UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended February 26, 2006.
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
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(State of incorporation) (I.R.S. Employer Identification Number)
2900 Semiconductor Drive, P.O. Box 58090
Santa Clara, California 95052-8090
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(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 721-5000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_.
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one): Large Accelerated filer X Accelerated filer __ Non-accelerated filer __.
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes __ No X .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Each Class Outstanding at February 26, 2006
------------------- --------------------------------
Common stock, par value $0.50 per share 337,612,173
NATIONAL SEMICONDUCTOR CORPORATION
INDEX
Page No.
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Part 1. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) for
the Three Months and Nine Months Ended February 26, 2006 and
February 27, 2005 3
Condensed Consolidated Statements of Comprehensive Income
(Unaudited) for the Three Months and Nine Months Ended
February 26, 2006 and February 27, 2005 4
Condensed Consolidated Balance Sheets (Unaudited) as of
February 26, 2006 and May 29, 2005 5
Condensed Consolidated Statements of Cash Flows (Unaudited)for
the Nine Months Ended February 26, 2006 and February 27, 2005 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-31
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 33
Part II. Other Information
Item 1. Legal Proceedings 34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 6. Exhibits 36
Signature 37
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended
-------------------------- --------------------------
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions, Except Per Share Amounts) 2006 2005 2006 2005
------------ ------------- ------------- ------------
Net sales $ 547.7 $ 449.2 $ 1,585.5 $ 1,446.1
Operating costs and expenses:
Cost of sales 215.5 212.6 664.3 680.9
Research and development 80.2 80.7 241.4 248.5
Selling, general and administrative 68.8 62.9 205.1 195.1
Cost reduction and restructuring charges 1.0 20.1 31.7 21.3
Goodwill impairment loss 5.2 - 5.2 -
Gain on sale of businesses (4.0) - (28.3) (8.8)
Other operating income, net (0.9) (7.4) (4.3) (19.7)
------------ ------------- ------------- ------------
Total operating costs and expenses 365.8 368.9 1,115.1 1,117.3
------------ ------------- ------------- ------------
Operating income 181.9 80.3 470.4 328.8
Interest income, net 8.5 4.3 23.1 10.4
Other non-operating income (expense), net - 0.2 (1.9) (2.5)
------------ ------------- ------------- ------------
Income before taxes 190.4 84.8 491.6 336.7
Income tax expense 60.3 7.4 161.2 51.6
------------ ------------- ------------- ------------
Net income $ 130.1 $ 77.4 $ 330.4 $ 285.1
============ ============= ============= ============
Earnings per share:
Basic $ 0.39 $ 0.22 $ 0.97 $ 0.80
Diluted $ 0.37 $ 0.21 $ 0.92 $ 0.76
Weighted-average shares used to calculate earnings per share:
Basic 337.5 353.2 341.0 355.5
Diluted 354.6 374.0 358.3 376.6
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended Nine Months Ended
------------------------ ------------------------
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions) 2006 2005 2006 2005
------------ ----------- ------------ -----------
Net income $ 130.1 $ 77.4 $ 330.4 $ 285.1
Other comprehensive (income) loss, net of tax:
Reclassification adjustment for net realized (gain) on
available-for-sale securities included in net income (4.7) - (4.7) -
Unrealized (gain) loss on available-for-sale securities 2.3 (0.5) 3.9 (0.3)
Derivative instruments:
Unrealized (gain) on cash flow hedges (0.1) - (0.1) -
------------ ----------- ------------ -----------
Comprehensive income $ 127.6 $ 76.9 $ 329.5 $ 284.8
============ =========== ============ ===========
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
Feb. 26, May 29,
(In Millions) 2006 2005
-------------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 852.1 $ 867.1
Short-term marketable investments 156.3 155.1
Receivables, less allowances of $37.5 in fiscal 2006
and $26.7 in fiscal 2005 187.8 123.9
Inventories 179.7 170.2
Deferred tax assets 137.6 126.9
Other current assets 27.2 70.3
-------------------- -----------------
Total current assets 1,540.7 1,513.5
Net property, plant and equipment 601.5 605.1
Goodwill 59.7 87.2
Deferred tax assets, net 187.7 192.2
Other assets 108.6 106.2
-------------------- -----------------
Total assets $ 2,498.2 $ 2,504.2
==================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 93.3 $ 64.7
Accrued expenses 179.5 143.6
Income taxes payable 107.3 76.7
-------------------- -----------------
Total current liabilities 380.1 285.0
Long-term debt 21.1 23.0
Other noncurrent liabilities 159.0 142.1
-------------------- -----------------
Total liabilities 560.2 450.1
-------------------- -----------------
Commitments and contingencies
Shareholders' equity:
Common stock 168.8 174.0
Additional paid-in capital 607.4 1,024.5
Retained earnings 1,267.6 961.2
Unearned compensation (6.7) (7.4)
Accumulated other comprehensive loss (99.1) (98.2)
-------------------- -----------------
Total shareholders' equity 1,938.0 2,054.1
-------------------- -----------------
Total liabilities and shareholders' equity $ 2,498.2 $ 2,504.2
==================== =================
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
----------------------------------------
Feb. 26, Feb. 27,
(In Millions) 2006 2005
--------------- ----------------
Cash flows from operating activities:
Net income $ 330.4 $ 285.1
Adjustments to reconcile net income with net cash
provided by operating activities:
Depreciation and amortization 126.9 147.6
Impairment of goodwill 5.2 -
Impairment of technology license - 0.5
Net gain on investments (8.4) (2.0)
Share in net losses of equity-method investments 0.6 4.0
Loss on disposal of equipment 2.7 1.0
Gain on sale of businesses (28.3) (8.8)
Tax benefit associated with stock options 84.4 3.9
Noncash other operating (income) expense, net 1.6 (10.6)
Other, net 6.3 2.5
Changes in certain assets and liabilities, net:
Receivables (63.9) 55.5
Inventories (9.5) 14.6
Other current assets 43.0 8.3
Accounts payable and accrued expenses 44.6 (131.6)
Current and deferred income taxes 24.5 (16.3)
Other noncurrent assets (9.0) -
Other noncurrent liabilities 16.9 5.8
--------------- ----------------
Net cash provided by operating activities 568.0 359.5
--------------- ----------------
Cash flows from investing activities:
Purchase of property, plant and equipment (100.0) (83.3)
Sale of equipment 1.1 -
Sale of businesses 64.0 10.0
Sale of investments 10.8 0.7
Investment in nonpublicly traded companies - (0.3)
Funding of benefit plan (2.4) (7.1)
Security deposits on leased equipment - (17.4)
Other, net (1.9) 1.7
--------------- ----------------
Net cash used by investing activities (28.4) (95.7)
--------------- ----------------
Cash flows from financing activities:
Payment on software license obligations (13.1) (13.6)
Issuance of common stock 233.2 72.2
Purchase and retirement of treasury stock (750.7) (225.5)
Cash dividends declared and paid (24.0) (7.1)
--------------- ----------------
Net cash used by financing activities (554.6) (174.0)
--------------- ----------------
Net change in cash and cash equivalents (15.0) 89.8
Cash and cash equivalents at beginning of period 867.1 642.9
--------------- ----------------
Cash and cash equivalents at end of period $ 852.1 $ 732.7
=============== ================
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Summary of Significant Accounting Policies
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (including normal recurring
adjustments) necessary to present fairly the financial position and results of
operations of National Semiconductor Corporation and our majority-owned
subsidiaries. You should not expect interim results of operations to necessarily
be indicative of the results for the full fiscal year. 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 amounts reported in these unaudited condensed consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. This report should be read in conjunction with the consolidated
financial statements and accompanying notes included in our annual report on
Form 10-K for the fiscal year ended May 29, 2005.
o Property, Plant and Equipment
Effective May 30, 2005, we prospectively changed the estimated useful life of
our factory machinery and equipment from 5 years to 9 years for machinery and
equipment placed in service on or after that date. We will continue to use a
straight-line method to depreciate machinery and equipment. The change in useful
life was adopted because we had completed the sale of our PC Super I/O and
cordless businesses and announced the closure of our assembly and test plant in
Singapore, all key actions associated with the implementation of our strategy to
focus on analog product capabilities. The life cycles of analog products and the
process technology associated with analog are longer than the non-analog
products that were historically a part of our product portfolio. As a result,
the average product life of our current portfolio is longer than it was
previously. Therefore, the equipment used to manufacture our now-predominantly
analog product portfolio will have a longer productive life. The effect of the
change in fiscal 2006 was an increase to net income of $0.5 million for the
third quarter and $0.7 million for the first nine months. There was no impact on
earnings per share for either the third quarter or first nine months of fiscal
2006. Factory machinery and equipment placed in service prior to fiscal year
2006 continue to be depreciated over 5 years using a straight-line method.
