UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 29, 2005
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
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common stock, par value New York Stock Exchange
$0.50 per share Pacific Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X . No .
The aggregate market value of voting stock held by non-affiliates of National as
of November 26, 2004, was approximately $4,971,570,964 based on the last
reported sale price on that date. Shares of common stock held by each officer
and director and by each person who owns 5 percent or more of the outstanding
common stock have been excluded because these persons may be considered to be
affiliates. This determination of affiliate status for purposes of this
calculation is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of the registrant's common stock, $0.50 par
value, as of July 22, 2005, was 345,741,784 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Document Location in Form 10-K
-------- ---------------------
Portions of the Proxy Statement for the Annual Meeting of Part III
Stockholders to be held on or about September 30, 2005.
NATIONAL SEMICONDUCTOR CORPORATION
TABLE OF CONTENTS
Page No
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PART I
Item 1. Business 4
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 16
Executive Officers of the Registrant 17
PART II
Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 7A.Quantitative and Qualitative Disclosures about
Market Risk 37
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 82
Item 9A.Controls and Procedures 83
Item 9B. Other Information 84
PART III
Item 10. Directors and Executive Officers of the Registrant 85
Item 11. Executive Compensation 85
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 86
Item 13. Certain Relationships and Related Transactions 87
Item 14. Principal Accountant Fees and Services 87
PART IV
Item 15. Exhibits and Financial Statement Schedules 88
Signatures 90
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements relate to, among other things,
sales, gross margins, operating expenses, capital expenditures, R&D efforts and
asset dispositions 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 the economy
generally and in various markets such as wireless, PC and displays; 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 acquisitions and/or dispositions and achieving the desired
improvements associated with those acquisitions and/or dispositions; legislative
and regulatory changes; the outcome of legal, administrative and other
proceedings that we are involved in; the results of our programs to control or
reduce costs; and the general worldwide geopolitical situation. For a discussion
of some of the factors that could cause actual results to differ materially from
our forward-looking statements, see the discussion on "Risk Factors" section set
forth in Item 7, Management's Discussion and Analysis of Financial Conditions
and Results of Operations, 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.
General
We design, develop, manufacture and market a wide range of semiconductor
products, most of which are analog and mixed-signal integrated circuits. Our
focus is on creating high-value analog products that provide more energy
efficiency, portability, better audio and sharper images in electronics systems.
We target a broad range of markets and applications such as:
o wireless handsets; o medical applications;
o displays; o automotive applications;
o PCs and notebooks; o test and measurement applications; and
o networks; o a broad range of portable
o industrial markets; applications.
We are a premier analog company creating high-value analog devices and
subsystems. Our leading-edge products include power management circuits, display
drivers, audio and operational amplifiers, communication interface products and
data conversion solutions. Approximately 87 percent of our revenue in fiscal
2005 was generated from analog-based products, and we believe this percentage
can continue to grow in the future as a result of our focus on developing new
analog products for a variety of markets and applications.
National was originally incorporated in the state of Delaware in 1959 and
our headquarters have been in Santa Clara, California since 1967. Our fiscal
year ends on the last Sunday of May and references in this document to fiscal
2005 refer to our fiscal year ended May 29, 2005. References to fiscal 2004
refer to our fiscal year ended May 30, 2004 and to fiscal 2003 refer to our
fiscal year ended May 25, 2003. On our "Investor Information" website, located
at www.national.com, we post the following filings as soon as reasonably
practicable after they are electronically filed with or furnished to the
Securities and Exchange Commission: our annual report on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on Form 8-K and any
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934. All of the filings on our website
are available free of charge. We also maintain certain corporate governance
documents on our website, including our Code of Conduct and Ethics, Director
Affairs Committee Charter, Compensation Committee Charter, Audit Committee
Charter and Other Governance Policies. We will provide a printed copy of any of
these documents to any shareholder who requests it. We do not intend for
information found on our website to be part of this document or part of any
other report or filing with the SEC.
Recent Highlights
Throughout fiscal 2005, we have continued to pursue our strategy of focusing 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. As a part of this focus, we periodically identify
opportunities to divest or reduce involvement in product areas that are not in
line with our business objectives. During fiscal 2005, we completed the sales of
our imaging business in September 2004 and the PC Super I/O business in May
2005. We entered into an agreement to sell our cordless business in May 2005,
and that sale was closed in June 2005. In addition, following our announcement
in March 2005 to seek a buyer for our assembly and test facility in Singapore,
we announced in July 2005 that we now plan to close this facility and
consolidate its production volume into our other assembly and test facilities in
Malaysia and China. The majority of closure activities is expected to take place
over the next nine to twelve months.
We achieved higher gross margins and profit in fiscal 2005 than in the
prior fiscal year, despite some mid-year market weakness that was caused by
excess inventory levels in the supply chain. This improved operating performance
reflects our shift toward a richer analog product mix, combined with ongoing
cost controls. In January 2005, we initiated a program to reduce expenses and
streamline manufacturing operations as we saw wafer-fabrication utilization
rates decline in the second quarter of fiscal 2005 to the mid-60s due to
significant inventory reductions in the distribution channel and lower demand
than expected in some markets. As we enter fiscal 2006, we are continuing our
focus on gross margin relative to sales and we are directing our research and
development investments primarily at high-value analog growth areas.
We continued our stock repurchases in fiscal 2005 under the $400 million
stock repurchase program originally announced in March 2004 and another $400
million stock repurchase program that was approved by our Board of Directors in
March 2005. Under these programs we repurchased a total of 20.3 million shares
of our common stock for $353.5 million during fiscal 2005. Of these shares, 17.6
million shares were repurchased in the open market for $298.5 million. The other
2.7 million shares were repurchased through privately negotiated transactions
with a major financial institution and include the repurchase of 1.5 million
shares for $30.0 million in June 2004 upon the settlement of an advance
repurchase contract entered into in April 2004. These stock repurchase
activities comprise one element of our overall effort to consistently generate a
high return on invested capital, which we believe improves shareholder value. As
of May 29, 2005, we had $304.0 million remaining for future common stock
repurchases under approved programs. We also paid cash dividends of $14.1
million during fiscal 2005. In June 2005, our Board of Directors declared a cash
dividend of $0.02 per outstanding share of common stock. The dividend totaling
$7.0 million was paid on July 11, 2005 to shareholders of record at the close of
business on June 20, 2005.
Products
Semiconductors are integrated circuits (in which a number of transistors and
other elements are combined to form a more complicated circuit) or discrete
devices (such as individual transistors). In an integrated circuit, various
components are fabricated in a small area or "chip" of silicon, which is then
encapsulated in plastic, ceramic or other advanced forms of packaging and
connected to a circuit board or substrate.
We manufacture an extensive range of analog intensive and mixed-signal
integrated products, which are used in numerous applications. While no precise
industry definition exists for analog and mixed-signal devices, we consider
products which process analog information or convert analog to digital or
digital to analog as analog and mixed-signal devices.
We are a leading supplier of analog and mixed-signal products, serving both
broad based markets such as the industrial, communications, computing, consumer,
medical and automotive markets, and more narrowly defined markets such as
wireless handsets, LCD monitors, personal computers and HDTVs. Our analog and
mixed-signal devices include:
o operational and audio amplifiers; o communication interface
o power references, regulators circuits;
and switchers; o radio frequency integrated
o analog to digital converters; circuits; and
o flat panel display drivers and
signal processors.
Other products with significant analog content include products for local
area and wireless networking and wireless communications, as well as products
for personal systems and personal communications.
Other product offerings that are not analog or mixed-signal include
microcontrollers, advanced input/output PC products, connectivity processors and
embedded BluetoothTM solutions that serve a wide variety of applications in the
personal computer, industrial, automotive, consumer and communication markets.
During fiscal 2005 we pursued a strategy to divest certain businesses that were
not core analog such as our PC Super I/O business and the cordless business
unit. Our core analog and mixed-signal products typically generate higher gross
margins than the products of these businesses that we divested.
Corporate Organization; Product Line Business Units
We are organized by various product line business units which are combined to
form groups. During fiscal 2005, our operations were organized in the following
five groups: the Analog Group, the Displays and Wireless Group, the PC and
Networking Group, the Custom Solutions Group, and the Imaging Group (which was
ultimately disbanded after the sale of its assets in September 2004).
Analog Group: Analog products provide the vital technology link that allows
the physical world to connect with digital information. They are used to enable
and enrich the experience of sight and sound of many electronic applications. In
addition to the real world interfaces, analog products are used extensively in
power management and signal conditioning applications.
We continue to maintain a leadership position in power management
technology. Our diverse portfolio of innovative intellectual property enables us
to develop building block products, application-specific standard analog
products and full custom large-scale integrations for our key customers in
applications such as wireless handsets and flat panel displays. In signal path
applications, our innovative and high-performance building blocks and
application specific standard products allow our customers to differentiate
their systems. The Analog Group designs, develops and manufactures a wide range
of products including:
o power management products (power conversion, regulation and
conservation);
o high-performance operational amplifiers;
o high-performance analog-to-digital converters and digital-to-analog
converters;
o high-efficiency audio amplifiers; and
o thermal management products.
With our leadership in innovative analog packaging and process technology,
we are focused on high growth markets that depend upon portability and
efficiency. We are continuing to focus on servicing top tier original equipment
manufacturers in the wireless and display markets and also expanding our
presence in broader markets which are often served through distributors. In
fiscal 2005, nearly 48 percent of the Analog Group's revenues were derived from
original equipment manufacturers, while the remaining 52 percent came from our
worldwide authorized distributors.
We also use our analog expertise to develop high-performance analog
products serving targeted applications in the broad consumer, industrial,
medical, automotive and information infrastructure markets. Our growing
portfolio of high-performance analog building blocks includes high voltage
regulators, high speed and precision op-amps, and high speed, low power analog
to digital converters. These building block products can serve as the starting
point for the development of highly integrated application-specific standard
products such as our current 3D audio subsystems.
The Hi-Rel (formerly Enhanced Solutions) business unit of the Analog Group
supplies integrated circuits and contract services to the high reliability
market, which includes avionics, defense, space and the federal government.
Displays and Wireless Group: The Displays and Wireless Group consists of
two separate business groups: Displays and Wireless.
We are a leader in analog video processing solutions for the displays
market. The Displays Group develops and manufactures products that provide
higher resolution, brighter color and/or better power efficiency for flat
panels, CRT monitors, notebook computer displays, LCD TV displays and personal
client device displays. The Displays Group consists of the following business
units:
o Flat Panel Displays;
o CRT; and
o Adaptive Video Converter.
The Flat Panel Displays business unit provides a variety of innovative
products for notebook thin film transistor (TFT) displays, flat panel monitors,
and LCD TV displays. These include timing controllers, low voltage differential
signal (LVDS) data receivers, LVDS transmitters and column drivers. We have a
significant market share in integrated LVDS receivers and timing controllers
that serve the notebook TFT displays market while continuing to expand our
position in the discrete LVDS market. We continue to solidify our position as a
leading innovator in the displays space through a proliferation of display
architecture standards we have developed: Advanced Bus Systems Interface (ABSI)
and Point to Point Differential Signal (PPDS). ABSI driver technology supports
chip-on-glass notebook and monitor panels. PPDS enables cinema quality display
performance and small bezels for LCD TV applications.
The CRT business unit offers a variety of video drivers and pre-amplifiers
that go into CRT monitors and digital TVs. Because the overall market unit
volume of CRT monitors is expected to decline over time due to the increasing
penetration of flat panel displays, this business unit's leading edge
capabilities, including our high voltage processes, are being channeled toward
opportunities in the fast growing digital TV market. Our product offerings
include an integrated family of pre-amplifiers with on-screen display, and clamp
and video drivers for a wide variety of CRT display types.
The Adaptive Video Converter business unit is targeting the emerging
markets for digital television, HDTV, audio video receivers, up-conversion DVD
players and HD recorders. The business's portfolio includes a family of products
with a universal front-end accepting standard and high-definition video formats
integrated with 3-D video channels, flexible scaling, multi-picture functions
and advanced-video enhancements to generate high quality output across a range
of desired standard video formats.
The Wireless Group delivers solutions that perform the radio and other
functions for handsets and base stations in the cellular and cordless telephone
markets. The Wireless Group leverages a number of technologies and standards:
o Code Division Multiple Access (CDMA);
o Personal Digital Cellular (PDC);
o Personal Handy System (PHS);
o Global Systems for Mobile Communications (GSM); and
o Digital Cordless Telephone technology (DCT)
There are two business units in the Wireless Group: RF Component and
Digital Cordless. The RF Component business unit offers radio frequency
components that address the synthesizer block of the radios in CDMA and PDC
handsets and GSM basestations and complete radio solutions for the PHS handset
space. The Digital Cordless business unit (referred to as our cordless
business), which offered DECT and DCT based solutions for digital cordless voice
and data applications, was sold in June 2005. We sold the business unit because
it no longer aligned with our core analog strategy.
PC and Networking Group: The PC and Networking Group consists of the
Networking business unit and the PC Super I/O business unit.
The Networking business unit is made up of three divisions that address
opportunities in the enterprise, communications infrastructure and embedded
markets. The Enterprise division provides mixed-signal solutions for switches
and routers. The Communications Infrastructure division provides high-speed
physical interconnect products for wireless, telecom, data networking and
professional video applications. The Embedded division provides products used in
networked peripherals in certain enterprise and consumer markets.
The PC Super I/O business unit was sold in May 2005. This business unit
provided mixed-signal I/O products for servers, desktops, mobile and storage
computing and focused on solutions for connectivity, security and manageability.
We sold the business unit because we determined that it no longer fit with our
core analog strategy.
Custom Solutions Group: The Custom Solutions Group primarily consists of
the following two business units: Device Connectivity and ASIC & Telecom.
The Device Connectivity business unit supplies connectivity processors,
embedded BluetoothTM solutions, general-purpose microcontrollers and DVD chipset
solutions. Our connectivity processors are marketed under the CP3000 family and
are based on our CR16 core integrated with advanced connectivity peripherals,
and are combined with optimized application software to address applications
needing device connectivity. Applications include BluetoothTM accessories,
telematics (automotive) and industrial equipment. Our general-purpose 8 and 16
bit microcontrollers address a wide variety of applications in the industrial,
automotive, consumer and communication markets.
The ASIC & Telecom business unit supplies user-designed application
specific products in the form of standard cells and gate arrays, key
telecommunications components for analog and digital line cards, as well as
AC97-compliant audio codecs for consumer and automotive applications. This
business unit also handles the logistics for providing materials and services to
third parties in support of the transitional service agreements associated with
businesses that we have divested.
Imaging Group: We completed the sale of certain intellectual property,
inventory and equipment of our imaging business to Eastman Kodak Company in
September 2004 during our second fiscal quarter. Our Imaging Group was disbanded
in fiscal 2005 following this sale of assets.
Worldwide Marketing and Sales and Central Technology and Manufacturing
Group: Separate from our business operating groups, our corporate structure in
fiscal 2005 includes a centralized Worldwide Marketing and Sales Group and a
Central Technology and Manufacturing Group (CTMG).
Worldwide Marketing and Sales is structured around the four major regions
of the world where we operate -- the Americas, Europe, Japan and Asia Pacific --
and unites our worldwide sales and marketing organization.
CTMG manages all production, including outsourced manufacturing and central
support technology. Central support technology includes process technology,
which consists of research and process development necessary for many of our
core production processes, packaging technology and research. CTMG provides a
range of process libraries, product cores and software that are shared among our
product lines. This group is also responsible for the selection and usage of
common support tools, including integrated computer-aided design for design,
layout and simulation.
At the beginning of fiscal 2006, we re-organized our operations to combine
the Office of the Chief Operating Officer together with the Office of the
President and promoted Donald Macleod to President and Chief Operating Officer.
In connection with this change, we re-organized our product lines into two
product groups as follows:
o Analog Signal Path Group: o Power Management Group:
o Amplifier Division; o Power Management Products Division;
o Audio Division; o Portable Power Systems Division;
o Data Conversion Division; o Flat Panel Display and AVC Divisions;
o Interface Division; o Device Connectivity Division; and
o Emerging Products Division; o ASIC/Telecom.
and
o Hi-Rel Operations.
In addition, we disbanded CTMG and separated its functional groups into a
different reporting structure. The product groups, Worldwide Marketing and Sales
and the former CTMG operations now all report to the President and Chief
Operating Officer.
Segment Financial Information and Geographic Information
For segment reporting purposes, each of our product line business units
represents an operating segment as defined under Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. Business units that have similarities, including economic
characteristics, underlying technology, markets and customers, are aggregated
into larger segments. Under the criteria in SFAS No. 131, Analog is our only
reportable segment for fiscal 2005. The remaining business units that are not
included in the Analog reportable segment are grouped as "All Other."
For further financial information on this segment, as well as geographic
information, refer to the information contained in Note 14, "Segment and
Geographic Information," in the Notes to the Consolidated Financial Statements
included in Item 8.
Marketing and Sales
We market our products globally to original equipment manufacturers and original
design manufacturers through a direct sales force. Some of our major OEMs
include:
o Apple Computer; o L.M. Ericsson; o Sharp;
o Robert Bosch; o Matsushita Electric; o Siemens;
o Delphi; o Motorola; o Sony;
o Kyocera; o Nokia; o Sony - Ericsson Mobile
o LG Electronics; o Samsung; Communication; and
o Toshiba.
There is a prevalent trend in the technology industry where OEMs use
contract manufacturers to build their products and ODMs to design and build
products. As a result, our design wins with major OEMs, particularly in the
personal computer and cellular phone markets, can ultimately result in sales to
a third party manufacturer.
In addition to our direct sales force, we use distributors in our four
business regions, and approximately 47 percent of our fiscal 2005 net sales were
generated through distributors. In line with industry practices, we generally
credit distributors for the effect of price reductions on their inventory of our
products and, under specific conditions, we repurchase products that we have
discontinued. Distributors do not have the right to return product except under
customary warranty provisions. The programs we offer to our distributors include
the following:
o Allowances involving pricing and volume. We refer to this as the "contract
sales debit" program;
o Discount for early payment. We refer to this as the "prompt payment" program;
and
o Allowance for inventory scrap. We refer to this as the "scrap allowance"
program.
Under the contract sales debit program, products are sold to distributors
at standard published prices that are contained in price books that are broadly
provided to our various distributors. Distributors are required to pay for this
product within our standard commercial terms. After the initial purchase of the
product, the distributor has the opportunity to request a price allowance for a
particular part number depending on the current market conditions for that
specific part as well as volume considerations. This request is made prior to
the distributor reselling the part. Once we have approved an allowance to the
distributor, the distributor proceeds with the resale of the product and credits
are issued to the distributor in accordance with the specific allowance that we
approved. Periodically, we issue new distributor price books. For those parts
for which the standard prices have been reduced, we provide an immediate credit
to distributors for inventory quantities they have on hand.
Under the prompt payment program, certain distributors are granted a fixed
percentage discount off the invoice price for payment earlier than our standard
commercial terms.
Under the scrap allowance program, certain distributors are given a
contractually defined allowance to cover the cost of any scrap they might incur.
The amount of the allowance is specifically agreed upon with each distributor.
Our regional facilities in the United States, Europe, Japan and Asia
Pacific handle local customer support. These customer support centers respond to
inquiries on product pricing and availability, pre-sale customer technical
support requests, order entry and scheduling, and post-sale support under our
product warranty provisions. The technical support provided to our customers
consists of marketing activities that occur prior to sale of product to our
customers and for which we have no contractual obligation and no fees are
charged. Technical support consists primarily of aiding customers in product
selection and answering questions about our products.
We augment our sales effort with application engineers based in the field.
These engineers are specialists in our product portfolio and work with customers
to identify and design our integrated circuits into customers' products and
applications. These engineers also help identify emerging markets for new
products and are supported by our design centers in the field or at
manufacturing sites.
We also provide web-based, online tools that allow customers and potential
customers to select our devices, create a design using our parts, and simulate
performance of that design.
Customers
The distributor Avnet accounted for 11 percent of our net sales in fiscal 2005
and 2004, and 10 percent of our net sales in fiscal 2003. In addition, the
distributor Arrow accounted for 10 percent of our net sales in fiscal 2005, 2004
and 2003. Although we do not have any other customers with sales greater than 10
percent, we do have several large OEM customers that manufacture and market
wireless handsets, among other electronic products. These customers typically
purchase a variety of different products from us. If any one of these customers
were to cease all purchases from us within a very short timeframe, such as
within one quarter, it could have a negative impact on our financial results for
that period. However, we have not had any such experience to date.
Backlog
In accordance with industry practice, we frequently revise semiconductor backlog
quantities and shipment schedules under outstanding purchase orders to reflect
changes in customer needs. We rarely formally enforce binding agreements for the
sale of specific quantities at specific prices that are contractually subject to
price or quantity revisions, consistent with industry practice. For these
reasons, we do not believe it is meaningful to disclose the amount of backlog at
any particular date.
Seasonality
We are affected by the seasonal trends in the semiconductor and related
industries. We typically experience sequentially lower sales in our first and
third fiscal quarters, primarily due to customer vacation and holiday schedules.
Sales usually reach a seasonal peak in our fourth fiscal quarter. Quarterly
seasonality in fiscal 2005, especially in the second quarter, was not consistent
with these trends as our business was affected by excess inventories in the
supply chain. As a result, sales in our second fiscal quarter were down from the
preceding first quarter and sales in our third fiscal quarter were flat with the
second quarter.
Manufacturing
The design of semiconductor and integrated circuit products is shaped by general
market needs and customer requirements. Following product design and
development, we generally produce integrated circuits in the following steps:
o Wafer Fabrication. Product designs are compiled and digitized by state of
the art design equipment and then transferred to silicon wafers in a series
of complex precision processes that include oxidation, lithography,
chemical etching, diffusion, deposition, implantation and metallization.
o Wafer Sort. The silicon wafers are tested and separated into individual
circuit devices.
o Product Assembly. Tiny wires are used to connect the electronic circuits on
the device to the stronger metal leads of the package in which the device
is encapsulated for protection.
o Final Test. The devices are subjected to a series of vigorous tests using
computerized circuit testers and, for certain applications, environmental
testers such as burn-in ovens, centrifuges, temperature cycle or moisture
resistance testers, salt atmosphere testers and thermal shock testers.
o Coating. Certain devices in the analog portfolio are designed to be used
without traditional packaging. In this case, the integrated circuit is
coated with a protective material and mounted directly onto the circuit
board.
Wafer fabrication is concentrated in two facilities in the United States
and one in Scotland. During fiscal 2005, nearly all product assembly and final
test operations were performed at our three facilities located in Malaysia,
Singapore and China. In July 2005, we announced that we plan to close our
assembly and test facility in Singapore and consolidate its production volume
into our other assembly and test facilities in Malaysia and China. The majority
of closure activities is expected to take place over the next nine to twelve
months. We use subcontractors to perform certain manufacturing functions in the
United States, Europe, Israel, Southeast Asia, China and Japan to address
capacity and other economic issues.
Our wafer manufacturing processes include Bipolar, Metal Oxide Silicon,
Complementary Metal Oxide Silicon and Bipolar Complementary Metal Oxide Silicon
technologies, including Silicon Germanium. Our efforts are heavily focused on
processes that support our analog portfolio of products, which address wireless
handsets, displays, computers and a broad variety of other electronic
applications. Bipolar processes primarily support our standard products. The
width of the individual transistors on a chip is measured in microns; one micron
equals one millionth of a meter. As products decrease in size and increase in
functionality, our wafer fabrication facilities must be able to manufacture
integrated circuits with sub-micron circuit pattern widths. This precision
fabrication carries over to assembly and test operations, where advanced
packaging technology and comprehensive testing are required to address the ever
increasing performance and complexity embedded in integrated circuits.
Raw Materials
Our manufacturing processes use certain key raw materials critical to our
products. These include silicon wafers, certain chemicals and gases, ceramic and
plastic packaging materials and various precious metals. We also rely on
subcontractors to supply finished or semi-finished products which we then market
through our sales channels. We obtain raw materials and semi-finished or
finished products from various sources, although the number of sources for any
particular material or product is relatively limited. We feel our current supply
of essential materials is adequate. However, shortages have occurred from time
to time and could occur again. Significant increases in demand, rapid product
mix changes or natural disasters could affect our ability to procure materials
or goods.
Research and Development
Our research and development efforts consist of research in metallurgical,
electro-mechanical and solid-state sciences, manufacturing process development
and product design. Research and development of most process and packaging
technologies are conducted by our process technology group. Specific product
design and development is generally done in our business units. Total R&D
expenses were $333.0 million for fiscal 2005, or 17 percent of net sales,
compared to $357.1 million for fiscal 2004, or 18 percent of net sales, and
$439.2 million for fiscal 2003, or 26 percent of net sales. These amounts
exclude an in-process R&D charge of $0.7 million related to the acquisition of
DigitalQuake in fiscal 2003. In-process R&D charges are included in our
consolidated statements of operations as a component of other operating expense,
net.
Total company spending through fiscal 2005 for new product development was
down 6 percent, and for process and support technology was down 8 percent from
fiscal 2004 primarily because of expenses we eliminated in the business areas we
have exited. Although research and development spending was down as a whole and
as a percentage of sales, research and development spending for our Analog
segment increased as we continue to invest in the development of our analog
capabilities to address a variety of markets. A significant portion of our
research and development is directed at power management technology.
Patents
We own numerous United States and non-U.S. patents and have many patent
applications pending. We consider the development of patents and the maintenance
of an active patent program advantageous to the conduct of our business.
However, we believe that continued success will depend more on engineering,
production, marketing, financial and managerial skills than on our patent
program. We license certain of our patents to other manufacturers and
participate in a number of cross licensing arrangements and agreements with
other parties. Each license agreement has unique terms and conditions, with
variations as to length of term, royalties payable, permitted uses and scope.
The majority of these agreements are cross-licenses in which we grant a broad
license to our intellectual property in exchange for receiving a similar
corresponding license from the other party, and none are exclusive. The amount
of income we have received from licensing agreements has varied in the past, and
we cannot precisely forecast the amount and timing of future income from
licensing agreements. On an overall basis, we believe that no single license
agreement is material to us, either in terms of royalty payments due or payable
or intellectual property rights granted or received.
Employees
At May 29, 2005, we employed approximately 8,500 people of whom approximately
3,600 were employed in the United States, 900 in Europe, 3,500 in Southeast
Asia, 400 in China and 100 in other areas. We believe that our future success
depends fundamentally on our ability to recruit and retain skilled technical and
professional personnel. Our employees in the United States are not covered by
collective bargaining agreements. We consider our employee relations worldwide
to be favorable.
Competition
Competition in the semiconductor industry is intense. With our focus on analog,
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 and markets.
We cannot assure you that we will be able to compete successfully in the
future against existing or new competitors or that our operating results will
not be adversely affected by increased price competition.
Environmental Regulations
To date, our compliance with foreign, federal, state and local laws or
regulations that have been enacted to regulate the environment has not had a
material adverse effect on our capital expenditures, earnings, competitive or
financial position. For more information, see Item 3, "Legal Proceedings" and
Note 13, "Commitments and Contingencies" to the Consolidated Financial
Statements in Item 8. However, we could be subject to fines, suspension of
production, alteration of our manufacturing processes or cessation of our
operations if we fail to comply with present or future statutes and regulations
governing the use, storage, handling, discharge or disposal of toxic, volatile
or otherwise hazardous chemicals used in our manufacturing processes.
