UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended May 28, 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
(State of incorporation) (I.R.S. Employer Identification Number)
2900 SEMICONDUCTOR DRIVE, P.O. BOX 58090
SANTA CLARA, CALIFORNIA 95052-8090
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 721-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common stock, par value New York Stock Exchange
$0.50 per share Pacific Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes[X]. No [ ].
Indicate by check mark if the registrant is not required to file reports
pursuant to section 13 or Section 15(d) of the Act. Yes[ ]. No [X].
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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].
The aggregate market value of voting stock held by non-affiliates of National as
of November 27, 2005, was approximately $7,054,904,577 based on the last
reported sale price on the last trading date prior to that date. Shares of
common stock held by each officer and director and by each person who owns 5
percent or more of the outstanding common stock have been excluded because these
persons may be considered to be affiliates. This determination of affiliate
status for purposes of this calculation is not necessarily a conclusive
determination for other purposes.
The number of shares outstanding of the registrant's common stock, $0.50 par
value, as of June 23, 2006, was 334,465,588 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Document Location in Form 10-K
-------- --------------------
Portions of the Proxy Statement for the Annual Meeting of Part III
Stockholders to be held on or about October 6, 2006.
NATIONAL SEMICONDUCTOR CORPORATION
TABLE OF CONTENTS
Page No
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PART I
Item 1. Business 4
Item 1A. Risk Factors 12
Item 1B. Unresolved Staff Comments 16
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 20
Executive Officers of the Registrant 21
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 39
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 87
Item 9A. Controls and Procedures 88
Item 9B. Other Information 89
PART III
Item 10. Directors and Executive Officers of the Registrant 90
Item 11. Executive Compensation 90
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 91
Item 13. Certain Relationships and Related Transactions 93
Item 14. Principal Accountant Fees and Services 93
PART IV
Item 15. Exhibits and Financial Statement Schedules 94
Signatures 96
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements are based on our current
expectations and could be affected by the uncertainties and risk factors
described throughout this filing and particularly in Part I of Form 10-K "Item
1A: Risk Factors" and business outlook section in Part II of Form 10-K "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations." 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," "will," and
similar words or phrases. These statements 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. For a discussion of some of the
factors that could cause actual results to differ materially from our
forward-looking statements, see the discussion on "Risk Factors" that appears in
Item 1A of this 2006 Form 10-K and other risks and uncertainties detailed in
this and our other reports and filings with the Securities and Exchange
Commission. We undertake no obligation to update forward-looking statements to
reflect developments or information obtained after the date hereof and disclaim
any obligation to do so.
General
We design, develop, manufacture and market a wide range of semiconductor
products, most of which are analog and mixed-signal integrated circuits. Our
focus is on creating analog-intensive solutions that provide energy efficiency,
portability, better audio, sharper images and higher performance in electronic
systems. We target a broad range of markets and applications such as:
o wireless handsets o medical applications
o displays o automotive applications
o networks o test and measurement applications
o industrial markets o a broad range of portable applications
We are a premier analog company creating high-value analog devices and
subsystems. Our leading-edge products include power management circuits, display
drivers, audio and operational amplifiers, communication interface products and
data conversion solutions. Approximately 86 percent of our revenue in fiscal
2006 was generated from analog-based products, and we believe this percentage
can continue to grow in the future as a result of our focus on developing new
analog products for a variety of markets and applications.
National was originally incorporated in the state of Delaware in 1959 and
our headquarters have been in Santa Clara, California since 1967. Our fiscal
year ends on the last Sunday of May and references in this document to fiscal
2006 refer to our fiscal year ended May 28, 2006. References to fiscal 2005
refer to our fiscal year ended May 29, 2005 and to fiscal 2004 refer to our
fiscal year ended May 30, 2004. Our fiscal 2006 and 2005 had 52-week years and
fiscal 2004 had a 53-week year. On our "Investor Information" website, located
at www.national.com, we post the following filings as soon as reasonably
practicable after they are electronically filed with or furnished to the
Securities and Exchange Commission: our annual report on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on Form 8-K and any
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934. All of the filings on our website
are available free of charge. We also maintain certain corporate governance
documents on our website, including our Code of Conduct and Ethics, Director
Affairs Committee Charter, Compensation Committee Charter, Audit Committee
Charter and Other Governance Policies. We will provide a printed copy of any of
these documents to any shareholder who requests it. We do not intend for
information found on our website to be part of this document or part of any
other report or filing with the SEC.
Recent Highlights
Throughout fiscal 2006, we 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 a planned closure of 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 occurred throughout fiscal 2006 and are targeted to be
completed by the end of our first quarter of fiscal 2007. In November 2005, we
took steps to reduce indirect manufacturing costs at 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 fiscal 2006 were both higher than
they were in the preceding fiscal year. The improvement in gross margin reflects
growth in our higher margin analog products, as well as higher factory
utilization associated with increased volume. We continued our 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.
We continued our stock repurchase program in fiscal 2006. Stock was
repurchased in fiscal 2006 under three programs: (i) the $400 million stock
repurchase program announced in March 2005 (of which we used $96.0 million to
repurchase 4.9 million shares of common stock in fiscal 2005), (ii) the $400
million stock repurchase program announced in September 2005, and (iii) another
$400 million stock repurchase program announced in December 2005. Under these
programs we repurchased a total of 37.2 million shares of our common stock for
$950.7 million during fiscal 2006. 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 May 28, 2006, we had $153.3 million
remaining for future common stock repurchases under the program announced in
December 2005. On June 8, 2006, we announced that our Board of Directors had
approved an additional $500 million stock repurchase program similar to our
prior stock repurchase programs.
We also continued our dividend program in fiscal 2006, as we paid a total
of $34.2 million in cash dividends in fiscal 2006. In June 2006, our Board of
Directors declared a cash dividend of $0.03 per outstanding share of common
stock, which was paid on July 10, 2006 to shareholders of record at the close of
business on June 19, 2006.
Products
Semiconductors are integrated circuits (in which a number of transistors and
other elements are combined to form a more complicated circuit) or discrete
devices (such as individual transistors). In an integrated circuit, various
components are fabricated in a small area or "chip" of silicon, which is then
encapsulated in plastic, ceramic or other advanced forms of packaging and
connected to a circuit board or substrate.
We manufacture an extensive range of analog intensive and mixed-signal
integrated circuits, which are used in numerous applications. While no precise
industry definition exists for analog and mixed-signal devices, we consider
products which process analog information or convert analog to digital or
digital to analog as analog and mixed-signal devices.
We are a leading supplier of analog and mixed-signal products, serving both
broad based markets such as the industrial, communications, computing, consumer,
medical and automotive markets, and more narrowly defined markets such as
wireless handsets, LCD monitors, personal computers and HDTVs. Our analog and
mixed-signal devices include:
o operational and audio amplifiers o communication interface circuits
o power references, regulators o flat panel display drivers and signal
and switchers processors
o analog to digital or o radio frequency integrated circuits
or digital-to-analog converters
Other products with significant analog content include products for local
area and wireless networking and wireless communications.
Other product offerings that are not analog or mixed-signal include
microcontrollers, connectivity processors and embedded BluetoothTM solutions
that collectively serve a wide variety of applications in the wireless, personal
computer, industrial, automotive, consumer and communication markets.
Our diverse portfolio of intellectual property enables us to develop
building block products, application-specific standard products and custom
large-scale integrations for our customers. Our high-performance building blocks
and application-specific standard products allow our customers to solve
challenging technical problems and to differentiate their systems in a way that
is beneficial to the end user.
With our leadership in innovative packaging and analog process technology,
we can address growth opportunities that depend upon the critical elements of
efficiency, physical size and performance. We continue to focus on directly
servicing the top tier original equipment manufacturers in many markets and on
expanding our presence for a broader range of customers through our franchised
distributors.
Corporate Organization
Our various product line business units are combined to form groups. During
fiscal 2006, our operations were organized in two groups: the Power Management
Group and the Analog Signal Path Group.
Power Management Group
Our Power Management Group contains five different business units in the power
management area which form the Power Management Division, as well as three other
business units that address displays, device connectivity and ASIC & telecom.
Power management refers to the conversion and management of power consumption in
electronic systems. Integrated circuits such as digital processors, analog to
digital converters and light emitting diodes each require different power
sources to operate. Power management ICs convert and regulate voltages to ensure
these products operate to their fullest potential with the lowest overall power
consumption. Our power management portfolio provides our customers valuable
solutions to solve their power conversion needs.
The Power Management Division designs, develops and manufactures a wide
range of products including:
o high-efficiency switching voltage regulators and controllers
o high-performance low drop-out voltage regulators
o accurate white LED drivers
o precision voltage references
o battery management integrated circuits
We are growing our power management business by balancing our focus between
broad customer needs and specific target markets. We continue to strengthen our
broad portfolio of power management ICs which can address customer needs in a
variety of end-markets such as consumer, industrial, medical, automotive and
communications infrastructure markets. At the same time, we focus on markets,
such as portable electronic devices and displays, which provide significant
growth while valuing the performance our products deliver, such as power
consumption efficiency and size reduction.
We continue to push the performance envelope of power management building
blocks in terms of providing greater efficiency, increased power density,
tighter accuracy and wider voltage ranges. These building block products serve
as the starting point for the development of highly integrated
application-specific standard products for high volume applications.
The Displays business unit develops technology leadership products for the
liquid crystal display (LCD) panel market. The end products in this market
include LCD TV displays, handheld devices, notebook thin film transistor (TFT)
panels and flat panel monitors. The devices we produce to address these products
include timing controllers, low voltage differential signal (LVDS) data
receivers, LVDS transmitters and integrated display drivers. We continue to
demonstrate our innovation in the displays space through the proliferation of
new display architecture standards. For example, our Mobile PixelLink (MPL)
technology enables reduced power and wire count in handheld devices. Also, our
point-to-point differential signaling (PPDS) technology for LCD TVs enables
cinema quality display performance featuring 10-bit "Deep Color" with
independent programmable gamma. We have licensed our PPDS technology to major
column driver providers including Sharp, Himax, ST Micro and Magnachip.
The Device Connectivity business unit supplies connectivity devices, embedded
BluetoothTM solutions, general-purpose microcontrollers and DVD chipset
solutions. Applications include BluetoothTM accessories, telematics (automotive)
and industrial equipment. Our general-purpose 8 and 16 bit microcontrollers
address a wide variety of applications in the industrial, automotive, consumer
and communication markets.
The ASIC & Telecom business unit supplies user-designed application specific
products in the form of standard cells and gate arrays, key telecommunications
components for analog and digital line cards, as well as AC97-compliant audio
codecs for consumer and automotive applications. This business unit also handles
the logistics for providing materials and services to third parties in support
of the transitional service agreements associated with businesses that we have
divested.
Analog Signal Path Group
Key business units under the Analog Signal Path Group include the Amplifiers,
Audio, Data Conversion and Interface business units, as well as Hi-Rel
operations. The analog signal path refers to the analog technology that is
applied during the path that information or data travels along from the point
where it enters the electronic equipment, is conditioned, converted and
processed to the point where it is sent out. Our analog signal path products
provide a vital technology link that allows the user to connect to digital
information. They are used to enable and enrich the user experience of sight and
sound of many electronic applications. In addition to providing the real world
interfaces, analog signal path products are used extensively in signal
conditioning, signal conversion (from analog to digital and vice versa) and
high-speed signal interfacing applications.
The Analog Signal Path Group designs, develops and manufactures a wide
range of products including:
o high-performance operational amplifiers
o high-performance analog-to-digital converters and digital-to-analog
converters
o high-speed signal conditioning products
o precision timing products
o high-efficiency audio amplifiers
o thermal management products
We are expanding our presence in the broader markets by developing more
high-performance analog products that can address various applications in the
broad consumer, industrial, medical, automotive and communications
infrastructure markets. With our growing product portfolio of high-performance
building blocks, we continue to improve performance by providing greater
precision, higher speed and lower power which our customers value. These
building block products serve as the starting point for the development of
highly integrated application-specific standard products for high volume
applications.
The Hi-Rel business unit of the Analog Signal Path Group supplies
integrated circuits and contract services to the high reliability market, which
includes avionics, defense, space and the federal government.
Worldwide Marketing and Sales Group, Technology Development Group and
Manufacturing Operations Group
Separate from our business operating groups, our corporate structure in fiscal
2006 includes a centralized Worldwide Marketing and Sales Group, a Technology
Development Group and a Manufacturing Operations Group.
The Worldwide Marketing and Sales Group unites our global sales and
marketing organization which is structured around the four major regions of the
world where we operate (the Americas, Europe, Japan and Asia Pacific).
The Technology Development Group is a centralized worldwide organization
which encompasses process development, technology infrastructure and shared
engineering services. Process development undertakes research in and development
of proprietary processes for the manufacture of our products. Technology
infrastructure provides a range of process libraries, product cores and
software, and the selection and support of computer aided design tools used in
the design, layout and simulation of our products. Engineering services provide
test development and reliability services used across all of our product lines.
The Manufacturing Operations Group is a centralized worldwide organization
that manages all production, including outsourced manufacturing, global
logistics, and packaging technology.
Segment Financial Information and Geographic Information
For segment reporting purposes, each of our product line business units
represents an operating segment as defined under Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. Business units that have similarities, including economic
characteristics, underlying technology, markets and customers, are aggregated
into larger segments. Under the criteria in SFAS No. 131, Analog is our only
reportable segment for fiscal 2006. The remaining business units that are not
included in the Analog reportable segment are grouped as "All Other."
For further financial information on the Analog reportable segment, as well
as geographic information, refer to the information contained in Note 13,
"Segment and Geographic Information," in the Notes to the Consolidated Financial
Statements included in Item 8.
Marketing and Sales
We market our products globally to original equipment manufacturers and original
design manufacturers through a direct sales force. Some of our major OEMs
include:
o Apple Computer o Motorola o Siemens
o Robert Bosch o Nokia o Sony
o LG Electronics o Samsung o Sony - Ericsson Mobile Communication
o L.M. Ericsson o Seagate o Toshiba
o Matsushita Electric o Sharp
There is a prevalent trend in the technology industry where OEMs use
contract manufacturers to build their products and ODMs to design and build
products. As a result, our design wins with major OEMs, particularly in the
personal computer and cellular phone markets, can ultimately result in sales to
a third party manufacturer.