The following table provides detail information related to property, plant and
equipment:
Feb. 26, May 29,
2006 2005
-------------- ---------------
Total property, plant and equipment 2,662.1 2,666.7
Less accumulated depreciation and amortization (2,060.6) (2,061.6)
-------------- ---------------
Property, plant and equipment, net $ 601.5 $ 605.1
============== ===============
Earnings Per Share
A reconciliation of the shares used in the computation of basic and diluted
earnings per share follows:
Three Months Ended Nine Months Ended
------------------------ -----------------------
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions) 2006 2005 2006 2005
------------ ----------- ----------- -----------
Numerator:
Net income $ 130.1 $ 77.4 $ 330.4 $ 285.1
============ =========== =========== ===========
Denominator:
Weighted-average common shares outstanding
used for basic earnings per share 337.5 353.2 341.0 355.5
Effect of dilutive securities:
Stock options 17.1 20.8 17.3 21.1
------------ ----------- ----------- -----------
Weighted-average common and potential
common shares outstanding used for
diluted earnings per share 354.6 374.0 358.3 376.6
============ =========== =========== ===========
For the third quarter of fiscal 2006, we did not include options outstanding to
purchase 10.2 million shares of common stock with a weighted-average per share
exercise price of $30.04 in diluted earnings per share since their effect was
antidilutive because the exercise price of these options exceeded the average
market price of the common stock during the quarter. For the first nine months
of fiscal 2006, we did not include options outstanding to purchase 11.0 million
shares of common stock with a weighted-average per share exercise price of
$29.84 in diluted earnings per share since their effect was antidilutive because
the exercise price of these options exceeded the average market price of the
common stock during the same period. However, these shares could potentially
dilute earnings per share in the future.
For the third quarter of fiscal 2005, we did not include options outstanding to
purchase 22.2 million shares of common stock with a weighted-average exercise
price per share of $24.81 in diluted earnings per share since their effect was
antidilutive because the exercise price of these options exceeded the average
market price of the common stock during the quarter. For the first nine months
of fiscal 2005, we did not include options outstanding to purchase 33.5 million
shares of common stock with a weighted-average exercise price per share of
$22.22 in diluted earnings per share since their effect was antidilutive because
the exercise price of these options exceeded the average market price of the
common stock during the same period.
o 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." As we indicated in the annual report
on Form 10-K for the fiscal year ended May 29, 2005, the adoption of SFAS No.
123 (revised 2004), "Share-Based Payment," will be effective beginning with our
2007 fiscal year. For more complete information on our stock-based compensation
plans, see Note 11 to the Consolidated Financial Statements included in our
annual report on Form 10-K for the year ended May 29, 2005.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure." This
information illustrates the effect on net income and earnings per share as if we
had accounted for stock-based awards to employees under the fair value method
specified by SFAS No. 123. The weighted-average fair value of stock options
granted during the third quarter and first nine months of fiscal 2006 was $13.73
and $14.86 per share, respectively. The weighted-average fair value of stock
options granted during the third quarter and first nine months of fiscal 2005
was $11.04 and $11.78 per share, respectively. The weighted-average fair value
of rights granted under the stock purchase plan was $6.56 and $6.55 per share
for the third quarter and first nine months of fiscal 2006, respectively. The
weighted-average fair value of rights granted under the stock purchase plan was
$5.25 and $5.54 per share for the third quarter and first nine months of fiscal
2005, respectively. We estimated the fair value of these employee stock-based
awards using a Black-Scholes option pricing model that uses the following
weighted-average assumptions:
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
2006 2005 2006 2005
-------------- -------------- ------------- --------------
Stock Option Plans
Expected life (in years) 4.6 5.5 5.4 5.2
Expected volatility 55% 71% 67% 72%
Risk-free interest rate 4.4% 4.0% 4.2% 3.4%
Dividend yield 0.4% 0.4% 0.3% 0.0%
Stock Purchase Plan
Expected life (in years) 0.7 0.7 0.7 0.7
Expected volatility 31% 47% 31% 49%
Risk-free interest rate 3.9% 2.0% 3.4% 2.0%
Dividend yield 0.4% 0.5% 0.4% 0.5%
For pro forma purposes, the estimated fair value of employee stock-based awards
is amortized over the relevant vesting period for options and over the
three-month purchase period for stock purchases under the stock purchase plan.
The pro forma information follows:
Three Months Ended Nine Months Ended
------------------------- --------------------------
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions, Except Per Share Amounts) 2006 2005 2006 2005
-------------- -------------- ------------- ---------------
Net income - as reported $ 130.1 $ 77.4 $ 330.4 $ 285.1
Add back: Stock compensation charge included in
net income determined under the intrinsic value
method, net of tax 4.0 0.6 8.0 1.8
Deduct: Total stock-based employee compensation
(expense) benefit determined under the fair value
method, net of tax 96.2 (50.0) 51.1 (108.3)
-------------- -------------- ------------- ---------------
Net income - pro forma $ 230.3 $ 28.0 $ 389.5 $ 178.6
============== ============== ============= ===============
Basic earnings per share - as reported $ 0.39 $ 0.22 $ 0.97 $ 0.80
Basic earnings per share - pro forma $ 0.68 $ 0.08 $ 1.14 $ 0.50
Diluted earnings per share - as reported $ 0.37 $ 0.21 $ 0.92 $ 0.76
Diluted earnings per share - pro forma * $ 0.66 $ 0.08 $ 1.11 $ 0.50
-------------------------------------------------- ------------ ------------ ------------- -------------
* Pro forma diluted earnings per share for the third quarter and first nine
months of fiscal 2005 have been revised to include the effect of
unamortized compensation in the treasury stock calculation used for
determining diluted earnings per share. The revision to the pro forma
diluted earnings per share was immaterial for both the third quarter and
first nine months of fiscal 2005. Pro forma diluted earnings per share for
the fiscal 2006 periods reflects the effect of unamortized compensation.
The tax effect on the pro forma stock compensation expense for the third
quarter and first nine months of fiscal 2006 reflects the pro forma recognition
of $120.6 million of additional tax benefits related to stock option deductions
that are now expected to be realized.
Under our stock option plans, employees who retire from the company and
meet certain conditions set forth in the stock option plans and related stock
option grant agreements continue to vest in their stock options after
retirement. During that post-retirement period of continued vesting, no service
is required of the employee. Stock option plans with this type of feature are
classified as non-compensatory plans under APB No. 25. For pro forma reporting
purposes, we have historically recognized compensation costs of these options
using the nominal vesting period approach. SFAS No. 123(R) specifies that a
stock option award is vested when the employee's retention of the option is no
longer contingent on the continuation to provide service (the "non-substantive
vesting period approach"). Under the non-substantive vesting period approach,
the compensation cost for the option should be recognized immediately for
options granted to employees who are eligible for retirement at the time the
option is granted. If an employee is not currently eligible for retirement, but
is expected to become eligible during the nominal vesting period, then the
compensation expense for the option should be recognized over the period from
the grant date to the date retirement eligibility occurs. Upon adoption of SFAS
No. 123(R), we will change the method for recognizing compensation cost to the
non-substantive vesting period approach for those options that are granted after
our adoption of SFAS No. 123(R). If we had used the non-substantive vesting
period approach for these condensed consolidated financial statements, the pro
forma compensation benefit would have been greater by $9.1 million in the third
quarter and $14.2 million in the first nine months of fiscal 2006. The effect on
pro forma compensation expense for fiscal 2005 would have been a decrease of
$11.4 million in the third quarter and $17.0 million in the first nine-month
period.
o Accounting Change Affecting Results of Operations
In the third quarter of fiscal 2006, we revised our accounting policy related to
the accrual of holiday compensation for certain employees. Effective with this
revision, we will no longer accrue for these amounts as they do not meet the
criteria for accrual pursuant to the provisions of SFAS No. 43, "Accounting for
Compensated Absences." Included in the third quarter 2006 results of operations
is approximately $2.2 million of net income, or $0.01 of earnings per diluted
share, from this change in policy. Management has considered the quantitative
and qualitative aspects of this item and has concluded there is no need to
restate any of our previously filed consolidated financial statements in
connection with this revision.
o Reclassifications
Certain amounts reported in fiscal 2005 have been reclassified to conform to the
fiscal 2006 presentation. Net income has not been affected by the
reclassification.
o New Accounting Pronouncement
We adopted SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB
Opinion No. 20, Accounting for Nonmonetary Transactions," at the beginning of
our fiscal 2006 second quarter. 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. As a result of the adoption of SFAS No. 153, we recognized
a $1.4 million gain to record the fair value of new equipment acquired in an
exchange of similar productive assets during the first nine months of fiscal
2006. This amount is included in selling, general and administrative expense in
the statement of operations.