ITEM 2. PROPERTIES
We conduct manufacturing, as well as process research and product development,
in our wafer fabrication facilities located in Arlington, Texas; South Portland,
Maine; and Greenock, Scotland. Wafer-fabrication capacity utilization during
fiscal 2005 averaged 72 percent, based on wafer starts, compared to 93 percent
for fiscal 2004. We exited fiscal 2005 with average wafer-fabrication capacity
utilization in the high 60 percent range during the fourth quarter. We expect
our captive manufacturing capacity together with our third-party subcontract
manufacturing arrangements to be adequate to supply our needs in the foreseeable
future.
Our assembly and test functions are performed primarily in Southeast Asia
and China. These facilities are located in Melaka, Malaysia and Toa Payoh,
Singapore, as well as our new assembly and test facility in Suzhou, China that
began operation in fiscal 2005. In July 2005, we announced that we plan to close
our assembly and test facility in Singapore and consolidate its production
volume into our other assembly and test facilities in Malaysia and China. The
majority of closure activities is expected to take place over the next nine to
twelve months.
Our principal administrative and research facilities are located in Santa
Clara, California. Our regional headquarters for Worldwide Marketing and Sales
are located in Santa Clara, California; Munich, Germany; Tokyo, Japan; and
Kowloon, Hong Kong. We maintain local sales offices and sales service centers in
various locations and countries throughout our four business regions. We also
operate small design facilities in various locations in the U.S., among which
include:
Arlington, Texas; Indianapolis, Indiana; Salem, New Hampshire;
Calabasas, California; Longmont, Colorado; San Diego, California;
Federal Way, Washington; Norcross, Georgia; South Portland, Maine;
Fort Collins, Colorado; Phoenix, Arizona; and
Grass Valley, California; Rochester, New York; Tucson, Arizona;
and at overseas locations including China, Estonia, Finland, Germany, India,
Japan, the Netherlands, Taiwan and the United Kingdom. We own our manufacturing
facilities and our corporate headquarters. In general, we lease most of our
design facilities and our sales and administrative offices. As we described in
the business section under Item 1, our manufacturing operations are centralized
and shared among our product lines and no individual facility is dedicated to a
specific operating segment. We believe our facilities are suitable and have
adequate capacity for our current needs. Further, we believe space and capacity
will be available if needed in the future.
ITEM 3. LEGAL PROCEEDINGS
We currently are a party to various legal proceedings, including those noted
below. While we believe that the ultimate outcome of these various proceedings,
individually and in the aggregate, will not have a material adverse effect on
our financial position or overall trends in results of operations, litigation is
always subject to inherent uncertainties, and unfavorable rulings could occur.
An unfavorable ruling could include money damages or an injunction prohibiting
us from selling one or more products. Were an unfavorable ruling to occur, there
exists the possibility of a material adverse impact on the net income of the
period in which the ruling occurs, and future periods.
Tax Matters
The IRS has completed its field examination 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. The issues giving rise to most of the proposed adjustments
relate to R&D credits, inventory and depreciation deductions. We are contesting
the adjustments through the IRS administrative process. 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 fiscal 2005, we resolved a tax audit at one of our
international locations, which resulted in a $4.2 million reduction in our
fiscal 2005 tax expense. We believe we have made adequate tax payments and/or
accrued adequate amounts such that the outcome of these audits will have no
material adverse effect on our financial statements.
Environmental Matters
We have been named to the National Priorities List (Superfund) for our Santa
Clara, California site and we have completed a remedial
investigation/feasibility study with the Regional Water Quality Control Board
(RWQCB), which is acting as agent for the EPA. We have agreed in principle with
the RWQCB on a site remediation plan, and we are conducting remediation and
cleanup efforts at the site. In addition to the Santa Clara site, we have been
designated from time to time as a potentially responsible party 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 the claims have been asserted against a number of other entities for the
same cost recovery or other relief as is sought from us. We have also retained
liability for environmental matters arising from our former operations of
Dynacraft, Inc. and the Fairchild business, but we are not currently involved in
any legal proceedings relating to those liabilities. 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 relating to the Santa Clara site remediation, excluding potential
reimbursements from insurance coverage, has not been material during each of the
last three fiscal years. We believe that the potential liability for
environmental matters, if any, in excess of amounts already accrued in our
financial statements will not have a material effect on our consolidated
financial position or results of operations.
Other
1. In November 2000, a derivative action was filed in the U.S. District Court in
Delaware against us, Fairchild Semiconductor International, Inc. and Sterling
Holding Company, LLC, by Mark Levy, a Fairchild stockholder. The action was
brought under Section 16(b) of the Securities Exchange Act of 1934 and the rules
issued under that Act by the Securities and Exchange Commission. The plaintiff
seeks disgorgement of alleged short-swing insider trading profits. We had
originally acquired Fairchild common and preferred stock in March 1997 at the
time we disposed of the Fairchild business. Prior to its initial public offering
in August 1999, Fairchild had amended its certificate of incorporation to
provide that all Fairchild preferred stock would convert automatically to common
stock upon completion of the initial public offering. As a result, our shares of
preferred stock converted to common stock in August 1999. Plaintiff has alleged
that our acquisition of common stock through the conversion constituted an
acquisition that should be "matched" against our sale in January 2000 of
Fairchild common stock for purposes of computing short-swing trading profits.
The action seeks to recover from us on behalf of Fairchild alleged recoverable
profits of approximately $14.1 million. In February 2002, the District Court
granted the motion to dismiss filed by us and our co-defendants and dismissed
the case, ruling that the conversion was done pursuant to a reclassification
which is exempt from the scope of Section 16(b). Plaintiff appealed the
dismissal of the case and upon appeal, the U.S. Court of Appeals for the Third
Circuit reversed the District Court's dismissal. Our petition for a panel
rehearing and/or rehearing en banc was denied by the Appeals Court in April
2003. Our petition to the U.S. Supreme Court for a writ of certiorari was denied
in October 2003. The case has completed discovery 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. In June 2005, plaintiff
filed a writ of mandamus with the U.S. Court of Appeals for the Third Circuit
seeking an order requiring the District Court to lift its stay. In July 2005,
the SEC informed the Appeals Court that the SEC was actively considering the
proposed rule amendment and in August 2005, announced the adoption of the
amendments which we believe exempt us from liability in this case. Nevertheless,
we intend to continue to contest the case through all available means.
2. In January 1999, a class action suit was filed against us and a number of our
suppliers in California Superior Court by James Harris and other former and
present employees claiming damages for personal injury. The complaint alleges
that cancer and/or reproductive harm were caused to employees as a result of
alleged exposure to toxic chemicals while working at our company. Plaintiffs
claim to have worked at sites in Santa Clara and/or in Greenock, Scotland. In
addition, one plaintiff claims to represent a class of children of company
employees who allegedly sustained developmental harm as a result of alleged in
utero exposure to toxic chemicals while their mothers worked at the company.
Although no specific amount of monetary damages is claimed, plaintiffs seek
damages on behalf of the classes for personal injuries, nervous shock, physical
and mental pain, fear of future illness, medical expenses and loss of earnings
and earnings capacity. The court has required the Scottish employees to seek
their remedies in Scottish courts. The court has also denied plaintiffs' motion
for certification of a medical monitoring class. Discovery in the case is
proceeding and we intend to defend this action vigorously.
3. In September 2002, iTech Group, Inc. brought suit against us in California
Superior Court alleging a number of contract and tort claims related to a
software license agreement we entered into earlier in 2002 and the proposed sale
of one of our business units. The case began trial in May 2005 and the jury in
the case found for iTech Group, Inc. on claims of breach of contract, promissory
fraud and unjust enrichment, awarding plaintiff compensatory damages of
approximately $234.0 thousand and punitive damages of $15.0 million. In post
trial motions heard by the court in July 2005, the court ordered the verdict of
punitive damages to be reduced to $3.0 million, subject to plaintiff iTech's
approval of the reduction. The court also found us liable for approximately
$60.0 thousand in attorneys' fees. Plaintiff has until the close of business on
August 31, 2005 to accept the reduction. At the time of the filing of this Form
10-K, we do not know what iTech will do. We intend to contest the case through
all available means, including appeal, if necessary.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT *
Fiscal Year 2005
Name Title, Fiscal Year 2005 Age
Kamal K. Aggarwal (1) Executive Vice President, Central 67
Technology and Manufacturing Group
Lewis Chew (2) Senior Vice President, Finance and Chief 42
Financial Officer
John M. Clark III (3) Senior Vice President, General Counsel 55
and Secretary
Brian L. Halla (4) Chairman of the Board, President and 58
Chief Executive Officer
Detlev J. Kunz (5) Senior Vice President and General Manager, 54
Worldwide Marketing and Sales
Donald Macleod (6) Executive Vice President and Chief 56
Operating Officer
Suneil V. Parulekar (7) Senior Vice President, Analog Group 57
Ulrich Seif (8) Senior Vice President and Chief 47
Information Officer
Edward J. Sweeney (9) Senior Vice President, Human Resources 48
* Except as noted, all information as of May 29, 2005, the last day of the
2005 fiscal year.
Business Experience During Last Five Years
(1) Mr. Aggarwal joined National in November 1996 as the Executive Vice
President of the Central Technology and Manufacturing Group. Prior to
joining National, Mr. Aggarwal held positions at LSI Logic as Vice
President, Worldwide Logistics and Customer Service and Vice President,
Assembly and Test. Mr. Aggarwal resigned from his position as Executive
Vice President of the Central Technology and Manufacturing Group effective
the beginning of the 2006 fiscal year and retired from National in July
2005.
(2) Mr. Chew joined National in May 1997 as Director of Internal Audit, and was
made Vice President and Controller in December 1998, Acting Chief Financial
Officer in April 2001 and Senior Vice President, Finance and Chief
Financial Officer in June 2001. Prior to joining National, Mr. Chew was a
partner at KPMG LLP.
(3) Mr. Clark joined National in May 1978. Prior to becoming Senior Vice
President, General Counsel and Secretary in April 1992, he held the
position of Vice President, Associate General Counsel and Assistant
Secretary.
(4) Mr. Halla joined National in May 1996 as Chairman of the Board, President
and Chief Executive Officer. Prior to that, Mr. Halla held positions at LSI
Logic as Executive Vice President, LSI Logic Products; Senior Vice
President and General Manager, Microprocessor/DSP Products Group; and Vice
President and General Manager, Microprocessor Products Group. Mr. Halla was
named Chairman of the Board and Chief Executive Officer effective the
beginning of the 2006 fiscal year.
(5) Mr. Kunz joined National in July 1981 and has held a number of marketing
positions since then. Prior to becoming Senior Vice President and General
Manager, Worldwide Marketing and Sales in July 2001, he held positions in
the company as the Regional Vice President and General Manager, Europe;
European Sales and Distribution Director; Director of European
Communications and Consumer Product Marketing; and Manager, European
Telecom Business Center. Mr. Kunz was named Senior Vice President, Power
Management Products Group effective the beginning of the 2006 fiscal year.
(6) Mr. Macleod joined National in February 1978 and was named Executive Vice
President and Chief Operating Officer in April 2001. Prior to April 2001,
he had been Executive Vice President, Finance and Chief Financial Officer
since June 1995 and previously held positions as Senior Vice President,
Finance and Chief Financial Officer; Vice President, Finance and Chief
Financial Officer; Vice President, Financial Projects; Vice President and
General Manager, Volume Products - Europe; and Director of Finance and
Management Services - Europe. Mr. Macleod was named President and Chief
Operating Officer effective the beginning of the 2006 fiscal year.
(7) Mr. Parulekar joined National in January 1989. Prior to becoming Senior
Vice President, Analog Products Group in April 2001, he held positions as
Vice President, Amplifier/Audio Products; Product Line Director,
Amplifier/Audio Products; Director of Marketing, Mediamatics; Director of
Strategy, Communications and Consumer Group; and Director of Marketing,
Power Management Group. Mr. Parulekar was named Senior Vice President,
Analog Signal Path Products Group effective the beginning of the 2006
fiscal year.
(8) Mr. Seif first joined National in January 1980 and had held a number of
positions in MIS related operations when he left the company in 1996 to
become the Chief Information Officer and Vice President of Information
Services at Cirrus Logic. He returned to National in May 1997 as the Chief
Information Officer and Vice President of Information Services and was made
Senior Vice President and Chief Information Officer in April 2001. Mr. Seif
was named Senior Vice President, Manufacturing Services and Chief
Information Officer effective the beginning of the 2006 fiscal year.
(9) Mr. Sweeney first joined National in February 1983 and had held a number of
human resources positions and was serving as Vice President, Human
Resources for the Central Technology and Manufacturing Group when he left
the company in 1998 to become the Vice President of Human Resources at
Candescent Technologies Corporation. He later became the Vice President of
Human Resources at Vitria Technology Inc. Mr. Sweeney rejoined National in
May 2002 as Senior Vice President, Human Resources.
Executive officers serve at the pleasure of our Board of Directors. There
is no family relationship among any of our directors and executive officers.
Effective the beginning of the 2006 fiscal year, Michael E. Noonen was
named Senior Vice President, Worldwide Marketing and Sales. Mr. Noonen, 42,
joined National in 2001 and had held positions as Vice President, Communications
and Computing Interface Group and Vice President, Wired Communications Division
prior to his new position. Prior to joining National, Mr. Noonen had served as
Director of New Markets and Technologies at Cisco Systems, Inc. and had held
sales management positions at 8x8, Inc. and the NCR Microelectronics division of
NCR Corporation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
See information appearing in Note 8, Debt; Note 10, Shareholders' Equity; and
Note 16, Financial Information by Quarter (Unaudited) in the Notes to the
Consolidated Financial Statements included in Item 8. Our common stock is traded
on the New York Stock Exchange and the Pacific Exchange. During fiscal 2005, we
paid total cash dividends of $14.1 million on our common stock, consisting of
dividends of $0.02 per share of common stock paid in each of the last two
quarters of the fiscal year. Prior to January 2005, we did not pay any dividends
on our common stock. Market price range data are based on the New York Stock
Exchange Composite Tape. Market price per share at the close of business on July
8, 2005 was $23.61. At July 8, 2005, the number of record holders of our common
stock was 6,853. For information on our equity compensation plans, see Item 12
of this Form 10-K.
During the past three fiscal years, we have not sold any unregistered
securities.
Issuer Purchases of Equity Securities
The following table summarizes purchases we made of our common stock during the
fourth quarter of fiscal 2005:
Total Number of Maximum Dollar
Shares Purchased as Value of Shares
Part of Publicly that May Yet Be
Total Number of Average Price Paid Announced Plans or Purchased Under the
Period Shares Purchased(1) per Share Programs Plans or Programs(2)
-------------------------- ------------------------ ------------------------ ------------------------ ----------------------
Month # 1 - - - $402 million
February 28, 2005 -
March 27, 2005
Month # 2
March 28, 2005 -
April 27, 2005
3,075,000 $19.83 3,075,000 $341 million
Month # 3
April 28, 2005 -
May 29, 2005 1,886,443 $19.56 1,886,443 $304 million
------------------------ ------------------------
4,961,443 4,961,443
Total
======================== ========================
(1) During the quarter ended May 29, 2005, we also reacquired 20,747 shares
through the withholding of shares to pay employee tax obligations upon the
vesting of restricted stock. Additionally, during the quarter ended May 29,
2005, 25,886 shares were purchased by the rabbi trust utilized by our Deferred
Compensation Plan which permits participants to "invest" in our stock in
accordance with the instructions of plan participants.
(2) Purchases during the fourth fiscal quarter were made under programs
announced March 11, 2004 and March 10, 2005. Of the total shares purchased,
1,261,443 shares were purchased through a privately negotiated transaction with
a major financial institution. The remainder of the shares was purchased in the
open market. The program announced March 11, 2004 was completed in the fourth
fiscal quarter. The total dollar amount approved for the new repurchase program
announced March 10, 2005 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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from audited
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 and the consolidated financial statements
and related notes thereto in Item 8.
FIVE-YEAR SELECTED FINANCIAL DATA
Years Ended
In Millions, Except Per Share Amounts and May 29, May 30, May 25, May 26, May 27,
Employee Figures 2005 2004 2003 2002 2001
----------- ----------- ------------ ------------- -----------
OPERATING RESULTS
Net sales $1,913.1 $1,983.1 $1,672.5 $1,494.8 $2,112.6
Operating costs and expenses 1,513.6 1,652.9 1,690.9 1,641.7 1,881.5
----------- ----------- ------------ ------------- -----------
Operating income (loss) 399.5 330.2 (18.4) (146.9) 231.1
Interest income, net 15.9 10.4 14.8 22.0 52.5
Other non-operating (expense) income, net (5.5) (6.9) (19.7) 1.5 23.5
----------- ----------- ------------ ------------- -----------
Income (loss) before income taxes and cumulative effect of
a change in accounting principle 409.9 333.7 (23.3) (123.4) 307.1
Income tax (benefit) expense (5.4) 49.0 10.0 (1.5) 61.4
----------- ----------- ------------ ------------- -----------
Income (loss) before cumulative effect of a change in
accounting principle $ 415.3 $ 284.7 $ (33.3) $ (121.9) $ 245.7
=========== =========== ============ ============= ===========
Net income (loss) $ 415.3 $ 282.8 $ (33.3) $ (121.9) $ 245.7
=========== =========== ============ ============= ===========
Earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle:
Basic $ 1.17 $ 0.79 $(0.09) $(0.34) $ 0.70
=========== =========== ============ ============= ===========
Diluted $ 1.11 $ 0.73 $(0.09) $(0.34) $ 0.65
=========== =========== ============ ============= ===========
Net income (loss):
Basic $ 1.17 $ 0.78 $(0.09) $(0.34) $ 0.70
=========== =========== ============ ============= ===========
Diluted $ 1.11 $ 0.73 $(0.09) $(0.34) $ 0.65
=========== =========== ============ ============= ===========
Weighted-average common and potential common
shares outstanding:
Basic 353.9 361.0 363.6 355.0 351.8
=========== =========== ============ ============= ===========
Diluted 373.9 388.5 363.6 355.0 376.8
=========== =========== ============ ============= ===========
FINANCIAL POSITION AT YEAR-END
Working capital $1,228.5 $ 784.5 $ 872.0 $ 804.3 $ 803.2
Total assets $2,504.2 $2,280.4 $2,248.4 $2,290.7 $2,362.6
Long-term debt $ 23.0 $ - $ 19.9 $ 20.4 $ 26.2
Total debt $ 23.0 $ - $ 22.2 $ 25.9 $ 55.6
Shareholders' equity $2,054.1 $1,680.5 $1,706.0 $1,781.1 $1,767.9
-------------------------------------------------------------- ----------- ----------- ------------ ------------ -----------
OTHER DATA
Research and development $ 333.0 $ 357.1 $ 439.2 $ 441.9 $ 435.6
Capital additions $ 96.6 $ 215.3 $ 154.9 $ 138.0 $ 239.5
Number of employees (in thousands) 8.5 9.7 9.8 10.1 10.3
-------------------------------------------------------------- ----------- ----------- ------------ ------------ -----------
During fiscal 2005, we paid cash dividends of $14.1 million on our common stock.
We did not pay cash dividends on our common stock in any of the previous years
presented above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements relate to, among other things, sales,
gross margins, operating expenses, capital expenditures, R&D efforts and asset
dispositions 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 the economy
generally and in various markets such as wireless, PC and displays; 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 acquisitions and/or dispositions and achieving the desired
improvements associated with those acquisitions and/or dispositions; 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.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto:
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:
a) Revenue Recognition
We recognize revenue from the sale of semiconductor products upon shipment,
provided we have persuasive evidence of an arrangement (typically in the
form of a purchase order), 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 47 percent of our semiconductor
product sales were made through distributors in fiscal 2005. We have
agreements with our distributors that cover various programs, including
pricing adjustments based on resale pricing and volume, price protection
for inventory, discounts for prompt payment and scrap allowances. 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 by geography and product family,
inventory levels in the distribution channel, current economic trends, and
other related factors. Actual distributor claims 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 are recognized as the services are provided or as
milestones are achieved, depending on the terms of the arrangement. These
revenues are included in net sales and are not a material component of our
total net sales.
Certain intellectual property income is classified as revenue if it
meets specified criteria established by company policy that defines whether
it is considered a source of income from our primary operations. These
revenues are included in net sales and are not a material component of our
total net sales. All other intellectual property income that does not meet
such criteria is not considered a source of income from primary operations
and is therefore classified as a component of other operating income, net,
in the consolidated statement of operations. Intellectual property income
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.
b) 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. Reductions in carrying value are deemed to establish a
new cost basis. Therefore, inventory is not written up if estimates of
market value subsequently improve. 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.
c) 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 or
economic conditions
o Current period operating losses or negative cash flow combined with a
history of similar losses or a forecast that indicates continuing
losses associated with the use of an asset
Our impairment evaluation of long-lived assets includes an analysis of
estimated future undiscounted net cash flows expected to be generated by
the assets over their remaining estimated useful lives. If the estimated
future undiscounted net cash flows are insufficient to recover the carrying
value of the assets over the remaining estimated useful lives, we 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. 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. 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.
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. Our reporting units in fiscal
2005 with goodwill include our wireless, displays, power management,
non-audio amplifier and communications interface business units, which are
operating segments within our Analog reportable segment, and our device
connectivity business unit, which is 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.
d) 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 historical taxable
income and projections of future taxable income over the periods that the
deferred tax assets are deductible. 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; such adjustment could have a material
impact on the tax expense for the fiscal year.
We account for income tax contingencies in accordance with Statement
of Financial Accounting Standards No. 5, "Accounting for Contingencies."
The calculation of tax liabilities involves significant judgment in
estimating the impact of uncertainties in the application of complex tax
laws. Resolution of these uncertainties in a manner inconsistent with our
expectations could have a material impact on our results of operations.
o Overview
Throughout fiscal 2005, we have continued to pursue our strategy of focusing 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. As a part of this focus, we periodically identify
opportunities to divest or reduce involvement in product areas that are not in
line with our business objectives. During fiscal 2005, we completed the sale of
our imaging business in September 2004 and the PC Super I/O business in May
2005. We entered into an agreement to sell our cordless business in May 2005,
and that sale was closed in June 2005. In addition, following our announcement
in March 2005 to seek a buyer for our assembly and test facility in Singapore,
we announced in July 2005 that we now plan to close this facility and
consolidate its production volume into our other assembly and test facilities in
Malaysia and China. The majority of closure activities is expected to take place
over the next nine to twelve months.
We achieved higher gross margins and profit in fiscal 2005 over the last
fiscal year, despite some mid-year market weakness. This improved performance
reflects our shift toward a richer analog product mix, combined with ongoing
cost controls. In January 2005, we initiated a program to reduce expenses and
streamline manufacturing operations as we saw wafer-fabrication utilization
rates decline in the second quarter of fiscal 2005 to the mid-60s due to
significant inventory reductions in the distribution channel and lower demand
than expected in some markets. As we enter fiscal 2006, we are continuing our
focus on gross margin relative to sales with research and development
investments 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
consistently high return on invested 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 repurchases in fiscal 2005 under the $400 million
stock repurchase program originally announced in March 2004 and another $400
million stock repurchase program that was approved by our Board of Directors in
March 2005. Under these programs we repurchased a total of 20.3 million shares
of our common stock for $353.5 million during fiscal 2005. Of these shares, 17.6
million shares were repurchased in the open market for $298.5 million. The other
2.7 million shares were repurchased through privately negotiated transactions
with a major financial institution and include the repurchase of 1.5 million
shares for $30.0 million in June 2004 upon the settlement of an advance
repurchase contract entered into in April 2004. These stock repurchase
activities comprise one element of our overall effort to consistently generate a
high return on invested capital, which we believe improves shareholder value. As
of May 29, 2005, we had $304.0 million remaining for future common stock
repurchases under approved programs. We also paid cash dividends of $14.1
million during fiscal 2005. In June 2005, our Board of Directors declared a cash
dividend of $0.02 per outstanding share of common stock. The dividend totaling
$7.0 million was paid on July 11, 2005 to shareholders of record at the close of
business on June 20, 2005.
The following table and discussion provide an overview of our operating
results for fiscal years 2005, 2004 and 2003:
--------------- ------------ ------------- ------------ --------------
Years Ended: May 29, 2005 May 30, May 25, 2003
(In Millions) % Change 2004 % Change
--------------- ------------ ------------- ------------ --------------
Net sales $ 1,913.1 (4%) $ 1,983.1 19% $1,672.5
Operating income (loss) $ 399.5 $ 330.2 $ (18.4)
As a % of net sales 21% 17% (1%)
Net income (loss) $ 415.3 $ 282.8 $ (33.3)
As a % of net sales 22% 14% (2%)
Net sales in fiscal 2005 were 4 percent lower than net sales in fiscal
2004. Although sales in the first half of fiscal 2005 were higher compared to
sales in the first half of fiscal 2004, we experienced sequential quarterly
sales declines in the first two quarters of the fiscal year due to excess
inventories in the supply chain along with slower end-market growth rates
compared to the last half of fiscal 2004. Consequently, sales were much lower in
the second half of fiscal 2005 compared to sales in the second half of fiscal
2004. For the company overall, our unit shipments were down 9 percent in fiscal
2005 from unit shipments in fiscal 2004. However, our blended-average selling
prices were up in fiscal 2005 by 6 percent over fiscal 2004. These
blended-average selling prices are affected by product mix as well as changes in
product prices. Our improvement in net income was driven by these higher
blended-average selling prices, higher gross margin and lower operating
expenses. Foreign currency exchange rate fluctuations had a slight favorable
impact on our foreign currency-denominated sales in fiscal 2005.
Net income for fiscal 2005 includes an $86.1 million impairment loss on
goodwill of the wireless reporting unit as a result of our annual assessment of
goodwill impairment and a $23.9 million charge for cost reduction actions taken
during the year (See Note 3 to the Consolidated Financial Statements). Net
income for fiscal 2005 also includes an $8.8 million gain from the sale of
assets associated with our imaging business in September 2004 and a $51.1
million gain from the sale of assets associated with our PC Super I/O business
in May 2005 (See Note 3 to the Consolidated Financial Statements). Other
operating income, net for fiscal 2005 includes a credit of $10.0 million related
to the ZF Micro Solutions, Inc. litigation that was settled in December 2004
(See Note 13 to the Consolidated Financial Statements); a net reimbursement of
$0.4 million for litigation costs; a refund of $7.4 million from the California
Manufacturer's Investment Credit; and net intellectual property income of $5.2
million. These credits were partially offset by a charge of $3.3 million related
to the iTech litigation and a $1.7 million charge related to settlement of an
intellectual property matter. Fiscal 2005 net income also includes a tax benefit
of $5.4 million arising from income tax expense of $160.8 million offset by a
benefit from the change in the beginning of the year valuation allowance of
$166.2 million.
Net sales were greater in fiscal 2004 than in fiscal 2003. The sales
increases were attributable to both higher industry demand and our market share
gains in key standard linear markets, particularly for power management
products. Unit shipments for the company were up 22 percent in fiscal 2004 from
unit shipments in fiscal 2003, while blended-average selling prices were flat.