In addition to our direct sales force, we use distributors in our four
geographic business regions, and approximately 51 percent of our fiscal 2006 net
sales were made to distributors. In line with industry practices, we generally
credit distributors for the effect of price reductions on their inventory of our
products and, under specific conditions, we repurchase products that we have
discontinued. Distributors do not have the right to return product except under
customary warranty provisions. The programs we offer to our distributors include
the following:
o Allowances involving pricing and volume. We refer to this as the
"contract sales debit" program.
o Allowance for inventory scrap. We refer to this as the "scrap
allowance" program.
o Discount for early payment. We refer to this as the "prompt payment"
program.
Under the contract sales debit program, products are sold to distributors
at standard published prices that are contained in price books that are broadly
provided to our various distributors. Distributors are required to pay for this
product within our standard commercial terms. After the initial purchase of the
product, the distributor has the opportunity to request a price allowance for a
particular part number depending on the current market conditions for that
specific part as well as volume considerations. This request is made prior to
the distributor reselling the part. Once we have approved an allowance to the
distributor, the distributor proceeds with the resale of the product and credits
are issued to the distributor in accordance with the specific allowance that we
approved. Periodically, we issue new distributor price books. For those parts
for which the standard prices have been reduced, we provide an immediate credit
to distributors for inventory quantities they have on hand.
Under the scrap allowance program, certain distributors are given a
contractually defined allowance to cover the cost of any scrap they might incur.
The amount of the allowance is specifically agreed upon with each distributor.
Under the prompt payment program, certain distributors are granted a fixed
percentage discount off the invoice price for payment earlier than our standard
commercial terms. This program was discontinued during fiscal 2006 for
substantially all of our distributors, except those in the Japanese region.
Our regional facilities in the United States, Europe, Japan and Asia
Pacific handle local customer support. These customer support centers respond to
inquiries on product pricing and availability, pre-sale customer technical
support requests, order entry and scheduling, and post-sale support under our
product warranty provisions. The technical support provided to our customers
consists of marketing activities that occur prior to sale of product to our
customers and for which we have no contractual obligation and no fees are
charged. Technical support consists primarily of aiding customers in product
selection and answering questions about our products.
We augment our sales effort with application engineers based in the field.
These engineers are specialists in our product portfolio and work with customers
to identify and design our integrated circuits into customers' products and
applications. These engineers also help identify emerging markets for new
products and are supported by our design centers in the field or at
manufacturing sites.
We also provide web-based, on-line tools that allow customers and potential
customers to select our devices, create a design using our parts, and simulate
performance of that design.
Customers
Our top ten customers combined represented approximately 64 percent of total
accounts receivable at May 28, 2006 and approximately 49 percent at May 29,
2005. The distributor Avnet accounted for 12 percent of our net sales in fiscal
2006, and 11 percent of our net sales in fiscal 2005 and 2004. In addition, the
distributor Arrow accounted for 12 percent of our net sales in fiscal 2006 and
10 percent of our net sales in fiscal 2005 and 2004. Although we do not have any
other customers with sales greater than 10 percent, we do have several large OEM
customers that manufacture and market wireless handsets, among other electronic
products. These customers typically purchase a range of different products from
us. If any one of these customers were to cease purchasing products from us
within a very short timeframe, such as within one quarter, it could have a
negative impact on our financial results for that period. However, we have not
had any such experience to date.
Backlog
In accordance with industry practice, we frequently revise semiconductor backlog
quantities and shipment schedules under outstanding purchase orders to reflect
changes in customer needs. We rarely formally enforce binding agreements for the
sale of specific quantities at specific prices that are contractually subject to
price or quantity revisions, consistent with industry practice. For these
reasons, we do not believe it is meaningful to disclose the amount of backlog at
any particular date.
Seasonality
We are affected by the seasonal trends in the semiconductor and related
industries. We typically experience sequentially lower sales in our first and
third fiscal quarters, primarily due to customer vacation and holiday schedules.
Sales usually reach a seasonal peak in our fourth fiscal quarter. This typical
trend did not occur during fiscal 2006, as sales in our third fiscal quarter,
which are typically lower, were slightly higher than sales in the preceding
second quarter. During the third quarter, sales from broader markets served
through our distribution channel were strong and more than offset the expected
seasonal decline in sales from products that serve wireless handsets. Sales did
peak for the fourth quarter of fiscal 2006.
Manufacturing
The design of semiconductor and integrated circuit products is shaped by general
market needs and customer requirements. Following product design and
development, we generally produce integrated circuits in the following steps:
o Wafer Fabrication. Product designs are compiled and digitized by state
of the art design equipment and then transferred to silicon wafers in
a series of complex precision processes that include oxidation,
lithography, chemical etching, diffusion, deposition, implantation and
metallization.
o Wafer Sort. The silicon wafers are tested and separated into
individual circuit devices.
o Product Assembly. Tiny wires are used to connect the electronic
circuits on the device to the stronger metal leads of the package in
which the device is encapsulated for protection.
o Final Test. The devices are subjected to a series of vigorous tests
using computerized circuit testers and, for certain applications,
environmental testers such as burn-in ovens, centrifuges, temperature
cycle or moisture resistance testers, salt atmosphere testers and
thermal shock testers.
o Coating. Certain devices in the analog portfolio are designed to be
used without traditional packaging. In this case, the integrated
circuit is coated with a protective material and mounted directly onto
the circuit board.
Wafer fabrication is concentrated in two facilities in the United States
and one in Scotland. During fiscal 2006, nearly all product assembly and final
test operations were performed at our facilities located in Malaysia and China.
In July 2005, we announced a plan to close our assembly and test facility in
Singapore and consolidate its production volume into our other assembly and test
facilities in Malaysia and China. The majority of closure activities took place
during fiscal 2006 and the remainder is expected to be completed by August 2007.
We currently do not anticipate any additional facility closures in the
foreseeable future. We routinely use subcontractors to perform certain
manufacturing functions in the United States, Europe, Israel, Southeast Asia,
China and Japan to address capacity and other economic issues.
Our wafer manufacturing processes include Bipolar, Metal Oxide Silicon,
Complementary Metal Oxide Silicon and Bipolar Complementary Metal Oxide Silicon
technologies, including Silicon Germanium. Our efforts are heavily focused on
proprietary processes that support our analog portfolio of products, which
address wireless handsets, displays, computers and a broad variety of other
electronic applications. The feature size of the individual transistors on a
chip is measured in microns; one micron equals one millionth of a meter. As
products decrease in size and increase in functionality, our wafer fabrication
facilities must be able to manufacture integrated circuits with sub-micron
circuit pattern widths. This precision fabrication carries over to assembly and
test operations, where advanced packaging technology and comprehensive testing
are required to address the ever increasing performance and complexity embedded
in integrated circuits.
Raw Materials
Our manufacturing processes use certain key raw materials critical to our
products. These include silicon wafers, certain chemicals and gases, ceramic and
plastic packaging materials and various precious metals. We also rely on
subcontractors to supply finished or semi-finished products which we then market
through our sales channels. We obtain raw materials and semi-finished or
finished products from various sources, although the number of sources for any
particular material or product is relatively limited. We believe our current
supply of essential materials is sufficient to meet our needs. However,
shortages have occurred from time to time and could occur again. Significant
increases in demand, rapid product mix changes or natural disasters could affect
our ability to procure materials or goods.
Research and Development
Our research and development efforts consist of research in metallurgical,
electro-mechanical and solid-state sciences, manufacturing process development
and product design. Research and development of most process technologies are
conducted by our technology development group. Specific product design and
development is generally done in our business units. Total R&D expenses were
$326.6 million for fiscal 2006, or 15 percent of net sales, compared to $333.0
million for fiscal 2005, or 17 percent of net sales, and $357.1 million for
fiscal 2004, or 18 percent of net sales.
Lower research and development expenses in fiscal 2006 compared to fiscal
2005 largely reflect cost savings from two businesses we divested at or near the
end of fiscal 2005. At the same time, we are continuing to concentrate our
ongoing research and development spending on analog products and underlying
analog capabilities. 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 approximately 15 percent 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.
Patents
We own numerous United States and non-U.S. patents and have many patent
applications pending. We consider the development of patents and the maintenance
of an active patent program advantageous to the conduct of our business.
However, we believe that continued success will depend more on engineering,
production, marketing, financial and managerial skills than on our patent
program. We license certain of our patents to other manufacturers and
participate in a number of cross licensing arrangements and agreements with
other parties. Each license agreement has unique terms and conditions, with
variations as to length of term, royalties payable, permitted uses and scope.
The majority of these agreements are cross-licenses in which we grant a broad
license to our intellectual property in exchange for receiving a similar
corresponding license from the other party, and none are exclusive. The amount
of income we have received from licensing agreements has varied in the past, and
we cannot precisely forecast the amount and timing of future income from
licensing agreements. On an overall basis, we believe that no single license
agreement is material to us, either in terms of royalty payments due or payable
or intellectual property rights granted or received.
Employees
At May 28, 2006, we employed approximately 8,500 people of whom approximately
3,500 were employed in the United States, 800 in Europe, 3,200 in Southeast
Asia, 900 in China and 100 in other areas. We believe that our future success
depends fundamentally on our ability to recruit and retain skilled technical and
professional personnel. Our employees in the United States are not covered by
collective bargaining agreements. We consider our employee relations worldwide
to be favorable.
Competition
Competition in the semiconductor industry is intense. With our focus on
high-value analog, our major competitors include Analog Devices, Linear
Technology, Maxim and Texas Instruments. In some cases, we may also compete with
our customers. Competition is based on design and quality of products, product
performance, price and service, with the relative importance of these factors
varying among products and markets.
We cannot assure you that we will be able to compete successfully in the
future against existing or new competitors or that our operating results will
not be adversely affected by increased competition.
Environmental Regulations
To date, our compliance with foreign, federal, state and local laws and
regulations that have been enacted to regulate the environment has not had a
material adverse effect on our capital expenditures, earnings, competitive or
financial position. For more information, see Item 3, "Legal Proceedings" and
Note 12, "Commitments and Contingencies" to the Consolidated Financial
Statements in Item 8. However, we could be subject to fines, suspension of
production, alteration of our manufacturing processes or cessation of our
operations if we fail to comply with present or future statutes and regulations
governing the use, storage, handling, discharge or disposal of toxic, volatile
or otherwise hazardous chemicals used in our manufacturing processes.
ITEM 1A. RISK FACTORS
You should read the following Risk Factors in conjunction with the factors
discussed elsewhere in this and our other filings with the Securities and
Exchange Commission (SEC) and in materials incorporated by reference in these
filings. These Risk Factors are intended to highlight certain factors that may
affect our financial condition and results of operations and are not meant to be
an exhaustive discussion of risks that apply to companies like National with
broad international operations. Like other companies, we are susceptible to
macroeconomic downturns in the United States or abroad that may affect the
general economic climate and our performance and the performance of our
customers. Similarly, the price of our stock is subject to volatility due to
fluctuations in general market conditions, differences in our results of
operations from estimates and projections generated by the investment community,
and other factors beyond our control.
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, even with
analog products which form the core of our strategic focus. We have seen and may
see in the future significant and rapid increases and decreases in product
demand. 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, including analog 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.
A large portion of our revenues is dependent on the wireless handset market.
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-driven market,
downturns in the economy that affect consumer demand can impact our business and
results.
We may experience delays in introducing new products or market acceptance of new
products may be below our expectations.
Rapidly changing technologies and industry standards, along with frequent new
product introductions, characterize the industries in which our primary
customers operate. As our customers evolve and introduce new products, our
success depends on our ability to anticipate and adapt to these changes in a
timely and cost-effective manner by developing and introducing into the market
new products that meet the needs of our customers. 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
successful growth and the ability to achieve strong financial performance.
Successful development and introduction of these 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 timely developing and introducing successful new products, and a
failure to bring new products to market may harm our operating results. We also
cannot assure you that products that may be developed in the future by our
competitors will not render our products obsolete or non-competitive.
We make forecasts of customer demand which need to be accurate.
Our ability to match inventory and production mix with the product mix needed to
fill current orders and orders to be delivered in any given quarter may affect
our ability to meet that quarter's revenue forecast. To be able to accommodate
customer requests for shorter shipment lead times, we manufacture product based
on customer forecasts. These forecasts are based on multiple assumptions. While
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
forecasts, if we inaccurately forecast customer demand, it could result in
inadequate, excess or obsolete inventory that would reduce our profit margins.
Our performance depends on the availability and cost of raw materials,
utilities, critical manufacturing equipment and third-party manufacturing
services.
Our manufacturing processes and critical manufacturing equipment require that
certain key raw materials and utilities be available. Limited or delayed access
to and high costs of these items, as well as the inability to implement new
manufacturing technologies or install manufacturing equipment on a timely basis
could adversely affect our results of operations. We subcontract a portion of
our wafer fabrication and assembly and testing of our integrated circuits. We
depend on a limited number of third parties to perform these functions. We do
not have long-term contracts with all of these third parties. Reliance on these
third parties involves risks, including possible shortages of capacity in
periods of high demand. Although we did not experience any material difficulties
with supplies or subcontractors in the last year, we have had difficulties in
the past and could experience them in the future.
We are subject to warranty claims, product recalls and product liability.
We could be subject to warranty or product liability claims that could lead to
significant expenses as we defend such claims or pay damage awards. In the event
of a warranty claim, we may also incur costs if we compensate the affected
customer. We maintain product liability insurance, but there is no guarantee
that such insurance will be available or adequate to protect against all such
claims. We may incur costs and expenses relating to a recall of one of our
customers' products containing one of our devices. Although costs or payments we
have made in connection with warranty claims or product recalls in the past have
not adversely affected our results of operations and financial condition, they
could in the future.
Our profit margins may vary over time.
Our profit margins may be adversely affected by a number of factors, including
decreases in our shipment volume, reductions in, or obsolescence of our
inventory and shifts in our product mix. In addition, the competitive market
environment in which we operate may adversely affect pricing for our products,
although we try to emphasize higher margin products. Because we own most of our
manufacturing capacity, a significant portion of our operating costs are fixed,
including costs associated with depreciation expense. In general, these costs do
not decline with reductions in customer demand or utilization of our
manufacturing capacity. If we are unable to utilize our manufacturing facilities
at a high level, the fixed costs associated with these facilities will result in
higher average unit costs and lower gross margins.
We may be harmed by natural disasters and other disruptions.
Our worldwide operations could be subject to natural disasters and other
disruptions. Our corporate headquarters are located near major earthquake fault
lines in California. In the event of a major earthquake, or other natural or
manmade disaster, we could experience loss of life of our employees, destruction
of facilities or other business interruptions. The operations of our suppliers
could also be subject to natural disasters and other disruptions, which could
cause shortages and price increases in various essential materials. We use third
party freight firms for nearly all of our shipments from vendors, from our
foundries to assembly and test sites and for shipments to customers of our final
product. This includes ground, sea and air freight. Any significant disruption
of our freight business globally or in certain parts of the world, particularly
where our operations are concentrated, would materially affect our operations.
