we announced that we will eliminate approximately 550
positions worldwide, mostly at our manufacturing sites. We took this action to
further reduce costs long term and to partially address the lower capacity
utilization resulting from reduced demand seen in the second quarter, as well as
our ongoing strategic de-emphasis on commodity products. The estimated cost of
these reductions will range from $22 to $26 million and will be included as a
charge to special items, most of which will be recorded in the third quarter of
fiscal 2005.
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.
Although less capital investment is needed for analog products than for many
other semiconductor products, substantial capital and R&D investment are
required to support products and manufacturing processes in the semiconductor
industry. We have experienced in the past and expect to experience in the future
periodic fluctuations in our operating results. Market 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 Analog Devices, Linear Technology, Maxim, ST
Microelectronics and Texas Instruments that sell competing products into some of
the same markets that we target. In some cases, we may also compete with our
customers. Competition is based on design and quality of products, product
performance, price and service, with the relative importance of these factors
varying among products, markets and customers. 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.
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 battery management that can adequately handle the demands of these
advanced features. 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.
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
applications in other markets that require analog technology.
We face risks from our international operations. We conduct a substantial
portion of our operations outside the United States. Our new assembly and test
facility in China that commenced operations in fiscal 2005 has expanded our
international operations to include China, where we have not previously
conducted manufacturing operations. International operations subject our
business 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 twelve months, one
or more of these factors has had an adverse effect on us in the past and could
adversely affect us in the future. In addition, although we have a program 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 the
euro.
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 and support our business model objectives (which
include gross margin, operating margin, and return on invested capital
objectives). 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.
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. The continuing hostilities in Iraq and terrorist
activities worldwide have resulted in additional uncertainty on the overall
state of the world economy. Our operations and activities in the Middle East are
fairly limited, but we have no assurance that the consequences from these events
will not disrupt our operations in the U.S. or other regions of the world in the
future. The emergence of varying illnesses in Asia over the past few years that
have the potential for becoming pandemic could also adversely affect our
business. The spread of any such illnesses beyond Asia could also negatively
impact other aspects of our operations. Although oil is not a major factor in
our cost structure, continued wide fluctuations and large increases in oil
prices may impact our cost structure in the future. In addition, any of these
factors may also have an unfavorable impact on future demand for our products.
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 30, 2004 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 30, 2004 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 2004 Form 10-K. There have been no material changes in market risk
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 mange,
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. As required by SEC Rule 13a-15(b), 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. The committee performed an evaluation, under the supervision of 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.
We are currently working to review our internal controls over financial
reporting as part of our efforts to ensure compliance with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002. The review is an ongoing process
and it is possible that we may institute additional or new internal controls
over financial reporting as a result of the review. During the second quarter of
fiscal 2005 which is covered by this report we did not make any changes in our
internal controls over financial reporting that have materially affected, or is
reasonably likely to materially affect our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We currently are a party to various legal proceedings. Information on our
existing material legal proceedings is provided in our 2004 Form 10-K and in our
Form 10-Q for the quarter ended August 29, 2004. Except as described below,
there have been no material developments in the legal proceedings described in
these filings.
As we have reported, we are undergoing tax audits in several international
locations and from time to time our tax returns are audited in the U.S. by state
agencies and at international locations by local tax authorities. During the
second quarter of fiscal 2005, we resolved an audit at one of our international
locations, which resulted in a $4.2 million reduction of income tax expense for
the quarter.
In April 2002, ZF Micro Solutions, Inc. brought suit against us in the
California Superior Court alleging a number of contract and tort claims related
to an agreement we entered into in 1999 to design and manufacture a custom
integrated circuit device for ZF Micro Devices. ZF Micro Devices ceased business
operations in February 2002 and the case was brought by ZF Micro Solutions as
successor to ZF Micro Devices. The case began trial in May 2004 and on June 14,
2004, the jury in the case found for ZF Micro Solutions on a claim on
intentional misrepresentation, awarding damages of $28.0 million and on a claim
of breach of the implied covenant of good faith and fair dealing, awarding
damages of $2.0 million. On seven other claims brought by the plaintiff, the
jury found for us. The jury also found for us on our breach of contract
cross-claim, awarding damages of $1.1 million. In response to our challenges to
the verdicts in favor of ZF Micro Solutions in post-trial motions, the court
ordered a new trial on all issues and set February 22, 2005 as the new trial
date. During a settlement conference held in December, the case was settled. We
agreed to pay the plaintiff the sum of $20.0 million, which has been paid into
an escrow account. In addition, we have agreed to grant the plaintiff a royalty
free license for the manufacture and sale of the custom device at issue in the
case. All claims will be released by the parties and the case dismissed once the
settlement documents have been completed and the settlement funds released to
the plaintiff.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The following table summarizes purchases we made of our common stock during
the second quarter of fiscal 2005:
Maximum Dollar
Total Number of Shares Value of Shares that May
Purchased as Part of Yet Be Purchased Under
Total Number of Publicly Announced the Plans or Programs
Shares Purchased Average Price Paid Per Plans or Programs (2)
Period (1) Share
- -------------------------- -------------------- ---------------------- ---------------------- ------------------------
Month #1
September 1, 2004 -
September 30, 2004 3,909,600 $15.16 3,909,600 $167.9 million
Month #2
October 1, 2004 -
October 31, 2004 964,500 $15.83 964,500 $152.6 million
Month #3
November 1, 2004 -
November 28, 2004 - - - $152.6 million
(1) During the quarter ended November 28, 2004, we also reacquired 3,204 shares
through the withholding of shares to pay employee tax obligations upon the
vesting of restricted stock.