The improvement in net income in fiscal 2004 over fiscal 2003 was driven by
higher gross margin on higher sales, as well as lower operating expenses.
Net income for fiscal 2004 included a net charge of $19.6 million for cost
reduction actions and the exit and sale of the information appliance business,
consisting primarily of the GeodeTM family of integrated processor products,
completed in August 2003 (See Note 3 to the Consolidated Financial Statements).
Other operating expense, net for fiscal 2004 included charges of $30.0 million
arising from a lawsuit brought against us by ZF Micro Solutions, Inc. (See Note
13 to the Consolidated Financial Statements) and $3.1 million for the settlement
of certain patent infringement claims, which were partially offset by $11.1
million of net intellectual property income. Fiscal 2004 net income also
included a $1.9 million charge (including a tax effect of $0.2 million) for the
cumulative effect of a change in accounting principle as a result of the
adoption of SFAS No. 143, Accounting for Asset Retirement Obligations" (See
Note 7 to the Consolidated Financial Statements).
o Net Sales
------------- ------------ ------------- ------------ --------------
Years Ended: May 29, May 30, May 25, 2003
(In Millions) 2005 % Change 2004 % Change
------------- ------------ ------------- ------------ --------------
$1,668.5 (1%) $1,680.3 23% $ 1,365.9
Analog segment
As a % of net sales 87% 85% 82%
All others 244.6 (19%) 302.8 (1%) 306.6
As a % of net sales 13% 15% 18%
------------- ------------- --------------
Total net sales $1,913.1 $1,983.1 $ 1,672.5
============= ============= ==============
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.
In fiscal 2005, the Analog segment represented 87 percent of our total
sales compared to 85 percent in fiscal 2004. Analog segment sales in the first
half of fiscal 2005 grew 13 percent over sales in the first half of fiscal 2004.
However, efforts by distributors and customers to reduce inventories combined
with lower than expected demand patterns as we exited the summer quarter caused
sales for the second half of fiscal 2005 to decline 12 percent compared to sales
in the second half of fiscal 2004. Although distributors continued to reduce
inventories during the second half of fiscal 2005, we have seen these activities
at distributors stabilize in the most recently completed fourth quarter as our
sales grew sequentially over the previous third quarter. Our analog unit
shipments were down 9 percent in fiscal 2005 from fiscal 2004, but
blended-average analog selling prices were up by 9 percent in fiscal 2005 over
fiscal 2004, reflecting both a mix of higher value products as well as some
actual price increases.
Within the Analog segment, sales from the power management area continued
to grow for fiscal 2005 with a 9 percent increase over fiscal 2004. This was
driven mainly by increased activity in wireless handsets. Sales from both the
audio amplifier and data conversion business units increased by 1 percent in
fiscal 2005 over fiscal 2004. However, sales from the application-specific
wireless (including radio frequency building blocks) and non-audio amplifier
business units declined in fiscal 2005 by 11 percent and 7 percent,
respectively, from fiscal 2004. The decrease in radio frequency chip sales was
due to a trend in cellular handsets in which the radio function is migrating
from discrete building-block solutions to more highly-integrated chips. Phones
that utilize integrated radios typically do not need discrete PLL building block
chips, such as those sold by National.
For fiscal 2005, sales decreased in all geographic regions compared to
fiscal 2004. The decreases were 10 percent in the Americas and 3 percent in the
Asia Pacific region while both Europe and Japan each decreased 1 percent. Sales
in fiscal 2005 as a percentage of total sales remained flat at 20 percent in
Europe and 13 percent in Japan, while the Asia Pacific region increased to 47
percent and the Americas decreased to 20 percent. Foreign currency-denominated
sales in fiscal 2005 were favorably affected by foreign currency exchange rate
fluctuations as the Japanese yen, pound sterling and euro all strengthened
against the dollar. However, the impact was minimal since only 20 percent of our
total sales was denominated in a foreign currency.
Beginning in fiscal 2005, product families within the standard analog
business unit, which was previously a separate business unit of the Analog
segment, were reassigned to the other business units within the Analog segment.
The corresponding sales information presented below for fiscal 2004 compared to
fiscal 2003 has been reclassified to reflect this change.
Our sales growth in fiscal 2004 was essentially all due to the Analog
segment. Growth in Analog segment sales was driven by higher consumer demand for
products such as wireless phones and notebook computers, and also because of a
general trend towards increased analog semiconductor content in a variety of
electronic products. Unit volume was up 22 percent over the prior year and
blended-average selling prices for fiscal 2004 as a whole grew slightly at 1
percent over fiscal 2003. Blended-average selling prices were higher in the
second half of fiscal 2004, reflecting both a richer mix of products as well as
actual price improvements, as we actively strived to increase our sales of
high-value, high-performance analog products.
Within the Analog segment, sales of power management products led the
growth in sales with an increase of 45 percent from sales in fiscal 2003 where
we continued to grow at a faster rate than the overall market. Also contributing
to the growth in fiscal 2004 were sales of audio amplifier products with an
increase of 30 percent and sales of data conversion and application-specific
wireless (including radio frequency building blocks) products each with
increases of 26 percent over sales in fiscal 2003.
For fiscal 2004, sales increased in all geographic regions compared to
fiscal 2003. The increases were 35 percent in Japan, 21 percent in the Asia
Pacific region, 16 percent in Europe and 8 percent in the Americas. As a
percentage of total sales, the Asia Pacific region remained at 46 percent and
Europe remained at 20 percent, while Japan increased to 13 percent of total
sales and the Americas decreased to 21 percent. Foreign currency-denominated
sales in fiscal 2004 were favorably affected by foreign currency exchange rate
fluctuations as the Japanese yen, pound sterling and euro all strengthened
against the dollar, but the impact on overall fiscal 2004 sales was minimal
since only a quarter of our total sales was denominated in foreign currency.
o Gross Margin
-------------- ------------- ------------- ------------ --------------
Years Ended: May 29, 2005 May 30, May 25, 2003
(In Millions) % Change 2004 % Change
-------------- ------------- ------------- ------------ --------------
Net sales $ 1,913.1 (4%) $ 1,983.1 19% $ 1,672.5
Cost of sales 892.3 (8%) 970.8 3% 946.8
-------------- ------------- --------------
Gross margin $ 1,020.8 $ 1,012.3 $ 725.7
============== ============= ==============
As a % of net sales 53% 51% 43%
The increase in gross margin percentage in 2005 compared to 2004 was mainly
driven by improvements in product mix and blended-average selling prices. Our
wafer-fabrication capacity utilization (based on wafer starts) was actually down
year over year at 72 percent in fiscal 2005 compared to 93 percent in fiscal
2004. Because of this lower utilization, we implemented mandatory factory
shutdowns and initiated an action in January 2005 to eliminate 421 manufacturing
personnel positions. 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 87 percent of total
net sales in fiscal 2005 from 85 percent of total net sales in fiscal 2004 also
had a positive impact on gross margin, despite lower factory utilization.
The increase in gross margin in fiscal 2004 over fiscal 2003 was driven by
a combination of higher factory utilization and improvement in product mix.
Wafer-fabrication capacity utilization during fiscal 2004 was 93 percent, based
on wafer starts, compared to 71 percent for fiscal 2003. The product mix
improvements discussed above, combined with higher factory utilization and an
increase in Analog segment sales to 85 percent of total sales in fiscal 2004 (as
compared to 82 percent in fiscal 2003) all contributed to the gross margin
increase in fiscal 2004. As noted above, our analog products generally have
higher margins than non-analog products.
o Research and Development
--------------- ------------- ------------- ------------ --------------
Years Ended: May 29, 2005 May 30, May 25, 2003
(In Millions) % Change 2004 % Change
--------------- ------------- ------------- ------------ --------------
Research and
development $ 333.0 (7%) $ 357.1 (19%) $ 439.2
As a % of net sales 17% 18% 26%
Research and development expenses shown in the table above exclude an in-process
R&D charge of $0.7 million in fiscal 2003.
Lower research and development expenses in fiscal 2005 compared to fiscal
2004 reflect full-year cost savings from 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 for fiscal 2005 also reflect reductions due to the sale
of the imaging and PC Super I/O businesses that occurred during the fiscal year.
We are continuing to concentrate our ongoing research and development spending
on analog products and underlying analog capabilities. Total company spending in
fiscal 2005 compared to fiscal 2004 was down 6 percent for new product
development and 8 percent for process and support technology. Although research
and development spending for the year 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 continued 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.
Lower research and development expenses in fiscal 2004 from fiscal 2003
reflect the full-year impact of actions we initially launched in February 2003
to reduce our research and development expenses as a percentage of sales. These
actions included exits of businesses, headcount reductions and restructuring of
a licensing agreement with Taiwan Semiconductor Manufacturing Company. Total
company spending through fiscal 2004 for new product development was down 15
percent. Fiscal 2004 spending on process and support technology was down 33
percent from fiscal 2003 primarily because the business areas we exited had been
incurring proportionally higher process and support technology related
expenditures.
o Selling, General and Administrative
-------------- ------------- ------------- ------------ --------------
Years Ended: May 29, 2005 May 30, May 25, 2003
(In Millions) % Change 2004 % Change
-------------- ------------- ------------- ------------ --------------
Selling, general and
administrative $ 256.2 (9%) $ 283.4 6% $ 266.7
As a % of net sales 13% 14% 16%
The reductions in selling, general and administrative expenses for fiscal 2005
compared to fiscal 2004 reflect our continuing efforts to manage our cost
structure more efficiently. In addition, we implemented discretionary cost
control programs during fiscal 2005 in response to the industry-wide sales
declines we saw in the early part of the fiscal year that was driven by excess
inventories in the supply chain. Although to a much lesser extent than R&D
expenses, SG&A expenses for fiscal 2005 also reflect some reductions due to the
sale of the imaging and PC Super I/O businesses that occurred during the fiscal
year. The SG&A expenses in fiscal 2005 are down from fiscal 2004 not only in
actual dollars, but also as a percent of sales.
The increases in selling, general and administrative expenses for fiscal
2004 over fiscal 2003 were consistent with increased business levels and were
mainly due to higher costs in fiscal 2004 related to employee compensation and
benefits, as well as incremental costs for outside services. Although sales
levels increased substantially in fiscal 2004, we focused on controlling our
cost structure in a way that allowed sales to rise faster than expenses. As a
result, SG&A expenses as a percent of sales declined from 16 percent in fiscal
2003 to 14 percent in fiscal 2004.
o Cost Reduction Programs and Restructuring of Operations
Our fiscal 2005 results include net charges of $23.9 million for cost reduction
and restructuring charges related to several actions taken during fiscal 2005.
These actions include workforce reductions connected with the divestiture of the
imaging business, the streamlining of manufacturing to address the lower
utilization of manufacturing facilities experienced during the fiscal year and a
reorganization of our business operations effective at the beginning of fiscal
2006. See Note 3 to the Consolidated Financial Statements for a more complete
discussion of these actions and related charges, as well as a discussion of
fiscal 2005 activity related to previously announced actions.
During fiscal 2004, we substantially completed all cost reduction actions
related to our strategic profit-improvement actions initially launched in
February 2003. These actions included the exit and sale of the information
appliance business, and other actions aimed at improving profitability and
return on invested capital. Net charges in fiscal 2004 for cost reduction
programs and restructuring of operations were $19.6 million.
o Interest Income and Interest Expense
------------- -------------- -------------
Years Ended: May 29, May 30, 2004 May 25,
(In Millions) 2005 2003
------------- -------------- -------------
Interest income $ 17.4 $ 11.6 $ 16.3
Interest expense (1.5) (1.2) (1.5)
------------- -------------- -------------
Interest income, net $ 15.9 $ 10.4 $ 14.8
============= ============== =============
The increase in interest income, net, for fiscal 2005 compared to fiscal 2004
was due to higher-average cash balances and higher interest rates. Interest
expense in fiscal 2005 also includes the accretion of interest associated with
software license obligations.
The decrease in interest income, net for fiscal 2004 compared to fiscal
2003 was due to lower average interest rates on lower average cash balances in
fiscal 2004. Although we generated positive cash flow from operations, our cash
balances in fiscal 2004 were lower mainly as a result of the repurchase of 32.4
million shares of our common stock for $542.5 million. Offsetting interest
expense was lower during fiscal 2004 compared to fiscal 2003 as we reduced our
outstanding debt.
o Other Non-operating Expense, Net
------------- -------------- -------------
Years Ended: May 29, May 30, 2004 May 25,
(In Millions) 2005 2003
------------- -------------- -------------
Share in net losses of equity-method
investments $ (5.7) $ (14.1) $ (15.9)
Net gain (loss) on marketable and other
investments, net 0.7 7.0 (3.9)
Other (0.5) 0.2 0.1
------------- -------------- -------------
Total other expense, net $ (5.5) $ (6.9) $ (19.7)
============= ============== =============
The components of other non-operating expense, net are primarily derived from
activities related to our investments. Net gain on investments in fiscal 2005
relates to the sale of shares in a nonpublicly traded company. The share of net
losses in equity-method investments was lower in fiscal 2005 than in fiscal 2004
and 2003 because we now hold fewer equity-method investments in nonpublic
companies. Net gain on investments for fiscal 2004 was primarily from the sale
of shares in two nonpublicly traded companies upon their acquisitions by third
parties. Net loss on investments in fiscal 2003 was the result of impairment
losses for other-than-temporary declines in fair value of nonmarketable
investments that more than offset gains from the sale of marketable investments.
o Income Tax Expense
We recorded an income tax benefit of $5.4 million on income before taxes in
fiscal 2005. This compares to income tax expense of $49.0 million in fiscal 2004
and income tax expense of $10.0 million in fiscal 2003. While the income before
taxes was higher in fiscal 2005 than it was in fiscal 2004 and 2003, an income
tax benefit arose primarily due to the recognition of additional tax benefits
that had not been previously recognized.
The annual effective tax rate for fiscal 2005 was approximately a 1.3
percent benefit. This included fiscal 2005 tax expense of $160.8 million, which
consisted of U.S. and non-U.S. income taxes, offset by a benefit from the change
in the beginning of the year valuation allowance of $166.2 million. The increase
in deferred tax assets during fiscal 2005 of $233.5 million is from a $164.4
million release of a valuation allowance to equity and benefits of $65.1 million
to continuing operations and $4.0 million to other comprehensive income. The
deferred tax benefit of $65.1 million to continuing operations arises from a
$166.2 million change in the beginning of the year valuation allowance and
utilization of $101.1 million of deferred tax assets during fiscal 2005
excluding tax effect on other comprehensive income items.
Fiscal 2004 tax expense consisted primarily of U.S. income tax, net of
benefits related to prior period net operating losses and tax credits, and
non-U.S. income taxes. The fiscal 2003 tax expense represented non-U.S. income
taxes on international income.
Our ability to realize the net deferred tax assets ($319.1 million at May
29, 2005) is primarily dependent on our ability to generate future U.S. taxable
income. We believe it is more likely than not that we will generate sufficient
taxable income to utilize these tax assets. Because our ability to utilize these
tax assets is dependent on future results, it is possible that we will be unable
to ultimately realize some portion or all of the benefits of recognized tax
assets. This could result in additions to the deferred tax asset valuation
allowance and an increase to tax expense.
o Foreign Operations
Our foreign operations include manufacturing facilities in the Asia Pacific
region and Europe and sales offices throughout the Asia Pacific region, Europe
and Japan. A portion of the transactions at these facilities is denominated in
local currency, which exposes us to risk from exchange rate fluctuations. Our
exposure from expenses at foreign manufacturing facilities during fiscal 2005
was concentrated in U.K. pound sterling, Singapore dollar, Malaysian ringgit and
Chinese RMB. Where practical, we hedge net non-U.S. dollar denominated asset and
liability positions using forward exchange and purchased option contracts. Our
exposure from foreign currency denominated revenue is limited to the Japanese
yen, pound sterling and the euro. We hedge up to 100 percent of the notional
value of outstanding customer orders denominated in foreign currency, using
forward exchange contracts and over-the-counter foreign currency options. A
portion of anticipated foreign sales commitments is at times hedged using
purchased option contracts that have an original maturity of one year or less.
At some of our international locations, we maintain defined benefit pension
plans that are operated in accordance with local statutes and practices. As
required by the pension accounting standards, we record an adjustment for
minimum pension liability to adjust the liability related to one of these plans
to equal the amount of the unfunded accumulated benefit obligation. For fiscal
2005, the adjustment was $13.5 million and a corresponding amount, net of a $4.0
million tax effect, is reflected in the consolidated financial statements as a
component of accumulated other comprehensive loss. The unfunded benefit
obligation decreased from $86.4 million in fiscal 2004 to $83.8 million in
fiscal 2005 primarily because of contributions paid to the plans totaling $26.5
million. As we have done in the past, we plan to continue to fund the plan in
the future to adequately meet the minimum funding requirements under local
statutes.
o Financial Market Risks
We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates. To mitigate these risks, we use derivative
financial instruments. We do not use derivative financial instruments for
speculative or trading purposes.
Due to the short-term nature of the major portion of our cash portfolio, a
series of severe cuts in interest rates does have a significant impact on the
amount of interest income we earn from our cash portfolio. An increase in
interest rates benefits us due to our large net cash position. An increase in
interest rates would not necessarily immediately increase interest expense due
to the fixed rates of our existing debt obligations.
A substantial majority of our revenue and capital spending is transacted in
U.S. dollars. However, we do enter into transactions in other currencies,
primarily the Japanese yen, pound sterling, euro and certain other Asian
currencies. To protect against reductions in value and the volatility of future
cash flows caused by changes in foreign exchange rates, we have established
programs to hedge our exposure to these changes in foreign currency exchange
rates. Our hedging programs reduce, but do not always eliminate, the impact of
foreign currency exchange rate movements. An adverse change (defined as 15
percent in all currencies) in exchange rates would result in a decline in income
before taxes of less than $5 million. This calculation assumes that each
exchange rate would change in the same direction relative to the U.S. dollar. In
addition to the direct effects of changes in exchange rates, these changes
typically affect the volume of sales or the foreign currency sales price as
competitors' products become more or less attractive. Our sensitivity analysis
of the effects of changes in foreign currency exchange rates does not factor in
a potential change in sales levels or local currency selling prices.
All of the potential changes noted above are based on sensitivity analyses
performed on our balances as of May 29, 2005.
o Liquidity and Capital Resources
------------ ---------- ----------- ---------- -----------
Years Ended: May 29, May 30, May 25,
(In Millions) 2005 2004 2003
------------ ---------- ----------- ---------- -----------
Net cash provided by
operating activities $ 528.5 $ 477.7 $ 221.6
Net cash used by
investing activities (69.9) (252.2) (123.4)
Net cash (used by) provided
by financing activities (234.4) (384.8) 22.7
------------ ----------- -----------
$ 224.2 $(159.3) $ 120.9
============ =========== ===========
The primary factors contributing to the changes in cash and cash equivalents in
fiscal 2005, 2004 and 2003 are described below:
The improvement in net income has been the primary contributor to the
increase in cash generated from operating activities in both fiscal 2005 and
fiscal 2004. In 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
fiscal 2005 comes from activity under distributor incentive programs and lower
receivables associated with reduced sales levels. We also generated cash from
operating activities in 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
fiscal 2003, we generated cash from operating activities because the impact from
the net loss, adjusted for noncash items (primarily depreciation and
amortization), was greater than the negative impact from changes in working
capital components.
Major uses of cash for investing activities during fiscal 2005 included
investment in property, plant and equipment of $96.6 million, primarily for the
purchase of machinery and equipment, purchases of available for sale securities
of $16.8 million, and payments for security deposits on leased equipment of
$21.8 million. These were partially offset by proceeds of $71.5 million from the
sale of assets associated with the imaging and PC Super I/O businesses. Major
uses of cash for investing activities during fiscal 2004 included investment in
property, plant and equipment of $215.3 million, primarily for the purchase of
machinery and equipment, net purchases of available-for-sale securities of $27.7
million and payments for security deposits on leased equipment of $20.1 million.
Major uses of cash for investing activities for fiscal 2003 included investment
in property, plant and equipment of $154.9 million, primarily for machinery and
equipment, the acquisition of DigitalQuake for $11.0 million, net of cash
acquired (See Note 4 to the Consolidated Financial Statements) and investment in
nonpublicly traded companies of $21.8 million. These uses of cash were partially
offset by proceeds from the net sale and maturity of marketable securities of
$49.2 million
The primary use of cash from our financing activities in fiscal 2005 was
for the repurchase of 18.8 million shares of our common stock for $323.5
million. Of these shares, 17.6 million shares were repurchased in the open
market for $298.5 million and the remaining 1.2 million shares were repurchased
through privately negotiated transactions with a major financial institution. We
also used cash to make payments of $15.2 million on software license obligations
and $14.1 million for cash dividends. These amounts were partially offset by
proceeds of $118.4 million from the issuance of common stock under employee
benefit plans. The primary use of cash from our financing activities in fiscal
2004 came from our repurchase of a total of 32.4 million shares of our common
stock for $542.5 million, net advances of $29.4 million to acquire our common
stock and payments of $22.7 million on software license obligations. A portion
(15.7 million shares) of the stock repurchase was transacted directly with a
major financial institution and the remainder in the open market. These uses of
cash were partially offset by proceeds of $211.9 million from the issuance of
common stock under employee benefit plans. The primary source of cash from
financing activities during fiscal 2003 came from the issuance of common stock
under employee benefit plans of $42.7 million, which was partially offset by
payments of $14.6 million on software license obligations and $5.4 million for
repayment of our outstanding debt balances.
In March 2005, we announced that our Board of Directors had approved a new
$400 million stock repurchase program similar to the previous two programs
approved in 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. As of May
29, 2005, we had $304.0 million remaining available for future common stock
repurchases under this program. We also paid cash dividends of $14.1 million
during fiscal 2005. In June 2005, our Board of Directors declared a cash
dividend of $0.02 per outstanding share of common stock. The dividend totaling
$7.0 million was paid on July 11, 2005 to shareholders of record at the close of
business on June 20, 2005.
We foresee continuing cash outlays for plant and equipment in fiscal 2006,
with our primary focus on analog capabilities at our existing sites. Capital
expenditures for fiscal 2005 were considerably lower than what we typically
expect as a result of our efforts to control costs and respond to reduced
utilization. We currently expect fiscal 2006 capital expenditures to return to a
more typical level and to be higher than the fiscal 2005 level. We will continue
to manage the level of capital expenditures in light of sales levels, capacity
utilization and industry 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 planned capital investments in
fiscal 2006, as well as the declared dividend and the stock repurchase program.
Our cash and investment balances are dependent in part 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 May 29, 2005:
Fiscal Year: 2011 and
(In Millions) 2006 2007 2008 2009 2010 thereafter Total
--------------- --------- --------- -------- ---------- -------------- -----------
Contractual obligations:
Debt obligations $ - $ - $22.8 $ - $ - $ 0.2 $ 23.0
Accrued software license
obligations 10.2 8.2 - - - - 18.4
Noncancelable
operating leases 30.9 24.8 11.7 7.1 4.3 2.8 81.6
Other purchase obligations 4.3 3.5 2.3 0.2 - - 10.3
--------------- --------- --------- -------- ---------- -------------- -----------
Total $45.4 $36.5 $36.8 $ 7.3 $ 4.3 $ 3.0 $133.3
=============== ========= ========= ======== ========== ============== ===========
Commercial Commitments:
Standby letters of credit
under bank multicurrency
agreement $ 9.1 - - - - - $ 9.1
=============== ========= ========= ======== ========== ============== ===========
In addition, as of May 29, 2005, capital purchase commitments were $3.7
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 we are materially exposed to
financing, liquidity, market or credit risks that could arise if we had engaged
in these relationships.
o Recently Issued Accounting Pronouncements
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 beginning with 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.
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 that occur beginning in our second fiscal period of
fiscal 2006 and we will apply its provisions prospectively upon adoption. We
currently expect that the adoption of this statement will not have a material
effect 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
2007 fiscal year. We are currently evaluating the requirements of SFAS No.
123(R) and although we have not yet determined the precise impact to our
financial statements and how similar it may be to the amounts currently
presented in our pro forma information under the current SFAS No. 123, we
believe the adoption of SFAS No. 123(R) will materially increase expenses and
reduce profits in the reported results of our operations. In March 2005, the
U.S. Securities and Exchange Commission released Staff Accounting Bulletin No.
107, "Share-Based Payment," which expresses the view of the SEC staff regarding
the application of SFAS No. 123(R). SAB 107 provides interpretive guidance
related to the interaction between SFAS No. 123(R) and certain SEC rules and
regulations. It also provides the staff's views regarding the valuation of
share-based payment arrangements for public companies. The interpretive guidance
is intended to assist companies in applying the provisions of SFAS No. 123(R)
and investors and users of the financial statements in analyzing the information
provided. We are currently analyzing Staff Accounting Bulletin No. 107 to
determine the impact of implementation of SFAS No. 123(R).
In December 2004, the Financial Accounting Standards Board issued FSP
109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004." FSP 109-2 provides
companies with additional time beyond the financial reporting period of
enactment to evaluate the effects of the Act on their plans for repatriation of
foreign earnings for purposes of applying SFAS No. 109, "Accounting for Income
Taxes." We are currently evaluating the repatriation provisions of the Act,
which if implemented by us would affect our tax provision and deferred tax
assets and liabilities. However, given the early stage of our evaluation, we are
unable to determine the exact amount that may be repatriated or the related
potential income tax effects of such repatriation. Based on the analysis to
date, however, it is reasonably possible that as much as $500 million could be
repatriated, which would then require a corresponding tax liability of up to $45
million. We expect to be in a position to finalize our analysis by March 2006.
In March 2005, the Financial Accounting Standards Board published FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations," which clarifies that the term, conditional asset retirement
obligation, as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. The
uncertainty about the timing and (or) method of settlement of a conditional
asset retirement obligation should be factored into the measurement of the
liability when sufficient information exists. The interpretation also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. This interpretation is effective no
later than the end of our fiscal 2006. We are currently analyzing the
interpretation and have not yet determined its impact on our consolidated
financial statements.
In May 2005, the Financial Accounting Standards Board issued SFAS No. 154,
"Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20
and FASB Statement No. 3." This statement establishes new standards on
accounting for changes in accounting principles. Pursuant to the new rules, all
such changes must be accounted for by retrospective application to the financial
statements of prior periods unless it is impracticable to do so. This statement
replaces APB No. 20 and SFAS No. 3, although it carries forward the guidance in
those pronouncements with respect to accounting for changes in estimates,
changes in the reporting entity and the correction of errors. SFAS No. 154 is
effective for accounting changes and error corrections made in our fiscal year
2007. We currently do not expect the adoption of this statement to have any
impact on our consolidated financial statements.
o Outlook
Our business during much of fiscal 2005 was affected by a slowdown in order
rates, particularly from our distributors. This was primarily caused by a
combination of shorter lead times and excess inventory levels in the supply
chain, especially in the first half of the fiscal year.
Turns orders in fiscal 2005, which are orders received with delivery
requested in the same quarter, were unusually low relative to past history.