We may not be able to attract or retain employees with skills necessary to
remain competitive in our industry.
Our continued success depends in part on the recruitment and retention of
skilled personnel, including technical, marketing, management and staff
personnel. Experienced personnel in the semiconductor industry, particularly in
our targeted analog areas, are in high demand and competition for their skills
is intense. There can be no assurance that we will be able to successfully
recruit and retain the key personnel we require.
Our products are dependent on the use of intellectual property which we need to
protect.
We rely on patents, trade secrets, trademarks, mask works and copyrights to
protect our products and technologies. Some of our products and technologies are
not covered by any patent or patent application and we cannot assure you that:
o the patents owned by us or numerous other patents which third parties
license to us will not be invalidated, circumvented, challenged or
licensed to other companies
o any of our pending or future patent applications will be issued within
the scope of the claims sought by us, if at all
In addition, effective patent, trademark, copyright and trade secret protection
may be unavailable, limited or not applied for in some countries.
We also seek to protect our proprietary technologies, including technologies
that may not be patented or patentable, in part by confidentiality agreements
and, if applicable, inventors' rights agreements with our collaborators,
advisors, employees and consultants. We cannot assure you that these agreements
will not be breached, that we will have adequate remedies for any breach or that
such persons or institutions will not assert rights to intellectual property
arising out of such research. Some of our technologies have been licensed on a
non-exclusive basis from other companies, which may license such technologies to
others, including our competitors. If necessary or desirable, we may seek
licenses under patents or intellectual property rights claimed by others.
However, we cannot assure you that we will obtain such licenses or that the
terms of any offered licenses will be acceptable to us. The failure to obtain a
license from a third party for technologies we use could cause us to incur
substantial liabilities and to suspend the manufacture or shipment of products
or our use of processes requiring the technologies.
We face risks from our international operations.
We have operations in many countries and, as a result, we are subject to risks
associated with doing business globally. International sales accounted for
approximately 80% of our revenue in fiscal 2006 and we expect that international
sales will continue to account for a significant majority of our total revenue
in future years. We are subject to various challenges and risks related to the
management of global operations and international sales, including, but not
limited to:
o trade balance issues
o economic and political conditions
o health concerns
o security concerns
o inefficient and limited infrastructure and disruptions
o local business and cultural factors that differ from our normal
standards and practices
o changes in currency controls
o differences in our ability to acquire and enforcement of intellectual
property and contract rights in varying jurisdictions
o our ability to develop relationships with local suppliers
o compliance with U.S. and international laws and regulations, including
export restrictions and laws affecting trade and investments
o fluctuations in interest and currency exchange rates
o difficulties in staffing and managing foreign operations and other
labor problems
o support required abroad for demanding manufacturing requirements
Although we did not experience any materially adverse effects from our
international 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.
Many of the challenges noted above are applicable in China. The risk factors
specifically associated with our manufacturing and other operations in China are
discussed below.
We have significantly expanded our manufacturing operations in China and, as a
result, will be increasingly subject to risks inherent in doing business in
China.
In fiscal 2005, we began production in our assembly and test facility in Suzhou,
China. The factory has steadily increased its output since that time. Our
ability to operate in China may be adversely affected by changes in China's laws
and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
Our operations in China are subject to the economic and political situation
there. We believe that our operations in China are in compliance with all
applicable legal and regulatory requirements. However, there can be no assurance
that China's central or local governments will not impose new, stricter
regulations or interpretations of existing regulations that would require
additional expenditures. Changes in the political environment or government
policies could result in revisions to laws or regulations or their
interpretation and enforcement, increased taxation, restrictions on imports,
import duties or currency revaluations. In addition, a significant
destabilization of relations between China and the United States could result in
restrictions or prohibitions on our operations in China. The legal system of
China relating to foreign trade is relatively new and continues to evolve.
Enforcement of existing laws or agreements may be sporadic and implementation
and interpretation of laws inconsistent. Moreover, there is a high degree of
fragmentation among regulatory authorities resulting in uncertainties as to
which authorities have jurisdiction over particular parties or transactions.
We are subject to fluctuations in the exchange rate of the U.S. dollar and
foreign currencies.
While we transact business primarily in U.S. dollars, and most of our revenues
are denominated in U.S. dollars, a portion of our costs and revenues is
denominated in other currencies, such as the euro, the Japanese yen, pound
sterling and certain other Asian currencies. As a result, changes in the
exchange rates of these or any other applicable currencies to the U.S. dollar
will affect the costs of goods sold and operating margins. We have a program to
hedge our exposure to currency rate fluctuations, but our hedge program may not
be fully effective in preventing foreign exchange losses.
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. Although we have not made any
acquisitions since fiscal 2003, 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 are subject to litigation risks.
All industries, including the semiconductor industry, are subject to legal
claims. We are involved in a variety of routine legal matters that arise in the
normal course of business. Further discussion of certain specific legal
proceedings we are involved with is contained in Note 12 to the Consolidated
Financial Statements. We believe it is unlikely that the final outcome of these
legal claims will have a material adverse effect on our consolidated financial
position or results of operation. However, litigation is inherently uncertain
and unpredictable. An unfavorable resolution of any particular legal claim or
proceeding could have a material adverse effect on our consolidated financial
position or results of operations.
We are subject to many environmental laws and regulations.
Increasingly stringent environmental regulations restrict the amount and types
of materials that can be released from our operations into the environment.
While the cost of compliance with environmental laws has not had a material
adverse effect on our results of operations historically, compliance with these
and any future regulations could require significant capital investments in
pollution control equipment or changes in the way we make our products. In
addition, because we use hazardous and other regulated materials in our
manufacturing processes, we are subject to risks of liabilities and claims,
regardless of fault, resulting from accidental releases, including personal
injury claims and civil and criminal fines. The following should also be
considered:
o we currently are remediating past contamination at some of our sites
o we have been identified as a potentially responsible party at a number
of Superfund sites where we (or our predecessors) disposed of wastes
in the past
o significant regulatory and public attention on the impact of
semiconductor operations on the environment may result in more
stringent regulations, further increasing our costs
We may be impacted by higher than expected tax rates or exposure to additional
income tax liabilities.
As a global company, our effective tax rate is dependent upon the geographic
composition of worldwide earnings and tax regulations governing each region. We
are subject to income taxes in both the United States and various foreign
jurisdictions, and significant judgment is required to determine worldwide tax
liabilities. From time to time, we have received notices of tax assessments in
various jurisdictions where we operate. We may receive future notices of
assessments 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 and the threat of
future hostilities involving the U.S. and other countries, cause uncertainty on
the overall state of the global 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. As we have noted earlier,
pandemic illness, and substantial natural, as well as geopolitical events, may
affect our future costs, operating capabilities and revenues.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We conduct manufacturing, as well as process research and product development,
at our wafer fabrication facilities located in Arlington, Texas; South Portland,
Maine; and Greenock, Scotland. Wafer-fabrication capacity utilization during
fiscal 2006 averaged 83 percent, based on wafer starts, compared to 72 percent
for fiscal 2005. We expect our captive manufacturing capacity together with our
third-party subcontract manufacturing arrangements to be adequate to supply our
needs in the foreseeable future.
Our assembly and test functions are performed primarily in Southeast Asia
and China. These facilities are located in Melaka, Malaysia and Toa Payoh,
Singapore, as well as our new assembly and test facility in Suzhou, China that
began operation in fiscal 2005. In July 2005, we announced a plan to close 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 the
end of our first quarter of fiscal 2007.
Our principal administrative and research facilities are located in Santa
Clara, California. Our regional headquarters for Worldwide Marketing and Sales
are located in Santa Clara, California; Munich, Germany; Tokyo, Japan; and
Kowloon, Hong Kong. We maintain local sales offices and sales service centers in
various locations and countries throughout our four business regions. We also
operate small design facilities in various locations in the U.S., among which
include:
Arlington, Texas Indianapolis, Indiana Salem, New Hampshire
Calabasas, California Longmont, Colorado San Diego, California
Federal Way, Washington Norcross, Georgia South Portland, Maine
Fort Collins, Colorado Phoenix, Arizona Tucson, Arizona
Grass Valley, California Rochester, New York
and at overseas locations including China, Estonia, Finland, Germany, India,
Japan, the Netherlands, Taiwan and the United Kingdom. We own our manufacturing
facilities and our corporate headquarters. In general, we lease most of our
design facilities and our sales and administrative offices. As we described in
the business section under Item 1, our manufacturing operations are centralized
and shared among our product lines, and no individual facility is dedicated to a
specific operating segment. We believe our facilities are suitable and have
adequate capacity for our current needs. Further, we believe space and capacity
will be available if needed in the future.
ITEM 3. LEGAL PROCEEDINGS
We currently are a party to various legal proceedings, including those noted
below. While we believe that the ultimate outcome of these various proceedings,
individually and in the aggregate, will not have a material adverse effect on
our financial position or results of operations, litigation is always subject to
inherent uncertainties, and unfavorable rulings could occur. An unfavorable
ruling could include money damages or an injunction prohibiting us from selling
one or more products. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the net income of the period in
which the ruling occurs, and future periods.
Tax Matters
The IRS has completed its field examination of our tax returns for fiscal years
1997 through 2000 and on July 29, 2003 issued a notice of proposed adjustment
seeking additional taxes of approximately $19.1 million (exclusive of interest)
for those years. The issues giving rise to most of the proposed adjustments
relate to R&D credits, inventory and depreciation deductions. We are contesting
the adjustments through the IRS administrative process. We are undergoing tax
audits in several international locations and from time to time our tax returns
are audited in the U.S. by state agencies and at international locations by
local tax authorities. During fiscal 2005, we resolved a tax audit at one of our
international locations, which resulted in a $4.2 million reduction in our
fiscal 2005 tax expense. We believe we have made adequate tax payments and/or
accrued adequate amounts such that the outcome of these audits will have no
material adverse effect on our financial statements.
Environmental Matters
We have been named to the National Priorities List (Superfund) for our Santa
Clara, California site and we have completed a remedial
investigation/feasibility study with the Regional Water Quality Control Board
(RWQCB), which is acting as agent for the EPA. We have agreed in principle with
the RWQCB on a site remediation plan, and we are conducting remediation and
cleanup efforts at the site. In addition to the Santa Clara site, we have been
designated from time to time as a potentially responsible party by
international, federal and state agencies for certain environmental sites with
which we may have had direct or indirect involvement. These designations are
made regardless of the extent of our involvement. These claims are in various
stages of administrative or judicial proceedings and include demands for
recovery of past governmental costs and for future investigations and remedial
actions. In many cases, the dollar amounts of the claims have not been specified
and the claims have been asserted against a number of other entities for the
same cost recovery or other relief as is sought from us. We have also retained
liability for environmental matters arising from our former operations of
Dynacraft, Inc. and the Fairchild business, but we are not currently involved in
any legal proceedings relating to those liabilities. We accrue costs associated
with environmental matters when they become probable and can be reasonably
estimated. The amount of all environmental charges to earnings, including
charges relating to the Santa Clara site remediation, excluding potential
reimbursements from insurance coverage, has not been material during each of the
last three fiscal years. We believe that the potential liability for
environmental matters, if any, in excess of amounts already accrued in our
financial statements will not have a material effect on our consolidated
financial position or results of operations.
Other
1. In November 2000, a derivative action was filed in the U.S. District Court
in Delaware against us, Fairchild Semiconductor International, Inc. and
Sterling Holding Company, LLC, by Mark Levy, a Fairchild stockholder. The
action was brought under Section 16(b) of the Securities Exchange Act of
1934 and the rules issued under that Act by the Securities and Exchange
Commission (SEC). The plaintiff seeks disgorgement of alleged short-swing
insider trading profits. We had originally acquired Fairchild common and
preferred stock in March 1997 at the time we disposed of the Fairchild
business. Prior to its initial public offering in August 1999, Fairchild
had amended its certificate of incorporation to provide that all Fairchild
preferred stock would convert automatically to common stock upon completion
of the initial public offering. As a result, our shares of preferred stock
converted to common stock in August 1999. Plaintiff has alleged that our
acquisition of common stock through the conversion constituted an
acquisition that should be "matched" against our sale in January 2000 of
Fairchild common stock for purposes of computing short-swing trading
profits. The action seeks to recover from us on behalf of Fairchild alleged
recoverable profits of approximately $14.1 million. The case has completed
discovery in the District Court. In June, 2004, the 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. The
District Court ordered a briefing on whether it should apply the SEC rule
amendment to the case, and oral arguments on the briefs were 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.
2. In January 1999, a class action suit was filed against us and a number of
our suppliers in California Superior Court by James Harris and other former
and present employees claiming damages for personal injury. The complaint
alleged that cancer and/or reproductive harm were 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 employees to seek their remedies in Scottish courts. The court
also denied plaintiffs' 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.
3. In September 2002, iTech Group, Inc. brought suit against us in California
Superior Court alleging a number of contract and tort claims related to a
software license agreement we entered into earlier in 2002 and the proposed
sale of one of our business units. The case began trial in May 2005 and the
jury in the case found for iTech Group, Inc. on claims of breach of
contract, promissory fraud and unjust enrichment, awarding plaintiff
compensatory damages of approximately $234.0 thousand and punitive damages
of $15.0 million. In post trial motions heard by the court in July 2005,
the court affirmed the verdict for compensatory damages, 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 have filed our
appellate briefs and intend to contest the case through all available
means.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
Fiscal Year 2006
Name Title, Fiscal Year 2006 Age
---- ----------------------- ---
Lewis Chew (1) Senior Vice President, Finance 43
Chief Financial Officer
John M. Clark III (2) Senior Vice President, 56
General Counsel and Secretary
Brian L. Halla (3) Chairman of the Board and 59
Chief Executive Officer
Detlev J. Kunz (4) Senior Vice President, 55
Power Management Products Group
Donald Macleod (5) President and Chief Operating Officer 57
Michael E. Noonen (6) Senior Vice President, 43
Worldwide Marketing and Sales
Suneil V. Parulekar (7) Senior Vice President, 58
Analog Signal Path Products Group
Ulrich Seif (8) Senior Vice President, Manufacturing 48
Services and Chief Information Officer
Edward J. Sweeney (9) Senior Vice President, Human Resources 49
All information as of May 28, 2006, the last day of the 2006 fiscal year.