(2) Purchases during the second quarter were made under a program announced
March 11, 2004. The total dollar amount approved for the repurchase program is
$400 million. There is no expiration date for the program. We do not have any
plans to terminate the current plan prior to its completion. There were no
repurchases during the third month of the quarter.
Our $20 million multicurrency credit agreement with a bank that provides
for multicurrency loans, letters of credit and standby letters of credit was
renewed in October 2004. The agreement contains restrictive covenants,
conditions and default provisions that, among other terms, restrict payment of
dividends. At November 28, 2004, $237.6 million of tangible net worth was
unrestricted and available for payment of dividends on common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Our annual meeting was held on October 1, 2004.
(b) The following directors were elected at the meeting:
DIRECTOR FOR AUTHORITY WITHHELD
- -------- --- ------------------
Brian L. Halla 313,165,715 11,749,249
Steven R. Appleton 306,277,793 18,637,171
Gary P. Arnold 233,777,549 91,137,415
Richard J. Danzig 319,990,039 4,924,925
Robert J. Frankenberg 318,815,628 6,099,336
E. Floyd Kvamme 318,766,276 6,148,688
Modesto A. Maidique 301,718,127 23,196,837
Edward R. McCracken 306,354,292 18,560,672
(c) The following matters were also voted on at the meeting:
(i) Proposal to ratify the appointment of KPMG LLP as the independent
auditors of the Company:
FOR: 320,086,255 AGAINST: 2,987,217 ABSTAIN: 1,841,492
(ii) Proposal to approve the Executive Officer Incentive Plan, as amended:
FOR: 302,199,301 AGAINST: 20,112,226 ABSTAIN: 2,603,437
(iii)Proposal to approve the adoption of the 2005 Executive Officer Equity
Plan:
FOR: 139,704,209 AGAINST: 134,013,848 ABSTAIN: 2,857,116
BROKER NON VOTE: 48,339,791
ITEM 6. EXHIBITS
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); Certificate of Adjusted Purchase Price on
Number of Shares dated April 23, 2004 filed by National Semiconductor
Corporation with the Rights Agent (incorporated by reference to the
Exhibits to our Amendment No. 3 to the Registration Statement on Form 8-A
filed April 24, 2004).
10.1 Management Contract or Compensatory Plan or Arrangement; Equity
Compensation Plan not approved by Stockholders: Form of Stock Option
Agreement used for options granted under the Stock Option Plan, Executive
Officer Stock Option Plan and 1997 Employees Stock Option Plan.
10.2 Management Contract or Compensatory Plan or Arrangement: Form of Stock
Option Agreement used for options granted under the Director Stock Option
Plan.
10.3 Equity Compensation Plan not approved by Stockholders: Form of Agreement
used for grants made under the Restricted Stock Plan.
31. Rule 13a - 14(a)/15d - 14(a) Certifications
32. Section 1350 Certifications
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: January 6, 2005 \s\Robert E. DeBarr
------------------------------------
Robert E. DeBarr
Controller
Signing on behalf of the registrant
and as principal accounting officer
Exhibit 31
CERTIFICATION
I, Brian L. Halla, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National
Semiconductor Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: January 6, 2005
\s\ Brian L. Halla
----------------------------------------
Brian L. Halla
President and Chief Executive Officer
Exhibit 31
CERTIFICATION
I, Lewis Chew, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National
Semiconductor Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: January 6, 2005
\s\ Lewis Chew
-----------------------------------
Lewis Chew
Senior Vice President, Finance and
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of National Semiconductor Corporation
(the "Company") on Form 10-Q for the period ended November 28, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Brian L. Halla, President and Chief Executive Officer for the Company,
certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or Section
15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Dated: January 6, 2005
\s\ Brian L. Halla
-----------------------------------------
Brian L. Halla
President and Chief Executive Officer
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of National Semiconductor Corporation
(the "Company") on Form 10-Q for the period ended November 28, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Lewis Chew, Senior Vice President, Finance and Chief Financial Officer for
the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of
the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
Section 15(d), as applicable, of the Securities Exchange Act of 1934,
and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: January 6, 2005
\s\ Lewis Chew
--------------------------------------
Lewis Chew
Senior Vice President, Finance and
Chief Financial Officer