However, turns orders were higher in the fourth quarter of fiscal 2005 because
distributor resales were higher in the fourth quarter and distributor
inventories were at much lower levels than a few quarters ago. Total new orders
also grew sequentially in the fourth quarter of fiscal 2005, due to the same
reasons. Our orders for products in key analog standard linear market areas grew
at rates higher than the company's overall average. Historically, order patterns
during our first quarter are generally lower than in the preceding fourth
quarter due to lower manufacturing activity at our customers that is typical
over the summer season, particularly in the European region.
As we ended fiscal 2005, although we saw indications that the excess
inventory conditions that persisted for much of the year were largely behind us,
the overall economic conditions of the semiconductor industry continued to be
difficult to predict. Entering our first quarter of fiscal 2006, we assumed that
distributor resales will be flat to slightly down, which is the typical summer
pattern based on past years. We also assumed a drop-off in sales due to the sale
of our PC Super I/O business, which was completed in May 2005, and the sale of
our cordless business, which was announced in May 2005 and completed in June
2005. Our opening 13-week backlog entering the first quarter of fiscal 2006 was
slightly higher than it was at the beginning of the previous quarter.
Considering all factors, including those discussed above, we provided guidance
for net sales in the first quarter of fiscal 2006 to be flat to down 2 percent
compared to the level achieved in our fiscal 2005 fourth quarter, with gross
margin percentage to be comparable to the percentage achieved in the fourth
quarter of fiscal 2005.
In July 2005, we announced that we plan to close our assembly and test
facility in Singapore and consolidate its production volume into our other
assembly and test facilities in Malaysia and China. The majority of closure
activities is expected to take place over the next nine to twelve months.
Although we expect some future reduction in our manufacturing costs once the
closure is completed, manufacturing costs during the interim may be unfavorably
affected.
During fiscal 2005, the American Jobs Creation Act of 2004 was signed into
law, creating a one-time incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85 percent dividends-received
deduction for certain dividends from controlled foreign corporations. As we are
currently evaluating the provision of the Act, we have not yet determined its
impact to our income tax expense for fiscal 2006. If we were to repatriate
foreign earnings, we would incur incremental income tax expense for those
repatriated amounts. Our overall income tax expense may also be affected by the
closing of acquisitions or divestitures, the jurisdiction in which profits are
determined to be earned and taxed, changes in estimates of credits and
deductions, the resolution of issues arising from tax audits with various tax
authorities, the finalization of various tax returns and changes in our ability
to realize deferred tax assets.
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 may 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. These companies 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 competition.
The wireless handset market continues to drive a significant portion of our
overall sales. 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 often uncertain and difficult to predict with
accuracy. Since the wireless handset market is a consumer market, downturns in
the economy that affect consumer demand will impact our business and results.
If our development of new products is delayed or market acceptance is below our
expectations, our 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, other portable devices and
applications in other broad markets that require analog technology. We cannot
assure you that we will develop and introduce successful new products and our
failure to bring these products to market may harm our operating results.
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 had 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 year, 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, euro and pound
sterling.
Investments, Acquisitions and Divestitures. We have made and will continue to
consider making strategic business investments, 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. We have made and
will continue to consider making strategic business divestitures. With any
divestiture, there are risks that future operating results could be unfavorably
impacted if targeted objectives, such as cost savings, are not achieved or if
other business disruptions occur as a result of the divestiture or activities
related to the divestiture.
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. Terrorist activities worldwide and hostilities in and
between nation states cause uncertainty on the overall state of the world
economy. 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 that have the potential for becoming pandemic
could also adversely affect our business. Although oil is not a major factor in
our cost structure, continued wide fluctuations and large increases in oil
prices may affect our future costs and revenues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See information/discussion appearing in subcaption "Financial Market Risks" of
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 and the information appearing 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Financial Statements of National Semiconductor Corporation and Subsidiaries:
Consolidated Balance Sheets at May 29, 2005 and May 30, 2004 39
Consolidated Statements of Operations for each of the years in the
three-year period ended May 29, 2005 40
Consolidated Statements of Comprehensive Income (Loss) for each of the years
in the three-year period ended May 29, 2005 41
Consolidated Statements of Shareholder' Equity for each of the years
in the three-year period ended May 29, 2005 42
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended May 29, 2005 43
Notes to Consolidated Financial Statements 44
Reports of Independent Registered Public Accounting Firm 80
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts for each of the
years in the three-year period ended May 29, 2005 89
Financial Statements of iReady Corporation and Subsidiary:
For the years ended September 30, 2003 and 2003; and the
four-month period ended January 31, 2004* Exhibit 99.1
*These financial statements are set forth in exhibit 99.1 and incorporated
herein by reference.
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
May 29, May 30,
In Millions, Except Share Amounts 2005 2004
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 867.1 $ 642.9
Short-term marketable investments 155.1 139.3
Receivables, less allowances of $26.7 in 2005 and $46.7 in 2004 123.9 198.9
Inventories 170.2 200.1
Deferred tax assets 126.9 12.3
Other current assets 70.3 52.3
------------- --------------
Total current assets 1,513.5 1,245.8
Property, plant and equipment, net 605.1 699.6
Goodwill 87.2 173.3
Deferred tax assets, net 192.2 73.3
Other assets 106.2 88.4
------------- --------------
Total assets $2,504.2 $2,280.4
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ 22.1
Accounts payable 64.7 141.0
Accrued expenses 143.6 234.8
Income taxes payable 76.7 63.4
------------- --------------
Total current liabilities 285.0 461.3
Long-term debt 23.0 -
Other noncurrent liabilities 142.1 138.6
------------- --------------
Total liabilities $ 450.1 $ 599.9
Commitments and contingencies
Shareholders' equity:
Preferred stock of $0.50 par value. Authorized 1,000,000 shares. $ - $ -
Common stock of $0.50 par value. Authorized 850,000,000 shares.
Issued and outstanding 347,952,971 in 2005 and 357,611,988 in 2004 174.0 178.8
Additional paid-in capital 1,024.5 1,038.9
Retained earnings 961.2 560.0
Unearned compensation (7.4) (8.8)
Accumulated other comprehensive loss (98.2) (88.4)
------------- --------------
Total shareholders' equity 2,054.1 1,680.5
------------- --------------
Total liabilities and shareholders' equity $2,504.2 $2,280.4
============= ==============
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended May 29, May 30, May 25,
In Millions, Except Per Share Amounts 2005 2004 2003
------------ ------------ ------------
Net sales $1,913.1 $1,983.1 $1,672.5
Operating costs and expenses:
Cost of sales 892.3 970.8 946.8
Research and development 333.0 357.1 439.2
Selling, general and administrative 256.2 283.4 266.7
Goodwill impairment loss 86.1 - -
Gain from sale of businesses (59.9) - -
Cost reduction and restructuring charges 23.9 19.6 43.6
Other operating (income) expense, net (18.0) 22.0 (5.4)
------------ ------------ ------------
Total operating costs and expenses 1,513.6 1,652.9 1,690.9
------------ ------------ ------------
Operating income (loss) 399.5 330.2 (18.4)
Interest income, net 15.9 10.4 14.8
Other non-operating expense, net (5.5) (6.9) (19.7)
------------ ------------ ------------
Income (loss) before income taxes and cumulative effect
of a change in accounting principle 409.9 333.7 (23.3)
Income tax expense (benefit) (5.4) 49.0 10.0
------------ ------------ ------------
Income (loss) before cumulative effect of a change
in accounting principle 415.3 284.7 (33.3)
Cumulative effect of a change in accounting principle
including tax effect of $0.2 - (1.9) -
------------ ------------ ------------
Net income (loss) $ 415.3 $ 282.8 $ (33.3)
============ ============ ============
Earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle:
Basic $ 1.17 $ 0.79 $(0.09)
Diluted $ 1.11 $ 0.73 $(0.09)
Cumulative effect of a change in accounting principle
including tax effect of $0.2:
Basic $ - $(0.01) $ -
Diluted $ - $(0.01) $ -
Net income (loss):
Basic $ 1.17 $ 0.78 $(0.09)
Diluted $ 1.11 $ 0.73 $(0.09)
Weighted-average common and potential common
shares outstanding:
Basic 353.9 361.0 363.6
Diluted 373.9 388.5 363.6
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended May 29, May 30, May 25,
In Millions 2005 2004 2003
------------- ------------- --------------
Net income (loss) $ 415.3 $ 282.8 $ (33.3)
Other comprehensive income (loss), net of tax:
Unrealized loss on available-for-sale securities (0.3) (3.4) (24.8)
Reclassification adjustment for net realized (gain) on
available- - - (10.1)
for-sale securities included in net income (loss)
Minimum pension liability (9.5) 29.1 (57.5)
Derivative instruments:
Unrealized gain on cash flow hedges - 0.2 0.2
------------- ------------- --------------
Other comprehensive income (loss) (9.8) 25.9 (92.2)
------------- ------------- --------------
Comprehensive income (loss) $ 405.5 $ 308.7 $(125.5)
============= ============= ==============
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Additional Other
Common Stock Paid-In Retained Unearned Comprehensive
--------------------
In Millions, Except Per Share Amount Shares Par Value Capital Earnings Compensation Loss Total
------------------------------------------ -------- ----------- ----------- --------- ------------ -------------- ----------
Balances at May 26, 2002 360.7 $180.4 $1,325.1 $310.5 $(12.8) $(22.1) $1,781.1
Net loss - - - (33.3) - - (33.3)
Issuance of common stock under option,
purchase and profit sharing plans 6.5 3.2 40.6 - - - 43.8
Unearned compensation relating to issuance
of restricted stock - - 0.5 - (0.5) - -
Cancellation of restricted stock (0.1) - (1.4) - 0.3 - (1.1)
Amortization of unearned compensation - - - - 3.0 - 3.0
Effect of investee equity transactions - - 4.7 - - - 4.7
Other comprehensive loss - - - - - (92.2) (92.2)
------------------------------------------ -------- ---------- ----------- --------- ------------ -------------- ----------
Balances at May 25, 2003 367.1 183.6 1,369.5 277.2 (10.0) (114.3) 1,706.0
Net income - - - 282.8 - - 282.8
Issuance of common stock under option,
purchase and profit sharing plans 22.9 11.4 202.4 - - - 213.8
Unearned compensation relating to issuance
of restricted stock 0.2 0.1 3.0 - (3.1) - -
Cancellation of restricted stock (0.2) (0.1) (2.5) - 1.2 - (1.4)
Amortization of unearned compensation - - - - 3.1 - 3.1
Tax benefit associated with stock options - - 22.2 - - - 22.2
Purchase and retirement of treasury stock (32.4) (16.2) (526.3) - - - (542.5)
Net advances to acquire treasury stock - - (29.4) - - - (29.4)
Other comprehensive income - - - - - 25.9 25.9
------------------------------------------ -------- ---------- ----------- --------- ------------ -------------- ----------
Balances at May 30, 2004 357.6 178.8 1,038.9 560.0 (8.8) (88.4) 1,680.5
Net income - - - 415.3 - - 415.3
Cash dividends declared and paid ($0.04
per share) - - - (14.1) - - (14.1)
Issuance of common stock under option and
purchase plans 10.7 5.2 114.2 - - - 119.4
Unearned compensation relating to issuance
of restricted stock 0.1 0.1 2.5 - (2.6) - -
Cancellation of restricted stock (0.1) - (2.2) - 0.8 - (1.4)
Amortization of unearned compensation - - - - 3.2 - 3.2
Tax benefit associated with stock options - - 184.5 - - - 184.5
Settlement of an advance to acquire
treasury stock (1.5) - 30.0 - - - 30.0
Purchase and retirement of treasury stock (18.8) (10.1) (343.4) - - - (353.5)
Other comprehensive loss - - - - - (9.8) (9.8)
------------------------------------------ -------- ---------- ----------- --------- ------------ -------------- ----------
Balances at May 29, 2005 348.0 $174.0 $1,024.5 $961.2 $ (7.4) $(98.2) $2,054.1
========================================== ======== ========== =========== ========= ============ ============== ==========
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended May 29, May 30, May 25,
In Millions 2005 2004 2003
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 415.3 $ 282.8 $ (33.3)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cumulative effect of a change in accounting principle - 1.9 -
Depreciation, amortization and accretion 194.4 209.9 228.5
Net (gain) loss on investments (0.7) (7.0) 3.9
Share in net losses of equity-method investments 5.7 14.1 15.9
Goodwill impairment loss 86.1 - -
Impairment of technology licenses - - 13.8
Loss on disposal of equipment 1.1 6.2 2.9
Tax benefit associated with stock options 20.1 22.2 -
Deferred tax provision (65.1) - 3.6
Gain from sale of businesses (59.9) - -
Noncash other operating (income) expenses, net (11.1) 1.2 12.8
Other, net 2.4 3.6 0.8
Changes in certain assets and liabilities, net:
Receivables 76.7 (50.4) (7.2)
Inventories 29.8 (62.5) 2.8
Other current assets (18.7) (31.6) 3.4
Accounts payable and accrued expenses (144.4) 78.7 (33.4)
Income taxes payable 13.3 13.6 1.7
Other noncurrent liabilities (16.5) (5.0) 5.4
------------ ------------ ------------
Net cash provided by operating activities 528.5 477.7 221.6
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (96.6) (215.3) (154.9)
Sale of equipment - - 2.3
Sale of businesses 71.5 - -
Sale and maturity of available-for-sale securities - 359.0 892.6
Purchase of available-for-sale securities (16.8) (386.7) (843.4)
Sale of investments 0.7 12.1 18.0
Investment in nonpublicly traded companies (0.3) (1.8) (21.8)
Business acquisitions, net of cash acquired - - (11.0)
Funding of benefit plan (6.9) (4.6) (3.6)
Security deposits on leased equipment (21.8) (20.1) -
Other, net 0.3 5.2 (1.6)
------------ ------------ ------------
Net cash used by investing activities (69.9) (252.2) (123.4)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt - (2.1) (5.4)
Payment on software license obligations (15.2) (22.7) (14.6)
Issuance of common stock 118.4 211.9 42.7
Net advances to acquire treasury stock - (29.4) -
Purchase and retirement of treasury stock (323.5) (542.5) -
Cash dividends declared and paid (14.1) - -
------------ ------------ ------------
Net cash (used by) provided by financing activities (234.4) (384.8) 22.7
------------ ------------ ------------
Net change in cash and cash equivalents 224.2 (159.3) 120.9
Cash and cash equivalents at beginning of year 642.9 802.2 681.3
------------ ------------ ------------
Cash and cash equivalents at end of year $ 867.1 $ 642.9 $ 802.2
============ ============ ============
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Operations
We design, develop, manufacture and market a wide range of semiconductor
products, most of which are analog and mixed-signal integrated circuits. Our
focus is on creating analog-intensive solutions that provide more energy
efficiency, portability, better audio and sharper images in electronics systems.
Basis of Presentation
The consolidated financial statements include National Semiconductor Corporation
and our majority-owned subsidiaries. All significant intercompany transactions
are eliminated in consolidation.
Our fiscal year ends on the last Sunday of May and for the fiscal year
ended May 29, 2005, we had a 52-week year. For the fiscal year ended May 30,
2004, we had a 53-week year. Operating results for the additional week were
considered immaterial to our consolidated results of operations for fiscal 2004.
Our fiscal year ended May 25, 2003 was a 52-week year.
On May 13, 2004, we completed a two-for-one stock split of our common stock that
was paid in the form of a stock dividend (See Note 10 to the Consolidated
Financial Statements). All information about capital stock accounts, share and
per share amounts included in the accompanying consolidated financial statements
and related notes for fiscal 2004 and 2003 have been retroactively adjusted to
reflect this stock split.
Revenue Recognition
We recognize revenue from the sale of semiconductor products upon shipment,
provided we have persuasive evidence of an arrangement typically in the form of
a purchase order, 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 47 percent of our semiconductor product sales were made through
distributors in fiscal 2005. We have agreements with our distributors that cover
various programs, including pricing adjustments based on resale pricing and
volume, price protection for inventory, discounts for prompt payment and scrap
allowances.
In line with industry practices, we generally credit distributors for the
effect of price reductions on their inventory of our products and, under
specific conditions, we repurchase products that we have discontinued. In
general, distributors do not have the right to return product, except under
customary warranty provisions. The programs we offer to our distributors could
include one or more of the following:
o Allowances involving pricing and volume. We refer to this as the "contract
sales debit" program;
o Discount for early payment. We refer to this as the "prompt payment"
program; and
o Allowance for inventory scrap. We refer to this as the "scrap allowance"
program.
Under the contract sales debit program, products are sold to distributors
at standard published prices that are contained in price books that are broadly
provided to our various distributors. Distributors are required to pay for this
product within our standard commercial terms. After the initial purchase of the
product, the distributor has the opportunity to request a price allowance for a
particular part number depending on the current market conditions for that
specific part as well as volume considerations. This request is made prior to
the distributor reselling the part. Once we have approved an allowance to the
distributor, the distributor proceeds with the resale of the product and credits
are issued to the distributor in accordance with the specific allowance that we
approved. Periodically, we issue new distributor price books. For those parts
for which the standard prices have been reduced, we provide an immediate credit
to distributors for inventory quantities they have on hand.
Under the prompt payment program, certain distributors are granted a fixed
percentage discount off the invoice price for payment earlier than our standard
commercial terms.
Under the scrap allowance program, certain distributors are given a
contractually defined allowance to cover the cost of any scrap they might incur.
The amount of the allowance is specifically agreed upon with each distributor.
The revenue we record for these distribution sales is net of estimated
allowances for these programs. Our estimates are based upon historical
experience rates by geography and product family, inventory levels in the
distribution channel, current economic trends and other related factors. We
continuously monitor the claimed allowances against the rates assumed in our
estimates of the allowances. Actual distributor claims activity has been
materially consistent with the provisions we have made based on our estimates.
Service revenues are recognized as the services are provided or as
milestones are achieved, depending on the terms of the arrangement. These
revenues are included in net sales and are not a material component of our total
net sales.
Certain intellectual property income is classified as revenue if it meets
specified criteria established by company policy that defines whether it is
considered a source of income from our primary operations. These revenues are
included in net sales and are not a material component of our total net sales.
All other intellectual property income that does not meet such criteria is not
considered a source of income from primary operations and is therefore
classified as a component of other operating income, net, in the consolidated
statement of operations. Intellectual property income 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. .
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.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. We use the straight-line
method to depreciate machinery and equipment over their estimated useful life
(3-5 years). Buildings and improvements are depreciated using both straight-line
and declining-balance methods over the assets' remaining estimated useful life
(3-50 years), or, in the case of leasehold improvements, over the lesser of the
estimated useful life or lease term.
We capitalize eligible costs to acquire software used internally. We use
the straight-line method to amortize software used internally over its estimated
useful life (3-5 years). Internal-use software is included in the property,
plant and equipment balance.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of
identifiable net tangible and intangible assets acquired in a business
combination. Goodwill is assigned to reporting units and as of May 29, 2005, we
have six reporting units that contain goodwill. Acquisition-related intangible
assets other than goodwill include developed technology and patents, which are
amortized on a straight-line basis over their estimated useful life (2-6 years).
Intangible assets other than goodwill are included within other assets on the
consolidated balance sheet.
Impairment of Long-Lived Assets
We evaluate goodwill for impairment on an annual basis and whenever events or
changes in circumstance indicate that it is more likely than not that an
impairment loss has been incurred. We evaluate goodwill impairment annually in
our fourth fiscal quarter, which has been selected as the period for our
recurring evaluation for all reporting units. In fiscal 2005 we tested each
reporting unit that contains goodwill as part of our annual goodwill impairment
evaluation. As a result of our annual evaluation, we recorded an $86.1 million
impairment loss on goodwill of the wireless reporting unit, which is an
operating segment within our Analog reporting segment. The fair value of the
wireless reporting unit was determined using a discounted cash flow approach
that incorporated our estimates of future revenues and costs for the business
unit. Included in our analysis was consideration of the disposition of our
cordless business, which was part of the wireless reporting unit.
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. If our estimate of future
undiscounted net cash flows is 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. If assets are determined to be recoverable, but the useful lives are
shorter than we originally estimated, we depreciate or amortize the net book
value of the asset over the newly determined remaining useful lives.
In fiscal 2003, we recorded an impairment loss of $ 13.8 million for the
write-down of technology licenses, which included a $5.0 million charge
associated with the TSMC technology licensing agreement that was restructured in
February 2003 (See Note 3 to the Consolidated Financial Statements). We also
reached alternative arrangements with two other R&D partners that led to the
impairment of additional technology licenses for the remaining $8.8 million.
Income Taxes
We determine deferred tax liabilities and assets at the end of each period 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 rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets are reduced by a valuation allowance
when, in our opinion, it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
Earnings per Share
We compute basic earnings per share using the weighted-average number of common
shares outstanding. Diluted earnings per share are computed using the
weighted-average common shares outstanding after giving effect to potential
common shares from stock options based on the treasury stock method.
For all years presented, the reported net income (loss) was used in our
computation of basic and diluted earnings (loss) per share. A reconciliation of
the shares used in the computation follows:
(In Millions) 2005 2004 2003
--------------- ---------------- ---------------
Weighted-average common shares outstanding used
for basic earnings (loss) per share 353.9 361.0 363.6
Effect of dilutive securities:
Stock options 20.0 27.5 -
--------------- ---------------- ---------------
Weighted-average common and potential common shares
outstanding used for diluted earnings (loss) per share 373.9 388.5 363.6
=============== ================ ===============
For the fiscal year ended May 29, 2005, we did not include options
outstanding to purchase 21.5 million shares of common stock with a
weighted-average exercise price of $25.05 in diluted earnings per share since
their effect was antidilutive because the exercise price of these options
exceeded the average market price during the year. However, these shares could
potentially dilute basic earnings per share in the future. For the fiscal year
ended May 30, 2004, we did not include options outstanding to purchase 14.7
million shares of common stock with a weighted-average exercise price of $28.33
in diluted earnings per share since their effect was antidilutive because the
exercise price of these options exceeded the average market price during the
year. For the fiscal year ended May 25, 2003, we did not include options
outstanding to purchase 88.9 million shares of common stock with a
weighted-average exercise price of $14.00 in diluted loss per share since their
effect was antidilutive due to the reported loss.
Currencies
The functional currency for all operations worldwide is the U.S. dollar. We
include gains and losses arising from remeasurement of foreign currency
financial statement balances into U.S. dollars in selling, general and
administrative expenses. We also include gains and losses resulting from foreign
currency transactions in selling, general and administrative expenses. Included
in net income for fiscal 2005, 2004 and 2003, were net foreign currency losses
of $1.0 million, $1.2 million and $3.5 million, respectively.
Financial Instruments
Cash and Cash Equivalents. Cash equivalents are highly liquid instruments with a
maturity of three months or less at the time of purchase. We maintain cash
equivalents in various currencies and in a variety of financial instruments.
Deferred Compensation Plan Assets. Employee contributions under the deferred
compensation plan (See Note 12 to the Consolidated Financial Statements) are
maintained in a rabbi trust and are not readily available to us. Participants
can direct the investment of their deferred compensation plan accounts in the
same investments funds offered by the 401(k) plan. Although participants direct
the investment of these funds, they are classified as trading securities and are
included in other assets because they remain assets of the company until they
are actually paid out to the participants.
Marketable Investments. Debt and marketable equity securities are classified
into held-to-maturity or available-for-sale categories and are included. Debt
securities are classified as held-to-maturity when we have the positive intent
and ability to hold the securities to maturity. We record held-to-maturity
securities, which are stated at amortized cost, as either short-term or
long-term on the balance sheet based upon contractual maturity date. Debt and
marketable equity securities not classified as held-to-maturity are classified
as available-for-sale and are carried at fair market value, with the unrealized
gains and losses, net of tax, reported in shareholders' equity as a component of
accumulated other comprehensive loss. Gains or losses on securities sold are
based on the specific identification method. These marketable securities are
included as cash and cash equivalents, short-term and long-term marketable
securities based on their holding period.
Nonmarketable Investments. We have investments in nonpublicly traded companies
as a result of various strategic business ventures. These nonmarketable
investments are included on the balance sheet in other assets. We record at cost
nonmarketable investments where we do not have the ability to exercise
significant influence or control and periodically review them for impairment. We
use the equity method of accounting for nonmarketable investments in which we do
have the ability to exercise significant influence, but do not hold a
controlling interest. Under the equity method, we record our proportionate share
of income or loss of the investees in non-operating income. As of May 29, 2005,
we had nonmarketable investments of $6.9 million included in other assets, of
which $1.6 million represents strategic business investments in four small
nonpublicly traded companies accounted for under the equity method. The
remainder of the investments is accounted for under the cost method.
Summarized unaudited financial information of our equity-method investments
as of and for periods ended closely corresponding to our fiscal years is
presented in the following table:
(In Millions) 2005 2004
------------- -------------
COMBINED FINANCIAL POSITION (Unaudited)
Current assets $ 30.2 $ 38.8
Noncurrent assets 3.2 4.9
------------- -------------
Total assets $ 33.4 $ 43.7
============= =============
Current liabilities 9.3 8.5
Noncurrent liabilities 3.8 5.0
Shareholders' equity 20.3 30.2
------------- -------------
Total liabilities and shareholders' equity $ 33.4 $ 43.7
============= =============
(In Millions) 2005 2004 2003
------------- ------------- --------------
COMBINED OPERATING RESULTS (Unaudited)
Sales $ 14.1 $ 20.8 $ 4.8
Costs and expenses 43.1 49.3 41.3
------------- ------------- --------------
Operating loss $(29.0) $(28.5) $(36.5)
============= ============= ==============
Net loss $(26.8) $(35.2) $(45.6)
============= ============= ==============
Derivative Financial Instruments. As part of our risk management strategy we use
derivative financial instruments, including forwards, swaps and purchased
options, to hedge certain foreign currency and interest rate exposures. Our
intent is to offset gains and losses that occur from our underlying exposure
with gains and losses on the derivative contracts used to hedge them. As a
matter of company policy, we do not enter into speculative positions with
derivative instruments. The criteria we use for designating an instrument as a
hedge include the instrument's effectiveness in risk reduction and direct
matching of the financial instrument to the underlying transaction.
We record all derivatives on the balance sheet at fair value. Gains or
losses resulting from changes in the values of these derivatives are accounted
for based on the use of the derivative and whether it qualifies for hedge
accounting. See Note 2 to the Consolidated Financial Statements for a full
description of our hedging activities and related accounting policies.
Fair Values of Financial Instruments
The carrying amounts for cash and cash equivalents, short-term investments,
accounts receivable and accounts payable approximate their fair values due to
the short period of time until their maturity. Fair values of long-term
investments (including the deferred compensation plan assets), long-term debt,
interest rate derivatives, currency forward contracts and currency options are
based on quoted market prices or pricing models using prevailing financial
market information as of May 29, 2005 and May 30, 2004. The estimated fair value
of debt was $23.0 million at May 29, 2005 and $22.0 million at May 30, 2004. See
Note 2 to the Consolidated Financial Statements for fair values of marketable
securities and derivative financial instruments.