Business Experience During Last Five Years
(1) Mr. Chew joined National in May 1997 as Director of Internal Audit, and was
made Vice President and Controller in December 1998, Acting Chief Financial
Officer in April 2001 and Senior Vice President, Finance and Chief
Financial Officer in June 2001. Prior to joining National, Mr. Chew was a
partner at KPMG LLP.
(2) Mr. Clark joined National in May 1978. Prior to becoming Senior Vice
President, General Counsel and Secretary in April 1992, he held the
position of Vice President, Associate General Counsel and Assistant
Secretary.
(3) Mr. Halla joined National in May 1996 as Chairman of the Board, President
and Chief Executive Officer. Prior to that, Mr. Halla held positions at LSI
Logic as Executive Vice President, LSI Logic Products; Senior Vice
President and General Manager, Microprocessor/DSP Products Group; and Vice
President and General Manager, Microprocessor Products Group. Mr. Halla was
named Chairman of the Board and Chief Executive Officer effective the
beginning of the 2006 fiscal year.
(4) Mr. Kunz joined National in July 1981. Prior to becoming Senior Vice
President, Power Management Products Group effective the beginning of the
2006 fiscal year, he held positions in the company as Senior Vice President
and General Manager, Worldwide Marketing and Sales; Regional Vice President
and General Manager, Europe; European Sales and Distribution Director;
Director of European Communications and Consumer Product Marketing; and
Manager, European Telecom Business Center.
(5) Mr. Macleod joined National in February 1978 and was named President and
Chief Operating Officer effective the beginning of the 2006 fiscal year.
Prior to then, he had held positions as Executive Vice President and Chief
Operating Officer; Executive Vice President, Finance and Chief Financial
Officer; Senior Vice President, Finance and Chief Financial Officer; Vice
President, Finance and Chief Financial Officer; Vice President, Financial
Projects; Vice President and General Manager, Volume Products - Europe; and
Director of Finance and Management Services - Europe.
(6) Mr. Noonen was named Senior Vice President, Worldwide Marketing and Sales
effective the beginning of the 2006 fiscal year. Mr. Noonen joined National
in 2001 and had held positions at National as Vice President,
Communications and Computing Interface Group and Vice President, Wired
Communications Division prior to being named Senior Vice President,
Worldwide Marketing and Sales. Prior to joining National, Mr. Noonen had
served as Director of New Markets and Technologies at Cisco Systems, Inc.
and had held sales management positions at 8x8, Inc. and the NCR
Microelectronics division of NCR Corporation.
(7) Mr. Parulekar joined National in January 1989. Prior to becoming Senior
Vice President, Analog Signal Path Products Group effective the beginning
of the 2006 fiscal year, he held positions as Senior Vice President, Analog
Products Group; Vice President, Amplifier/Audio Products; Product Line
Director, Amplifier/Audio Products; Director of Marketing, Mediamatics;
Director of Strategy, Communications and Consumer Group; and Director of
Marketing, Power Management Group.
(8) Mr. Seif first joined National in January 1980 and had held a number of
positions in MIS related operations when he left the company in 1996 to
become the Chief Information Officer and Vice President of Information
Services at Cirrus Logic. He returned to National in May 1997 as the Chief
Information Officer and Vice President of Information Services and was made
Senior Vice President and Chief Information Officer in April 2001. Mr. Seif
was named Senior Vice President, Manufacturing Services and Chief
Information Officer effective the beginning of the 2006 fiscal year.
(9) Mr. Sweeney first joined National in February 1983 and had held a number of
human resources positions and was serving as Vice President, Human
Resources for the Central Technology and Manufacturing Group when he left
the company in 1998 to become the Vice President of Human Resources at
Candescent Technologies Corporation. He later became the Vice President of
Human Resources at Vitria Technology Inc. Mr. Sweeney rejoined National in
May 2002 as Senior Vice President, Human Resources.
Executive officers serve at the pleasure of our Board of Directors. There
is no family relationship among any of our directors and executive officers.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
See information appearing in Note 7, Debt; Note 9, Shareholders' Equity; and
Note 15, Financial Information by Quarter (Unaudited) in the Notes to the
Consolidated Financial Statements included in Item 8. Our common stock is traded
on the New York Stock Exchange and the Pacific Exchange. During fiscal 2006, we
paid total cash dividends of $34.2 million on our common stock, consisting of
dividends of $0.02 per share of common stock paid in the first quarter of the
fiscal year and dividends of $0.03 per share of common stock in the remaining
three quarters of the fiscal year. Market price range data are based on the New
York Stock Exchange Composite Tape. Market price per share at the close of
business on July 14, 2006 was $23.13. At July 14, 2006, the number of record
holders of our common stock was 5,991. For information on our equity
compensation plans, see Item 12 of this Form 10-K.
During the past three fiscal years, we did not make any unregistered sales
of our securities.
Issuer Purchases of Equity Securities
The following table summarizes purchases we made of our common stock during the
fourth quarter of fiscal 2006:
Total Number of Maximum Dollar
Shares Purchased as Value of Shares
Part of Publicly that May Yet Be
Total Number of Average Price Paid Announced Plans or Purchased Under the
Period Shares Purchased(1) per Share Programs Plans or Programs(2)
-------------------------- ------------------------ ------------------------ ------------------------ ----------------------
Month # 1
February 27, 2006 -
March 26, 2006 1,960,000 $27.41 1,960,000 $300 million
Month # 2
March 27, 2006 -
April 26, 2006 4,055,000 $28.50 4,055,000 $184 million
Month # 3
April 27, 2006 -
May 28, 2006 1,032,730 $29.67 1,032,730 $153 million
--------- --------- ------------
Total 7,047,730 7,047,730
=========== ===========
(1) During the quarter ended May 28, 2006, we also reacquired 6,628 shares
through the withholding of shares to pay employee tax obligations upon the
vesting of restricted stock. Additionally, during the quarter ended May 28,
2006, 38,620 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 fourth fiscal quarter were made under a program
announced in December 2005. Shares were purchased in the open market. The
program announced in December 2005 was completed after the end of the
fiscal year and before the filing of this Form 10-K. In June 2006, we
announced a new program for the repurchase of up to $500 million of our
stock. We do not have any plans to terminate the new plan prior to its
completion.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from audited
Consolidated Financial Statements. The information set forth below is not
necessarily indicative of results of our future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 and the Consolidated Financial Statements
and related notes thereto in Item 8.
FIVE-YEAR SELECTED FINANCIAL DATA
Years Ended
(In Millions, Except Per Share Amounts and May 28, May 29, May 30, May 25, May 26,
Employee Figures) 2006 2005 2004 2003 2002
----------- ----------- ------------ ------------- ------------
OPERATING RESULTS
Net sales $2,158.1 $1,913.1 $1,983.1 $1,672.5 $1,494.8
Cost of sales 885.4 892.3 970.8 946.8 941.4
----------- ----------- ------------ ------------- ------------
Gross Margin 1,272.7 1,020.8 1,012.3 725.7 553.4
----------- ----------- ------------ ------------- ------------
Operating expenses 607.2 621.9 684.5 744.0 699.3
----------- ----------- ------------ ------------- ------------
Operating income (loss) 665.5 398.9 327.8 (18.3) (147.9)
Interest income, net 31.8 15.9 10.4 14.8 22.0
Other non-operating (expense) income, net (2.1) (4.9) (4.5) (19.8) 0.5
----------- ----------- ------------ ------------- ------------
Income (loss) before income taxes and cumulative effect of
a change in accounting principle 695.2 409.9 333.7 (23.3) (123.4)
Income tax expense (benefit) 246.0 (5.4) 49.0 10.0 (1.5)
----------- ----------- ------------ ------------- ------------
Income (loss) before cumulative effect of a change in
accounting principle $ 449.2 $ 415.3 $ 284.7 $ (33.3) $ (121.9)
=========== =========== ============ ============= ============
Net income (loss) $ 449.2 $ 415.3 $ 282.8 $ (33.3) $ (121.9)
=========== =========== ============ ============= ============
Earnings (loss) per share:
Income (loss) before cumulative effect of a change in
accounting principle:
Basic $ 1.32 $ 1.17 $ 0.79 $ (0.09) $ (0.34)
=========== =========== ============ ============= ============
Diluted $ 1.26 $ 1.11 $ 0.73 $ (0.09) $ (0.34)
=========== =========== ============ ============= ============
Net income (loss):
Basic $ 1.32 $ 1.17 $ 0.78 $ (0.09) $ (0.34)
=========== =========== ============ ============= ============
Diluted $ 1.26 $ 1.11 $ 0.73 $ (0.09) $ (0.34)
=========== =========== ============ ============= ============
Weighted-average common and potential common
shares outstanding:
Basic 339.8 353.9 361.0 363.6 355.0
=========== =========== ============ ============= ============
Diluted 357.0 373.9 388.5 363.6 355.0
=========== =========== ============ ============= ============
FINANCIAL POSITION AT YEAR-END
Working capital $1,142.2 $1,228.5 $ 784.5 $ 872.0 $ 804.3
Total assets $2,511.1 $2,504.2 $2,280.4 $2,248.4 $2,290.7
Long-term debt $ 21.1 $ 23.0 $ - $ 19.9 $ 20.4
Total debt $ 21.1 $ 23.0 $ 22.1 $ 22.2 $ 25.9
Shareholders' equity $1,926.1 $2,054.1 $1,680.5 $1,706.0 $1,781.1
-------------------------------------------------------------- ----------- ----------- ------------ ------------ -----------
OTHER DATA
Research and development $ 326.6 $ 333.0 $ 357.1 $ 439.2 $ 441.9
Capital additions $ 163.6 $ 96.6 $ 215.3 $ 154.9 $ 138.0
Number of employees (in thousands) 8.5 8.5 9.7 9.8 10.1
-------------------------------------------------------------- ----------- ----------- ------------ ------------ -----------
We paid cash dividends on our common stock of $34.2 million in fiscal 2006 and
$14.1 million in fiscal 2005. We did not pay cash dividends on our common stock
in fiscal 2004, 2003, or 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This MD&A and Annual Report on Form 10-K contain a number of 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 are based
on our current expectations and could be affected by the uncertainties and risk
factors described throughout this filing and particularly in Part I of Form 10-K
"Item 1A: Risks Factors" and business outlook section of this MD&A. 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," "will," and similar words or phrases.
These statements 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. For a discussion of some of the factors that could cause actual
results to differ materially from our forward-looking statements, see the
discussion on Risk Factors that appears in Item 1A of our 2006 Form 10-K and
other risks and uncertainties detailed in this and our other reports and filings
with the Securities and Exchange Commission. We undertake no obligation to
update forward-looking statements to reflect developments or information
obtained after the date hereof and disclaim any obligation to do so.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto.
o Strategy and Business
---------------------
Our strategy is to be the premier analog company creating high-value analog
devices and subsystems. We focus on our analog product capabilities,
particularly in the standard linear categories. Our leading-edge products
include power management circuits, display drivers, audio and operational
amplifiers, communication interface products and data conversion solutions.
Approximately 86 percent of our revenue in fiscal 2006 was generated from
analog-based products. For more information on our business, see Part I, Item I,
Business, in our 2006 Form 10-K.
o Critical Accounting Policies and Estimates
------------------------------------------
We believe the following critical accounting policies are those policies that
have a significant effect on the determination of our financial position and
results of operations. These policies also require us to make our most difficult
and subjective judgments:
a) Revenue Recognition
We recognize revenue from the sale of semiconductor products upon shipment,
provided we have persuasive evidence of an arrangement typically in the
form of a purchase order, title and risk of loss have passed to the
customer, the amount is fixed or determinable and collection of the revenue
is reasonably assured. We record a provision for estimated future returns
at the time of shipment. Approximately 51 percent of our semiconductor
product sales were made to distributors in 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, scrap allowances and discounts for prompt payment. The prompt
payment program was discontinued during fiscal 2006 for substantially all
of our distributors, except in the Japanese region. The revenue we record
for these distribution sales is net of estimated provisions for these
programs. When determining this net distribution revenue, we must make
significant judgments and estimates. Our estimates are based upon
historical experience rates by geography and product family, inventory
levels in the distribution channel, current economic trends, and other
related factors. Actual distributor claims activity has been materially
consistent with the provisions we have made based on our estimates.
However, because of the inherent nature of estimates, there is always a
risk that there could be significant differences between actual amounts and
our estimates. Our financial condition and operating results are dependent
on our ability to make reliable estimates, and we believe that our
estimates are reasonable. However, different judgments or estimates could
result in variances that might be significant to reported operating
results.
Service revenues are recognized as the services are provided or as
milestones are achieved, depending on the terms of the arrangement. These
revenues are included in net sales and are not a material component of our
total net sales.
Certain intellectual property income is classified as revenue if it
meets specified criteria established by company policy that defines whether
it is considered a source of income from our primary operations. These
revenues are included in net sales and totaled $5.3 million in fiscal 2006
and $1.8 million in fiscal 2005. There were no intellectual property
amounts classified as sales in fiscal 2004. 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
income. Intellectual property income is recognized when the license is
delivered, the fee is fixed or determinable, collection of the fee is
reasonably assured and remaining obligations are inconsequential or
perfunctory to the other party.
b) Valuation of Inventories
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out basis, or market. 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 reasonable estimates. The actual amount of obsolete or unmarketable
inventory has been materially consistent with previously estimated
write-downs we have recorded. We also evaluate the carrying value of
inventory for lower-of-cost-or-market on an individual product basis, and
these evaluations are intended to identify any difference between net
realizable value and standard cost. Net realizable value is determined as
the selling price of the product less the estimated cost of disposal. When
necessary, we reduce the carrying value of inventory to net realizable
value. If actual market conditions and resulting product sales were to be
less favorable than what we have projected, additional inventory
write-downs may be required.
c) Impairment of Goodwill, Intangible Assets and Other Long-lived Assets
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that their carrying value may not be recoverable
from the estimated future cash flows expected to result from their use and
eventual disposition. Our long-lived assets subject to this evaluation
include property, plant and equipment and amortizable intangible assets.