Note 2. Condensed Consolidated Financial Statements Detail
Condensed consolidated balance sheets:
Feb. 26, May 29,
(In Millions) 2006 2005
--------------------------- ---------------------------
Inventories:
Raw materials $ 19.7 $ 11.0
Work in process 96.7 102.4
Finished goods 63.3 56.8
--------------------------- ---------------------------
Total inventories $ 179.7 $ 170.2
=========================== ===========================
Condensed consolidated statements of operations:
Three Months Ended Nine Months Ended
---------------------------- -----------------------
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions) 2006 2005 2006 2005
------------- -------------- ----------- -----------
Other operating income, net
Net intellectual property income $ (1.9) $ (1.7) $ (3.3) $ (4.0)
Intangible asset impairment 1.8 - 1.8 -
Release of litigation accrual - - - (10.0)
Manufacturer's Investment Credit refund - (7.4) - (7.4)
Other (0.8) 1.7 (2.8) 1.7
------------- -------------- ----------- -----------
Total other operating income, net $ (0.9) $ (7.4) $ (4.3) $ (19.7)
============= ============== =========== ===========
Interest income, net
Interest income $ 9.0 $ 4.7 $ 24.3 $ 11.6
Interest expense (0.5) (0.4) (1.2) (1.2)
------------- -------------- ----------- -----------
Interest income, net $ 8.5 $ 4.3 $ 23.1 $ 10.4
============= ============== =========== ===========
Other non-operating income (expense), net:
Net gain on marketable and other investments, net:
Trading securities:
Change in net unrealized holding gains $ - $ 0.8 $ 2.6 $ 1.3
Available-for-sale securities:
Gain from sale 4.7 - 4.7 -
Non-marketable investments:
Gain from sale 5.0 0.1 5.3 0.7
Impairment loss - - (4.2) -
------------ -------------- ------------ -----------
Total net gain on marketable and other
investments, net 9.7 0.9 8.4 2.0
Share in net losses of equity-method investments - (0.7) (0.6) (4.0)
Other (9.7) - (9.7) (0.5)
------------ -------------- ------------ -----------
Total other non-operating income (expense), net $ - $ 0.2 $ (1.9) $ (2.5)
============ ============== ============ ===========
Other non-operating expenses include a $9.7 million charitable contribution
in the third quarter of fiscal 2006 and a $0.5 million litigation settlement in
the first nine months of fiscal 2005.
Beginning in fiscal 2006, the change in net unrealized holding gains from
trading securities related to deferred compensation plan assets is included in
other non-operating income (expense), net. The net unrealized holding gains for
the fiscal 2005 period presented have been reclassified from SG&A expenses to
conform to the fiscal 2006 presentation.
Note 3. Statements of Cash Flows Information
Nine Months Ended
------------------------------------
Feb. 26, Feb. 27,
(In Millions) 2006 2005
------------------- ----------------
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest $ 1.1 $ 1.2
Income taxes $ 12.7 $ 72.0
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Issuance of common stock to directors $ 2.3 $ 1.0
Unearned compensation relating to issuance of restricted stock $ 4.0 $ 1.2
Restricted stock cancellation $ 1.1 $ 1.4
Unearned compensation relating to grants of restricted stock units $ 0.6 $ -
Change in unrealized gain on available-for-sale securities $ 3.9 $ (0.3)
Purchase of software under license obligations, net $ 20.5 $ -
Repurchase of common stock upon settlement of an advance
repurchase contract $ - $ 30.0
Accretion related to stock-based compensation plan $ 8.0 $ -
Note 4. Cost Reduction Programs
During the third quarter of fiscal 2006, we recorded a net charge of $1.0
million for additional cost reduction actions related to the reorganization of
our product lines into two groups (Analog Signal Path Group and Power Management
Group) originally announced at the end of fiscal 2005. The charge included $1.1
million of severance for 16 employees, most of whom are expected to depart by
the end of fiscal 2006. The charge was partially offset by a $0.1 million credit
from the release of accruals for other exit-related costs upon the completion of
activities related to prior cost reduction actions.
In November 2005, we took steps to improve our competitive cost structure by
reducing indirect manufacturing costs, mainly in our Texas plant. This included
a change in the plant's organizational structure and a reduction of its
workforce. This action was completed by the end of November and affected 57
employees, most of whom were indirect manufacturing personnel in the Texas
facility. As a result, we recorded a charge of $2.7 million for severance that
is included in our results of operations for the first nine months of fiscal
2006.
In July 2005, we announced that we would close our assembly and test plant
in Singapore in a phased shutdown after unsuccessful efforts to sell the plant
on terms that were acceptable to us, as we determined that the equipment in
Singapore was of higher value to us than any of the potential offers we
received. The Singapore plant had been geared more towards complex, high-pin
count products and we have moved more to a product portfolio that does not have
a great need for these high-pin count packages. The plant's equipment and any
remaining production volume are being consolidated into our other assembly and
test facilities in Malaysia and China. The closure activities are targeted to be
completed by the end of our first quarter in fiscal 2007. The closure impacts
approximately 972 employees who were notified of termination at the time we
announced our decision to close the plant. Our management team in Singapore is
working with local government agencies and other employers on job placement
opportunities for these affected employees. Departure dates of these employees
should coincide with the phased timing of the plant closure activities. In
connection with this action, we recorded a charge of $28.3 million that is
included in our results of operations for the first nine months of fiscal 2006,
primarily for severance. Non-cash charges relate to the write-off of certain
plant assets used in one of the assembly lines that was immediately shut down in
July 2005.
In addition to the charges and credit described in the preceding
paragraphs, we recorded an additional $0.3 million credit in the first quarter
that is included in our results of operations for the first nine months of
fiscal 2006 for the release of severance cost accruals no longer required due to
completion of prior cost reduction actions.
The following table provides a summary of the cost reduction charges by
segment recorded in the third quarter and first nine months of fiscal 2006:
Analog
(In Millions) Segment All Others Total
-------------- ------------- -------------
Three months ended February 26, 2006:
Cost reduction program charge:
Business reorganization:
Severance $ 0.7 $ 0.4 $ 1.1
Release of reserves:
Other exit-related costs - (0.1) (0.1)
-------------- ------------- -------------
Total cost reduction program charge $ 0.7 $ 0.3 $ 1.0
============== ============= =============
Nine months ended February 26, 2006:
Cost reduction program charge:
Business reorganization:
Severance $ 0.7 $ 0.4 $ 1.1
Streamline manufacturing operations:
Severance 0.4 2.3 2.7
Singapore plant closure charge:
Severance - 28.2 28.2
Asset write-off - 0.1 0.1
-------------- ------------- -------------
1.1 31.0 32.1
Release of reserves:
Severance - (0.4) (0.4)
-------------- ------------- -------------
Total cost reduction program charge $ 1.1 $30.6 $31.7
============== ============= =============
The following table provides a summary of the activities related to our
cost reduction and restructuring actions included in accrued liabilities for the
nine months ended February 26, 2006:
Fiscal 2006 Cost Cost Reduction Actions in
Reduction Actions Prior Years
------------------- --------------------------
Other Exit
(In Millions) Severance Severance Costs Total
------------------- --- ------------ ------------- ----------
Balance at May 29, 2005 $ - $ 4.5 $ 5.8 $ 10.3
Cost reduction charges 32.0 - - 32.0
Cash payments (23.1) (3.7) (1.0) (27.8)
Release of residual reserves - (0.3) (0.1) (0.4)
------------------- --- ------------ ------------- -- ----------
Balance at February 26, 2006 8.9 0.5 4.7 14.1
Less noncurrent portion of lease
obligations included in other
noncurrent liabilities - - (4.2) (4.2)
------------------- --- ------------ ------------- -- ----------
Balance included in accrued liabilities $ 8.9 $ 0.5 $ 0.5 $ 9.9
=================== === ============ ============= == ==========
During the first nine months of fiscal 2006 we paid severance to 822
employees in connection with workforce reductions primarily related to the
Singapore plant closure and Texas action, but also including severance for cost
reduction actions begun in fiscal 2005. Amounts paid for other exit-related
costs during the first nine months of fiscal 2006 were primarily for payments
under lease obligations associated with actions taken in prior years.