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." See Note 11 to the Consolidated
Financial Statements for more complete information on our stock-based
compensation plans.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure." This information illustrates the effect on net income (loss) and
earnings (loss) per share as if we had accounted for stock-based awards to
employees under the fair value method specified by SFAS No. 123. The
weighted-average fair value of stock options granted during fiscal 2005, 2004
and 2003 was $11.73, $8.45 and $4.76 per share, respectively. The
weighted-average fair value of rights granted under the stock purchase plans was
$5.23, $3.90 and $2.59 per share for fiscal 2005, 2004 and 2003, respectively.
The fair value of the stock-based awards to employees was estimated using a
Black-Scholes option pricing model that uses the following weighted-average
assumptions for fiscal 2005, 2004 and 2003:
2005 2004 2003
------------------ ----------------- ------------------
STOCK OPTION PLANS
Expected life (in years) 5.2 4.9 5.0
Expected volatility 71% 75% 77%
Risk-free interest rate 3.4% 3.3% 2.7%
Dividend Yield* - - -
2005 2004 2003
------------------ ----------------- ------------------
STOCK PURCHASE PLANS
Expected life (in years) 0.5 0.4 0.3
Expected volatility 45% 46% 54%
Risk-free interest rate 1.6% 1.3% 1.1%
Dividend Yield 0.2% - -
* The weighted-average expected dividend yield calculation for stock
option plans in fiscal 2005 was less than 0.01 percent since the
majority of the stock options included in the calculation were granted
prior to any expectation of dividend payments.
For pro forma purposes, the estimated fair value of stock-based awards to
employees is amortized 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:
(In Millions, Except Per Share Amounts) 2005 2004 2003
-------------- -------------- ---------------
Net income (loss) - as reported $415.3 $282.8 $( 33.3)
Add back: Stock compensation charge included in
net income (loss) determined under the intrinsic
value method, net of tax 3.2 2.2 1.9
Deduct: Total stock-based employee compensation
expense determined under the fair value method,
net of tax 16.1 (187.0) (180.9)
-------------- -------------- ---------------
Net income (loss) - pro forma $434.6 $ 98.0 $(212.3)
============== ============== ===============
Basic earnings (loss) per share - as reported $ 1.17 $ 0.78 $ (0.09)
Basic earnings (loss) per share - pro forma $ 1.23 $ 0.27 $ (0.58)
Diluted earnings (loss) per share - as reported $ 1.11 $ 0.73 $ (0.09)
Diluted earnings (loss) per share - pro forma $ 1.16 $ 0.25 $ (0.58)
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
o We adopted the provisions of Emerging Issues Task Force Issue No. 02-14,
"Whether an Investor Should Apply the Equity Method of Accounting to
Investments Other Than Common Stock," at the beginning of our fiscal 2005
third quarter. In EITF Issue No. 02-14, the Task Force reached a consensus
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 provided related guidance. We evaluated our investments
subject to this EITF and determined that substantially all investments that
were previously accounted for under the equity method of accounting should
continue to be accounted for under the equity method of accounting. The
adoption of EITF 02-14 had no material impact on our consolidated financial
statements.
o We adopted the provisions of Emerging Issues Task Force Issue No. 03-13,
"Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in
Determining Whether to Report Discontinued Operations," beginning with our
business dispositions that occurred after December 15, 2004. The EITF
provides guidance on how to apply the criteria of Paragraph 42 of FASB
Statement No. 144. The paragraph states the results of operations of a
component of an entity that either has been disposed of or is classified as
held for sale shall be reported in discontinued operations if both of the
following conditions are met: (a) the operations and cash flows of the
component have been (or will be) eliminated from the ongoing operations of
the entity as a result of the disposal transaction and (b) the entity will
not have any significant continuing involvement in the operations of the
component after the disposal transaction. The adoption of EITF 03-13 had no
material impact on our consolidated financial statements.
Reclassifications
Certain amounts in prior years' consolidated financial statements and notes to
consolidated financial statements have been reclassified to conform to the
fiscal 2005 presentation. Net operating results have not been affected by these
reclassifications.
Note 2. Financial Instruments
Cash Equivalents
Our policy is to diversify our investment portfolio to minimize the exposure of
our principal to credit, geographic and investment sector risk. At May 29, 2005,
investments were placed with a variety of different financial institutions and
other issuers. Investments with maturity of less than one year have a rating of
A1/P1 or better. Investments with maturity of more than one year have a minimum
rating of AA/Aa2.
Our cash equivalents consisted of the following as of May 29, 2005 and May
30, 2004:
(In Millions) 2005 2004
-------------- ---------------
CASH EQUIVALENTS
Available-for-sale securities:
Institutional money market funds $377.5 $501.9
Commercial paper - 2.0
-------------- ---------------
377.5 503.9
Held-to-maturity securities:
Bank time deposits 372.3 30.5
-------------- ---------------
Total cash equivalents $749.8 $534.4
============== ===============
Marketable investments at fiscal year-end comprised:
Gross Gross
Amortized Unrealized Unrealized Estimated
(In Millions) Cost Gains Losses Fair Value
------------- ------------- ------------- -------------
2005
SHORT-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Callable agencies $157.6 $ - $ (2.5) $155.1
------------- ------------- ------------- -------------
Total short-term marketable investments $157.6 $ - $ (2.5) $155.1
============= ============= ============= =============
LONG-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Equity securities $ 0.8 $ 2.1 $ - $ 2.9
------------- ------------- ------------- -------------
Total long-term marketable investments $ 0.8 $ 2.1 $ - $ 2.9
============= ============= ============= =============
2004
SHORT-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Callable agencies $140.7 $ - $ (1.4) $139.3
------------- ------------- ------------- -------------
Total short-term marketable investments $140.7 $ - $ (1.4) $139.3
============= ============= ============= =============
LONG-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Equity securities $ 0.8 $ 1.3 $ - $ 2.1
------------- ------------- ------------- -------------
Total long-term marketable investments $ 0.8 $ 1.3 $ - $ 2.1
============= ============= ============= =============
Net unrealized losses on available-for-sale securities of $0.4 million at
May 29, 2005 and $0.1 million at May 30, 2004 are included in accumulated other
comprehensive loss. The related tax effects are not significant. Long-term
marketable investments of $2.9 million at May 29, 2005 and $2.1 million at May
30, 2004 are included in other assets.
Scheduled maturities of investments in debt securities are:
(In Millions)
----------------
2006 $ 36.5
2007 118.6
----------------
Total $155.1
================
There were no gross realized gains on available-for-sale securities in
fiscal 2005, but we recognized gross realized gains of $0.5 million in fiscal
2004 and $11.6 million in fiscal 2003. We recognized impairment losses on
available-for-sale securities for other than temporary declines in fair value of
$1.6 million in fiscal 2003. No impairment losses were recognized in fiscal 2005
and 2004.
For nonmarketable investments, we recognized gross realized gains of $0.7
million in fiscal 2005 and $6.4 million in fiscal 2004, which came primarily
from the sale of shares and acquisitions by third parties. No such gains were
recognized in fiscal 2003. We recognized impairment losses on nonmarketable
investments of $0.3 million in fiscal 2004 and $11.6 million in fiscal 2003. No
impairment losses were recognized in fiscal 2005.
Derivative Financial Instruments
The objective of our foreign exchange risk management policy is to preserve the
U.S. dollar value of after-tax cash inflow in relation to non-U.S. dollar
currency movements. We are exposed to foreign currency exchange rate risk that
is inherent in orders, sales, cost of sales, expenses, and assets and
liabilities denominated in currencies other than the U.S. dollar. We enter into
foreign exchange contracts, primarily forwards and purchased options, to hedge
against exposure to changes in foreign currency exchange rates. These contracts
are matched at inception to the related foreign currency exposures that are
being hedged. Exposures which are hedged include sales by subsidiaries, and
assets and liabilities denominated in currencies other than the U.S. dollar. Our
foreign currency hedges typically mature within one year.
We measure hedge effectiveness for foreign currency forward contracts by
comparing the cumulative change in the hedge contract with the cumulative change
in the hedged item, both of which are based on forward rates. For purchased
options, we measure hedge effectiveness by the change in the option's intrinsic
value, which represents the change in the forward rate relative to the option's
strike price. Any changes in the time value of the option are excluded from the
assessment of effectiveness of the hedge and recognized in current earnings.
We designate derivative instruments that are used to hedge exposures to
variability in expected future foreign denominated cash flows as cash flow
hedges. We record the effective portion of the gains or losses on the derivative
instrument in accumulated other comprehensive loss as a separate component of
shareholders' equity and reclassify amounts into earnings in the period when the
hedged transaction affects earnings. For cash flow hedges the maximum length of
time we hedge our exposure is 3 to 6 months. Derivative instruments that we use
to hedge exposures to reduce or eliminate changes in the fair value of an asset
or liability denominated in foreign currency are designated as fair value
hedges. The gain or loss on the derivative instrument, as well as the offsetting
gain or loss on the hedged item attributable to the hedged risk, is included in
selling, general and administrative expenses. The effective portion of all
changes in these derivative instruments is reported in the same financial
statement line item as the changes in the hedged item.
We are also exposed to variable cash flow that is inherent in our
variable-rate debt. We use an interest rate swap to convert the variable
interest payments to fixed interest payments. We designate this derivative as a
cash flow hedge. For interest rate swaps, the critical terms of the interest
rate swap and hedged item are designed to match up, enabling us to assume
effectiveness under SFAS No. 133. We recognize interest expense as cash
settlements are paid or received.
We report hedge ineffectiveness from foreign currency derivatives for both
forward contracts and options in current earnings. We also report
ineffectiveness related to interest rate swaps in current earnings. Hedge
ineffectiveness was not material for fiscal 2005, 2004 or 2003. No cash flow
hedges were terminated as a result of forecasted transactions that did not
occur.
At May 29, 2005, there was no net amount of existing gains or losses from
cash flow hedges expected to be reclassified into earnings within the next year.
We recognized a $0.3 million net realized loss from cash flow hedges and a $0.4
million net realized gain from fair value hedges in fiscal 2005. For fiscal
2004, we recognized a $0.6 million net realized loss from cash flow hedges and a
$1.6 million net realized gain from fair value hedges. For fiscal 2003, we
recognized a $0.5 million net realized loss from cash flow hedges and a $1.3
million net realized gain from fair value hedges.
Fair Value and Notional Principal of Derivative Financial Instruments
The table below shows the fair value and notional principal of derivative
financial instruments as of May 29, 2005 and May 30, 2004. The notional
principal amounts for derivative financial instruments provide one measure of
the transaction volume outstanding as of year-end and do not represent the
amount of the exposure to credit or market loss. The estimates of fair value are
based on applicable and commonly used pricing models using prevailing financial
market information as of May 29, 2005 and May 30, 2004. The fair value of
interest rate swap agreements represents the estimated amount we would receive
or pay to terminate the agreements taking into consideration current interest
rates. The fair value of forward foreign currency exchange contracts represents
the present value difference between the stated forward contract rate and the
current market forward rate at settlement. The fair value of foreign currency
option contracts represents the probable weighted net amount we would expect to
receive at maturity. The credit risk amount shown in the table represents the
gross exposure to potential accounting loss on these transactions if all counter
parties failed to perform according to the terms of the contract, based on the
then-current currency exchange rate or interest rate at each respective date.
Although the following table reflects the notional principal, fair value and
credit risk amounts of the derivative financial instruments, it does not reflect
the gains or losses associated with the exposures and transactions that the
derivative financial instruments are intended to hedge. The amounts ultimately
realized upon settlement of these financial instruments, together with the gains
and losses on the underlying exposures, will depend on actual market conditions
during the remaining life of the instruments.
Carrying Notional Estimated Credit
(In Millions) Amount Principal Fair Value Risk
-------------- ------------ ------------ -------------
2005
INTEREST RATE INSTRUMENTS
Swaps:
Variable to fixed $ - $22.7 $ 0.2 $ -
============== ============ ============ =============
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts - To sell dollars:
Pound sterling $ - $ 6.1 $ - $ -
Singapore dollar - 3.7 - -
-------------- ------------ ------------ -------------
Total $ - $ 9.8 $ - $ -
============== ============ ============ =============
Purchased options:
Japanese yen $ - $ 3.0 $ - $ -
============== ============ ============ =============
2004
INTEREST RATE INSTRUMENTS
Swaps:
Variable to fixed $ - $21.9 $ - $ -
============== ============ ============ =============
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts - To sell dollars:
Pound sterling $(0.1) $ 6.3 $(0.1) $ -
Singapore dollar - 4.7 - -
-------------- ------------ ------------ -------------
Total $(0.1) $11.0 $(0.1) $ -
============== ============ ============ =============
Purchased options:
Japanese yen $ 0.1 $ 9.0 $ 0.1 $ -
============== ============ ============ =============
Concentrations of Credit Risk
Financial instruments that may subject us to concentrations of credit risk are
primarily investments and trade receivables. Our investment policy requires cash
investments to be placed with high-credit quality counter parties and limits the
amount of investments with any one financial institution or direct issuer. We
sell our products to distributors and manufacturers involved in a variety of
industries including computers and peripherals, wireless communications and
automotive. We perform continuing credit evaluations of our customers whenever
necessary and we generally do not require collateral. Our top ten customers
combined represented approximately 49 percent of total accounts receivable at
May 29, 2005, and approximately 45 percent at May 30, 2004. In fiscal 2005 and
2004, we had one distributor who accounted for approximately 11 percent of total
net sales and another distributor who accounted for approximately 10 percent of
total net sales in each year. In fiscal 2003, we had two distributors who each
accounted for approximately 10 percent of total net sales. Sales to these
distributors are mostly for our Analog segment products, but also include some
sales for our other operating segment products. Historically, we have not
experienced significant losses related to receivables from individual customers
or groups of customers in any particular industry or geographic area.
Note 3. Cost Reduction Programs and Restructuring of Operations
Fiscal 2005
We reported net charges of $23.9 million for cost reduction and restructuring
charges related to the actions described below. Our cost reduction and
restructuring actions in fiscal 2005 were consistent with our strategy of
focusing on our analog capabilities and on higher value-added analog products
that generate higher gross margins and produce higher returns on invested
capital.
In May 2005, we recorded net charges of $2.6 million for cost reduction actions
which included $1.8 million of severance for 26 employees, primarily resulting
from a reorganization of our business operations. The departure of these
employees is expected to be completed in the first quarter of fiscal 2006.
Severance payments are generally paid 30-60 days after the employee's actual
departure date. Also included is a charge of $1.3 million for a lease obligation
on a facility we vacated in connection with a prior cost reduction action that
we no longer believe we will be able to sublease. These charges were partially
offset by a $0.5 million credit recognized upon the completion of activities
related to prior cost reduction actions.
In January 2005, we announced actions to reduce expenses and streamline
manufacturing in response to underutilization of our manufacturing facilities.
This resulted in a reduction-in-force of 525 employees, consisting of 421
employees working in our manufacturing facilities worldwide and 104 employees
from product lines and support functions at various sites, including our
headquarters in Santa Clara. The majority of the affected employees had departed
by the end of fiscal 2005. The total charge of $21.2 million, primarily related
to severance, was partially offset by a $1.1 million credit recognized upon the
completion of activities related to prior cost reduction actions. The credit
included a $0.6 million release of an accrual for other exit-related costs,
primarily coming from lease obligations where we were able to obtain subleases
on more favorable terms than originally estimated and a $0.5 million release of
an accrual for residual severance costs representing the difference between the
actual amounts paid and our original estimated amounts.
We recorded a gain of $8.8 million in fiscal 2005 upon completion of the
sale of certain intellectual property, inventory and equipment of our imaging
business to Eastman Kodak Company in September 2004. The imaging business was an
operating segment within our Analog reportable segment. The carrying value of
the assets sold was $0.9 million. As part of the transaction, Kodak also hired
47 former National employees. 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 fiscal 2005 also include a
$1.2 million cost reduction charge for the imaging severance and impairment loss
as well as severance charges related to other cost reduction actions in the
first quarter.
We recorded a gain of $51.1 million upon close of the sale in May 2005 of
our PC Super I/O business to Winbond Electronics Corporation. The PC Super I/O
business was a part of our Advanced PC operating segment that was reported under
"All Others." Under the terms of the agreement, Winbond acquired intellectual
property and certain assets. The carrying value of the assets sold was $0.8
million. In addition, Winbond hired approximately 150 employees, most of whom
were based at our research and design center in Herzlia, Israel.
Further detail related to cost reduction and restructuring charges
discussed above is presented in the following table:
Analog
(In Millions) Segment All Others Total
-------------- --------------- --------------
Cost reduction and restructuring charges:
Business reorganization:
Severance costs $ 0.3 $ 1.5 $ 1.8
Streamline operations:
Severance costs 1.6 19.6 21.2
Imaging business divestiture:
Severance costs 0.3 0.4 0.7
Asset write-off 0.5 - 0.5
Other - 1.3 1.3
-------------- --------------- --------------
2.7 22.8 25.5
-------------- --------------- --------------
Release of reserves:
Severance costs (0.1) (0.7) (0.8)
Other exit-related costs - (0.8) (0.8)
-------------- --------------- --------------
(0.1) (1.5) (1.6)
-------------- --------------- --------------
Total cost reduction and restructuring charges $ 2.6 $21.3 $23.9
============== =============== ==============
In the table above, the write-off of the intangible asset that was a part
of the imaging business was a noncash charge. In connection with the PC Super
I/O and imaging dispositions, we also entered into separate agreements with the
buyers where we will manufacture product for them at prices specified by the
terms of the agreements, which we believe approximate market prices, and provide
certain transition services at rates that approximate fair market value. These
agreements are effective for one to three years, unless terminated earlier as
permitted under their terms.
Fiscal 2004
We reported a net charge of $19.6 million for cost reduction and restructuring
charges related to the actions described below. Our cost reduction and
restructuring charges in fiscal 2004 primarily related to the profit-improvement
actions begun in February 2003.
During fiscal 2004, we substantially completed all cost reduction
activities related to the strategic profit-improvement actions initially
launched in February 2003. Consistent with the objectives of those actions, we
also continued to take supplemental actions during fiscal 2004, primarily for
workforce reductions in various manufacturing, product development and support
areas. Cost reduction charges related to these supplemental actions included
severance costs, as well as asset write-offs and lease obligations we incurred
upon vacating certain manufacturing and design center facilities during the year
upon closure of those operations.
In addition to these supplemental actions, we also completed the exit and
sale of our information appliance business in late August 2003. This included
the sale to AMD of certain intellectual property and assets of the information
appliance business. As part of the transaction, AMD hired 125 former National
employees who were mostly located in Longmont, Colorado. However, certain
information appliance assets were not included in the sale and certain employees
that were directly supporting the information appliance business were not hired
by AMD, which resulted in additional severance and asset impairment charges.
These charges were reduced by proceeds of $10.1 million from the sale of assets
that had a carrying value of $7.5 million less transaction costs of $1.3
million. A total of 238 employees were terminated in fiscal 2004 as a combined
result of the exit from the information appliance business and the other
supplemental actions.
The charges for the supplemental actions and the exit of our information
appliance business were partially offset by a $3.9 million credit for the
release of severance and other exit-related cost accruals no longer required. A
large portion of the accruals for severance costs was for employees in the
information appliance business and the cellular baseband business (closed at the
end of fiscal 2003), but the actual severance costs were lower than originally
expected because of some voluntary terminations and more employees eventually
being hired by AMD in the information appliance disposition than originally
expected.
Total net charges related to cost reduction actions in fiscal 2004,
including the sale to AMD of the assets of the information appliance business,
are presented in the following table:
Analog
(In Millions) Segment All Others Total
-------------- ------------- -------------
Cost reduction and restructuring charges:
Severance costs $ 5.7 $ 6.8 $12.5
Exit-related costs 2.9 3.7 6.6
Asset write-off 1.2 4.5 5.7
-------------- ------------- -------------
9.8 15.0 24.8
-------------- ------------- -------------
Release of reserves:
Severance costs (0.5) (2.8) (3.3)
Other exit-related costs (0.3) (0.3) (0.6)
-------------- ------------- -------------
(0.8) (3.1) (3.9)
-------------- ------------- -------------
Gain from sale of IA business assets - (1.3) (1.3)
-------------- ------------- -------------
Total cost reduction and restructuring charges $ 9.0 $10.6 $19.6
============== ============= =============
In the table above, the write-off of assets are noncash charges and are
attributed primarily to equipment and a technology license that were dedicated
to the information appliance and cellular baseband businesses. The cellular
baseband business was closed at the end of fiscal 2003 as part of our
profit-improvement plan. In connection with the information appliance
disposition to AMD discussed above, we also entered into a separate supply
agreement where we manufacture product for AMD at prices specified by the terms
of the agreement, which we believe approximate market prices. This agreement is
effective for three years unless terminated earlier as permitted under its
terms.
Fiscal 2003
We reported net charges of $43.6 million for cost reduction and restructuring
charges related to the actions described below. As in 2004, cost reduction and
restructuring charges in fiscal 2003 primarily related to the profit improvement
actions begun in February 2003, which were designed to streamline our cost
structure and enhance shareholder value by prioritizing R&D spending on
higher-margin analog businesses.
In February 2003, we began our profit improvement actions by reducing 424
positions from our worldwide workforce and realigning personnel resources for
various manufacturing, product development and support areas. We continued these
actions in May 2003 with further reductions of 336 positions from affected
business units, related support functions and certain parts of the
infrastructure.
Noncash charges in fiscal 2003 related to the write-offs of certain assets,
primarily equipment and technology licenses. Other exit costs primarily
represented facility lease obligations related to closure of sales offices and
design centers that occurred prior to the end of the fiscal year. We also
completed certain activities by the end of the fiscal year that reduced our
estimate for an environmental liability for costs related to a prior exit
action, which resulted in a credit of $2.1 million. This credit partially offset
the charges for the fiscal 2003 actions.
In February 2003, we also restructured our then existing technology
licensing agreement, and entered into a new long-term technology and
manufacturing agreement, with Taiwan Semiconductor Manufacturing Corporation. We
recorded a $5.0 million charge included in R&D expenses for impairment of
licensed technology associated with the original TSMC technology licensing
agreement that was revised.
Total net charges related to cost reduction actions in fiscal 2003
discussed above are presented in the following table:
Analog
(In Millions) Segment All Others Total
-------------- ------------- --------------
Cost reduction and restructuring charges:
Severance $ 8.5 $22.7 $31.2
Exit-related costs 2.1 0.3 2.4
Asset write-off 8.6 3.5 12.1
-------------- ------------- --------------
19.2 26.5 45.7
-------------- ------------- --------------
Release of reserve - (2.1) (2.1)
-------------- ------------- --------------
Total cost reduction and restructuring charges $19.2 $24.4 $43.6
============== ============= ==============
Summary of Activities
The following table provides a summary of the activities related to our
cost reduction and restructuring accruals during fiscal 2005, 2004 and 2003:
Cost Reduction and
Restructuring Actions
Fiscal 2005 Actions * In Prior Years
--------------------------------- ------------------------
Other
(A) (B) (C) Exit
---------- ---------- -----------
(In Millions) Severance Severance Costs Total
--------------------------------- ------------- ----------- -----------
Balance at May 26, 2002 $ - $ - $ - $ 8.6 $ $ 16.4
- - - 7.8
Cost reduction charges - - - 31.2 2.4 33.6
Cash payments - - - (22.3) (2.4) (24.7)
---------- ---------- ----------- ------------ ----------- -- -----------
Balance at May 25, 2003 - - - 17.5 7.8 25.3
Cost reduction charges - - - 12.5 6.6 19.1
Cash payments - - - (23.3) (6.3) (29.6)
Release of residual reserves - - - (3.3) (0.6) (3.9)
---------- ---------- ----------- ------------ ----------- -----------
Balance at May 30, 2004 - - - 3.4 7.5 10.9
Cost reduction charges 1.8 21.2 0.7 - 1.3 25.0
Cash payments (0.1) (18.5) (0.5) (2.7) (2.2) (24.0)
Release of residual reserves - (0.1) - (0.7) (0.8) (1.6)
---------- ---------- ----------- ------------ ----------- -----------
Balance at May 29, 2005 $ 1.7 $ 2.6 $ 0.2 $ - $ 5.8 $ 10.3
Less noncurrent portion of lease
obligations included in other
noncurrent liabilities - - - - (5.0) (5.0)
---------- ---------- ----------- ------------ ----------- -----------
Balance included in accrued expenses $ 1.7 $ 2.6 $ 0.2 $ - $ 0.8 $ 5.3
========== ========== =========== ============ =========== ===========
-----------------------------------------------------------------------------------------------------------------------
* Fiscal 2005 Actions:
(A) Business reorganization
(B) Streamline operations
(C) Imaging business divestiture
During fiscal 2005 we paid severance to 551 employees in connection with
workforce reductions related to actions that occurred in fiscal 2005 and 2004.
Amounts paid for other exit-related costs during fiscal 2005 were primarily for
payments under lease obligations associated with actions taken in prior years.
The balances at May 29, 2005 represent all remaining estimated costs for
activities yet to be completed as a result of the cost reduction actions
previously described. Payments for the remaining $1.7 million, $2.6 million and
$0.2 million severance balances for fiscal 2005 cost reduction actions are
expected to be substantially completed in early fiscal 2006. Other exit costs of
$5.8 million primarily relate to lease obligations, which are expected to be
paid through lease expiration dates that range from July 2005 through June 2009.
In May 2005, we announced that we had entered into an agreement to sell our
cordless business unit to HgCapital, a private equity investor based in London,
UK. Our cordless business unit is a part of the wireless operating segment
within the Analog reportable segment. This sale is consistent with our ongoing
strategy to focus on our core analog capabilities. Under the terms of the
agreement, HgCapital acquires intellectual property and certain assets for $60.0
million. The assets, primarily machinery and equipment with a carrying value of
$1.6 million, have been classified as "Assets Held for Sale" and are included in
Other Assets on the consolidated balance sheet as of May 29, 2005. In addition,
HgCapital has agreed to hire approximately 70 engineers, all of whom are based
at our cordless business unit in 's-Hertogenbosch and its design center in
Hengelo, The Netherlands. The sale was closed in June 2005 and we expect to
record a gain in the first quarter of fiscal 2006 after determining final costs
of the transaction.
Note 4. Acquisitions
We did not have any acquisitions in fiscal 2005 and 2004. During fiscal 2003, we
completed the acquisition of DigitalQuake, Inc., a development stage enterprise
engaged in the development of flat panel display products located in Campbell,
California in August 2002. DigitalQuake capabilities and products, which include
a fourth-generation scaling solution, a triple analog-to-digital converter and
an advanced digital video interface with encryption/decryption technologies,
were intended to enhance our offerings of system solutions for flat panel
display applications.
The purchase was completed through a step-acquisition where during the six
months prior to the closing we acquired approximately a 30 percent equity
interest through investments totaling $6.4 million. In August 2002, the
remaining equity interest was acquired for additional consideration of $14.8
million. Of this amount, we paid $12.7 million upon the closing of the
transaction and recorded the remaining liability of $2.1 million to be paid in 2
installments over the following two years. We allocated $18.6 million of the
total purchase price to developed technology, $1.9 million to net tangible
assets, and $0.7 million to in-process research and development. The in-process
research and development was expensed upon completion of the acquisition and is
included as a component of other operating income, net in the consolidated
statement of operations for fiscal 2003. No amounts were allocated to goodwill
since this development stage enterprise was not considered a business. The
developed technology is an intangible asset that is being amortized over its
estimated useful life of six years.