Amortizable intangible assets subject to this evaluation include developed
technology we have acquired, patents and technology licenses. We assess the
impairment of goodwill annually in our fourth fiscal quarter and whenever
events or changes in circumstances indicate that it is more likely than not
that an impairment loss has been incurred. We are required to make
judgments and assumptions in identifying those events or changes in
circumstances that may trigger impairment. Some of the factors we consider
include:
o Significant decrease in the market value of an asset
o Significant changes in the extent or manner for which the asset is
being used or in its physical condition
o Significant change, delay or departure in our business strategy
related to the asset
o Significant negative changes in the business climate, industry or
economic conditions
o Current period operating losses or negative cash flow combined with a
history of similar losses or a forecast that indicates continuing
losses associated with the use of an asset
Our impairment evaluation of long-lived assets includes an analysis of
estimated future undiscounted net cash flows expected to be generated by
the assets over their remaining estimated useful lives. If the estimated
future undiscounted net cash flows are insufficient to recover the carrying
value of the assets over the remaining estimated useful lives, we record an
impairment loss in the amount by which the carrying value of the assets
exceeds the fair value. We determine fair value based on discounted cash
flows using a discount rate commensurate with the risk inherent in our
current business model. Major factors that influence our cash flow analysis
are our estimates for future revenue and expenses associated with the use
of the asset. Different estimates could have a significant impact on the
results of our evaluation. If, as a result of our analysis, we determine
that our amortizable intangible assets or other long-lived assets have been
impaired, we will recognize an impairment loss in the period in which the
impairment is determined. Any such impairment charge could be significant
and could have a material adverse effect on our financial position and
results of operations.
Our impairment evaluation of goodwill is based on comparing the fair
value to the carrying value of our reporting units with goodwill. The fair
value of a reporting unit is measured at the business unit level using a
discounted cash flow approach that incorporates our estimates of future
revenues and costs for those business units. As of May 28, 2006 our
reporting units with goodwill include our flat panel displays (formerly
within 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.
d) Income Taxes
We determine deferred tax assets and liabilities based on the future tax
consequences that can be attributed to net operating loss and credit
carryovers and differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases, using
the enacted tax rate expected to be applied when the taxes are actually
paid or recovered. The recognition of deferred tax assets is reduced by a
valuation allowance if it is more likely than not that the tax benefits
will not be realized. The valuation allowance has been established
primarily against the reinvestment and investment tax allowances related to
Malaysia because we have concluded that a significant portion of the
deferred tax asset will not be realized owing to the uncertainty of
sufficient taxable income in Malaysia beyond the foreseeable future. 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.
The calculation of tax liabilities involves significant judgment in
estimating the impact of uncertainties in the application of complex tax
laws. Resolution of these uncertainties in a manner inconsistent with our
expectations could have a material impact on our results of operations.
o Overview
Throughout fiscal 2006, we 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 a planned closure of 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 occurred throughout fiscal 2006 and are targeted to be
completed by the end of our first quarter of fiscal 2007. In November 2005, we
took steps to reduce indirect manufacturing costs at 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 fiscal 2006 were both higher than
they were in the preceding fiscal year. The improvement in gross margin reflects
growth in our higher margin analog products, as well as higher factory
utilization associated with increased volume. We continued our 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 activity in fiscal 2006 under three
programs: (i) the $400 million stock repurchase program announced in March 2005
(of which we used $96.0 million to repurchase 4.9 million shares of common stock
in fiscal 2005), (ii) the $400 million stock repurchase program announced in
September 2005, and (iii) the $400 million stock repurchase program announced in
December 2005. Under these programs we repurchased a total of 37.2 million
shares of our common stock for $950.7 million during fiscal 2006. All of these
shares were purchased in the open market. The stock repurchase activity is one
element of our overall program to deliver a consistently high return on invested
capital, which we believe improves shareholder value over time. As of May 28,
2006, we had $153.3 million remaining for future common stock repurchases under
the program announced in December 2005. On June 8, 2006, we announced that our
Board of Directors had approved an additional $500 million stock repurchase
program similar to our prior stock repurchase programs.
We also continued our dividend program in fiscal 2006, as we paid a total
of $34.2 million in cash dividends during the fiscal year. In June 2006, the
Board of Directors declared a cash dividend of $0.03 per outstanding share of
common stock, which was paid on July 10, 2006 to shareholders of record at the
close of business on June 19, 2006.
The following table and discussion provide an overview of our operating
results for fiscal years 2006, 2005 and 2004:
--------------- ------------ ------------- ------------ --------------
Years Ended: May 28, May 29, May 30,
(In Millions) 2006 % Change 2005 % Change 2004
--------------- ------------ ------------- ------------ --------------
Net sales $ 2,158.1 12.8% $ 1,913.1 (3.5%) $ 1,983.1
Operating income $ 665.5 $ 398.9 $ 327.8
As a % of net sales 30.8% 20.9% 16.5%
Net income $ 449.2 $ 415.3 $ 282.8
As a % of net sales 20.8% 21.7% 14.3%
Net income for fiscal 2006 includes a net charge of $33.7 million for
severance and restructuring expenses arising from cost reduction actions taken
during the year (See Note 3 to the Consolidated Financial Statements), goodwill
impairment losses of $7.6 million, gain from sale of businesses of $28.9 million
(See Note 3 to the Consolidated Financial Statements), net intellectual property
income of $4.1 million, an impairment loss on an intangible asset (other than
goodwill) of $1.8 million and other operating income of $3.4 million. All of
these charges and credits are pre-tax amounts. Fiscal 2006 net income also
includes $24.5 million of tax expense related to the repatriation of accumulated
foreign earnings under provisions of the American Jobs Creation Act of 2004.
Net income for fiscal 2005 included a goodwill impairment loss of $86.1
million, a net charge of $23.9 million for severance and restructuring expense
related to cost reduction actions (See Note 3 to the Consolidated Financial
Statements), gain from the sale of businesses of $59.9 million (See Note 3 to
the Consolidated Financial Statements), a net credit of $7.1 million related to
litigation settlements, a refund of $7.4 million from the California
Manufacturer's Investment Credit, net intellectual property income of $5.2
million and other operating expenses of $1.7 million. All of these charges and
credits are pre-tax amounts. Fiscal 2005 net income also reflected a net tax
benefit of $5.4 million, which consisted of income tax expense of $160.8 million
offset by a benefit from the change in the beginning of the year valuation
allowance of $166.2 million.
Net income for fiscal 2004 included a net charge of $19.6 million for
severance and restructuring expenses related to cost reduction actions (See Note
3 to the Consolidated Financial Statements), a litigation charge of $30.0
million, net intellectual property income of $11.1 million and settlement of
certain patent infringement claims for $3.1 million. All of these charges and
credits are pre-tax amounts. Fiscal 2004 net income also included a $1.9 million
charge (including a tax effect of $0.2 million) for the cumulative effect of a
change in accounting principle as a result of the adoption of SFAS No. 143,
"Accounting for Asset Retirement Obligations" (See Note 6 to the Consolidated
Financial Statements).
o Net Sales
---------
------------- ------------ ------------- ------------ --------------
Years Ended: May 28, May 29, May 30,
(In Millions) 2006 % Change 2005 % Change 2004
------------- ------------ ------------- ------------ --------------
Analog segment $1,845.2 10.7% $1,666.3 (0.7%) $ 1,677.5
As a % of net sales 85.5% 87.1% 84.6%
All others 312.9 26.8% 246.8 (19.2%) 305.6
As a % of net sales 14.5% 12.9% 15.4%
------------- ------------- --------------
Total net sales $2,158.1 $1,913.1 $ 1,983.1
============= ============= ==============
100% 100% 100%
The chart above and the following discussion are based on our reportable
segments described in Note 13 to the Consolidated Financial Statements.
In fiscal 2006, the Analog segment represented 86 percent of our total
sales compared to 87 percent in fiscal 2005. The shift in percentage was due
solely to our disposition of the cordless business which had been a business
unit included within our Analog segment in fiscal 2005 and 2004. In fiscal 2006,
we provided foundry materials to the new owners of this business and those sales
are included in the "all others" category. Analog segment sales growth in fiscal
2006 was driven by stronger customer demand levels, especially in wireless
handset and portable consumer markets. We also increased our market share in the
analog standard linear area during fiscal 2006. Analog unit shipments were up 11
percent in fiscal 2006 over fiscal 2005. While blended-average selling prices
for the whole company were flat in fiscal 2006 compared to fiscal 2005,
blended-average selling prices in our analog standard linear product portfolio
were up by 5 percent. Although our analog products generally have lower
blended-average selling prices than our non-analog products, they also have
higher margins.
Within the Analog segment, products sold by the power management, data
conversion, amplifier (including audio amplifier products) and interface
business units were the underlying drivers of the growth in sales for fiscal
2006 with increases of 20 percent, 19 percent, 18 percent and 20 percent,
respectively.
For the "all others" category, the increase in sales for fiscal 2006 over
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
related to the cordless business in fiscal 2005.
For fiscal 2006, sales increased in all geographic regions compared to
fiscal 2005. The increases were 17 percent in the Asia Pacific region, 13
percent in both the Americas and Japan, and 2 percent in Europe. Sales in fiscal
2006 as a percentage of total sales increased to 49 percent in the Asia Pacific
region, while remaining flat at 20 percent in the Americas and 13 percent in
Japan, and decreasing to 18 percent in Europe. Foreign currency-denominated
sales in fiscal 2006 were unfavorably affected by foreign currency exchange rate
fluctuations as the pound sterling, euro and Japanese yen all weakened over the
fiscal year against the dollar. However, the impact was minimal since less than
a quarter of our total sales were denominated in a foreign currency.
Analog segment sales were lower in fiscal 2005 compared to fiscal 2004
because efforts by distributors and customers to reduce inventories combined
with lower than expected demand patterns as we exited our summer quarter caused
sales in the second half of fiscal 2005 to decline significantly compared to
sales in the second half of fiscal 2004. Our analog unit shipments were down 9
percent in fiscal 2005 from fiscal 2004, but blended-average analog selling
prices were up by 9 percent in fiscal 2005 over fiscal 2004, reflecting both a
mix of higher value products as well as some actual price increases.
Within the Analog segment, sales from the power management area grew 9
percent in fiscal 2005 over fiscal 2004. This was driven mainly by increased
activity in wireless handsets. Sales from both the audio amplifier and data
conversion business units increased by 1 percent in fiscal 2005 over fiscal
2004. However, sales from the application-specific wireless (including radio
frequency building blocks) and non-audio amplifier business units declined in
fiscal 2005 by 11 percent and 7 percent, respectively, from fiscal 2004. The
decrease in radio frequency chip sales was due to a trend in cellular handsets
in which the radio function migrated from discrete building-block solutions to
more highly-integrated chips. Phones that utilize integrated radios typically do
not need discrete PLL building block chips, such as those sold by us.
For fiscal 2005, sales decreased in all geographic regions compared to
fiscal 2004. The decreases were 10 percent in the Americas and 3 percent in the
Asia Pacific region while both Europe and Japan each decreased 1 percent. Sales
in fiscal 2005 as a percentage of total sales remained flat at 20 percent in
Europe and 13 percent in Japan, while the Asia Pacific region increased to 47
percent and the Americas decreased to 20 percent. Foreign currency-denominated
sales in fiscal 2005 were favorably affected by foreign currency exchange rate
fluctuations as the Japanese yen, pound sterling and euro all strengthened
against the dollar. However, the impact was minimal since less than a quarter of
our total sales was denominated in a foreign currency.
o Gross Margin
------------
-------------- ------------- ------------- ------------ --------------
Years Ended: May 28, May 29, May 30,
(In Millions) 2006 % Change 2005 % Change 2004
-------------- ------------- ------------- ------------ --------------
Net sales $ 2,158.1 12.8% $ 1,913.1 (3.5%) $ 1,983.1
Cost of sales 885.4 (0.8%) 892.3 (8.1%) 970.8
-------------- ------------- --------------
Gross margin $ 1,272.7 $ 1,020.8 $ 1,012.3
============== ============= ==============
As a % of net sales 59.0% 53.4% 51.0%
The increase in the gross margin percentage in fiscal 2006 compared to
fiscal 2005 was driven by improved product mix of higher-margin analog standard
linear products. Our product mix 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 during fiscal 2006. Wafer fabrication capacity
utilization (based on wafer starts) was 83 percent in fiscal 2006 compared to 72
percent in fiscal 2005.
The increase in gross margin percentage in fiscal 2005 compared to fiscal
2004 was mainly driven by improvements in product mix and blended-average
selling prices. Our wafer-fabrication capacity utilization was actually down
year over year at 72 percent in fiscal 2005 compared to 93 percent in fiscal
2004. Because of this lower utilization, we implemented mandatory factory
shutdowns and initiated an action in January 2005 to eliminate 421 manufacturing
personnel positions. Since our analog products generally have higher margins
than non-analog products, the growth in Analog segment sales to 87 percent of
total net sales in fiscal 2005 from 85 percent of total net sales in fiscal 2004
had a positive impact on gross margin, despite the lower factory utilization.
o Research and Development
------------------------
--------------- ------------- ------------- ------------ --------------
Years Ended: May 28, May 29, May 30,
(In Millions) 2006 % Change 2005 % Change 2004
--------------- ------------- ------------- ------------ --------------
Research and
development $ 326.6 (1.9%) $ 333.0 (6.7%) $ 357.1
As a % of net sales 15.1% 17.4% 18.0%
Lower research and development expenses in fiscal 2006 compared to fiscal
2005 largely reflect cost savings from the businesses we divested. At the same
time, we are continuing to concentrate our ongoing research and development
spending on analog products and underlying analog capabilities. 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 approximately 15 percent 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.
Lower research and development expenses in fiscal 2005 compared to fiscal
2004 reflected a full-year of cost savings from our sale and exit of the
information appliance business in August 2003 and the completion in fiscal 2004
of other actions aimed at reducing our research and development expenses as a
percentage of sales. R&D expenses for fiscal 2005 also reflected reductions due
to the sale of the imaging and PC Super I/O businesses that occurred during the
fiscal year. Total company spending in fiscal 2005 compared to fiscal 2004 was
down 6 percent for new product development and 8 percent for process and support
technology. Although research and development spending for the year was down as
a whole and as a percentage of sales, research and development spending on our
key focus areas in the Analog segment increased approximately 10 percent.
o Selling, General and Administrative
-----------------------------------
-------------- ------------- ------------- ------------ --------------
Years Ended: May 28, May 29, May 30,
(In Millions) 2006 % Change 2005 % Change 2004
-------------- ------------- ------------- ------------ --------------
Selling, general and
administrative $ 273.9 6.7% $ 256.8 (10.1%) $ 285.8
As a % of net sales 12.7% 13.4% 14.4%
The dollar increase in selling, general and administrative expenses for fiscal
2006 compared to 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 were actually down slightly as
we continue to manage our cost structure in line with our overall business model
objectives.