As part of our actions to reposition toward a higher-value analog
portfolio, we have divested businesses that do not align with our business
model. In June 2005, we completed the sale of our cordless business unit to
HgCapital, a private equity investor based in London, U.K. The cordless business
unit was a part of the wireless operating segment within the Analog reportable
segment. Under the terms of the agreement, HgCapital acquired certain assets,
primarily machinery and equipment with a carrying value of $1.6 million, and
intellectual property. In addition, HgCapital agreed to hire approximately 70
engineers, who were based at our cordless business unit in 's-Hertogenbosch and
its design center in Hengelo, The Netherlands. As a result, upon the close of
the sale we recorded a gain of $24.3 million that is included in our results of
operations for the first nine months of fiscal 2006. In the third quarter of
fiscal 2006, we also recorded an additional gain of $4.0 million, which
represented contingent consideration earned when the buyer achieved certain
revenue milestones set forth in the agreement. We also have separate agreements
with HgCapital under which we will manufacture product for it at prices
specified by the terms of the agreements, which we believe approximate market
prices; and we will also provide certain transition services at rates that
approximate fair market value. In general, these agreements are effective for 18
months, unless terminated earlier in accordance with their terms.
In the third quarter of fiscal 2006, based on our business focus and
priorities, a decision was made to exit a small business unit that was
developing high definition products (HDP). Our HDP business unit is an operating
segment that has insignificant quarterly revenues and is included within the
Analog reportable segment. In March 2006 we entered into an agreement to sell
the HDP business to an unrelated third party. Under the terms of the agreement
the buyer will acquire intellectual property and certain assets of the HDP
business for $7.0 million. Tangible assets of this unit, primarily machinery and
equipment with a carrying value of $0.4 million, have been classified as "Assets
Held for Sale" and are included in Other Assets on the condensed consolidated
balance sheet as of February 26, 2006. The remaining intangible assets of the
business were evaluated for impairment. As a result of that evaluation, we
recorded a $5.2 million goodwill impairment loss and a $1.8 impairment loss on
an intangible asset in the third quarter of fiscal 2006 to adjust the carrying
values of the remaining assets of the business to their recoverable fair values.
The sale is scheduled to close in our fiscal 2006 fourth quarter and we do not
expect to recognize any gain or loss after determining final costs and
disposition of assets related to the transaction.
Note 5. Goodwill
The following table presents goodwill by reportable segments:
Analog
(In Millions) Segment All Others Total
--------------- -------------- --------------
Balances at May 29, 2005 $ 64.5 $ 22.7 $ 87.2
Sale of cordless business (22.3) - (22.3)
Goodwill impairment loss (5.2) - (5.2)
--------------- -------------- --------------
Balances at February 26, 2006 $ 37.0 $ 22.7 $ 59.7
=============== ============== ==============
Note 6. Multicurrency Credit Agreement
Our $20 million multicurrency credit agreement with a bank that provides for
multicurrency loans, letters of credit and standby letters of credit was renewed
in October 2005 for another one-year term. The agreement contains restrictive
covenants, conditions and default provisions that require the maintenance of
financial ratios. Under the amended agreement, we are no longer required to
maintain certain levels of tangible net worth, a requirement which previously
restricted the amounts available for payment of dividends on common stock. As of
February 26, 2006, we were in compliance with all financial covenants under the
agreement and no amounts were outstanding.
Note 7. Defined Pension and Retirement Plans
Net periodic pension costs for fiscal 2006 for our defined benefit pension plans
maintained in the U.K., Germany, Japan and Taiwan are presented in the following
table:
Three Months Ended Nine Months Ended
--------------------------- -------------------------
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions) 2006 2005 2006 2005
-------------- ------------ ------------ ------------
Service cost of benefits earned during the period $ 1.5 $ 1.6 $ 4.4 $ 4.6
Plan participant contributions (0.3) (0.4) (0.8) (1.1)
Interest cost on projected benefit obligation 3.5 3.3 10.3 9.7
Expected return on plan assets (3.0) (2.5) (8.9) (7.4)
Net amortization and deferral 1.3 1.3 3.8 3.8
-------------- ------------ ------------ ------------
Net periodic pension cost $ 3.0 $ 3.3 $ 8.8 $ 9.6
============== ============ ============ ============
Total contributions paid to these plans during fiscal 2006 were $0.8
million in the third quarter and $2.4 million in the first nine months. Total
contributions paid to these plans during fiscal 2005 were $0.8 million in the
third quarter and $2.5 million in the first nine months. In March 2006, we made
a $20.0 million contribution to the defined benefit plan maintained in the U. K.
The total contribution to these plans in fiscal 2006 is currently expected to
total approximately $24.0 million.
Note 8. Shareholders' Equity
o Stock Repurchase Program
We continued to repurchase our common stock during the third quarter of fiscal
2006. Stock repurchased in the third quarter of fiscal 2006 was repurchased
under two programs: (i) the $400 million stock repurchase program announced in
September 2005, which was completed during the third quarter; and (ii) another
$400 million stock repurchase program announced in December 2005. We repurchased
a total of 7.2 million shares of our common stock in the third quarter for
$200.1 million. In the first nine months of fiscal 2006, we have repurchased a
total of 30.2 million shares of our common stock for $750.7 million. All of
these shares were purchased in the open market and have been cancelled as of
February 26, 2006. The stock repurchase activity is one element of our overall
program to generate a high return on invested capital, which we believe improves
shareholder value. As of February 26, 2006, we had $353.3 million remaining for
future common stock repurchases under the program announced in December 2005.
During the period after the end of our fiscal 2006 third quarter through
March 31, 2006, we repurchased 3.3 million shares of our common stock for $90.0
million. These purchases were made under the stock repurchase program announced
in December 2005.
o Dividends
On March 9, 2006, we announced that the Board of Directors had declared a cash
dividend of $0.03 per outstanding share of common stock to be payable on April
10, 2006 to shareholders of record at the close of business on March 20, 2006.
This dividend payable will be recorded in the fourth quarter of fiscal 2006. We
previously paid cash dividends of $10.1 million ($0.03 per outstanding share of
common stock) in the third quarter of fiscal 2006 and a total of $24.0 million
in the first nine months of fiscal 2006.
Note 9. Segment Information
The following table presents information related to our reportable segments:
(In Millions) Analog Segment All Others Total
-------------- ------------ -------------
Three months ended February 26, 2006:
Sales $ 471.6 $ 76.1 $ 547.7
============== ============ =============
Income before income taxes $ 176.7 $ 13.7 $ 190.4
============== ============ =============
Three months ended February 27, 2005:
Sales $ 400.3 $ 48.9 $ 449.2
============== ============ =============
Income before income taxes $ 100.8 $ (16.0) $ 84.8
============== ============ =============
Nine months ended February 26, 2006:
Sales $ 1,363.0 $ 222.5 $ 1,585.5
============== ============ =============
Income before income taxes $ 452.4 $ 39.2 $ 491.6
============== ============ =============
Nine months ended February 27, 2005:
Sales $ 1,252.5 $ 193.6 $ 1,446.1
============== ============ =============
Income before income taxes $ 326.2 $ 10.5 $ 336.7
============== ============ =============
Note 10. Contingencies - Legal Proceedings
o 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 the
fiscal periods covered in these condensed consolidated financial statements.
As part of our disposition in fiscal 1996 of the Dynacraft assets and
business, we retained responsibility for environmental claims connected with
Dynacraft's Santa Clara, California, operations and for other environmental
claims arising from our conduct of the Dynacraft business prior to the
disposition. As part of the Fairchild disposition in fiscal 1997, we also agreed
to retain liability for current remediation projects and environmental matters
arising from our prior operation of certain Fairchild plants while Fairchild
agreed to arrange for and perform the remediation and cleanup. We prepaid to
Fairchild the estimated costs of the remediation and cleanup and we remain
responsible for costs and expenses incurred by Fairchild in excess of the
prepaid amounts. To date, the costs associated with the liabilities we have
retained in these dispositions have not been material and there have been no
related legal proceedings.
o Tax Matters
The IRS has completed the field examinations of our tax returns for fiscal years
1997 through 2000 and has 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 at 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 in our consolidated
financial statements such that the outcome of these audits will have no material
adverse effect on our consolidated financial statements.
o Other Matters
In January 1999, a class action suit was filed against us and our chemical
suppliers by former and present employees claiming damages for personal
injuries. The complaint alleged that cancer and reproductive harm were caused to
employees exposed to chemicals in the workplace. The plaintiffs' efforts to
certify a medical monitoring class were denied by the court. The case was
settled and dismissed in February 2006 and the matter is now finalized. The
parties have agreed to keep confidential the terms of the settlement, which did
not have a material effect on our consolidated financial position or results of
operations.