Employees and former shareholders of DigitalQuake were to receive
additional contingent consideration of up to $9.9 million if certain revenue
targets were achieved over the 24 months following the acquisition. The
contingent consideration was to be recognized when it was probable that the
revenue targets would be achieved. Of the total contingent consideration, $5.7
million was also contingent on future employment and was to be treated as
compensation expense. The remainder was to be treated as an additional part of
the purchase price. Since the revenue targets were not achieved by August 2004,
no such amounts have been recognized.
Pro forma results of operations related to this acquisition have not been
presented since the results of its operations were immaterial in relation to
National.
Note 5. Consolidated Financial Statement Details
Consolidated Balance Sheets
(In Millions) 2005 2004
-------------- ---------------
RECEIVABLE ALLOWANCES
Doubtful accounts $ 1.7 $ 2.1
Returns and allowances 25.0 44.6
-------------- ---------------
Total receivable allowances $ 26.7 $ 46.7
============== ===============
INVENTORIES
Raw materials $ 11.0 $ 13.9
Work in process 102.4 122.6
Finished goods 56.8 63.6
-------------- ---------------
Total inventories $ 170.2 $ 200.1
============== ===============
PROPERTY, PLANT AND EQUIPMENT
Land $ 30.0 $ 28.8
Buildings and improvements 539.8 517.2
Machinery and equipment 1,972.9 1,950.5
Internal-use software 113.4 119.9
Construction in progress 10.6 57.5
-------------- ---------------
Total property, plant and equipment 2,666.7 2,673.9
Less accumulated depreciation and amortization (2,061.6) (1,974.3)
-------------- ---------------
Property, plant and equipment, net $ 605.1 $ 699.6
============== ===============
OTHER ASSETS
Deposits $ 44.6 $ 22.7
Deferred compensation plan assets 37.2 30.3
Other 24.4 35.4
-------------- ---------------
Total other assets $ 106.2 $ 88.4
============== ===============
ACCRUED EXPENSES
Payroll and employee related $ 79.6 $ 124.6
Cost reduction charges and restructuring of operations 5.3 10.9
Litigation accruals 3.3 30.0
Other 55.4 69.3
-------------- ---------------
Total accrued expenses $ 143.6 $ 234.8
============== ===============
ACCUMULATED OTHER COMPREHENSIVE LOSS
Unrealized loss on available-for-sale securities $ (0.4) $ (0.1)
Minimum pension liability (97.8) (88.3)
-------------- ---------------
Accumulated other comprehensive loss $ (98.2) $ (88.4)
============== ===============
Consolidated Statements of Operations
(In Millions) 2005 2004 2003
------------- ------------- --------------
OTHER OPERATING (INCOME) EXPENSE, NET
Litigation $ (7.1) $ 30.0 $ -
Manufacturer's Investment Credit refund (7.4) - -
Net intellectual property income (5.2) (11.1) (6.1)
Net intellectual property settlements 1.7 3.1 -
In-process research and development charges - - 0.7
------------- ------------- --------------
Total other operating (income) expense, net $ (18.0) $ 22.0 $ (5.4)
============= ============= ==============
INTEREST INCOME, NET
Interest income $ 17.4 $ 11.6 $ 16.3
Interest expense (1.5) (1.2) (1.5)
------------- ------------- --------------
Interest income, net $ 15.9 $ 10.4 $ 14.8
============= ============= ==============
OTHER NON-OPERATING EXPENSE, NET
Net gain on marketable and other investments, net:
Available-for-sale securities:
Gain from sale $ - $ 0.5 $ 11.6
Impairment loss - - (1.6)
Non-marketable investments:
Gain from sale 0.7 6.4 -
Impairment losses - (0.3) (11.6)
Other investments - 0.4 (2.3)
------------- ------------- --------------
Total net gain (loss) on marketable and other investments,
net 0.7 7.0 (3.9)
Share in net losses of equity-method investments (5.7) (14.1) (15.9)
Other (0.5) 0.2 0.1
------------- ------------- --------------
Total other non-operating expense, net $ (5.5) $ (6.9) $ (19.7)
============= ============= ==============
Note 6. Goodwill and Intangible Assets
The following table presents goodwill by reportable segments:
Analog
(In Millions) Segment All Others Total
--------------- -------------- --------------
Balances at May 30, 2004 $150.6 $ 22.7 $173.3
Impairment (86.1) - (86.1)
--------------- -------------- --------------
Balances at May 29, 2005 $ 64.5 $ 22.7 $ 87.2
=============== ============== ==============
There were no changes to the carrying value of goodwill during the years
ended May 30, 2004 and May 25, 2003.
Other intangible assets, which are included in other assets in the
accompanying consolidated balance sheet and will continue to be amortized,
consisted of the following:
Weighted-Average Weighted-Average
Amortization Amortization
Period Period
(In Millions) 2005 (Years) 2004 (Years)
------------- --------------------- --------------- ---------------------
Patents $ 4.9 5.0 $ 4.9 5.0
Unpatented technology 18.6 5.8 18.6 5.8
------------- ---------------
23.5 23.5
Less accumulated amortization (13.6) (9.6)
------------- ---------------
$ 9.9 5.7 $13.9 5.7
============= ===============
Amortization expense was:
(In Millions) 2005 2004 2003
------------ ----------- -----------
Patent amortization $ 1.0 $ 1.0 $ 1.0
Technology amortization 3.0 3.3 2.6
------------ ----------- -----------
Total amortization $ 4.0 $ 4.3 $ 3.6
============ =========== ===========
Beginning in fiscal 2005, we have classified the amortization expense of
these intangible assets as R&D expenses. Amounts reported in previous years have
been reclassified to conform with this presentation.
We expect amortization expense in the following fiscal years to be:
(In Millions)
----------------
2006 $ 3.2
2007 3.0
2008 3.0
2009 0.7
----------------
$ 9.9
================
Note 7. Asset Retirement Obligations
We adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," at the
beginning of fiscal 2004. This statement requires that the fair value of a legal
liability for an asset retirement obligation be recorded in the period in which
it is incurred if a reasonable estimate of fair value can be made. Upon
recognition of a liability, the asset retirement cost is recorded as an increase
in the carrying value of the related long-lived asset and then depreciated over
the life of the asset. Our asset retirement obligations arise primarily from
contractual commitments to decontaminate machinery and equipment used at our
manufacturing facilities at the time we dispose of or replace them. We also have
leased facilities where we have asset retirement obligations from contractual
commitments to remove leasehold improvements and return the property to a
specified condition when the lease terminates. As a result of our evaluation of
our asset retirement obligations, we recorded a $2.1 million noncurrent
liability for asset retirement obligations and a $0.4 million increase in the
carrying value of the related assets, net of $1.0 million of accumulated
depreciation at the beginning of fiscal 2004. The cumulative effect that was
recorded in the first quarter of fiscal 2004 upon the adoption of this
accounting standard resulted in a charge of $1.9 million, including a tax effect
of $0.2 million.
At the time we adopted SFAS No. 143, we did not recognize any asset
retirement obligations associated with the closure or abandonment of the
manufacturing facilities we own. Our legal asset retirement obligations for
manufacturing facilities arise primarily from local laws and statutes that
establish minimum standards or requirements for companies in that locale in the
event it were to shut down or otherwise exit or abandon a manufacturing
facility. We intend to operate our manufacturing facilities indefinitely and are
therefore unable at any one time to reasonably estimate the fair value of any
legal obligations we may have because of the indeterminate closure dates.
However, we announced in July 2005 that we plan to close our assembly and test
facility in Singapore and consolidate its production volume into our other
assembly and test facilities in Malaysia and China. The majority of the
activities associated with the closure is expected to take place over the next
nine to twelve months. We do not expect to incur any significant asset
retirement costs in excess of amounts accrued associated with the closure of
this facility.
The following table presents the activity for the asset retirement
obligations included in other noncurrent liabilities for the years ended May 29,
2005 and May 30, 2004:
(In Millions)
-----------------------
Balance at May 25, 2003 $ 2.1
Liability incurred for assets acquired 0.2
Accretion expense 0.2
-----------------------
Balance at May 30, 2004 2.5
Liability incurred for assets acquired -
Accretion expense 0.3
-----------------------
Balance at May 29, 2005 $ 2.8
=======================
The following table presents net income (loss) and earnings (loss) per
share for fiscal 2004 and 2003 as if the provisions of SFAS No. 143 had been
applied at the beginning of fiscal 2003:
(In Millions, Except Per Share Amounts) 2004 2003
------------- --------------
Net income (loss), as reported $ 282.8 $ (33.3)
Add back:
Cumulative effect of a change in accounting
principle including tax effect of $0.2 million 1.9 -
Deduct:
Accretion and depreciation in fiscal 2003, net of tax - (0.2)
------------- --------------
Net income (loss), as adjusted $ 284.7 $ (33.5)
============= ==============
Net income (loss) per share, as adjusted:
Basic $ 0.79 $ (0.09)
Diluted $ 0.73 $ (0.09)
Note 8. Debt
Debt at fiscal year-end consisted of the following:
(In Millions) 2005 2004
------------- ------------
Unsecured promissory note at 1.8% $22.8 $21.9
Other 0.2 0.2
------------- ------------
Total debt 23.0 22.1
Less current portion of long-term debt - (22.1)
------------- ------------
Long-term debt $23.0 $ -
============= ============
The unsecured promissory note, due August 2007, is denominated in Japanese
yen (2,408,750,000). Interest is based on 1.375 percent over the 3-month
Japanese LIBOR rate and is reset quarterly. Under the terms of the note, we are
also required to comply with the covenants set forth under our multicurrency
credit agreement, which was renewed on October 20, 2004. As of May 29, 2005,
maturities on our outstanding debt obligations were $22.8 million in fiscal 2008
and $0.2 million in fiscal 2013.
We have a multicurrency credit agreement with a bank that provides for
multicurrency loans, letters of credit and standby letters of credit. The total
amount of credit under the agreement is $20 million. The agreement expires in
October 2005, and we expect to renew or replace it prior to expiration. At May
29, 2005, we had committed $9.1 million of the credit available under the
agreement. This agreement contains restrictive covenants, conditions and default
provisions that, among other terms, restrict payment of dividends and require
the maintenance of financial ratios and certain levels of tangible net worth. At
May 29, 2005, under the most restrictive of these covenants, $497.0 million of
tangible net worth was unrestricted and available for payment of dividends on
common stock.
Note 9. Income Taxes
Worldwide pretax income (loss) from operations and income taxes consist of the
following:
(In Millions) 2005 2004 2003
-------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE
U.S. $ 338.0 $ 267.3 $(75.3)
Non-U.S. 71.9 66.4 52.0
-------------- ------------- -------------
$ 409.9 $ 333.7 $(23.3)
INCOME TAX EXPENSE (BENEFIT)
Current:
U.S. federal, state and local $ 30.4 $ 33.8 $ -
Non-U.S. 29.3 15.2 6.4
-------------- ------------- -------------
59.7 49.0 6.4
Deferred:
U.S. federal and state (41.0) (1.7) -
Non-U.S. (24.1) 1.7 3.6
-------------- ------------- -------------
(65.1) - 3.6
-------------- ------------- -------------
Income tax expense (benefit) $ (5.4) $ 49.0 $ 10.0
============== ============= =============
The fiscal 2005 income tax benefit of $5.4 million includes income tax
expense of $160.8 million, which consisted primarily of U.S. and non-U.S. income
taxes, offset by a benefit from the change in the beginning of the year
valuation allowance of $166.2 million. The tax benefit from employee stock plans
was $20.1 million in fiscal 2005 and $22.2 million in fiscal 2004. There was no
tax benefit from employee stock plans in fiscal 2003.
The tax effects of temporary differences that constitute significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
(In Millions) 2005 2004
-------------- --------------
DEFERRED TAX ASSETS
Equity investments $ 17.9 $ 23.7
Property, plant and equipment and amortization - 4.8
Inventory 5.8 11.9
Accrued liabilities 43.1 58.4
R&D expenditures 117.6 56.7
Deferred compensation 32.1 31.9
Non-U.S. loss carryovers and other allowances 83.5 7.0
Federal and state credit carryovers 141.8 243.0
Other 7.3 25.6
-------------- ---------------
Total deferred tax assets 449.1 463.0
Valuation allowance (91.5) (373.9)
-------------- ---------------
Net deferred tax assets 357.6 89.1
DEFERRED TAX LIABILITIES
Property, plant and equipment and amortization (28.5) -
Other liabilities (10.0) (3.5)
-------------- ---------------
Total deferred tax liabilities (38.5) (3.5)
-------------- ---------------
Net deferred tax assets $319.1 $ 85.6
============== ===============
The increase in deferred tax assets during fiscal 2005 of $233.5 million is
from a $164.4 million release of a valuation allowance to equity and benefits of
$65.1 million to continuing operations and $4.0 million to other comprehensive
income. The deferred tax benefit of $65.1 million to continuing operations
arises from a $166.2 million change in the beginning of the year valuation
allowance and utilization of $101.1 million of deferred tax assets during fiscal
2005 excluding tax effect on other comprehensive income items.
We record a valuation allowance to reflect the estimated amount of deferred
tax assets that may not be realized. The valuation allowance for deferred tax
assets decreased by $282.4 million in fiscal 2005 compared to a decrease of
$22.0 million in fiscal 2004. We recognized a $164.4 million tax benefit from
the reduction in the valuation allowance related to employee stock options in
fiscal 2005, which was credited to shareholders' equity. At May 29, 2005, there
was no valuation allowance against deferred tax assets for stock option
deductions.
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. As of May 29, 2005, based on historical taxable income and
projections for future taxable income over the periods that the deferred tax
assets are deductible, we believe it is more likely than not that we will
realize the benefits of these deductible differences, net of valuation
allowance.
The reconciliation between the income tax rate computed by applying the
U.S. federal statutory rate and the reported worldwide tax rate follows:
2005 2004 2003
--------------- -------------- --------------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Non-U.S. income taxed at different rates 2.9 2.1 (10.5)
U.S. state and local taxes net of federal benefits 1.7 0.1 (0.7)
Current year loss not benefited - - (66.7)
Changes in beginning of year valuation allowances (40.5) (18.9) -
Export sales benefit (4.5) (3.5) -
Tax credits (1.7) (0.9) -
Impairment of goodwill 5.8 - -
Other - 0.8 -
--------------- -------------- --------------
Effective tax rate (1.3)% 14.7% (42.9)%
=============== ============== ==============
We have not provided U.S. income taxes on the cumulative unremitted
earnings of approximately $548.9 million from certain non-U.S. subsidiaries. We
currently intend to reinvest these earnings in operations outside the U.S.
indefinitely. It is not practicable to determine the U.S. income tax liability
that would be payable if such earnings were not reinvested indefinitely. The
American Jobs Creation Act of 2004 creates a one-time incentive for U.S.
corporations to repatriate accumulated income earned abroad by providing an 85
percent dividends-received deduction for certain dividends from controlled
foreign corporations. The deduction is subject to a number of limitations, and
we are uncertain as to how to interpret numerous provisions in the Act.
Accordingly, we are not yet in a position to decide whether, and to what extent,
foreign earnings that have not yet been remitted to the U.S. might be
repatriated. Based on the analysis to date, however, it is reasonably possible
that as much as $500 million could be repatriated, which would then require a
corresponding tax liability of up to $45 million. We expect to be in a position
to finalize our analysis by March 2006.
At May 29, 2005, we had $6.0 million of federal net operating loss
carryovers and $103.9 million of state net operating loss carryovers, which
expire between 2005 and 2024. We also had $82.6 million of federal credit
carryovers and $59.3 million of state credit carryovers, which primarily expire
between 2006 and 2025. Included in the state tax credits is a California R&D
credit of $48.3 million, which can be carried forward indefinitely. In addition,
we had net operating loss and other tax allowance carryovers of $374.4 million
from certain non-U.S. jurisdictions.
The IRS has completed its 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. 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. We believe we
have made adequate tax payments and/or accrued adequate amounts such that the
outcome of these audits will have no material adverse effects on our financial
statements.
Note 10. Shareholders' Equity
Stock Split
On May 13, 2004, we completed a two-for-one stock split of our common stock. The
stock split was payable in the form of a 100 percent stock dividend and entitled
each shareholder of record on April 29, 2004, to receive one share of common
stock for each outstanding share of common stock held on that date. All
information about capital stock accounts, share and per share amounts included
in the accompanying consolidated financial statements for fiscal 2004 and 2003
have been retroactively adjusted to reflect this stock split.
Stock Purchase Rights
Each outstanding share of common stock carries with it a stock purchase right.
If and when the rights become exercisable, each right entitles the registered
holder to purchase one two-thousandth of a share of series A junior
participating preferred stock at a price of $60.00 per one one-thousandth share,
subject to adjustment. The rights are attached to all outstanding shares of
common stock and no separate rights certificates have been distributed.
If any individual or group acquires 20 percent or more of our common stock
or announces a tender or exchange offer which, if completed, would result in
that person or group owning at least 20 percent of our common stock, the rights
become exercisable and will detach from the common stock. If the person or group
actually acquires 20 percent or more of the common stock (except in certain cash
tender offers for all of the common stock), each right will entitle the holder
to purchase, at the right's then-current exercise price, our common stock in an
amount having a market value equal to twice the exercise price. In addition, if,
after the rights become exercisable, we merge or consolidate with or sell 50
percent or more of our assets or earning power to another person or entity, each
right will then entitle the holder to purchase, at the right's then-current
exercise price, the stock of the acquiring company in an amount having a market
value equal to twice the exercise price. We may redeem the rights at $0.005 per
right at any time prior to the acquisition by a person or group of 20 percent or
more of the outstanding common stock. Unless they are redeemed earlier, the
rights will expire on August 8, 2006.
Stock Repurchase Program
We began to repurchase stock in fiscal 2004 pursuant to a stock repurchase
program announced in July 2003. During September and October 2003, we
repurchased a total of 25.4 million shares of our common stock for $400 million.
A portion (15.0 million shares) of the shares was repurchased through a
privately negotiated transaction with a major financial institution and the
remainder was purchased in the open market.
We began another $400 million stock repurchase program in March 2004 and at
the end of fiscal 2004, we had repurchased an additional 7.0 million shares of
our common stock for $142.5 million, of which 730,988 shares were purchased
through a privately negotiated transaction with a major financial institution,
with the remainder purchased in the open market. We continued this repurchase
program in fiscal 2005. At the time we completed this repurchase program in
March 2005, we had repurchased a total of 15.4 million shares of our common
stock in fiscal 2005 for $257.5 million. Of these shares, 1.5 million shares
were repurchased for $30.0 million in June 2004 upon the final settlement of an
advance purchase contract originally entered into with a financial institution
in April 2004. Under the terms of the advance purchase contract, we made an
advance cash payment of $60.0 million in May 2004 that enabled us to repurchase
shares of our common stock at a fixed price on specified settlement dates. The
advance payment was recorded as a note receivable and a credit to additional
paid-in capital. The remaining 13.9 million shares of common stock were
repurchased in the open market for $227.5 million during the second, third and
fourth quarters of fiscal 2005.
In March 2005, we announced that our Board of Directors had approved
another $400 million stock repurchase program similar to our prior stock
repurchase programs. As of May 29, 2005, we had repurchased a total of 4.9
million shares of common stock for $96.0 million under this new repurchase
program. Of these shares, 1.2 million were purchased for $25.0 million through
an advance purchase contract with a major financial institution with terms
similar to the prior advance purchase contract. As of May 29, 2005, we had
$304.0 million remaining available for future common stock repurchases.
All stock repurchased has been cancelled and is not held as treasury stock.
Dividends
During fiscal 2005, we paid $14.1 million in dividends. In June 2005, the Board
of Directors declared a cash dividend of $0.02 per outstanding share of common
stock, which was paid on July 11, 2005 to shareholders of record at the close of
business on June 20, 2005.
Note 11. Stock-Based Compensation Plans
Stock Option Plans
As of May 29, 2005, under all stock options plans there were 129.1 million
shares reserved for issuance, including 51.5 million shares available for future
option grants. More information on our stock option plans follows:
We have four stock plans under which employees and officers may be granted
stock options to purchase shares of common stock. One plan, which has been in
effect since 1977 when it was first approved by shareholders, authorizes the
grant of up to 78,709,858 shares of common stock for nonqualified or incentive
stock options (as defined in the U.S. tax code) to officers and key employees.
As of the end of fiscal 2005, only 95,562 shares remained available for option
grants under this plan. Another plan, which has been in effect since 1997,
authorizes the grant of up to 140,000,000 shares of common stock for
nonqualified stock options to employees who are not executive officers. There is
also an executive officer stock option plan, which was approved by shareholders
in fiscal 2000 and which authorizes the grant of up to 12,000,000 shares of
common stock for nonqualified options only to executive officers. The 2005
Executive Officer Equity Plan approved by shareholders in fiscal 2004 authorizes
the issuance of a total of 3,000,000 shares, 1,000,000 of which can be pursuant
to the exercise of stock options. All plans provide that options are granted at
the market price on the date of grant and can expire up to a maximum of between
six years and one day and ten years and one day after grant or three months
after termination of employment (up to five years after termination due to
death, disability or retirement), whichever occurs first. The plans provide that
options can vest six months after grant. Until the beginning of fiscal 2004,
most options granted began vesting in four equal annual installments beginning
one year after grant and expired ten years and one day after grant. All options
granted since the beginning of fiscal 2004 expire six years and one day after
grant and begin vesting with one fourth of the total grant after one year and
the rest in equal monthly installments over the next three years.
As part of the acquisition of ComCore Semiconductor in fiscal 1998, we
assumed ComCore's outstanding obligations under its stock options plan and stock
option agreements for its employees and consultants. The final options remaining
under the ComCore plan expired during fiscal 2005 and at May 29, 2005, there
were no more options outstanding under this stock option plan.
We have a director stock option plan that was first approved by
shareholders in fiscal 1998 which authorizes the grant of up to 2,000,000 shares
of common stock to eligible directors who are not employees of the company.
Options were granted automatically upon approval of the plan by shareholders and
are granted automatically to eligible directors upon their appointment to the
board and subsequent election to the board by shareholders. Director stock
options vest in full after six months. Under this plan, options to purchase
750,000 shares of common stock with a weighted-average exercise price of $14.44
and weighted-average remaining contractual life of 6.2 years were outstanding
and exercisable as of May 29, 2005.
Upon his retirement in May 1995, we granted the former chairman of the
company an option to purchase 600,000 shares of common stock at $13.94 per
share. The option was granted outside the company's stock option plans at the
market price on the date of grant. It expired ten years and one day after grant
and became exercisable ratably over a four-year period. All options were
exercised prior to expiration in May 2005.
In connection with the DigitalQuake acquisition in fiscal 2003, we granted
options to purchase an aggregate of 261,396 shares of common stock at $7.93 to
five founding shareholders of DigitalQuake. These options were granted outside
of the stock option plans at the market price on the date of grant and become
exercisable in two equal installments, one and two years after the date of
grant. The option gave the DigitalQuake founding shareholders the right to
receive all or a portion of their installment payments of the purchase price
paid for DigitalQuake in cash or shares of common stock, subject to the founders
remaining employed by National. A total of 103,268 shares were issued upon
exercise of these DigitalQuake options. The options have now expired.
Changes in shares of common stock outstanding under the option plans during
fiscal 2005, 2004 and 2003 (but excluding the ComCore, DigitalQuake, director
and former chairman options), were as follows:
Number of Shares Weighted-Average
(In Millions) Exercise Price
--------------------------- ------------------------------
Outstanding at May 26, 2002 83.1 $14.54
Granted 14.2 $ 7.51
Exercised (2.1) $ 7.02
Cancelled (3.5) $15.98
---------------------------
Outstanding at May 25, 2003 91.7 $13.57
Granted 15.0 $13.50
Exercised (19.7) $ 9.14
Cancelled (5.3) $16.01
---------------------------
Outstanding at May 30, 2004 81.7 $14.47
Granted 7.0 $19.04
Exercised (8.2) $10.16
Cancelled (3.8) $16.18
---------------------------
Outstanding at May 29, 2005 76.7 $15.26
===========================
Expiration dates for options outstanding at May 29, 2005 range from
September 25, 2005 to May 19, 2013.
The following tables summarize information about options outstanding under
these plans (excluding the ComCore, DigitalQuake, director and former chairman
options) at May 29, 2005:
Outstanding Options
---------------------------------------------------------------------------
Weighted-Average
Remaining Contractual
Number of Shares Life Weighted-Average
(In Millions) (In Years) Exercise Price
--------------------- ---------------------------- ------------------------
RANGE OF EXERCISE PRICES
$ 4.72-$ 6.50 10.0 4.6 $ 6.36
$ 6.53-$ 8.38 9.8 5.9 $ 7.55
$ 8.45-$11.63 10.1 4.3 $11.50
$11.68-$13.05 10.7 6.0 $12.95
$13.10-$17.03 3.6 4.3 $15.28
$17.10-$17.10 10.8 6.9 $17.10
$17.15-$20.62 9.6 5.0 $19.13
$20.68-$39.03 12.1 4.9 $29.36
---------------------
Total 76.7 5.3 $15.26
=====================
Options Exercisable
--------------------------------------------------
Number of Shares Weighted-Average
(In Millions) Exercise Price
--------------------- ----------------------------
RANGE OF EXERCISE PRICES
$ 4.72-$ 6.50 8.4 $ 6.37
$ 6.53-$ 8.38 6.1 $ 7.46
$ 8.45-$11.63 4.6 $11.48
$11.68-$13.05 10.3 $12.95
$13.10-$17.03 2.9 $15.27
$17.10-$17.10 7.9 $17.10
$17.15-$20.62 1.1 $19.08
$20.68-$39.03 11.9 $29.45
---------------------
Total 53.2 $15.75
=====================
In summary, as of May 29, 2005, there were 129.1 million shares reserved
for issuance under all option plans, including 51.5 million shares available for
future option grants.
Stock Purchase Plans
During fiscal 2004, we implemented a new employee stock purchase plan that
authorizes the issuance of up to 16,000,000 shares in quarterly offerings to
eligible employees worldwide at a price that is equal to 85 percent of the lower
of the common stock's fair market value at the beginning of a one year offering
period or at the end of the applicable quarter in the offering period. Once
implemented, we terminated our employee stock purchase plan that had been in
effect in the U.S. since 1977 that authorized the issuance of up to 49,900,000
shares of stock in quarterly offerings to eligible employees at a price that was
equal to 85 percent of the lower of the common stock's fair market value at the
beginning or the end of a quarterly period. We also had an employee stock
purchase plan available to employees at international locations that had been in
effect since 1994. That plan authorized the issuance of up to 10,000,000 shares
of stock in quarterly offerings to eligible employees, also at a price equal to
85 percent of the lower of its fair market value at the beginning or the end of
a quarterly period. Both our new and prior purchase plans use a captive broker
and we deposit shares purchased by the employee with the captive broker. In
addition, for international participants, the National subsidiary that the
participant is employed by is responsible for paying to National the difference
between the purchase price set by the terms of the plan and the fair market
value at the time of the purchase. All purchase plans have been approved by
shareholders.