The reductions in selling, general and administrative expenses for fiscal 2005
compared to fiscal 2004 reflected our specific efforts to manage our cost
structure more efficiently. In addition, we implemented discretionary cost
control programs during fiscal 2005 in response to the industry-wide sales
declines we saw in the early part of the fiscal year that resulted from excess
inventories in the supply chain. Although to a much lesser extent than R&D
expenses, SG&A expenses for fiscal 2005 also reflected some reductions due to
the sale of the imaging and PC Super I/O businesses that occurred during the
fiscal year. The SG&A expenses in fiscal 2005 were down from fiscal 2004 not
only in actual dollars, but also as a percent of sales.
o Severance and Restructuring Expenses Related to Cost Reduction Programs
-----------------------------------------------------------------------
Our fiscal 2006 results include a net charge of $33.7 million for severance and
restructuring expenses arising from cost reduction actions taken during the
year. These actions include the phased closure of our assembly and test plant in
Singapore, steps to reduce indirect manufacturing costs at our Texas plant and
additional cost reduction actions primarily 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. See Note 3 to the
Consolidated Financial Statements for a more complete discussion of these
actions and related charges, as well as a discussion of fiscal 2006 activity
related to previously announced actions.
Our fiscal 2005 results included a net charge of $23.9 million for severance and
restructuring expenses related to several actions taken during fiscal 2005.
These actions included workforce reductions connected with the divestiture of
the imaging business, the streamlining of manufacturing to address the lower
utilization of manufacturing facilities experienced during the fiscal year and
the reorganization of our product lines into two groups effective at the
beginning of fiscal 2006. See Note 3 to the Consolidated Financial Statements
for a more complete discussion of these actions and related charges.
During fiscal 2004, we substantially completed all cost reduction actions
related to our strategic profit-improvement actions initially launched in
February 2003. These actions included the exit and sale of the information
appliance business, and other actions aimed at improving profitability and
return on invested capital. The net charge in fiscal 2004 for severance and
restructuring expenses was $19.6 million. See Note 3 to the Consolidated
Financial Statements for a more complete discussion of these actions and related
charges.
o Gain from Sale of Businesses
----------------------------
As part of our actions to reposition toward a higher-value portfolio, we have
divested businesses that do not align with our business model. Our fiscal 2006
results include a gain of $0.6 million upon the completion in April 2006 of the
sale of a small business unit that was developing high definition products (HDP)
and a gain of $24.3 million from the sale completed in June 2005 of our cordless
business unit. In connection with the sale of the cordless business unit, 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. See Note 3 to the Consolidated Financial Statements for
a more complete discussion of these transactions.
Our fiscal 2005 results included a gain of $8.8 million upon completion of
the sale of certain intellectual property, inventory and equipment of our
imaging business in September 2004 and a gain of $51.1 million upon close of the
sale in May 2005 of our PC Super I/O business. See Note 3 to the Consolidated
Financial Statements for a more complete discussion of these transactions.
o Goodwill Impairment Loss
------------------------
Our fiscal 2006 results include a $5.2 million impairment loss for goodwill in
our HDP reporting unit, which arose in connection with our decision to sell that
business. We also recorded an additional $2.4 million impairment loss for
goodwill in our CRT reporting unit, which arose in connection with our annual
evaluation of goodwill in our fiscal fourth quarter. The fair values of the HDP
and CRT reporting units were determined using a discounted cash flow approach
that incorporated our estimates of future sales and costs for the business
units.
Our fiscal 2005 results include an $86.1 million impairment loss for goodwill in
our wireless reporting unit, which arose in connection with our annual
evaluation of goodwill. The fair value of the wireless reporting unit was
determined using a discounted cash flow approach that incorporated our estimates
of future sales and costs for the business unit.
o Interest Income and Interest Expense
------------------------------------
------------- -------------- -------------
Years Ended: May 28, May 29, May 30,
(In Millions) 2006 2005 2004
------------- -------------- -------------
Interest income $ 33.7 $ 17.4 $ 11.6
Interest expense (1.9) (1.5) (1.2)
------------- -------------- -------------
Interest income, net $ 31.8 $ 15.9 $10.4
============= ============== =============
The increase in interest income, net, for fiscal 2006 over fiscal 2005 and for
fiscal 2005 over fiscal 2004 was due to higher-average cash balances and higher
interest rates in each year. Interest expense in fiscal 2006 and fiscal 2005
also includes the accretion of interest associated with software license
obligations.
o Other Non-Operating Expense, Net
--------------------------------
------------- -------------- -------------
Years Ended: May 28, May 29, May 30,
(In Millions) 2006 2005 2004
------------- -------------- -------------
Gain on investments $ 8.3 $ 1.3 $ 9.4
Share in net losses of equity-method
investments (0.7) (5.7) (14.1)
Charitable contribution (9.7) - -
Other - (0.5) 0.2
------------- -------------- -------------
Total other non-operating expense, net $ (2.1) $ (4.9) $ (4.5)
============= ============== =============
The components of other non-operating expense, net include activities related to
our investments. The gain on investments in fiscal 2006 reflects the sale of
shares in available-for-sale securities and a non-publicly traded company, as
well as the change in unrealized holdings gains from trading securities, offset
by an impairment loss on a non-marketable investment. The share of net losses in
equity-method investments has declined in both fiscal 2006 and 2005 because we
carried lower balances for these types of investments. The gain on investments
in fiscal 2005 relates to the sale of shares in a non-publicly traded company.
Net gain on investments for fiscal 2004 was primarily from the sale of shares in
two non-publicly traded companies upon their acquisitions by third parties.
Other non-operating expenses included a litigation settlement in fiscal 2005 and
the write down to net realizable value of a note receivable.
o Income Tax Expense
------------------
------------- -------------- -------------
Years Ended: May 28, May 29, May 30,
(In Millions) 2006 2005 2004
------------- -------------- -------------
Income tax expense $ 246.0 $ (5.4) $ 49.0
Effective tax rate 35.4% (1.3)% 14.7%
We recorded income tax expense of $246.0 million in fiscal 2006. This
compares to an income tax benefit of $5.4 million in fiscal 2005 and income tax
expense of $49.0 million in fiscal 2004. In addition to having higher income
before tax in fiscal 2006 than we had in fiscal 2005, resulting in higher taxes,
the fiscal 2006 income tax expense includes an additional $24.5 million of tax
expense related to the repatriation of accumulated foreign earnings under
provisions of the American Jobs Creation Act of 2004.
While income before income tax was higher in fiscal 2005 than it was in
fiscal 2004, we received an income tax benefit primarily because of the
recognition of additional tax benefits that had not been previously recognized.
The fiscal 2005 income tax benefit included tax expense of $160.8 million, which
consisted of both U.S. and non-U.S. income taxes, offset by a benefit from the
change in the beginning of the year valuation allowance of $166.2 million.
Fiscal 2004 tax expense consisted primarily of U.S. income tax, net of
benefits related to prior period net operating losses and tax credits, and
non-U.S. income taxes.
Our ability to realize the net deferred tax assets ($260.4 million at May
28, 2006) is primarily dependent on our ability to generate future U.S. taxable
income. We believe it is more likely than not that we will generate sufficient
taxable income to utilize these tax assets. Because our ability to utilize these
tax assets is dependent on future results, it is possible that we will be unable
to ultimately realize some portion or all of the benefits of recognized tax
assets. This could result in additions to the deferred tax asset valuation
allowance and an increase to tax expense.
o Foreign Operations
------------------
Our foreign operations include manufacturing facilities in the Asia Pacific
region and Europe and sales offices throughout the Asia Pacific region, Europe
and Japan. A portion of the transactions at these facilities is denominated in
local currency, which exposes us to risk from exchange rate fluctuations. Our
exposure from expenses at foreign manufacturing facilities during fiscal 2006
was concentrated in U.K. pound sterling, Singapore dollar, Malaysian ringgit and
Chinese RMB. Where practical, we hedge net non-U.S. dollar denominated asset and
liability positions using forward exchange and purchased option contracts. Our
exposure from foreign currency denominated revenue is limited to the Japanese
yen, pound sterling and the euro. We hedge up to 100 percent of the notional
value of outstanding customer orders denominated in foreign currency, using
forward exchange contracts and over-the-counter foreign currency options. A
portion of anticipated foreign sales commitments is at times hedged using
purchased option contracts that have an original maturity of one year or less.
At some of our international locations, we maintain defined benefit pension
plans that operate in accordance with local statutes and practices. As required
by the pension accounting standards, we record an adjustment for minimum pension
liability to adjust the liability related to one of these plans to equal the
amount of the unfunded accumulated benefit obligation. For fiscal 2006, the
adjustment was $22.1 million and a corresponding amount, net of a $6.7 million
tax effect, is reflected in the Consolidated Financial Statements as a component
of accumulated other comprehensive loss.
Financial Market Risks
----------------------
We are exposed to financial market risks, including changes in interest rates
and foreign currency exchange rates. To mitigate these risks, we use derivative
financial instruments. We do not use derivative financial instruments for
speculative or trading purposes.
Due to the short-term nature of the major portion of our cash portfolio, a
series of severe cuts in interest rates does have a significant impact on the
amount of interest income we earn from our cash portfolio. An increase in
interest rates benefits us due to our large net cash position. An increase in
interest rates would not necessarily immediately increase interest expense due
to the fixed rates of our existing debt obligations.
A substantial majority of our revenue and capital spending is transacted in
U.S. dollars. However, we do enter into transactions in other currencies,
primarily the Japanese yen, pound sterling, euro and certain other Asian
currencies. To protect against reductions in value and the volatility of future
cash flows caused by changes in foreign exchange rates, we have established
programs to hedge our exposure to these changes in foreign currency exchange
rates. Our hedging programs reduce, but do not always eliminate, the impact of
foreign currency exchange rate movements. An adverse change (defined as 15
percent in all currencies) in exchange rates would result in a decline in income
before taxes of less than $5 million. This calculation assumes that each
exchange rate would change in the same direction relative to the U.S. dollar. In
addition to the direct effects of changes in exchange rates, these changes
typically affect the volume of sales or the foreign currency sales price as
competitors' products become more or less attractive. Our sensitivity analysis
of the effects of changes in foreign currency exchange rates does not factor in
a potential change in sales levels or local currency selling prices. All of
these potential changes are based on sensitivity analyses performed on our
balances as of May 28, 2006.
o Liquidity and Capital Resources
-------------------------------
------------ ----------- -----------
Years Ended: May 28, May 29, May 30,
(In Millions) 2006 2005 2004
------------ ---------- -----------
Net cash provided by
operating activities $ 795.8 $ 527.9 $ 475.3
Net cash used by
investing activities (36.0) (69.3) (249.8)
Net cash used by
by financing activities (694.7) (234.4) (384.8)
------------ ----------- -----------
$ 65.1 $ 224.2 $ (159.3)
============ =========== ===========
The primary factors contributing to the changes in cash and cash equivalents in
fiscal 2006, 2005 and 2004 are described below:
The improvement in net income has been the primary contributor to the
increase in cash generated from operating activities in fiscal years 2006 and
2005. In fiscal 2006, cash from operating activities was generated primarily
from net income, adjusted for non-cash items (primarily depreciation and
amortization and the tax benefit associated with stock options) combined with a
positive impact that came from changes in working capital components. We also
generated cash from operating activities in fiscal years 2005 and 2004 when the
positive impact from net income, adjusted for non-cash items (primarily
depreciation and amortization), was greater than the negative impact from
changes in working capital components.
The major use of cash for investing activities during fiscal 2006 was for
investment in property, plant and equipment of $163.3 million, primarily for the
purchase of machinery and equipment, which was partially offset by the proceeds
of $71.0 million from the sale of our cordless and high definition products
businesses, $46.9 million from the sale and maturity of available-for-sale
securities and $11.6 million from the sales of investments. Major uses of cash
for investing activities during fiscal 2005 included investment in property,
plant and equipment of $96.6 million, primarily for the purchase of machinery
and equipment, purchases of available for sale securities of $16.8 million, and
payments for security deposits on leased equipment of $21.8 million. These were
partially offset by proceeds of $71.5 million from the sale of assets associated
with the imaging and PC Super I/O businesses. Major uses of cash for investing
activities during fiscal 2004 included investment in property, plant and
equipment of $215.3 million, primarily for the purchase of machinery and
equipment, net purchases of available-for-sale securities of $27.7 million and
payments for security deposits on leased equipment of $20.1 million.
The primary use of cash from our financing activities in fiscal 2006 was
for the repurchase of 37.2 million shares of our common stock for $950.7
million. All of these shares were repurchased in the open market. We also used
cash to pay $34.2 million in cash dividends and $13.1 million on software
license obligations. These amounts were partially offset by proceeds of $303.3
million from the issuance of common stock under employee benefit plans. The
primary use of cash from our financing activities in fiscal 2005 was for the
repurchase of 18.8 million shares of our common stock for $323.5 million. Of
these shares, 17.6 million shares were repurchased in the open market for $298.5
million and the remaining 1.2 million shares were repurchased through privately
negotiated transactions with a major financial institution. We also used cash in
fiscal 2005 to make payments of $15.2 million on software license obligations
and $14.1 million for cash dividends. These amounts were partially offset by
proceeds of $118.4 million from the issuance of common stock under employee
benefit plans. The primary use of cash from our financing activities in fiscal
2004 came from our repurchase of a total of 32.4 million shares of our common
stock for $542.5 million, net advances of $29.4 million to acquire our common
stock and payments of $22.7 million on software license obligations. A portion
(15.7 million shares) of the stock repurchase was transacted directly with a
major financial institution and the remainder in the open market. These uses of
cash were partially offset by proceeds of $211.9 million from the issuance of
common stock under employee benefit plans.
On June 8, 2006, our Board of Directors declared a cash dividend of $0.03
per outstanding share of common stock to be paid on July 10, 2006 to
shareholders of record at the close of business on June 19, 2006. At the same
time, we also announced that our Board of Directors approved a new $500 million
stock repurchase program similar to the previous programs approved in fiscal
2005 and 2004. The stock repurchase program is consistent with our current
business model which focuses on higher-value analog products and, therefore, is
less capital intensive than it has been historically. As of May 28, 2006, we had
$153.3 million remaining for future common stock repurchases under the program
announced in December 2005. We also made a $20.0 million contribution to one of
our international defined benefit pension plans in March 2006 and we plan to
continue to fund the plan in the future to adequately meet the minimum funding
requirements under local statutes.