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 us 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 (SEC) proposed clarifying amendments to its
section 16(b) rules which we believe would be dispositive of the case and the
SEC adopted the rule amendments in August 2005. Oral argument on the briefing
ordered by the district court as to whether the SEC amendments should apply to
the case was held in November 2005 and we are waiting for the court's ruling. We
intend to continue to contest the case through all available means.
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
discussions 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. After
hearing post trial 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,
and judgment was entered in those amounts in late August 2005. We have appealed
the verdict and judgment, and our opening brief in the appeal was filed in
January 2006. We intend to contest the case through all available means. In the
fourth quarter of fiscal 2005, we accrued a charge of $3.3 million to cover the
total amount of damages awarded to 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.
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.
o Contingencies - Other
In connection with our past divestitures, we have routinely provided indemnities
to cover the indemnified party for matters such as environmental, tax, product
and employee liabilities. We also routinely include intellectual property
indemnification provisions in our terms of sale, development agreements and
technology licenses with third parties. Since maximum obligations are not
explicitly stated in these indemnification provisions, the potential amount of
future maximum payments cannot be reasonably estimated. To date we have incurred
minimal losses associated with these indemnification obligations and, as a
result, we have not recorded any liabilities in our consolidated financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements relate to, among other things,
sales, gross margins, operating expenses, capital expenditures, R&D efforts 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 in various
markets such as wireless 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 major factors
that could cause actual results to differ materially from our forward-looking
statements, see the discussion on "Risk Factors" that appears below and other
risks and uncertainties detailed in this and our other reports and filings with
the Securities and Exchange Commission. We undertake no obligation to update
forward-looking statements to reflect developments or information obtained after
the date hereof and disclaim any obligation to do so.
This discussion should be read in conjunction with the consolidated
financial statements and the accompanying notes included in this Form 10-Q and
in our Annual Report on Form 10-K for the fiscal year ended May 29, 2005.
o Critical Accounting Policies and Estimates
------------------------------------------
We believe the following critical accounting policies are those policies that
have a significant effect on the determination of our financial position and
results of operations. These policies also require us to make our most difficult
and subjective judgments:
1. Revenue Recognition
We recognize revenue from the sale of semiconductor products upon shipment,
provided 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 51 percent of our semiconductor
product sales were made through distributors in the first nine months of
fiscal 2006. 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 define whether it is
considered a source of income from our primary operations. These revenues are
included in net sales and for the first nine months of fiscal 2006 totaled $2.0
million. All other intellectual property income that does not meet the specified
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.
2. Valuation of Inventories
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market. The total carrying
value of our inventory is net of any reductions we have recorded to reflect
the difference between cost and estimated market value of inventory that is
determined to be obsolete or unmarketable 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. 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 prove to be
less favorable than what we have projected, additional inventory
write-downs may be required.
3. Impairment of Goodwill, Intangible Assets and Other Long-lived Assets
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that their carrying value may not be recoverable
from the estimated future cash flows expected to result from their use and
eventual disposition. Our long-lived assets subject to this evaluation
include property, plant and equipment and amortizable intangible assets.
Amortizable intangible assets subject to this evaluation include developed
technology we have acquired, patents and technology licenses. We assess the
impairment of goodwill annually in our fourth fiscal quarter and whenever
events or changes in circumstances indicate that it is more likely than not
that an impairment loss has been incurred. We are required to make
judgments and assumptions in identifying those events or changes in
circumstances that may trigger impairment. Some of the factors we consider
include:
o Significant decrease in the market value of an asset
o Significant changes in the extent or manner for which the asset is being
used or in its physical condition
o 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
consolidated 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 with goodwill include our flat panel
displays, high definition products and CRT products (formerly grouped as
displays); RF products (formerly within wireless); portable power (formerly
within power management); non-audio amplifier and 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, if the products fail to gain expected market acceptance, or if
market conditions for these business units fail to materialize as anticipated,
our revenue and cost forecasts may not be achieved and we may incur charges for
goodwill impairment, which could be significant and could have a material
adverse effect on our net equity and results of operations.
4. 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 the first nine months of fiscal 2006, we have continued to focus on
addressing analog product areas, particularly in the analog standard linear
categories. 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 our business focus, we
periodically identify opportunities to improve our cost structure or to divest
or reduce involvement in product areas that are not in line with our business
objectives. In June 2005, we completed the sale of our cordless business unit in
Europe to HgCapital. In July 2005, we announced that we are closing our assembly
and test plant in Singapore in a phased shutdown with the plant's volume to be
consolidated into our other assembly and test facilities in Malaysia and China.
The closure activities are targeted to be completed by our first quarter of
fiscal 2007. In November 2005, we took steps to reduce indirect manufacturing
costs in our Texas plant. This included a change in the plant's organizational
structure and a reduction of its workforce.
Our sales and gross margin percentage in the third quarter of fiscal 2006
were both higher than they were in the preceding second quarter and in last
year's third quarter. The improvement in gross margin reflects growth in our
higher margin analog products, as well as higher factory utilization associated
with the increased volume. We continue to focus on improving our gross margin
relative to sales with our research and development investments aimed primarily
at high-value growth areas in analog standard linear markets.
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, which are orders received with delivery
requested in the same quarter), blended-average selling prices, sales of new
products and market share in the analog 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 reduced by
goodwill and non-interest bearing liabilities.
We continued our stock repurchase program during the third quarter of
fiscal 2006. Stock repurchased in the third quarter of fiscal 2006 was
repurchased under two programs: (i) the $400 million stock repurchase program
announced in September 2005, which was completed during the third quarter; and
(ii) another $400 million stock repurchase program announced in December 2005.
We repurchased a total of 7.2 million shares of our common stock in the third
quarter for $200.1 million. In the first nine months of fiscal 2006, we have
repurchased a total of 30.2 million shares of our common stock for $750.7
million. All of these shares were purchased in the open market. The stock
repurchase program is one element of our overall effort to deliver a
consistently high return on invested capital, which we believe improves
shareholder value over time. As of February 26, 2006, we had $353.3 million
remaining for future common stock repurchases under the program announced in
December 2005. We have also continued with the dividend program in the first
nine months of fiscal 2006 during which time we have paid a total of $24.0
million in cash dividends. In the third quarter of fiscal 2006, we paid cash
dividends of $10.1 million ($0.03 per outstanding share of common stock) on
January 9, 2006 to shareholders of record at the close of business on December
19, 2005. In March 2006, the Board of Directors declared a cash dividend of
$0.03 per outstanding share of common stock to be paid on April 10, 2006 to
shareholders of record at the close of business on March 20, 2006.
The following table and discussion provides an overview of our operating
results for the current fiscal year and recently completed third quarter:
------------------------------------- -----------------------------------------
Three Months Ended Nine Months Ended
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions) 2006 % Change 2005 2006 % Change 2005
----------- ------------- ----------- ------------- --------------- -----------
Net sales $ 547.7 21.9% $ 449.2 $ 1,585.5 9.6% $ 1,446.1
Operating income $ 181.9 $ 80.3 $ 470.4 $ 328.8
As a % of net sales 33.2% 17.9% 29.7% 22.7%
Net income $ 130.1 $ 77.4 $ 330.4 $ 285.1
As a % of net sales 23.8% 17.2% 20.8% 19.7%
Net income for the third quarter of fiscal 2006 includes a $5.2 million
goodwill impairment loss, a net charge of $1.0 million for cost reduction
actions arising from a reorganization of our business operations (See Note 4 to
the Condensed Consolidated Financial Statements), an additional $4.0 million
gain related to the sale of our cordless business (See Note 4 to the Condensed
Consolidated Financial Statements), $1.9 million of net intellectual property
income, an impairment loss of $1.8 million on an intangible asset and other
operating income of $0.8 million. In addition to these third quarter amounts,
net income for the first nine months of fiscal 2006 includes an additional $30.7
million for cost reduction and restructuring charges related to the Singapore
assembly and test plant and the Texas manufacturing operations (See Note 4 to
the Condensed Consolidated Financial Statements), a gain of $24.3 million
recognized in the first quarter from the sale of our cordless business in June
2005 (See Note 4 to the Condensed Consolidated Financial Statements), an
additional $1.4 million of net intellectual property income and other operating
income of an additional $2.0 million.