Under the terms of all purchase plans, we issued 2.2 million shares in
fiscal 2005, 2.7 million shares in fiscal 2004 and 4.3 million shares in fiscal
2003 to employees for $33.2 million, $30.0 million and $28.1 million,
respectively. As of May 29, 2005, there were 13.4 million shares reserved for
issuance under the new stock purchase plan. The prior purchase plans were
terminated before the end of fiscal 2004 and the reserves maintained for them
were cancelled.
Other Stock Plans
We have a director stock plan, which has been approved by shareholders, that
authorizes the issuance of up to 400,000 shares of common stock to eligible
directors who are not employees of the company. The stock is issued
automatically to eligible new directors upon their appointment to the board and
to all eligible directors on their subsequent election to the board by
shareholders. Directors may also elect to take their annual retainer fees for
board and committee membership in stock under the plan. As of May 29, 2005, we
have issued 258,610 shares under the director stock plan and have reserved
141,390 shares for future issuances.
We have a restricted stock plan, which authorizes the issuance of up to
4,000,000 shares of common stock to employees who are not officers of the
company. The plan has been made available primarily as a retention vehicle for
employees with technical skills and expertise that are important to us. We
issued 134,420, 194,000 and 60,000 shares under the restricted stock plan during
fiscal 2005, 2004 and 2003, respectively. Restrictions expire over time, ranging
from one to six years after issuance. Based upon the market value on the dates
of issuance, we recorded $2.6 million, $3.1 million and $0.5 million of unearned
compensation during fiscal 2005, 2004 and 2003, respectively. This unearned
compensation is included as a separate component of shareholders equity in the
financial statements and is amortized to operations ratably over the applicable
restriction periods. As of May 29, 2005, we have 1,948,010 shares reserved for
future issuances under the restricted stock plan. Compensation expense for
fiscal 2005, 2004 and 2003 related to shares of restricted stock was $3.2
million, $3.1 million and $3.0 million, respectively. At May 29, 2005, the
weighted-average grant date fair value for all outstanding shares of restricted
stock was $12.49.
As noted in the discussion on stock option plans, stockholders approved the
2005 Executive Officer Equity Plan in October 2004. This plan authorizes the
issuance of up to a total of 3,000,000 shares through stock options, performance
share units and stock appreciation rights. Of these, 1,000,000 shares may be
issued upon the exercise of stock options and 2,000,000 shares may be issued in
any combination upon the settlement of stock appreciation rights and/or as
payment for performance share units. As of May 29, 2005, no options had been
granted and no shares had been issued under this plan.
Note 12. Retirement and Pension Plans
Our retirement and savings program for U.S. employees consists of a salary
deferral 401(k) plan. Until the beginning of fiscal 2005, it also included a
profit sharing plan. More information of each of these plans follows.
The salary deferral 401(k) plan allows employees to defer up to 15 percent
of their salaries, subject to certain limitations, with partially matching
company contributions. To encourage employee participation, we make a matching
contribution of 150% of the first 4% of the employee's contribution to the
401(k) plan. The matching contribution was significantly increased in fiscal
2004 to encourage and increase employee participation. Contributions are
invested in one or more of fifteen investment funds at the discretion of the
employee. One of the investment funds is a stock fund in which contributions are
invested in National common stock at the discretion of the employee. 401(k)
investments made by the employee in National stock may be sold at any time at
the employee's direction. Although 10,000,000 shares of common stock are
reserved for issuance to the stock fund, shares purchased to date with
contributions have been purchased on the open market and we have not issued any
stock directly to the stock fund.
Until fiscal 2004, the profit sharing plan required contributions of the
greater of 5 percent of consolidated net earnings before income taxes (subject
to a limit of 5 percent of payroll) or 1 percent of payroll. Contributions were
made 25 percent in National stock and 75 percent in cash. During fiscal 2004,
the profit sharing plan was amended and terminated beginning fiscal 2005. The
final profit sharing contribution was made in cash and consisted of the profit
sharing contribution that would have been made for fiscal 2004 less the amount
for increased 401(k) matching contributions made during fiscal 2004. Total
shares contributed to the profit sharing plan during fiscal 2004 for the fiscal
2003 contribution were 76,884 and during fiscal 2003 for the fiscal 2002
contribution were 74,286.
We also have a deferred compensation plan, which allows highly compensated
employees (as defined by IRS regulations) to receive a higher profit-sharing
plan allocation than would otherwise be permitted under IRS regulations and to
defer greater percentages of compensation than would otherwise be permitted
under the salary deferral 401(k) plan and IRS regulations. The deferred
compensation plan is a nonqualified plan of deferred compensation maintained in
a rabbi trust. Participants can direct the investment of their deferred
compensation plan accounts in the same investment funds offered by the 401(k)
plan.
Certain of our international subsidiaries have varying types of defined
benefit pension and retirement plans that comply with local statutes and
practices.
The annual expense for all plans was as follows:
(In Millions) 2005 2004 2003
------------- ------------ ------------
Profit sharing plan $ - $ 14.5 $ 3.8
Salary deferral 401(k) plan $ 22.0 $ 14.6 $ 12.3
Non-U.S. pension and retirement plans $ 18.8 $ 19.9 $ 13.5
Defined benefit pension plans maintained in the U.K., Germany, Japan and
Taiwan cover all eligible employees within each respective country. Pension plan
benefits are based primarily on participants' compensation and years of service
credited as specified under the terms of each country's plan. The funding policy
is consistent with the local requirements of each country. We may also
voluntarily fund additional annual contributions as determined by management.
For fiscal 2006, we currently expect contributions to total approximately $8.0
million. The plans use measurement dates of February 28th and May 31st to
determine the measurements of plan assets and obligations.
Plan assets of funded plans are invested in an index based fund held by a
third-party fund manager or are deposited into government-managed accounts in
which we are not actively involved with and have no control over investment
strategy. One of the plans is a self-funded plan. The plan assets held by the
third-party fund manager consist primarily of U.S. and foreign equity
securities, bonds and cash. The fund manager monitors the fund's asset
allocation within the guidelines established by the plan's Board of Trustees. In
line with plan investment objectives and consultation with company management,
the Trustees set an allocation benchmark between equity and bond assets based on
the relative weighting of overall international market indices. The overall
investment objectives of the plan are 1) the acquisition of suitable assets of
appropriate liquidity which will generate income and capital growth to meet
current and future plan benefits, 2) limit the risk of the asset failing to meet
the long term liabilities of the plan and 3) minimize the long term costs of the
plan by maximizing the return on the assets. Performance is regularly evaluated
by the Trustees and is based on actual returns achieved by the fund manager
relative to their benchmark. The expected long-term rate of return for plan
assets is based on analysis of historical data and future expectations relevant
to the investments and consistency with the assumed rate of inflation implicit
in the market.
The following table presents target allocation percentages and the year end
percentage for each major category of plan assets:
2005 2004
---------------------------------- -----------------------------------
Asset Target Actual Target Actual
Category Allocation Percentage Allocation Percentage
---------------- ----------------- ----------------- -----------------
Equities 80% 80% 80% 80%
Bonds 20% 20% 20% 20%
---------------- ----------------- ----------------- -----------------
Total 100% 100% 100% 100%
================ ================= ================= =================
Net annual periodic pension cost of these non-U.S. defined benefit pension
plans is presented in the following table:
(In Millions) 2005 2004 2003
----------------- ----------------- -----------------
Service cost of benefits earned during the year $ 6.0 $ 5.8 $4.9
Plan participant contributions (1.5) (0.9) (0.8)
Interest cost on projected benefit obligation 12.9 11.5 9.6
Expected return on plan assets (9.7) (6.3) (6.1)
Net amortization and deferral 4.8 5.8 1.8
----------------- ----------------- -----------------
Net periodic pension cost $12.5 $15.9 $9.4
================= ================= =================
(In Millions) 2005 2004
----------------- -----------------
BENEFIT OBLIGATION
Beginning balance $224.7 $196.4
Service cost 6.0 5.8
Interest cost 12.9 11.5
Benefits paid (3.9) (2.9)
Actuarial (gain) loss 20.4 (8.4)
Exchange rate adjustment 14.7 22.3
----------------- -----------------
Ending balance $274.8 $224.7
================= =================
PLAN ASSETS AT FAIR VALUE
Beginning balance $125.9 $ 78.4
Actual return on plan assets 9.4 17.5
Company contributions 26.5 22.1
Plan participant contributions 1.5 0.9
Benefits paid (3.6) (2.7)
Exchange rate adjustment 8.5 9.7
----------------- -----------------
Ending balance $168.2 $125.9
================= =================
RECONCILIATION OF FUNDED STATUS
Fund status - Benefit obligation in excess of
plan assets $106.6 $ 98.8
Unrecognized net loss (131.5) (107.6)
Unrecognized net transition obligation 2.1 2.1
Adjustment to recognize minimum liability 106.6 93.1
----------------- -----------------
Accrued pension cost $ 83.8 $ 86.4
================= =================
ACCUMULATED BENEFIT OBLIGATION
Fiscal year end balance $271.1 $221.5
================= =================
The net periodic pension cost and projected benefit obligations were
determined using the following assumptions:
2005 2004 2003
----------------- ----------------- -----------------
NET PERIODIC PENSION COST
Discount rate 1.8%-5.4% 1.8%-5.7% 2.3%-5.5%
Rate of increase in compensation levels 2.3%-4.3% 1.0%-4.1% 2.5%-3.8%
Expected long-term return on assets 2.3%-7.5% 2.8%-7.5% 3.0%-7.5%
PROJECTED BENEFIT OBLIGATIONS
Discount rate 1.8%-5.4% 1.8%-5.7%
Rate of increase in compensation levels 2.0%-4.3% 1.0%-4.1%
The following table presents the total expected benefits to be paid to plan
participants for the next ten years as determined based on the same assumptions
used to measure the benefit obligation at the end of the year:
(In Millions)
-----------------
2006 $ 2.8
2007 3.1
2008 3.2
2009 3.5
2010 3.6
2011-2015 21.4
-----------------
Total $37.6
=================
As required by the pension accounting standards, in each of the fiscal
years presented, we recorded adjustments for minimum pension liability to equal
the amount of the unfunded accumulated benefit obligation in one of our plans.
For fiscal 2005, the adjustment was $13.5 million and a corresponding amount,
net of a $4.0 million tax effect, is reflected in the consolidated financial
statements as a component of accumulated other comprehensive loss. The unfunded
benefit obligation decreased from $86.4 million in fiscal 2004 to $83.8 million
in fiscal 2005 primarily because of contributions paid to the plans totaling
$26.5 million.
Note 13. Commitments and Contingencies
Commitments
We lease certain facilities and equipment under operating lease arrangements.
Rental expenses under operating leases were $34.6 million, $25.4 million and
$24.1 million in fiscal 2005, 2004 and 2003, respectively.
Future minimum commitments under noncancelable operating leases are as
follows:
(In Millions)
------------------------------
2006 $ 30.9
2007 24.8
2008 11.7
2009 7.1
2010 4.3
Thereafter 2.8
------------------------------
Total $ 81.6
==============================
We had a manufacturing agreement with Fairchild Semiconductor Corporation
where we were committed to purchase a minimum level of goods and services based
on specified wafer prices, which were intended to approximate market prices. The
agreement had an original term of three years through December 2003, but was
extended in fiscal 2004 through December 2004 under similar terms at which time
it expired. Total purchases from Fairchild were $4.5 million in fiscal 2005,
$16.7 million in fiscal 2004 and $24.2 million in fiscal 2003.
During fiscal 2004 we entered into a master operating lease agreement for
capital equipment under which individual operating lease agreements are executed
as the delivery and acceptance of scheduled equipment occurs. The required
future minimum lease payments under these operating leases are included in the
table above. These individual operating lease agreements under the master lease
provide for guarantees of the equipment's residual value at the end of their
lease terms for up to a maximum of $52.8 million. At May 29, 2005 the fair value
of the lease guarantees was $0.6 million and included in other noncurrent
liabilities.
Contingencies -- Legal Proceedings
Environmental Matters. We have been named to the National Priorities List for
our Santa Clara, California, site and we 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 fiscal 2005, 2004 and 2003.
As part of the 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 and Fairchild agreed to arrange for and perform the
remediation and cleanup. We prepaid to Fairchild the estimated costs of the
remediation and cleanup and remain responsible for costs and expenses incurred
by Fairchild in excess of the prepaid amounts. To date, the costs associated
with the liabilities we have retained in these dispositions have not been
material and there have been no related legal proceedings.
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
proceeding.
In November 2000, a derivative action was brought against us and other
defendants by a shareholder of Fairchild Semiconductor International, Inc.
Plaintiff seeks recovery of alleged "short-swing" profits under section 16(b) of
the Securities Exchange Act of 1934 from the sale by the defendants in January
2000 of Fairchild common stock. The complaint alleges that Fairchild's
conversion of preferred stock held by the defendants at the time of Fairchild's
initial public offering in August 1999 constitutes a "purchase" that must be
matched with the January 2000 sale for purposes of computing the "short-swing"
profits. Plaintiff seeks from National alleged recoverable profits of $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 amendment. Plaintiff filed a writ of mandamus with the
appeals court, requesting that the district court be ordered to lift the stay.
The SEC informed the appeals court that it was actively considering the proposed
rule amendments and in August 2005, announced the adoption of the rule
amendments which we believe exempt us from liability in this case. Nevertheless,
we intend to continue to contest the case through all available means.
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.
Subsequent to the trial, the court ordered the case to be retried in its
entirety. At a settlement conference held in December 2004, the case was
settled. We paid to the plaintiff the sum of $20.0 million and granted to the
plaintiff a royalty free license for the manufacture and sale of the custom
device at issue in the case. All settlement documents have now been completed
and the case has been dismissed in its entirety. We originally recorded a loss
accrual of $30.0 million in fiscal 2004, which represented our best estimate at
the time of the loss that would be incurred. As a result of the settlement, we
recorded a credit of $10.0 million that was included in other operating income,
net, in fiscal 2005 to adjust the loss accrual to equal the agreed settlement
amount.
In September 2002, iTech Group ("iTech") brought suit against us alleging a
number of contract and tort claims related to a software license agreement and
discussion to sell certain assets to iTech. At the trial, which began in May
2005, the jury rendered a verdict finding us liable for breach of contract,
promissory fraud and unjust enrichment and assessing approximately $234.0
thousand in compensatory damages and $15.0 million in punitive damages. We
contested the verdict in post trial motions heard late in July 2005. After
hearing the motions, the court affirmed the verdict for compensatory damages of
approximately $234.0 thousand, awarded attorneys' fees to iTech of approximately
$60.0 thousand, and reduced the punitive damages to $3.0 million. iTech has
until August 31, 2005 to accept the reduction of the punitive damages. If iTech
does not accept the reduction, a new trial will be ordered solely on the issue
of punitive damages. We intend to continue to contest the case through all
available means. We have accrued a charge of $3.3 million to cover the total
amount of damages awarded iTech under the court's order. Although the loss we
ultimately sustain may be higher or lower than the amount we have recorded, this
is currently our best estimate of any loss we may incur.
The IRS has completed field examinations of our tax returns for fiscal
years 1997 through 2000 and has issued a notice of proposed adjustment seeking
additional taxes of approximately $19.1 million (exclusive of interest) for
those years (See Note 9 to the Consolidated Financial Statements). We are
contesting the claims through the IRS administrative process.
We are currently a party to various claims and legal proceedings, including
those noted above. We make provisions for a liability when it is both probable
that a liability has been incurred and the amount of the loss can be reasonably
estimated. We believe we have made adequate provisions for potential liability
in litigation matters. We review these provisions at least quarterly and adjust
these provisions to reflect the impact of negotiations, settlements, rulings,
advice of legal counsel and other information and events pertaining to a
particular case. Based on the information that is currently available to us, we
believe that the ultimate outcome of litigation matters, individually and in the
aggregate, will not have a material adverse effect on our results of operations
or consolidated financial position. However, litigation is inherently
unpredictable. If an unfavorable ruling or outcome were to occur, there is a
possibility of a material adverse effect on results of operations or our
consolidated financial position.
Contingencies -- Other
In connection with our past divestitures, we have routinely provided indemnities
to cover the indemnified party for matters such as environmental, tax, product
and employee liabilities. We also routinely include intellectual property
indemnification provisions in our terms of sale, development agreements and
technology licenses with third parties. Since maximum obligations are not
explicitly stated in these indemnification provisions, the potential amount of
future maximum payments cannot be reasonably estimated. To date we have incurred
minimal losses associated with these indemnification obligations and as a
result, we have not recorded any liabilities in our consolidated financial
statements.
Note 14. Segment and Geographic Information
We design, develop, manufacture and market a wide range of semiconductor
products, most of which are analog and mixed-signal integrated circuits. We are
organized by various product line business units. For segment reporting
purposes, each of our product line business units represents an operating
segment as defined under SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," and our chief executive officer is
considered the chief operating decision-maker. Business units that have
similarities, including economic characteristics, underlying technology, markets
and customers, are aggregated into larger segments. For fiscal 2005, our Analog
segment, which accounted for 87 percent of net sales, is the only operating
segment that meets the criteria of a reportable segment under SFAS No. 131.
Operating segments that do not meet the criteria in SFAS 131 of a reportable
segment are combined under "All Others" and primarily include the device
connectivity business unit and the PC Super I/O business unit which was sold in
May 2005. Segment information for fiscal 2004 and 2003 has been reclassified to
conform to the fiscal 2005 presentation.
Product line business units that represent the Analog segment include the
power management, audio amplifier, data conversion, non-audio amplifier,
displays and wireless; and the communications infrastructure business units,
which provide a wide range of building block products such as high-performance
operational amplifiers, power management circuits, data acquisition circuits,
interface circuits, radio frequency circuits, audio subsystems, display drivers,
integrated receivers and timing controllers; and analog-to-digital converters.
The Analog segment also includes a variety of mixed-signal products which
combine analog and digital circuitry onto the same chip. The segment is heavily
focused on using our analog expertise to develop high-performance building
blocks, integrated solutions and mixed-signal products aimed at wireless
handsets, displays, notebook computers, other portable devices, industrial and
medical equipment, and automotive applications.
Aside from these operating segments, our corporate structure in fiscal
years 2003, 2004 and 2005 also included the centralized Worldwide Marketing and
Sales Group, the Central Technology and Manufacturing Group, and the Corporate
Group. Certain expenses of these groups are allocated to the operating segments
and are included in their segment operating results.
With the exception of the allocation of certain expenses, the significant
accounting policies and practices used to prepare the consolidated financial
statements as described in Note 1 are generally followed in measuring the sales,
segment income or loss and determination of assets for each reportable segment.
We allocate certain expenses associated with centralized manufacturing, selling,
marketing and general administration to operating segments based on either the
percentage of net trade sales for each operating segment to total net trade
sales or headcount, as appropriate. Certain R&D expenses primarily associated
with centralized activities such as process development are allocated to
operating segments based on the percentage of dedicated R&D expenses for each
operating segment to total dedicated R&D expenses.
The following table presents specified amounts included in the measure of
segment results or the determination of segment assets:
Analog
(In Millions) Segment All Others Total
------------- -------------- ---------------
2005
Sales to unaffiliated customers $1,668.5 $ 244.6 $1,913.1
============= ============== ===============
Segment income before income taxes $ 345.6 $ 64.3 $ 409.9
============= ============== ===============
Depreciation and amortization $ 15.7 $ 178.7 $ 194.4
Interest income - $ 17.4 $ 17.4
Interest expense - $ 1.5 $ 1.5
Share in net losses of equity-method
Investments $ 2.1 $ 3.6 $ 5.7
Segment assets $ 213.8 $2,290.4 $2,504.2
2004
Sales to unaffiliated customers $1,680.3 $ 302.8 $1,983.1
============= ============== ===============
Segment income (loss) before income taxes $ 394.4 $ (60.7) $ 333.7
============= ============== ===============
Depreciation and amortization $ 16.8 $ 193.1 $ 209.9
Interest income - $ 11.6 $ 11.6
Interest expense - $ 1.2 $ 1.2
Share in net losses of equity-method
investments $ 6.6 $ 7.5 $ 14.1
Segment assets $ 307.7 $1,972.7 $2,280.4
Analog
(In Millions) Segment All Others Total
------------- -------------- ---------------
2003
Sales to unaffiliated customers $1,365.9 $ 306.6 $1,672.5
============= ============== ===============
Segment income (loss) before income taxes $ 50.9 $ (74.2) $ (23.3)
============= ============== ===============
Depreciation and amortization $ 16.0 $ 212.5 $ 228.5
Interest income - $ 16.3 $ 16.3
Interest expense - $ 1.5 $ 1.5
Share in net losses of equity-method
investments $ 10.3 $ 5.6 $ 15.9
Segment assets $ 260.8 $ 1,987.6 $2,248.4
Segment assets include those assets that are specifically dedicated to an
operating segment and include inventories, equipment, equity investments,
goodwill and amortizable intangibles assets. As of May 31, 2005, equity method
investments included in segment assets of the Analog segment were $0.5 million.
Depreciation and amortization presented for each segment include only such
charges on dedicated segment assets. The measurement of segment profit and loss
includes an allocation of depreciation expense for shared manufacturing
facilities contained in the standard cost of product for each segment.
Our revenues from external customers are derived from the sales of
semiconductor product and engineering-related services. For fiscal 2005, 2004
and 2003, sales from engineering-related services were immaterial and are
included with semiconductor product sales. Our semiconductor products sales
consist of integrated circuit components and are considered a group of similar
products.
We operate our marketing and sales activities in four main geographic areas
that include the Americas, Europe, Japan and the Asia Pacific region. Total
sales by geographical area include sales to unaffiliated customers and
inter-geographic transfers, which are based on standard cost. To control costs,
a substantial portion of our products are transported between the Americas,
Europe and the Asia Pacific region in the process of being manufactured and
sold. In the information presented below, we have excluded these
inter-geographic transfers.
The following tables provide geographic sales to and asset information by
major countries within the main geographic areas:
(In Millions) 2005 2004 2003
---------------- ---------------- ---------------
Sales to unaffiliated customers:
United States $ 378.6 $ 421.2 $ 388.9
United Kingdom 192.4 170.9 160.5
Germany 194.9 218.9 173.4
Japan 248.6 250.3 185.3
Singapore 395.6 377.8 262.7
People's Republic of China 502.9 544.0 500.0
Rest of World 0.1 - 1.7
---------------- ---------------- ---------------
Total $1,913.1 $1,983.1 $1,672.5
================ ================ ===============
(In Millions) 2005 2004
----------------- ---------------
Long-lived assets:
United States $ 523.7 $ 665.5
Malaysia 133.6 146.6
Rest of World 138.3 147.1
----------------- ---------------
Total $ 795.6 $ 959.2
================= ===============
Our top ten customers combined represented approximately 49 percent of
total accounts receivable at May 29, 2005, and approximately 45 percent at May
30, 2004. In fiscal 2005 and 2004, we had one distributor who accounted for
approximately 11 percent of total net sales and another distributor who
accounted for approximately 10 percent of total net sales in each year. In
fiscal 2003, we had two distributors who each accounted for approximately 10
percent of total net sales. Sales to these distributors are mostly for our
Analog segment products, but also include some sales for our other operating
segment products.
Note 15. Supplemental Disclosure of Cash Flow Information and Noncash Investing
and Financing Activities
(In Millions) 2005 2004 2003
------------ ------------ --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for:
Interest $ 1.4 $ 1.3 $ 1.5
Income taxes $ 76.1 $ 15.4 $ 17.6
(In Millions) 2005 2004 2003
------------ ------------ --------------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of stock for employee benefit plans $ - $ 0.9 $ 0.8
Issuance of common stock to directors $ 1.0 $ 0.4 $ 0.3
Issuance of common stock in connection with the final installment
payment of the purchase price paid for DigitalQuake - $ 0.6 -
Unearned compensation relating to restricted stock issuance $ 2.6 $ 3.1 $ 0.5
Restricted stock cancellation $ 1.4 $ 1.4 $ 1.1
Change in unrealized gain on cash flow hedges $ - $ 0.2 $ 0.2
Change in unrealized gain on available-for-sale securities $ (0.3) $ (3.4) $(34.9)
Minimum pension liability $ 13.5 $(24.3) $ 57.5
Effect of investee equity transactions $ - $ - $ 4.7
Acquisition of software license under long-term contracts $ - $ 19.7 $ 16.4
Repurchase of common stock upon settlement of an advance
repurchase contract $ 30.0 $ - $ -
Note 16. Financial Information by Quarter (Unaudited)
The following table presents the quarterly information for fiscal 2005 and 2004:
Fourth Third Second First
(In Millions, Except Per Share Amounts) Quarter Quarter Quarter Quarter
-------------- --------------- --------------- ---------------
2005
Net sales $467.0 $449.2 $448.9 $548.0
Gross margin $255.6 $236.6 $227.0 $301.6
Net income $130.2 $ 77.4 $ 90.0 $117.7
--------------------------------------------------- -------------- --------------- --------------- ---------------
Earnings per share:
Net income:
Basic $ 0.37 $ 0.22 $ 0.25 $ 0.33
Diluted $ 0.36 $ 0.21 $ 0.24 $ 0.31
--------------------------------------------------- -------------- --------------- --------------- ---------------
Weighted-average common and potential
common shares outstanding:
Basic 349.2 353.2 356.0 357.3
Diluted 365.8 374.0 374.2 381.7
--------------------------------------------------- -------------- --------------- --------------- ---------------
Common stock price - high $ 21.67 $ 20.35 $ 17.44 $ 22.44
Common stock price - low $ 18.36 $ 14.94 $ 11.85 $ 13.18
--------------------------------------------------- -------------- --------------- --------------- ---------------
2004
Net sales $571.2 $513.6 $473.5 $424.8
Gross margin $310.8 $264.1 $237.0 $200.4
Net income $ 94.2 $ 93.1 $ 65.8 $ 29.7
--------------------------------------------------- -------------- --------------- --------------- ---------------
Earnings per share:
Net income:
Basic $ 0.26 $ 0.26 $ 0.18 $ 0.08
Diluted $ 0.24 $ 0.24 $ 0.17 $ 0.08
--------------------------------------------------- -------------- --------------- --------------- ---------------
Weighted-average common and potential
common shares outstanding:
Basic 357.3 357.4 360.2 369.0
Diluted 389.6 389.4 391.0 383.8
--------------------------------------------------- -------------- --------------- --------------- ---------------
Common stock price - high $ 24.35 $ 22.63 $ 22.30 $ 14.80
Common stock price - low $ 18.83 $ 17.95 $ 13.05 $ 9.19
--------------------------------------------------- -------------- --------------- --------------- ---------------
Our common stock is traded on the New York Stock Exchange and the Pacific
Exchange. The quoted market prices are as reported on the New York Stock
Exchange Composite Tape. At May 29, 2005, there were approximately 6,884 holders
of common stock.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
National Semiconductor Corporation:
We have audited the accompanying consolidated balance sheets of National
Semiconductor Corporation and subsidiaries (the Company) as of May 29, 2005 and
May 30, 2004, and the related consolidated statements of operations,
comprehensive income (loss), shareholders' equity, and cash flows for each of
the years in the three-year period ended May 29, 2005. In connection with our
audits of the consolidated financial statements, we have also audited the
related financial statement schedule II. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National
Semiconductor Corporation and subsidiaries as of May 29, 2005 and May 30, 2004,
and the results of their operations and their cash flows for each of the years
in the three-year period ended May 29, 2005, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of May 29, 2005, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
August 8, 2005 expressed an unqualified opinion on management's assessment of,
and the effective operation of, internal control over financial reporting.