We foresee continuing cash outlays for plant and equipment in fiscal 2007,
with our primary focus on analog capabilities at our existing sites. As a
result, our fiscal 2007 capital expenditures are expected to be similar to the
fiscal 2006 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 fiscal 2007,
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 as of May 28, 2006:
Payments due by period:
----------------------------------------------------------------------------------
Less than More than
(In Millions) Total 1 Year 1 - 3 Years 3 -5 Years 5 Years
----------- --------------- -------------- ------------- ---------------
Debt obligations $ 21.1 $ - $ 20.9 $ - $ 0.2
Operating lease obligations:
Non-cancelable operating leases 52.7 27.0 19.9 4.9 0.9
Purchase Obligations:
CAD software licensing
agreements 29.6 9.9 19.7 - -
Utility contract 19.5 6.5 13.0 - -
Other 6.2 3.8 2.4 - -
----------- --------------- -------------- ------------- ---------------
Total $129.1 $ 47.2 $ 75.9 $ 4.9 $ 1.1
=========== =============== ============== ============= ===============
Commercial Commitments:
Standby letters of credit under
bank multicurrency agreement $ 7.6 $ 5.6 $ 2.0 $ - $ -
=========== =============== ============== ============= ===============
In addition, as of May 28, 2006, capital purchase commitments were $52.8
million.
We do not currently have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which might be established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. We do not engage in trading activities involving non-exchange
traded contracts. As a result, we do not believe we are materially exposed to
financing, liquidity, market or credit risks that could arise if we had engaged
in these relationships.
o Recently Issued Accounting Pronouncements
-----------------------------------------
In November 2004, the Financial Accounting Standards Board issued SFAS No. 151,
"Inventory Costs, an amendment of ARB 43, Chapter 4," which amends the guidance
in ARB No. 43, Chapter 4, "Inventory Pricing." This Statement is the result of a
broader effort by the FASB working with the International Accounting Standards
Board to reduce differences between U.S. and international accounting standards.
SFAS No. 151 eliminates the "so abnormal" criterion in ARB No. 43 and companies
will no longer be permitted to capitalize inventory costs on their balance
sheets when the production defect rate varies significantly from the expected
rate. It also makes clear that fixed overhead should be allocated based on
"normal capacity." The provisions of this Statement are effective for inventory
costs incurred beginning in our fiscal year 2007. We do not expect the adoption
of this statement effective at the beginning of our fiscal 2007 first quarter to
have any impact on our Consolidated Financial Statements.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised 2004), "Share-Based Payment." This Statement is a revision of SFAS
No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. SFAS No. 123(R) requires that compensation cost
relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. We expect the adoption of this Statement effective
at the beginning of our fiscal 2007 first quarter will materially increase
expenses included in our reported results of operations for fiscal 2007 and
thereafter.
In May 2005, the Financial Accounting Standards Board issued SFAS No. 154,
"Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20
and FASB Statement No. 3." This Statement establishes new standards on
accounting for changes in accounting principles. Pursuant to the new rules, all
such changes must be accounted for by retrospective application to the financial
statements of prior periods unless it is impracticable to do so. This statement
replaces APB No. 20 and SFAS No. 3, although it carries forward the guidance in
those pronouncements with respect to accounting for changes in estimates,
changes in the reporting entity and the correction of errors. SFAS No. 154 is
effective for accounting changes and error corrections made in our fiscal year
2007. We do not expect the adoption of this statement effective at the beginning
of our fiscal 2007 first quarter to have any impact on our Consolidated
Financial Statements.
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.
In June 2006, the Financial Accounting Standards Board reached a consensus
on Emerging Issues Task Force Issue No. 06-3, "How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation). The EITF applies to
any tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer and may include,
but are not limited to, sales, use, value added, and some excise taxes. The
Board concluded that the presentation of taxes within the scope of the EITF on
either a gross or a net basis is an accounting policy decision to be disclosed
pursuant to ABP Opinion No. 22. The requirements of this EITF will apply to our
fiscal 2007 annual financial report. We do not expect the EITF to have a
significant impact on our Consolidated Financial Statements since it only
requires the presentation of additional disclosures.
In July 2006, the Financial Accounting Standards Board issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109," which clarifies the accounting for
uncertainty in income taxes recognized in an entity's financial statements in
accordance with SFAS No. 109, "Accounting for Income Taxes." The Interpretation
prescribes a recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. The Interpretation is effective beginning in our first quarter of fiscal
2008. We are currently analyzing the requirements of this Interpretation and
have not yet determined its impact on our Consolidated Financial Statements.
o Outlook
-------
Compared to fiscal 2005, we experienced stronger market conditions throughout
fiscal 2006. New orders in the fourth quarter were slightly higher than the
third quarter of fiscal 2006, 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 in all regions was up in our
fiscal 2006 fourth quarter compared to the preceding third quarter while
distributor weeks of inventory declined in all regions except Europe with the
largest reduction in the Asia Pacific region.
Our opening 13-week backlog entering the first quarter of fiscal 2007 was
below what it was when we began the fourth quarter of fiscal 2006, but this is
not unusual as we head into the summer. Historically, we have seen order
patterns during our first quarter to be generally lower than in the preceding
fourth quarter because manufacturing activity at some of our customers is
typically lower over the summer season, particularly in the European region. We
also expect the foundry sales for our divested businesses to decline
sequentially in the first quarter by more than $10 million. Considering all
factors, including those discussed above and our historical seasonality
patterns, we provided guidance for net sales in the first quarter of fiscal 2007
to be down 2 to 3 percent sequentially from the level achieved in our recently
completed fiscal 2006 fourth 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 expect our gross margin
percentage to be similar to the percentage achieved in the fiscal 2006 fourth
quarter based on the expected sales level and including the estimated impact of
compensation expense from the adoption of SFAS No. 123(R) discussed below. We
expect wafer fabrication capacity utilization to continue to run at levels
similar to what we saw in the fourth quarter. However, if there is a decline in
factory utilization or changes in the expected sales level or product mix, our
gross margin percentage could be negatively impacted.
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
occurred throughout fiscal 2006 and are targeted to be completed in 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.
Commencing in our first quarter of fiscal 2007, we will begin to record
compensation expense related to stock-based plans upon the adoption of SFAS No.
123(R), "Share-Based Payment." Until now, we have accounted for stock-based
awards (such as stock option and employee stock purchase plans) using the
intrinsic method under APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and therefore, we generally have not recognized any compensation
expense for these awards in our Consolidated Financial Statements. The adoption
of SFAS No. 123(R) will materially increase our operating expenses due to the
amortization of the fair value of the outstanding unvested share-based awards
over their vesting period. The financial impact in future periods will depend on
the level of share-based awards granted in the future. We currently estimate
that the fiscal 2007 first quarter compensation expense related to share-based
awards will range from $26 to $27 million on a pre-tax basis.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See information/discussion appearing in subcaption "Financial Market Risks" of
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 and the information appearing in Note 1, "Summary of
Significant Accounting Policies," and Note 2, "Financial Instruments," in the
Notes to the Consolidated Financial Statements included in Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Financial Statements of National Semiconductor Corporation and Subsidiaries:
----------------------------------------------------------------------------
Consolidated Balance Sheets at May 28, 2006 and May 29, 2005 41
Consolidated Statements of Income for each of the years in the
three-year period ended May 28, 2006 42
Consolidated Statements of Comprehensive Income for each of the years
in the three-year period ended May 28, 2006 43
Consolidated Statements of Shareholders' Equity for each of the years
in the three-year period ended May 28, 2006 44
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended May 28, 2006 45
Notes to Consolidated Financial Statements 46
Reports of Independent Registered Public Accounting Firm 85
Financial Statement Schedule:
-----------------------------
Schedule II -- Valuation and Qualifying Accounts for each of the years in the
three-year period ended May 28, 2006 95
Financial Statements of iReady Corporation and Subsidiary:
----------------------------------------------------------
For the years ended September 30, 2003 and 2002; and the four-month period
ended January 31, 2004* Exhibit 99.1
*These financial statements are set forth in exhibit 99.1 and incorporated
herein by reference.
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
May 28, May 29,
(In Millions, Except Share Amounts) 2006 2005
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 932.2 $ 867.1
Short-term marketable investments 110.3 155.1
Receivables, less allowances of $38.8 in 2006 and $26.7 in 2005 208.6 123.9
Inventories 189.4 170.2
Deferred tax assets 74.7 126.9
Other current assets 25.3 70.3
------------- --------------
Total current assets 1,540.5 1,513.5
Property, plant and equipment, net 627.7 605.1
Goodwill 57.3 87.2
Deferred tax assets, net 185.7 192.2
Other assets 99.9 106.2
------------- --------------
Total assets $2,511.1 $2,504.2
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 108.8 $ 64.7
Accrued expenses 191.0 143.6
Income taxes payable 98.5 76.7
------------- --------------
Total current liabilities 398.3 285.0
Long-term debt 21.1 23.0
Other non-current liabilities 165.6 142.1
------------- --------------
Total liabilities $ 585.0 $ 450.1
Commitments and contingencies
Shareholders' equity:
Preferred stock of $0.50 par value. Authorized 1,000,000 shares. $ - $ -
Common stock of $0.50 par value. Authorized 850,000,000 shares.
Issued and outstanding 335,680,499 in 2006 and 347,952,971 in 2005 167.8 174.0
Additional paid-in capital 504.2 1,024.5
Retained earnings 1,376.2 961.2
Unearned compensation (8.6) (7.4)
Accumulated other comprehensive loss (113.5) (98.2)
------------- --------------
Total shareholders' equity 1,926.1 2,054.1
------------- --------------
Total liabilities and shareholders' equity $2,511.1 $2,504.2
============= ==============
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years Ended May 28, May 29, May 30,
(In Millions, Except Per Share Amounts) 2006 2005 2004
------------ ------------ ------------
Net sales $2,158.1 $1,913.1 $1,983.1
Cost of sales 885.4 892.3 970.8
------------ ------------ ------------
Gross margin 1,272.7 1,020.8 1,012.3
------------ ------------ ------------
Research and development 326.6 333.0 357.1
Selling, general and administrative 273.9 256.8 285.8
Goodwill impairment loss 7.6 86.1 -
Gain from sale of businesses (28.9) (59.9) -
Severance and restructuring expenses 33.7 23.9 19.6
Other operating (income) expense, net (5.7) (18.0) 22.0
------------ ------------ ------------
Operating expenses 607.2 621.9 684.5
------------ ------------ ------------
Operating income 665.5 398.9 327.8
Interest income, net 31.8 15.9 10.4
Other non-operating expense, net (2.1) (4.9) (4.5)
------------ ------------ ------------
Income before income taxes and cumulative effect
of a change in accounting principle 695.2 409.9 333.7
Income tax expense (benefit) 246.0 (5.4) 49.0
------------ ------------ ------------
Income before cumulative effect of a change
in accounting principle 449.2 415.3 284.7
Cumulative effect of a change in accounting principle
including tax effect of $0.2 - - (1.9)
------------ ------------ ------------
Net income $ 449.2 $ 415.3 $ 282.8
============ ============ ============
Earnings per share:
Income before cumulative effect of a change in
accounting principle:
Basic $ 1.32 $ 1.17 $ 0.79
Diluted $ 1.26 $ 1.11 $ 0.73
Cumulative effect of a change in accounting principle
including tax effect of $0.2:
Basic $ - $ - $(0.01)
Diluted $ - $ - $ -
Net income:
Basic $ 1.32 $ 1.17 $ 0.78
Diluted $ 1.26 $ 1.11 $ 0.73
Weighted-average common and potential common
shares outstanding:
Basic 339.8 353.9 361.0
Diluted 357.0 373.9 388.5
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended May 28, May 29, May 30,
(In Millions) 2006 2005 2004
------------- ------------- --------------
Net income $ 449.2 $ 415.3 $ 282.8
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities 4.8 (0.3) (3.4)
Reclassification adjustment for net realized (gain) on
available-for-sale securities included in net income (4.7) - -
Minimum pension liability (15.4) (9.5) 29.1
Derivative instruments:
Unrealized gain on cash flow hedges - - 0.2
------------- ------------- --------------
Other comprehensive income (loss) (15.3) (9.8) 25.9
------------- ------------- --------------
Comprehensive income $ 433.9 $ 405.5 $ 308.7
============= ============= ==============
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Accumulated
-------------- Paid-In Retained Unearned Other
(In Millions, Except Per Share Amount) Shares Par Value Capital Earnings Compensation Comprehensive Loss Total
------------------------------------------------ ------ -------- ---------- --------- ------------ ------------------ ------
Balances at May 25, 2003 367.1 $ 183.6 $1,369.5 $ 277.2 $ (10.0) $ (114.3) $1,706.0
Net income - - - 282.8 - - 282.8
Issuance of common stock under option, purchase
and profit sharing plans 22.9 11.4 202.4 - - - 213.8
Unearned compensation relating to issuance of
restricted stock 0.2 0.1 3.0 - (3.1) - -
Cancellation of restricted stock (0.2) (0.1) (2.5) - 1.2 - (1.4)
Amortization of unearned compensation - - - - 3.1 - 3.1
Tax benefit associated with stock options - - 22.2 - - - 22.2
Purchase and retirement of treasury stock (32.4) (16.2) (526.3) - - - (542.5)
Net advances to acquire treasury stock - - (29.4) - - - (29.4)
Other comprehensive income - - - - - 25.9 25.9
------------------------------------------------ ------- -------- ---------- ---------- ----------- ---------------- --------
Balances at May 30, 2004 357.6 178.8 1,038.9 560.0 (8.8) (88.4) 1,680.5
Net income - - - 415.3 - - 415.3
Cash dividends declared and paid ($0.04 per
share) - - - (14.1) - - (14.1)
Issuance of common stock under option and
purchase plans 10.7 5.2 114.2 - - - 119.4
Unearned compensation relating to issuance of
restricted stock 0.1 0.1 2.5 - (2.6) - -
Cancellation of restricted stock (0.1) - (2.2) - 0.8 - (1.4)
Amortization of unearned compensation - - - - 3.2 - 3.2
Tax benefit associated with stock options - - 184.5 - - - 184.5
Settlement of an advance to acquire treasury
stock (1.5) - 30.0 - - - 30.0
Purchase and retirement of treasury stock (18.8) (10.1) (343.4) - - - (353.5)
Other comprehensive loss - - - - - (9.8) (9.8)
------------------------------------------------ -------- -------- ---------- ---------- ------------- --------------- -------
Balances at May 29, 2005 348.0 174.0 1,024.5 961.2 (7.4) (98.2) 2,054.1
Net income - - - 449.2 - - 449.2
Cash dividends declared and paid ($0.10 per
share) - - - (34.2) - - (34.2)
Issuance of common stock under option and
purchase plans 24.8 12.4 291.3 - - - 303.7
Unearned compensation relating to issuance of
restricted stock 0.1 - 7.7 - (7.7) - -
Cancellation of restricted stock - - (2.4) - 1.1 - (1.3)
Amortization of unearned compensation - - - - 5.4 - 5.4
Expense associated with Executive Incentive Plan - - 10.7 - - - 10.7
Tax benefit associated with stock options - - 104.5 - - - 104.5
Purchase and retirement of treasury stock (37.2) (18.6) (932.1) - - - (950.7)
Other comprehensive loss - - - - - (15.3) (15.3)
------------------------------------------------ -------- -------- ---------- ---------- ------------- --------------- --------
Balance at May 28, 2006 335.7 $ 167.8 $ 504.2 $1,376.2 $ (8.6) $ (113.5) $1,926.1
================================================ ======== ======== ========== ========== ============= =============== ========
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended May 28, May 29, May 30,
(In Millions) 2006 2005 2004
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 449.2 $ 415.3 $ 282.8
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of a change in accounting principle - - 1.9
Depreciation and amortization 166.3 194.4 209.9
Net gain on investments (8.3) (1.3) (9.4)
Share in net losses of equity-method investments 0.7 5.7 14.1
Goodwill impairment loss 7.6 86.1 -
Loss on disposal of equipment 2.7 1.1 6.2
Tax benefit associated with stock options 104.5 20.1 22.2
Deferred tax provision (benefit) 70.3 (65.1) -
Gain from sale of businesses (28.9) (59.9) -
Non-cash other operating (income) expenses, net 1.9 (11.1) 1.2
Other, net 8.2 2.4 3.6
Changes in certain assets and liabilities, net:
Receivables (84.3) 76.7 (50.4)
Inventories (19.2) 29.8 (62.5)
Other current assets 45.0 (18.7) (31.6)
Accounts payable and accrued expenses 70.7 (144.4) 78.7
Income taxes payable 17.0 13.3 13.6
Other non-current assets (9.0) - -
Other non-current liabilities 1.4 (16.5) (5.0)
------------ ------------ ------------
Net cash provided by operating activities 795.8 527.9 475.3
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (163.3) (96.6) (215.3)
Sale of equipment 1.2 - -
Purchase of available-for-sale securities - (16.8) (386.7)
Sale and maturity of available-for-sale securities 46.9 - 359.0
Sale of businesses 71.0 71.5 -
Sale of investments 11.6 0.7 12.1
Investment in non-publicly traded companies - (0.3) (1.8)
Funding of benefit plan (3.0) (6.9) (4.6)
Security deposits on leased equipment - (21.8) (20.1)
Other, net (0.4) 0.9 7.6
------------ ------------ ------------
Net cash used by investing activities (36.0) (69.3) (249.8)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on software license obligations (13.1) (15.2) (22.7)
Repayment of debt - - (2.1)
Issuance of common stock 303.3 118.4 211.9
Net advances to acquire treasury stock - - (29.4)
Purchase and retirement of treasury stock (950.7) (323.5) (542.5)
Cash dividends declared and paid (34.2) (14.1) -
------------ ------------ ------------
Net cash used by financing activities (694.7) (234.4) (384.8)
------------ ------------ ------------
Net change in cash and cash equivalents 65.1 224.2 (159.3)
Cash and cash equivalents at beginning of year 867.1 642.9 802.2
------------ ------------ ------------
Cash and cash equivalents at end of year $ 932.2 $ 867.1 $ 642.9
============ ============ ============
See accompanying Notes to Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Operations
We design, develop, manufacture and market a wide range of semiconductor
products, most of which are analog and mixed-signal integrated circuits. Our
focus is on creating analog-intensive solutions that provide more energy
efficiency, portability, better audio and sharper images in electronic systems.