Net income for the third quarter of fiscal 2005 included a cost reduction
charge of $20.1 million, net intellectual property income of $1.7 million, a
refund of $7.4 million for the California Manufacturer's Investment Credit and a
$1.7 million charge related to an intellectual property settlement. In addition
to these third quarter amounts, net income for the first nine months of fiscal
2005 included an additional cost reduction charge of $1.2 million, a gain of
$8.8 million from the sale of assets associated with the imaging business, an
additional $2.3 million of net intellectual property income and a credit of
$10.0 million to adjust the loss accrual related to the ZF Micro Solutions, Inc.
litigation that was settled in December 2004.
o Net Sales
---------
-------------------------------------- --------------------------------------
Three Months Ended Nine Months Ended
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions) 2006 % Change 2005 2006 % Change 2005
----------- ------------- ------------ ------------ ------------ ------------
Analog segment $ 471.6 17.8% $ 400.3 $ 1,363.0 8.8% $ 1,252.5
As a % of net sales 86.1% 89.1% 86.0% 86.6%
All others 76.1 55.6% 48.9 222.5 14.9% 193.6
As a % of net sales 13.9% 10.9% 14.0% 13.4%
----------- ------------ ------------ ------------
Total net sales $ 547.7 $ 449.2 $ 1,585.5 $ 1,446.1
=========== ============ ============ ============
The chart above and the following discussion are based on our reportable
segments described in Note 14 to the Consolidated Financial Statements included
in our annual report on Form 10-K for the year ended May 29, 2005.
The year-over-year growth in analog segment sales seen in fiscal 2006 has
been primarily driven by stronger customer demand levels, especially in wireless
handset and portable consumer markets. We have also continued to grow market
share in the analog standard linear area. Consequently, our analog unit
shipments were up 19 percent in the third quarter of fiscal 2006 from the third
quarter of fiscal 2005 and 13 percent in the first nine months of fiscal 2006
from the comparable fiscal 2005 period. Although blended-average selling prices
for the whole company are down by 4 percent so far in fiscal 2006 compared to
fiscal 2005, blended-average selling prices in our analog standard linear
product portfolio were up year-over-year for both the three months and the nine
months ended February 26, 2006 over the comparable periods of fiscal 2005 by 6
percent and 2 percent, respectively. Although our analog products generally have
lower blended-average selling prices than our non-analog products, they also
sell for higher margins.
Within the Analog segment, products sold by the data conversion, power
management, amplifier (including audio amplifier products) and interface
business units were the underlying drivers of the growth in sales for the third
quarter of fiscal 2006 over the third quarter of fiscal 2005 with increases of
22 percent, 27 percent, 27 percent and 31 percent, respectively. These business
units also contributed to the growth in sales for the first nine months of
fiscal 2006 over the comparable period of fiscal 2005 with increases of 14
percent, 19 percent, 17 percent and 12 percent, respectively.
For the "all others" category, the increase in sales for the third quarter
and first nine months of fiscal 2006 over the comparable periods of fiscal 2005
is primarily due to the foundry sales related to the cordless business that was
divested in June 2005. There were no such foundry sales in fiscal 2005. Since
the cordless business unit was an operating segment within the Analog segment,
sales related to the cordless business were included in Analog segment sales for
the third quarter and first nine months of fiscal 2005.
o Gross Margin
------------
-------------------------------------- -------------------------------------
Three Months Ended Nine Months Ended
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions) 2006 % Change 2005 2006 % Change 2005
---------- -------------- ------------ ----------- ------------- -----------
Net Sales $ 547.7 21.9% $ 449.2 $ 1,585.5 9.6% $ 1,446.1
Cost of sales 215.5 1.4% 212.6 664.3 (2.4%) 680.9
---------- ------------ ----------- -----------
Gross margin $ 332.2 $ 236.6 $ 921.2 $ 765.2
========== ============ =========== ===========
As a % of net sales 60.7% 52.7% 58.1% 52.9%
The increase in the gross margin percentage for the third quarter and first
nine months of fiscal 2006 compared to the same periods of fiscal 2005 was
driven by improved product mix of higher-margin analog standard linear products.
Our product mix has improved through our 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. Higher factory
utilization, coupled with manufacturing efficiencies, also contributed to the
gross margin improvement in both the third quarter and first nine months of
fiscal 2006. Wafer fabrication capacity utilization during the first nine months
of fiscal 2006 was 82 percent compared to 73 percent for the first nine months
of fiscal 2005. Foundry sales from our two recently divested businesses
(cordless in June 2005 and PC Super I/O in May 2005), which carry a much lower
gross margin, were around $10 million lower in the third quarter of fiscal 2006
than the second quarter. As a result, the effect on our gross margin percentage
from these foundry businesses was less dilutive in the third quarter of fiscal
2006.
o Research and Development
------------------------
------------------------------------- --------------------------------------
Three Months Ended Nine Months Ended
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions) 2006 % Change 2005 2006 % Change 2005
----------- ------------- ----------- ----------- -------------- -----------
Research and
development $ 80.2 (0.6%) $ 80.7 $ 241.4 (2.9%) $ 248.5
As a % of net sales 14.6% 18.0% 15.2% 17.2%
Lower research and development expenses in the third quarter and first nine
months of fiscal 2006 compared to the same periods of fiscal 2005 largely
reflect cost savings from the businesses we recently divested. At the same time,
we are continuing to concentrate our ongoing research and development spending
on analog products and underlying analog capabilities. Compared to the first
nine months of fiscal 2005, total company spending through the first nine months
of fiscal 2006 for new product development was down 6 percent, while spending
for analog process and support technology was up 12 percent. Although research
and development spending is down as a whole and as a percentage of sales,
research and development spending on our key focus areas in the Analog segment
increased as we continue to invest in the development of new analog products for
wireless handsets, displays, other portable devices, as well as applications for
the broader markets requiring analog technology. A significant portion of our
research and development is directed at power management technology.
o Selling, General and Administrative
-----------------------------------
------------------------------------- --------------------------------------
Three Months Ended Nine Months Ended
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions) 2006 % Change 2005 2006 % Change 2005
----------- ------------- ----------- ----------- -------------- -----------
Selling, general and
administrative $ 68.8 9.4% $ 62.9 $ 205.1 5.1% $ 195.1
As a % of net sales 12.6% 14.0% 12.9% 13.5%
The dollar increase in selling, general and administrative expenses for the
third quarter and first nine months of fiscal 2006 compared to the same periods
of fiscal 2005 is due primarily to higher personnel costs in fiscal 2006, mainly
attributable to increased compensation and benefits. As a percentage of sales,
however, our SG&A expenses remained relatively steady as we continue to manage
our cost structure in line with our overall business model objectives.
o Interest Income, Net
--------------------
------------------------- -------------------------
Three Months Ended Nine Months Ended
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions) 2006 2005 2006 2005
------------ ------------ ------------ ------------
Interest income $ 9.0 $ 4.7 $ 24.3 $ 11.6
Interest expense (0.5) (0.4) (1.2) (1.2)
------------ ------------ ------------ ------------
Interest income, net $ 8.5 $ 4.3 $ 23.1 $ 10.4
============ ============ ============ ============
The increase in interest income, net, for the third quarter and first nine
months of fiscal 2006 compared to the same periods of fiscal 2005 was due to
higher average cash balances and higher interest rates.
o Other Non-Operating Expense, Net
--------------------------------
------------------------- -------------------------
Three Months Ended Nine Months Ended
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions) 2006 2005 2006 2005
------------ ------------ ------------ ------------
Gain on investments $ 9.7 $ 0.9 $ 8.4 $ 2.0
Share in net losses of equity-method
investments - (0.7) (0.6) (4.0)
Charitable contribution (9.7) - (9.7) -
Other - - - (0.5)
------------ ------------ ------------ ------------
Total other non-operating
expense, net $ - $ 0.2 $ (1.9) $ (2.5)
============ ============ ============ ============
The components of other non-operating expense, net are primarily derived from
activities related to our investments. The gain on investments in the third
quarter and first nine months of fiscal 2006 reflects the sale of shares in
available-for-sale securities and a non-publicly traded company, as well as the
net change in unrealized holdings gains from trading securities. The share of
net losses in equity-method investments declined in fiscal 2006 due to lower
amounts of such investments being carried by the company. Other non-operating
expenses also included a charitable contribution in the third quarter of fiscal
2006 and a litigation settlement in the first nine months of fiscal 2005.