As described in the notes to the consolidated financial statements, the Company
recorded the cumulative effect of a change in accounting principle in connection
with its adoption of Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations," as of the beginning of fiscal
2004.
KPMG LLP
Mountain View, California
August 8, 2005
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
National Semiconductor Corporation:
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting in Item
9A, that National Semiconductor Corporation and subsidiaries (the Company)
maintained effective internal control over financial reporting as of May 29,
2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). National Semiconductor Corporation's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that National Semiconductor Corporation
and subsidiaries maintained effective internal control over financial reporting
as of May 29, 2005, is fairly stated, in all material respects, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also,
in our opinion, National Semiconductor Corporation and subsidiaries maintained,
in all material respects, effective internal control over financial reporting as
of May 29, 2005, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
National Semiconductor Corporation and subsidiaries as of May 29, 2005 and May
30, 2004, and the related consolidated statements of operations, comprehensive
income (loss), shareholders' equity, and cash flows for each of the years in the
three-year period ended May 29, 2005, and our report dated August 8, 2005
expressed an unqualified opinion on those consolidated financial statements.
KPMG LLP
Mountain View, California
August 8, 2005
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures that are intended to ensure that
the information required to be disclosed in our Exchange Act filings is properly
and timely recorded, processed, summarized and reported. In designing and
evaluating our disclosure controls and procedures, our management recognizes
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives
and that management necessarily is required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures. Since we have
investments in certain unconsolidated entities which we do not control or
manage, our disclosure controls and procedures with respect to such entities are
necessarily substantially more limited than those we maintain for our
consolidated subsidiaries.
We have a disclosure controls committee comprised of key individuals from a
variety of disciplines in the company that are involved in the disclosure and
reporting process. The committee meets regularly to ensure the timeliness,
accuracy and completeness of the information required to be disclosed in our
filings. As required by SEC Rule 13a-15(b), the committee reviewed this Form
10-K and also met with the Chief Executive Officer and the Chief Financial
Officer to review this Form 10-K 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 year 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 are effective at the
reasonable assurance level.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance
with authorization of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could have a
material effect on the financial statements.
Management assessed our internal control over financial reporting as of May
29, 2005, the end of our 2005 fiscal year. Management conducted its evaluation
of the effectiveness of our internal control over financial reporting based on
the framework established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management's
assessment included evaluation of such elements as the design and operating
effectiveness of key reporting controls, process documentation, accounting
policies, and our overall control environment. This assessment is supported by
testing and monitoring performed by our internal audit and finance personnel.
Based on our assessment, our management has concluded that our internal
control over financial reporting was effective as of the end of our 2005 fiscal
year to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external reporting
purposes in accordance with U.S. generally accepted accounting principles. We
reviewed the results of this assessment with the audit committee of our board of
directors.
Our independent registered public accounting firm, KPMG LLP, audited our
management's assessment and independently assessed the effectiveness of our
internal control over financial reporting. KPMG has issued an attestation report
concurring with management's assessment, which is included under Item 8 as a
separate Report of Independent Registered Public Accounting Firm.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls or our internal control
over financial reporting will prevent or detect all error and all fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met. The design of a control system must reflect the fact that there are
resource constraints and the benefits of controls must be considered relative to
their costs. Further, because of inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud,
if any, within the company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Projections of any
evaluation of controls effectiveness to future periods are subject to risks.
Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree on compliance with policies or procedures.
Changes in Internal Controls
As part of our efforts to ensure compliance with the requirements of Section 404
of the Sarbanes-Oxley Act of 2002, we conducted a review of our internal control
over financial reporting. 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 fourth quarter of fiscal 2005,
there has been no change in our internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information appearing in our Proxy Statement for the 2005 annual
meeting of shareholders to be held on or about September 30, 2005 and which will
be filed in definitive form pursuant to Regulation 14A on or about August 22,
2005 (hereinafter "2005 Proxy Statement"), is incorporated herein by reference:
o information concerning our directors appearing in the section on the
proposal relating to election of directors;
o information appearing under the subcaptions "Audit Committee," "Section
16(a) Beneficial Ownership Reporting Compliance, and "Code of Business
Conduct and Ethics" appearing in the section titled "Corporate Governance,
Board Meetings and Committees."
Information concerning our executive officers is set forth in Part I of the
Form 10-K under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the section titled "Executive Compensation"
(including all related subcaptions thereof), under the subcaptions "Director
Compensation" and "Compensation Committee Interlocks and Insider Participation"
in the section titled "Corporate Governance, Board Meetings and Committees," in
the section titled "Compensation Committee Report on Executive Compensation,"
and in the section titled "Company Stock Price Performance" in the 2005 Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information concerning the only known ownership of more than 5 percent of
our outstanding common stock appearing in the section titled "Security Ownership
of Certain Beneficial Owners" in the 2005 Proxy Statement is incorporated herein
by reference. The information concerning the ownership of our equity securities
by directors, certain executive officers and directors and officers as a group,
appearing under the caption "Security Ownership of Management" in the 2005 Proxy
Statement is incorporated herein by reference.
Equity Compensation Plans
The following table summarizes share and exercise price information about our
equity compensation plans as of May 29, 2005.
Equity Compensation Plan Information
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under equity
Plan Category exercise of outstanding compensation plans
outstanding options, options, warrants (excluding securities
warrants, and rights and rights reflected in column (a))
(a) (b) (c)
------------------------ --------------------- ------------------------------
Equity compensation plans approved by
security holders:
Option Plans (1) 23,983,935 $14.57 1,475,562
Employee Stock Purchase Plan - - 13,358,764
Director Stock Plan - - 141,390
2005 Executive Officer Equity - - 3,000,000
Plan (2)
Equity compensation plans not
approved by security holders:
Option Plans (3) 53,565,463 $15.56 48,983,976
Restricted Stock Plan - - 1,948,010
-----------------------------------------------------------------------------
Total 77,549,398 68,907,702
======================== ================
(1) Includes shares to be issued upon exercise of options under the Stock Option
Plan, Executive Officer Stock Option Plan and Director Stock Option Plan.
(2) Includes shares to be issued upon the exercise of options and/or stock
appreciation rights, as well as shares issued upon payment of performance share
awards.
(3) Includes options to be issued under the 1997 Employees Stock Option Plan.
Information about our Equity Compensation Plans not Approved by Stockholders
The 1997 Employees Stock Option Plan provides for the grant of nonqualified
stock options to employees who are not executive officers of the company.
Options are granted at market price on the date of grant and can expire up to a
maximum of six years and one day after grant or three months after termination
of employment (up to five years after termination due to death, disability or
retirement), whichever occurs first. Options can vest after six months; all
options granted since the beginning of fiscal 2004 begin to vest after one year,
with vesting completed on a monthly basis ratably over the next three years.
Our Restricted Stock Plan authorizes issuance of restricted stock to
employees who are not officers of the company. The plan has been made available
to employees with skills and technical expertise considered important to the us.
The restrictions expire over time, ranging from one to six years after issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information appearing in the section of the 2005 Proxy Statement relating to
the proposal on the Ratification of the Appointment of KPMG LLP as the
Independent Auditors of the Company is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Pages in
(a) 1. Financial Statements this document
National Semiconductor Corporation and Subsidiaries
For the three years ended May 29, 2005-
refer to Index in Item 8 38-81
iReady Corporation and Subsidiary
For the years ended September 30, 2003 and 2002; and the
four-month period ended January 31, 2004* Exhibit 99.1
(a) 2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts 89
All other schedules are omitted since the required information is inapplicable
or the information is presented in the consolidated financial statements or
notes thereto.
Separate financial statements of National are omitted because we are
primarily an operating company and all subsidiaries included in the consolidated
financial statements being filed, in the aggregate, do not have minority equity
interest or indebtedness to any person other than us in an amount which exceeds
five percent of the total assets as shown by the most recent year end
consolidated balance sheet filed herein.
(a) 3. Exhibits
The exhibits listed in the accompanying Index to Exhibits on pages 93 to 95 of
this report are filed as part of, or incorporated by reference into, this
report.
*These financial statements are set forth in exhibit 99.1 and incorporated
herein by reference.
NATIONAL SEMICONDUCTOR CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In Millions)
Deducted from Receivables
in the Consolidated Balance Sheets
Doubtful
Description Accounts Returns Allowances Total
----------------- ----------------- ---------------- ----------------
Balance at May 26, 2002 $ 7.6 $ 6.7 $ 23.5 $ 37.8
Additions charged against revenue - 13.0 147.8 160.8
Additions charged against costs and expenses 0.4 - - 0.4
Deductions (1.3) (1) (14.3) (145.2) (160.8)
----------------- ----------------- ---------------- ----------------
Balance at May 25, 2003 6.7 5.4 26.1 38.2
Additions charged against revenue - 12.4 179.7 192.1
Deductions (4.6) (1) (12.6) (166.4) (183.6)
----------------- ----------------- ---------------- ----------------
Balances at May 30, 2004 2.1 5.2 39.4 46.7
Additions charged against revenue - 8.2 149.8 158.0
Deductions (0.4) (1) (9.8) (167.8) (178.0)
----------------- ----------------- ---------------- ----------------
Balance at May 29,2005 $ 1.7 $ 3.6 $ 21.4 $ 26.7
================= ================= ================ ================
________________________________________________
(1) Doubtful accounts written off, less recoveries.
Our customers do not have contractual rights to return product to us except
under customary warranty provisions. The majority of returns and allowances are
related to the price adjustment programs we have with distributors, none of
which involve return of product. As discussed in Note 1 to the Consolidated
Financial Statements, we have agreements with our distributors that cover
various programs, including pricing adjustments based on resale pricing and
volume, price protection for inventory, discounts for prompt payment and scrap
allowances. The revenue we record for these distribution sales is net of
estimated provisions for these programs. Our estimates are based upon historical
experience rates by geography and product family, inventory levels in the
distribution channel, current economic trends, and other related factors. Our
history of actual credits granted in connection with the allowance programs has
been consistent with the reserve we have accrued.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: August 8, 2005 /S/ BRIAN L. HALLA*
--------------------
Brian L. Halla
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities stated and on the 8th day of August 2005.
Signature Title
/S/ BRIAN L. HALLA* Chairman of the Board
--------------- and Chief Executive Officer
Brian L. Halla (Principal Executive Officer)
/S/ LEWIS CHEW* Senior Vice President, Finance
----------- and Chief Financial Officer
Lewis Chew (Principal Financial Officer)
/S/ JAMIE E. SAMATH * Corporate Controller
----------------- (Principal Accounting Officer)
Jamie E. Samath
/S/ STEVEN R. APPLETON * Director
--------------------
Steven R. Appleton
/S/ GARY P. ARNOLD * Director
----------------
Gary P. Arnold
/S/ RICHARD J. DANZIG * Director
-------------------
Richard J. Danzig
/S/ ROBERT J. FRANKENBERG * Director
-----------------------
Robert J. Frankenberg
/S/ E. FLOYD KVAMME* Director
----------------
E. Floyd Kvamme
/S/ MODESTO A. MAIDIQUE * Director
---------------------
Modesto A. Maidique
/S/ EDWARD R. McCRACKEN * Director
---------------------
Edward R. McCracken
*By \s\ Lewis Chew
----------------------------
Lewis Chew, Attorney-in-Fact
Consent of Independent Registered Public Accounting Firm
The Board of Directors
National Semiconductor Corporation:
We consent to incorporation by reference in the Registration Statements (Nos.
33-48943, 33-54931, 333-09957, 333-36733, 333-53801, 333-63614, 333-48424,
333-109348, 333-119963 and 333-122652) on Form S-8 of National Semiconductor
Corporation of our reports dated August 8, 2005, with respect to the
consolidated balance sheets of National Semiconductor Corporation and
subsidiaries as of May 29, 2005 and May 30, 2004, and the related consolidated
statements of operations, comprehensive income (loss), shareholders' equity, and
cash flows for each of the years in the three-year period ended May 29, 2005 and
the related financial statement schedule, management's assessment of the
effectiveness of internal control over financial reporting as of May 29, 2005,
and the effectiveness of internal control over financial reporting as of May 29,
2005, which reports appear in the 2005 Annual Report on Form 10-K of National
Semiconductor Corporation.
Our report on the consolidated financial statements and related financial
statement schedule refers to the cumulative effect of a change in accounting
principle and the Company's adoption of Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations," as of the
beginning of fiscal 2004.
KPMG LLP
Mountain View, California
August 8, 2005
Consent of Independent Registered Public Accounting Firm
The Board of Directors
iReady Corporation:
We consent to incorporation by reference in the Registration Statements (Nos.
33-48943, 33-54931, 333-09957, 333-36733, 333-53801, 333-63614,
333-48424, 333-109348, 333-119963 and 333-122652) on Form S-8 of National
Semiconductor Corporation of our report dated February 18, 2004 relating to the
consolidated balance sheet of iReady Corporation and subsidiary (the Company) as
of September 30, 2003, and the related consolidated statements of operations,
mandatorily redeemable convertible preferred stock and stockholders' deficit,
and cash flows for the year then ended, which report appears in the 2005 Annual
Report on Form 10-K of National Semiconductor Corporation.
Our report dated February 18, 2004 contains explanatory paragraphs stating
(i) that the Company's consolidated balance sheet as of September 30, 2003, and
the related consolidated statements of operations, mandatorily redeemable
convertible preferred stock and stockholders' deficit, and cash flows for the
year ended September 30, 2003, have been restated and (ii) that the Company has
suffered recurring losses from operations and has a stockholders deficit which
raise substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG LLP
Mountain View, California
August 8, 2005
INDEX TO EXHIBITS
Item 14(a) (3)
The following documents are filed as part of this report:
1. Financial Statements: reference is made to the Financial Statements
described under Part IV, Item 14(a) (1).
2. Other 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 July 20, 2005 (incorporated by
reference from the Exhibits to our Form 8-K dated July 19, 2005 filed July
22, 2005).
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 Registration Statement on Form 8-A filed
April 26, 2004).
10.1 Management Contract or Compensatory Plan or Arrangement: Executive Officer
Incentive Plan as amended effective July 14, 2004; Fiscal Year 2005
Executive Officer Incentive Plan Agreement (both incorporated by reference
from the Exhibits to our Form 10-K for the fiscal year ended May 30, 2004
filed August 11, 2004). Fiscal Year 2006 Executive Officer Incentive Plan
Agreement (incorporated by reference to the Exhibits to our Form 8-K dated
July 19, 2005 filed July 22, 2005). Executive Officer Incentive Plan -
Suneil Parulekar.
10.2 Management Contract or Compensatory Plan or Agreement: Stock Option Plan,
as amended effective April 15, 2003 (incorporated by reference from the
Exhibits to our Form 10-K for the fiscal year ended May 25, 2003 filed July
22, 2003). Form of stock option agreement used for options granted under
the Stock Option Plan (incorporated by reference from the Exhibits to our
Form 10-Q for the quarter ended November 28, 2004 filed January 6, 2005).
10.3 Management Contract or Compensatory Plan or Agreement: Executive Officer
Stock Option Plan, as amended effective April 15, 2003 (incorporated by
reference from the Exhibits to our Form 10-K for the fiscal year ended May
25, 2003 filed July 22, 2003). Form of stock option agreement used for
options granted under the Executive Office Stock Option Plan (incorporated
by reference from the Exhibits to our Form 10-Q for the quarter ended
November 28, 2004 filed January 6, 2005).
10.4 Management Contract or Compensatory Plan or Arrangement; Equity
Compensation Plan not approved by Stockholders: Non Qualified Stock Option
Agreement with Peter J. Sprague dated May 18, 1995 (incorporated by
reference from the Exhibits to our Registration Statement on Form S-8
Registration No. 33-61381 which became effective July 28, 1995).
10.5 Management Contract or Compensatory Plan or Arrangement: Director Stock
Plan as amended through June 26, 1997 (incorporated by reference from the
Exhibits to our Form 10-K for the fiscal year ended May 25, 2003 filed July
22, 2003).
10.6 Management Contract or Compensatory Plan or Arrangement: Director Stock
Option Plan. Form of stock option agreement used for options granted under
the Director Stock Option Plan (incorporated by reference from the Exhibits
to our Form 10-Q for the quarter ended November 28, 2004 filed January 6,
2005).
10.7 Management Contract or Compensatory Plan or Arrangement: Director Deferral
Plan (plan terminated effective April 13, 2005).
10.8 Management Contract or Compensatory Plan or Arrangement: Board Retirement
Policy.
10.9 Management Contract or Compensatory Plan or Arrangement: Preferred Life
Insurance Program.
10.10Management Contract or Compensatory Plan or Arrangement: Retired Officers
and Directors Health Plan (incorporated by reference from the Exhibits to
our Form 10-K for the fiscal year ended May 28, 2000 filed August 3, 2000).
10.11Management Contract or Compensatory Plan or Agreement: Executive Long Term
Disability Plan as amended January 1, 2002 as restated July 2002
(incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended November 24, 2002 filed January 6, 2003).
10.12Management Contract or Compensatory Plan or Agreement: Executive Staff
Long Term Disability Plan as amended January 1, 2002 as restated July 2002
(incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended November 24, 2002 filed January 6, 2003).
10.13Management Contract or Compensatory Plan or Agreement: Form of Change of
Control Employment Agreement entered into with Executive Officers of the
Company (incorporated by reference from the Exhibits to our Form 10-K for
the fiscal year ended May 30, 2004 filed August 11, 2004).
10.14Management Contract or Compensatory Plan or Agreement: National
Semiconductor Deferred Compensation Plan (incorporated by reference from
the Exhibits to our Form 10-Q for the quarter ended February 24, 2002 filed
April 10, 2002). Amendment One to Deferred Compensation Plan (incorporated
by reference from the Exhibits to our Form 10-K for the fiscal year ended
May 30, 2004 filed August 11, 2004).
10.15Equity Compensation Plan not approved by Stockholders: ComCore
Semiconductor, Inc. 1997 Stock Option Plan (incorporated by reference from
the Exhibits to our Registration Statement on Form S-8 Registration No.
333-53801 filed May 28, 1998).
10.16Equity Compensation Plan not approved by Stockholders: Restricted Stock
Plan as amended effective July 20, 2005; Form of agreements used for grants
of restricted stock and restricted stock units under the Restricted Stock
Plan (all incorporated by reference from the Exhibits to Form 8-K dated
July 19, 2005 filed July 22, 2005).
10.17Equity Compensation Plan not approved by Stockholders: 1997 Employees
Stock Option Plan, as amended effective July 14, 2004 (incorporated by
reference from the Exhibits to our Form 10-K for the fiscal year ended May
30, 2004 filed August 11, 2004). Form of stock option agreement used for
options granted under the 1997 Employees Stock Option plan (incorporated by
reference from the Exhibits to our Form 10-Q for the quarter ended November
28, 2004 filed January 6, 2005).
10.18Equity Compensation Plan not approved by stockholders: Option and
Agreement and Plan of Merger by and among National Semiconductor
Corporation, Nintai Acquisition Sub, Inc., DigitalQuake, Inc. and Paul A.
Lessard and Michael G. Fung dated as of February 8, 2002; First Amendment
to Option and Agreement and Plan of Merger; Letter Agreement with Jackson
Tung; Letter Agreement with Michael Fung; Letter Agreement with Anil Kumar;
Letter Agreement with Paul Lessard; Letter Agreement with Duane Oto (all
incorporated by reference from the Exhibits to our Registration Statement
on Form S-8 Registration No. 333-100662 filed October 22, 2002).
10.19Equity Compensation Plan not approved by Stockholders: Retirement and
Savings Program (incorporated by reference from the Exhibits to our Form
10-K for the year ended May 26, 2002 filed August 16, 2002). Amendments One
to Seven to Retirement and Savings Program (incorporated by reference from
the Exhibits to our Form 10-K for the fiscal year ended May 30, 2004 filed
August 11, 2004).
10.20Management Contract or Compensatory Plan or Arrangement: Executive
Physical Exam Plan effective January 1, 2003 (incorporated by reference
from the Exhibits to our Form 10-Q for the quarter ended November 24, 2002
filed January 6, 2003).
10.21Management Contract or Compensatory Plan or Arrangement: Executive
Preventive Health Program, January 2003 (incorporated by reference from the
Exhibits to our Form 10-Q for the quarter ended February 23, 2003 filed
April 2, 2003).
10.22Management Contract or Compensatory Plan or Arrangement: Severance Benefit
Plan, as amended and restated as of January 1, 2003 (incorporated by
reference from the Exhibits to our Form 10-K for the fiscal year ended May
25, 2003 filed July 22, 2003).
10.23Management Contract or Compensatory Plan or Arrangement: 2005 Executive
Officer Equity Plan (incorporated by reference from the Exhibits to our
Registration Statement on Form S-8 Registration No. 333-122652 which became
effective February 9, 2005). Form of option grant agreement under 2005
Executive Officer Equity Plan; form of performance share unit award
agreement under 2005 Executive Officer Equity Plan (both incorporated by
reference from the Exhibits to our Form 8-K dated April 12, 2005 filed
April 15, 2005).
10.24Management Contract or Compensatory Plan or Arrangement: Director
Compensation Arrangements.
10.25Management Contract or Compensatory Plan or Arrangement: Executive
Financial Counseling Plan.
10.26Management Contract or Compensatory Plan or Arrangement: Corporate
Aircraft Time Share Policy.
10.27Management Contract or Compensatory Plan or Arrangement: Executive Officer
Salary Arrangements.
14.1 Code of Ethics (incorporated by reference from the Exhibits to our Form
10-K for the fiscal year ended May 30, 2004, filed August 11, 2004).
21.1 List of Subsidiaries and Affiliates.
23.1 Consent of Independent Registered Public Accounting Firm (included in Part
IV).
24.1 Power of Attorney.
31.1 Rule 13a-14 (a) /15d-14 (a) Certifications.
32.1 Section 1350 certifications.
99.1 iReady Corporation and subsidiary financial statements for the years ended
September 30, 2003 and 2002; and the four-month period ended January 31,
2004.
Exhibit 21.1
NATIONAL SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
SUBSIDIARIES AND AFFILIATES OF THE REGISTRANT
The following table shows certain information with respect to our active
subsidiaries and affiliates as of May 29, 2005, all of which are included in our
consolidated financial statements:
Percent of
State or Other Voting
Jurisdiction of Other Country In Which Securities Owned
Name Incorporation Subsidiary is Registered by National
-------------------------------------------------- ------------------------ ----------------------------- -------------------
Algorex Inc. California 100%
DigitalQuake, Inc. California 100%
InnoComm Wireless California 100%
Mediamatics, Inc. California 100%
National Semiconductor International, Inc. Delaware 100%
National Semiconductor Netsales, Inc. Delaware 100%
National Semiconductor (Maine), Inc. Delaware 100%
ASIC II Limited Hawaii 100%
National Semiconductor B.V. Corporation Delaware 100%
National Semiconductor Estonia Ou Estonia 100%
National Semiconductor Finland Oy Finland 100%
National Semiconductor France S.A.R.L. France 100%
National Semiconductor GmbH Germany 100%
National Semiconductor (I.C.) Ltd. Israel 100%
National Semiconductor S.r.l. Italy 100%
National Semiconductor Aktiebolog Sweden 100%
National Semiconductor Sweden Aktiebolog Sweden 100%
National Semiconductor (U.K.) Ltd. Great Britain Denmark/Belgium 100%
Finland/Spain/Netherlands
National Semiconductor (U.K.)
Pension Trust Company Ltd. Great Britain 100%
National Semiconductor Benelux B.V. Netherlands 100%
National Semiconductor B.V. Netherlands 100%
National Semiconductor International B.V. Netherlands 100%
Natsem India Designs Pvt. Ltd. India 100%
National Semiconductor (Australia) Pty.Ltd. Australia 100%
National Semiconductor Hong Kong Limited Hong Kong 100%
National Semiconductor (Far East) Limited Hong Kong Taiwan 100%
National Semiconductor Hong Kong Sales
Limited Hong Kong 100%
National Semiconductor Services Limited Hong Kong 100%
National Semiconductor Manufacturing
Hong Kong Limited Hong Kong 100%
National Semiconductor International
Hong Kong Limited Hong Kong 100%
National Semiconductor Manufacturing
China Trust Hong Kong 100%
National Semiconductor Japan Ltd. Japan 100%
N.S. Microelectronics Co., LTD. Japan 19%
National Semiconductor Korea Limited Korea 100%
National Semiconductor SDN. BHD. Malaysia 100%
National Semiconductor Technology
SDN. BHD. Malaysia 100%
Percent of
State or Other Voting
Jurisdiction of Other Country In Which Securities Owned
Name Incorporation Subsidiary is Registered by National
----------------------------------------------- ---------------------------- ----------------------------- -------------------
National Semiconductor Services
Malaysia SDN. BHD. Malaysia 100%
National Semiconductor Pte. Ltd. Singapore 100%
National Semiconductor Asia Pacific Pte.
Ltd. Singapore 100%
National Semiconductor Manufacturer
Singapore Pte. Ltd. Singapore 100%
National Semiconductor Shanghai Limited People's Republic of China 95%
National Semiconductor Management People's Republic of China 100%
Shanghai Ltd.
National Semiconductor (Suzhou) Ltd. People's Republic of China 100%
Shanghai National Semiconductor People's Republic of China 95%
Technology Limited
National Semiconductor Canada, Inc. Canada 100%
National Semicondcutores do Brasil Ltda. Brazil 100%
Electronica NSC de Mexico, S.A. de C.V. Mexico 100%
National Semiconductor Investments, Ltd. British Virgin Islands 100%
National Semiconductor Investments II, Ltd. British Virgin Islands 100%
Exhibit 31.1
CERTIFICATION
I, Brian L. Halla, certify that:
1. I have reviewed this annual report on Form 10-K 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(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 the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses 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: August 8, 2005
\s\ Brian L. Halla
------------------
Brian L. Halla
Chief Executive Officer
CERTIFICATION
I, Lewis Chew, certify that:
1. I have reviewed this annual report on Form 10-K 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervisions, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(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 registrants 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 the registrants board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses 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: August 8, 2005
\s\ Lewis Chew
--------------
Lewis Chew
Senior Vice President, Finance and Chief
Financial Officer
Exhibit 32.1
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 Annual Report of National Semiconductor Corporation (the
"Company") on Form 10-K for the period ended May 29, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Brian
L. Halla, 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.
Date: August 8, 2005
\s\ Brian L. Halla
------------------
Brian L. Halla
Chief Executive Officer
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 Annual Report of National Semiconductor Corporation (the
"Company") on Form 10-K for the period ended May 29, 2005 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.
Date: August 8, 2005
\s\ Lewis Chew
--------------
Lewis Chew
Senior Vice President, Finance and
Chief Financial Officer