o Income Tax Expense
------------------
---------------------------- -------------------------
Three Months Ended Nine Months Ended
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
(In Millions) 2006 2005 2006 2005
-------------- ------------- ------------ ------------
Income tax expense $ 60.3 $ 7.4 $ 161.2 $ 51.6
Effective tax rate 31.7% 8.7% 32.8% 15.3%
The effective tax rate for the third quarter is lower than the rate for the
first nine months of fiscal 2006 because the first quarter results included an
incremental $5.8 million tax provision that arose from certain discrete
transactions recorded in the first quarter, which included cost reduction and
restructuring activities associated with the announced closure of the Singapore
plant and the sale of the cordless business. The tax expense in fiscal 2005 was
lower because it consisted primarily of alternative minimum tax, net of tax
credit carryforwards and non-U.S. taxes.
o Liquidity and Capital Resources
-------------------------------
--------------------------------------
Nine Months Ended
Feb. 26, Feb. 27,
(In Millions) 2006 2005
-------------- -------------
Net cash provided by
operating activities $ 568.0 $ 359.5
Net cash used by
investing activities (28.4) (95.7)
Net cash used by
financing activities (554.6) (174.0)
-------------- -------------
Net change in cash and
cash equivalents $ (15.0) $ 89.8
============== =============
The primary factors contributing to the changes in cash and cash equivalents in
the first nine months of fiscal 2006 and 2005 are described below:
In the first nine months of fiscal 2006, cash from operating activities was
generated primarily from net income, adjusted for noncash items (primarily
depreciation and amortization and the tax benefit associated with stock options)
combined with the positive impact that came from changes in working capital
components. Increases in working capital from accounts payable and accrued
expenses, current and deferred income taxes, other current assets and other
non-current liabilities more than offset the impact of higher receivables. We
also generated cash from operating activities in the first nine months of fiscal
2005. The positive impact from net income, when adjusted for noncash items
(primarily depreciation and amortization), was greater than the negative impact
from changes in working capital components in the first nine months of fiscal
2005.
The primary use of cash for investing activities during the first nine
months of fiscal 2006 was investment in property, plant and equipment of $100.0
million, primarily for the purchase of machinery and equipment, which was
partially offset by proceeds from the sale of the cordless business for $64.0
million and the sale of investments for $10.8 million. Major uses of cash for
investing activities during the first nine months of fiscal 2005 included
investment in property, plant and equipment of $83.3 million, primarily for the
purchase of machinery and equipment, payments for security deposits on leased
equipment of $17.4 million and funding of a benefit plan in the amount of $7.1
million. In addition, proceeds of $10.0 million from the sale of assets
partially offset major uses of cash in fiscal 2005.
The primary use of cash for our financing activities in the first nine
months of fiscal 2006 was for the repurchase of 30.2 million shares of our
common stock in the open market for $750.7 million, payments of $13.1 million on
software license obligations and $24.0 million for cash dividends. These amounts
were partially offset by proceeds of $233.2 million from the issuance of common
stock under employee benefit plans. The primary use of cash for our financing
activities in the first nine months of fiscal 2005 was for the repurchase of
13.9 million shares of our common stock in the open market for $225.5 million
and payments of $13.6 million on software license obligations and $7.1 million
for cash dividends. These amounts were partially offset by proceeds of $72.2
million from the issuance of common stock under employee benefit plans.
On March 9, 2006, our Board of Directors declared a cash dividend of $0.03
per outstanding share of common stock to be paid on April 10, 2006 to
shareholders of record at the close of business on March 20, 2006. We also made
a $20.0 million contribution to one of our international defined benefit plans
in March 2006. We foresee continuing cash outlays for plant and equipment in
fiscal 2006 and into fiscal 2007, with our primary focus on analog capabilities
at our existing sites. As a result, our fiscal 2006 capital expenditures are
expected to be higher than the fiscal 2005 amount. However, we will continue to
manage the level of capital expenditures relative to sales levels, capacity
utilization and industry business conditions. We expect that existing cash and
investment balances, together with existing lines of credit and cash generated
by operations, will be sufficient to finance the capital investments currently
planned for the remainder of fiscal 2006, as well as the declared dividend, the
stock repurchase program and the pension contribution.
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 at February 26, 2006 (payment periods are
measured from the end of fiscal 2005):
Payments due by period:
Less than Greater than
1 Year 1 - 3 Years 4 - 5 Years 5 Years
---------- ------------------------- --------------- -------------
Fiscal Year: 2012 and
(In Millions) 2006 2007 2008 2009 2010 2011 thereafter Total
---------- ------- -------- -------- ------- ------- ------------- ---------
Contractual obligations:
Debt obligations $ - $ - $ 20.9 $ - $ - $ - $ 0.2 $ 21.1
CAD software
licensing agreements - 9.9 10.0 9.7 - - - 29.6
Other contractual
obligations under:
Noncancelable
operating leases 8.3 25.5 12.1 7.0 4.5 0.7 0.9 59.0
Other 1.3 3.2 1.8 0.2 - - - 6.5
---------- ------- -------- -------- ------- ------- ------------- ---------
Total $ 9.6 $ 38.6 $ 44.8 $ 16.9 $ 4.5 $ 0.7 $ 1.1 $116.2
========== ======= ======== ======== ======= ======= ============= =========
Commercial Commitments:
Standby letters of credit
under bank multicurrency
agreement $ - $ 7.8 - - - - - $ 7.8
========== ======= ======== ======== ======= ======= ============= =========
In addition, as of February 26, 2006, capital purchase commitments were
$45.9 million.
We do not currently have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which might be established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. We do not engage in trading activities involving non-exchange
traded contracts. As a result, we do not believe that we are materially exposed
to financing, liquidity, market or credit risk that could arise if we had
engaged in these relationships.
o Recently Issued Accounting Pronouncements
-----------------------------------------
In February 2006, the Financial Accounting Standards Board issued SFAS No. 155,
"Accounting for Certain Hybrid Financial Instruments," which amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This Statement is aimed at improving the
financial reporting of certain hybrid financial instruments by requiring more
consistent accounting that eliminates exemptions and provides a means to
simplify the accounting for these instruments. We are currently analyzing this
Statement and have not yet determined its impact on our consolidated financial
statements. This Statement is effective for all financial instruments acquired
or issued after the beginning of our fiscal 2008.
o Outlook
-------
Compared to fiscal 2005, we have experienced stronger market conditions
throughout the first nine months of fiscal 2006. Although at a slower rate, new
orders in the third quarter grew sequentially over the second quarter of fiscal
2006. This growth was driven by a combination of seasonally higher orders for
products that serve wireless handsets and other portable electronics, as well as
increased orders from our distributors, which tend to serve the broader markets.
Distribution resale activity accelerated in our Europe and North America regions
during January and February after the December holidays. In the Asia region,
resale activity was strong in February after the Lunar New Year holiday was
over. Overall distributor inventory levels in the third quarter also grew over
the levels in the preceding second quarter, but were still at the lower end of
their typical operating range.
Our opening 13-week backlog entering the fourth quarter of fiscal 2006 was
higher than it was when we began the third quarter of fiscal 2006. We expect
foundry sales for our two recently divested businesses to decline slightly in
the fourth quarter. Considering all factors, including those discussed above and
our historical seasonality patterns, we provided guidance for net sales in the
fourth quarter of fiscal 2006 to be up 2 to 4 percent sequentially over the
level achieved in our third quarter. However, if backlog orders are cancelled or
if the currently anticipated level of turns orders is less than expected, we may
not be able to achieve this level of sales. We also expect our gross margin
percentage to be slightly higher than the percentage achieved in the third
quarter based on the expected sales level and current cost structure. We expect
wafer fabrication capacity utilization to continue to run at similar high levels
that we saw in the third quarter. However, if there is a decline in factory
utilization or changes in the expected sales level or product mix, we may not be
able to achieve a higher gross margin percentage.
In July 2005, we announced a plan to close our assembly and test facility
in Singapore and consolidate its equipment and ongoing production volume into
our assembly and test facilities in Malaysia and China. The closure activities
are targeted to be completed by our first quarter of fiscal 2007. Although we
expect some future reduction in our manufacturing costs once the closure is
completed, manufacturing costs during the interim may be unfavorably affected by
the discrete costs of the transfer activity.
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. The
deduction is subject to a number of limitations requiring detailed computations
in various jurisdictions. Repatriation of foreign earnings required for the
dividends-received deduction must be completed by the end of our fiscal 2006
fourth quarter. Accordingly, we are undertaking a comprehensive analysis 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 have a corresponding tax liability of up to $45 million
and would impact our effective tax rate. We expect to finalize our analysis in
the fourth quarter of fiscal 2006.
o Risk Factors
------------
Conditions inherent in the semiconductor industry may 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 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 be a significant source of our
overall sales. New products are being developed to address new features and
functionality in handsets, such as advanced 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 be successful in developing and introducing successful
new products, and a failure to bring new 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, which 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.
We may pursue acquisitions, investments and divestitures, which could harm our
operating results and may disrupt our business. 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.
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.
We may receive tax assessments, which could adversely affect our financial
condition and results of operations. From time to time, we have received notices
of tax assessments from governments of certain 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.
Our business is global and world events and changes in the world economy could
adversely affect our financial performance and operating results. Terrorist
activities worldwide and hostilities in and between nation states including the
continuing hostilities and insurgency in Iraq 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. 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. Pandemic illness, hurricanes and other substantial
natural, as well as geopolitical events, may affect our future costs, operating
capabilities and revenues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market
Risk, in our annual report on Form 10-K for the year ended May 29, 2005 and to
the subheading "Financial Market Risks" under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 30 of our Annual Report on Form 10-K for the year ended May 29, 2005 and to
Note 1, "Summary of Significant Accounting Policies," and Note 2, "Financial
Instruments," in the Notes to the Consolidated Financial Statements included in
Item 8 of our 2005 Form 10-K. There have been no material changes in market risk
from the information reported in these sections.
ITEM 4. 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 those entities
are necessarily substantially more limited than those we maintain for our
consolidated subsidiaries.
We have a disclosure controls committee comprised of key individuals from a
variety of disciplines in the company that are involved in the disclosure and
reporting process. The committee meets regularly to ensure the timeliness,
accuracy and completeness of the information required to be disclosed in our
filings. As required by SEC Rule 13a-15(b), the committee reviewed this Form
10-Q and also met with the Chief Executive Officer and the Chief Financial
Officer to review this Form 10-Q and the required disclosures and the
effectiveness of the design and operation of our disclosure controls and
procedures. The committee performed an evaluation, under the supervision of and
with the participation of management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the fiscal quarter covered
by this report. Based on that evaluation and their supervision of and
participation in the process, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.
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 conduct a continual review of our internal
controls 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 third quarter of
fiscal 2006 which is covered by this report, we did not make any changes in our
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
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 controls
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We currently are a party to various legal proceedings. 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 of our 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. Information on our existing
material legal proceedings is provided in our Form 10-K for the fiscal year
ended May 29, 2005, our Form 10-Q for the quarter ended August 28, 2005 and our
Form 10-Q for the quarter ended November 27, 2005. Except as described below,
there have been no material developments in the legal proceedings described in
those filings.
1. 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 alleged
that cancer and/or reproductive harm was caused to employees as a result of
alleged exposure to toxic chemicals while working at our manufacturing
facilities. Plaintiffs claimed to have worked at sites in Santa Clara and/or in
Greenock, Scotland. In addition, one of the plaintiffs claimed 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 our manufacturing facilities. Although no specific amount of
monetary damages was claimed, plaintiffs sought 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
required the Scottish plaintiffs to seek their remedies in Scottish courts. The
court also denied the plaintiff' motion for certification of a medical
monitoring class. In February 2006, the case was settled and dismissed and the
case is now completed. The parties have agreed to keep confidential the terms of
the settlement, which did not have a material effect on our financial position
or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
a. During the third quarter of fiscal 2006 covered by this report, we did not
make unregistered sales of our securities.
c. The following table summarizes purchases we made of our common stock during
the third quarter of fiscal 2006:
Approximate Dollar
Total Number of Value of Shares that
Shares Purchased as May Yet Be Purchased
Total Number of Part of Publicly Under the Plans or
Shares Purchased (1) Average Price Paid Announced Plans Or Programs (2)
Period per Share Programs
-------------------------- -------------------- ---------------------- ---------------------- ----------------------
Month #1
November 28, 2005 -
December 27, 2005 1,989,000 $27.24 1,989,000 $499 million
Month #2
December 28, 2005 -
January 27, 2006 4,402,935 $27.83 4,402,935 $376 million
Month #3
January 28, 2006 -
February 26, 2006 818,400 $28.42 818,400 $353 million
-------------------- ----------------------
Total 7,210,335 7,210,335
==================== ======================
1. During the quarter ended February 26,2006, we also reacquired 23,010 shares
through the withholding of shares to pay employee tax obligations upon the
vesting of restricted stock. Additionally, during the quarter ended
February 26, 2006, 30,955 shares were purchased by the rabbi trust utilized
by our Deferred Compensation Plan, which permits participants to direct
investment of their accounts in National stock in accordance with their
instructions.
2. Purchases during the third quarter were made under two different programs:
$153 million of the purchases were made under a $400 million repurchase
program announced September 9, 2005 which was completed in January 2006.
$47 million of the purchases were made under a new $400 million program
announced December 8, 2005. There is no expiration date for the new
repurchase program. The total dollar amount approved for the new repurchase
program is $400 million. All 7,210,335 shares were purchased in the open
market.
ITEM 6. EXHIBITS
(a) Exhibits
3.1 Second Restated Certificate of Incorporation of the Company as amended
(incorporated by reference from the Exhibits to our Registration Statement
on Form S-3 Registration No. 33-52775, which became effective March 22,
1994); Certificate of Amendment of Certificate of Incorporation dated
September 30, 1994 (incorporated by reference from the Exhibits to our
Registration Statement on Form S-8 Registration No. 333-09957, which became
effective August 12, 1996); Certificate of Amendment of Certificate of
Incorporation dated September 22, 2000 (incorporated by reference from the
Exhibits to our Registration Statement on Form S-8 Registration No.
333-48424, which became effective October 23, 2000).
3.2 By Laws of the Company, as amended effective April 3, 2006 (incorporated by
reference from the Exhibits to our Form 8-K dated April 3, 2006 filed April
3, 2006).
4.1 Form of Common Stock Certificate (incorporated by reference from the
Exhibits to our Registration Statement on Form S-3 Registration No.
33-48935, which became effective October 5, 1992).
4.2 Rights Agreement (incorporated by reference from the Exhibits to our
Registration Statement on Form 8-A filed August 10, 1988); First Amendment
to the Rights Agreement dated as of October 31, 1995 (incorporated by
reference from the Exhibits to our Amendment No. 1 to the Registration
Statement on Form 8-A filed December 11, 1995); Second Amendment to the
Rights Agreement dated as of December 17, 1996 (incorporated by reference
from the Exhibits to our Amendment No. 2 to the Registration Statement on
Form 8-A filed January 17, 1997); Certificate of Adjusted Purchase Price on
Number of Shares dated April 23, 2004 filed by National Semiconductor
Corporation with the Rights Agent (incorporated by reference to the
Exhibits to our Amendment No. 3 to the Registration Statement on Form 8-A
filed April 24, 2004).
10.1 Management Contract or Compensatory Plan or Arrangement; Equity
Compensation Plan not Approved by Stockholders; Amendment Two to the
Deferred Compensation Plan (incorporated by reference from the Exhibits to
our Form 8-K dated December 15, 2005 filed December 16, 2005).
31. Rule 13a - 14(a)/15d - 14(a) Certifications
32. Section 1350 Certifications
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL SEMICONDUCTOR CORPORATION
Date: April 3, 2006 /s/ Jamie E. Samath
----------------------------------
Jamie E. Samath
Corporate Controller
Signing on behalf of the registrant
and as principal accounting officer
Exhibit 31
CERTIFICATION
I, Brian L. Halla, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Semiconductor
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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: April 3, 2006 /s/ Brian L. Halla
----------------------
Brian L. Halla
Chief Executive Officer
CERTIFICATION
I, Lewis Chew, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Semiconductor
Corporation;
2. Based on my knowledge, this 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 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: April 3, 2006 /s/ Lewis Chew
----------------
Lewis Chew
Senior Vice President, Finance and Chief
Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of National Semiconductor Corporation
(the "Company") on Form 10-Q for the period ended February 26, 2006 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: April 3, 2006 /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 Quarterly Report of National Semiconductor Corporation
(the "Company") on Form 10-Q for the period ended February 26, 2006 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: April 3, 2006 /s/ Lewis Chew
---------------
Lewis Chew
Senior Vice President, Finance and
Chief Financial Officer