Basis of Presentation
The Consolidated Financial Statements include National Semiconductor Corporation
and our majority-owned subsidiaries. All significant intercompany transactions
are eliminated in consolidation.
Our fiscal year ends on the last Sunday of May and for the fiscal years
ended May 28, 2006 and May 29, 2005, we had 52-week years. For the fiscal year
ended May 30, 2004, we had a 53-week year. Operating results for the additional
week were considered immaterial to our consolidated results of operations for
fiscal 2004.
On May 13, 2004, we completed a two-for-one stock split of our common stock
that was paid in the form of a stock dividend (See Note 9 to the Consolidated
Financial Statements). All information about capital stock accounts, share and
per share amounts included in the accompanying Consolidated Financial Statements
and related notes for fiscal 2004 have been retroactively adjusted to reflect
this stock split.
Revenue Recognition
We recognize revenue from the sale of semiconductor products upon shipment,
provided we have persuasive evidence of an arrangement typically in the form of
a purchase order, title and risk of loss have passed to the customer, the amount
is fixed or determinable and collection of the revenue is reasonably assured. We
record a provision for estimated future returns at the time of shipment.
Approximately 51 percent of our semiconductor product sales were made to
distributors in 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, scrap allowances and discounts for
prompt payment.
In line with industry practices, we generally credit distributors for the
effect of price reductions on their inventory of our products and, under
specific conditions, we repurchase products that we have discontinued. In
general, distributors do not have the right to return product, except under
customary warranty provisions. The programs we offer to our distributors could
include one or more of the following:
o Allowances involving pricing and volume. We refer to this as the "contract
sales debit" program.
o Allowance for inventory scrap. We refer to this as the "scrap allowance"
program.
o Discount for early payment. We refer to this as the "prompt payment"
program.
Under the contract sales debit program, products are sold to distributors
at standard published prices that are contained in price books that are broadly
provided to our various distributors. Distributors are required to pay for this
product within our standard commercial terms. After the initial purchase of the
product, the distributor has the opportunity to request a price allowance for a
particular part number depending on the current market conditions for that
specific part as well as volume considerations. This request is made prior to
the distributor reselling the part. Once we have approved an allowance to the
distributor, the distributor proceeds with the resale of the product and credits
are issued to the distributor in accordance with the specific allowance that we
approved. Periodically, we issue new distributor price books. For those parts
for which the standard prices have been reduced, we provide an immediate credit
to distributors for inventory quantities they have on hand.
Under the scrap allowance program, certain distributors are given a
contractually defined allowance to cover the cost of any scrap they might incur.
The amount of the allowance is specifically agreed upon with each distributor.
Under the prompt payment program, certain distributors are granted a fixed
percentage discount off the invoice price for payment earlier than our standard
commercial terms. This program was discontinued during fiscal 2006 for
substantially all of our distributors, except those in the Japanese region.
The revenue we record for these distribution sales is net of estimated
allowances for these programs. Our estimates are based upon historical
experience rates by geography and product family, inventory levels in the
distribution channel, current economic trends and other related factors. We
continuously monitor the claimed allowances against the rates assumed in our
estimates of the allowances. Actual distributor claims activity has been
materially consistent with the provisions we have made based on our estimates.
Service revenues are recognized as the services are provided or as
milestones are achieved, depending on the terms of the arrangement. These
revenues are included in net sales and are not a material component of our total
net sales.
Certain intellectual property income is classified as revenue if it meets
specified criteria established by company policy that defines whether it is
considered a source of income from our primary operations. These revenues are
included in net sales and totaled $5.3 million in fiscal 2006 and $1.8 million
in fiscal 2005. There were no amounts classified as sales in fiscal 2004. All
other intellectual property income that does not meet such criteria is not
considered a source of income from primary operations and is therefore
classified as a component of other operating income, net, in the consolidated
statement of income. Intellectual property income is recognized when the license
is delivered, the fee is fixed or determinable, collection of the fee is
reasonably assured and remaining obligations are inconsequential or perfunctory
to the other party.
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.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. We use the straight-line
method to depreciate machinery and equipment over their estimated useful life
(3-9 years). Buildings and improvements are depreciated using both straight-line
and declining-balance methods over the assets' remaining estimated useful life
(5-40 years), or, in the case of leasehold improvements, over the lesser of the
estimated useful life or lease term.
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 $1.9 million and to
diluted earnings per share of $0.01. Factory machinery and equipment placed in
service prior to fiscal year 2006 continue to be depreciated over 5 years using
a straight-line method.
We capitalize eligible costs to acquire software used internally. We use
the straight-line method to amortize software used internally over its estimated
useful life (3-5 years). Internal-use software is included in the property,
plant and equipment balance.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of
identifiable net tangible and intangible assets acquired in a business
combination. Goodwill is assigned to reporting units and as of May 28, 2006, we
have six reporting units that contain goodwill. Acquisition-related intangible
assets other than goodwill include developed technology and patents, which are
amortized on a straight-line basis over their estimated useful life (2-6 years).
Intangible assets other than goodwill are included within other assets on the
consolidated balance sheet.
Impairment of Long-Lived Assets
We evaluate goodwill for impairment on an annual basis and whenever events or
changes in circumstance indicate that it is more likely than not that an
impairment loss has been incurred. We evaluate goodwill impairment annually in
our fourth fiscal quarter, which has been selected as the period for our
recurring evaluation for all reporting units. As a result of our evaluations
performed in fiscal 2006, we recorded a $5.2 million impairment loss on goodwill
of the high definition products reporting unit in our fiscal 2006 third quarter
and a $2.4 million impairment loss on goodwill of the CRT reporting unit in our
fiscal 2006 fourth quarter. These reporting units are operating segments within
our Analog reportable segment. The fair values of the high definition products
and CRT reporting units were determined using a discounted cash flow approach
that incorporated our estimates of future sales and costs for the business
units. Also included in our analysis for the high definition products reporting
unit was consideration of the expected disposition of that business which
occurred in April 2006.
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. 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 our
estimate of future undiscounted net cash flows is insufficient to recover the
carrying value of the assets over the remaining estimated useful lives, we will
record an impairment loss in the amount by which the carrying value of the
assets exceeds the fair value. If assets are determined to be recoverable, but
the useful lives are shorter than we originally estimated, we depreciate or
amortize the net book value of the asset over the newly determined remaining
useful lives.
Income Taxes
We determine deferred tax liabilities and assets based on the future tax
consequences that can be attributed to net operating loss and credit carryovers
and differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases, using the enacted tax
rates 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.
Earnings per Share
We compute basic earnings per share using the weighted-average number of common
shares outstanding. Diluted earnings per share are computed using the
weighted-average common shares outstanding after giving effect to potential
common shares from stock options based on the treasury stock method.
For all years presented, the reported net income was used in our
computation of basic and diluted earnings per share. A reconciliation of the
shares used in the computation follows:
(In Millions) 2006 2005 2004
--------------- ---------------- ---------------
Weighted-average common shares outstanding used
for basic earnings per share 339.8 353.9 361.0
Effect of dilutive securities:
Stock options 17.2 20.0 27.5
--------------- ---------------- ---------------
Weighted-average common and potential common shares
outstanding used for diluted earnings per share 357.0 373.9 388.5
=============== ================ ===============
For the fiscal year ended May 28, 2006, we did not include options
outstanding to purchase 10.9 million shares of common stock with a
weighted-average 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 during the year. However, these shares could
potentially dilute basic earnings per share in the future. For the fiscal year
ended May 29, 2005, we did not include options outstanding to purchase 21.5
million shares of common stock with a weighted-average exercise price of $25.05
in diluted earnings per share since their effect was antidilutive because the
exercise price of these options exceeded the average market price during the
year. For the fiscal year ended May 30, 2004, we did not include options
outstanding to purchase 14.7 million shares of common stock with a
weighted-average exercise price of $28.33 in diluted earnings per share since
their effect was antidilutive because the exercise price of these options
exceeded the average market price during the year.
Currencies
The functional currency for all operations worldwide is the U.S. dollar. We
include gains and losses arising from remeasurement of foreign currency
financial statement balances into U.S. dollars in selling, general and
administrative expenses. We also include gains and losses resulting from foreign
currency transactions in selling, general and administrative expenses. Included
in net income for fiscal 2006, 2005 and 2004, were net foreign currency losses
of $0.1 million, $1.0 million and $1.2 million, respectively.
Financial Instruments
Cash and Cash Equivalents. Cash equivalents are highly liquid instruments with a
maturity of three months or less at the time of purchase. We maintain cash
equivalents in various currencies and in a variety of financial instruments.
Deferred Compensation Plan Assets. Employee contributions under the deferred
compensation plan (See Note 11 to the Consolidated Financial Statements) are
maintained in a rabbi trust and are not readily available to us. Participants
can direct the investment of their deferred compensation plan accounts in the
same investments funds offered by the 401(k) plan. Although participants direct
the investment of these funds, they are classified as trading securities and are
included in other assets because they remain assets of the company until they
are actually paid out to the participants.
Marketable Investments. Debt and marketable equity securities are classified as
held-to-maturity or available-for-sale categories. Debt securities are
classified as held-to-maturity when we have the positive intent and ability to
hold the securities to maturity. We record held-to-maturity securities, which
are stated at amortized cost, as either short-term or long-term on the balance
sheet based upon contractual maturity date. Debt and marketable equity
securities not classified as held-to-maturity are classified as
available-for-sale and are carried at fair market value, with the unrealized
gains and losses, net of tax, reported in shareholders' equity as a component of
accumulated other comprehensive loss. Gains or losses on securities sold are
based on the specific identification method. These marketable securities are
included as cash and cash equivalents, short-term and long-term marketable
securities based on their holding period.
Non-marketable Investments. We have investments in non-publicly traded companies
as a result of various strategic business ventures. These non-marketable
investments are included on the balance sheet in other assets. We record at cost
non-marketable investments where we do not have the ability to exercise
significant influence or control and periodically review them for impairment. We
use the equity method of accounting for non-marketable investments in which we
do have the ability to exercise significant influence, but do not hold a
controlling interest. Under the equity method, we record our proportionate share
of income or loss of the investees in non-operating income. As of May 28, 2006,
we had non-marketable investments of $1.3 million included in other assets, of
which $0.3 million represents a strategic business investment in a partnership
venture accounted for under the equity method. The remainder of the investments
is accounted for under the cost method.
Summarized unaudited financial information of our equity-method investments
is presented in the following table:
(In Millions) 2006 2005
------------- -------------
COMBINED FINANCIAL POSITION (Unaudited)
Current assets $ 17.2 $ 30.2
Non-current assets 2.5 3.2
------------- -------------
Total assets $ 19.7 $ 33.4
============= =============
Current liabilities 9.4 9.3
Non-current liabilities 5.0 3.8
Shareholders' equity 5.3 20.3
------------- -------------
Total liabilities and shareholders' equity $ 19.7 $ 33.4
============= =============
(In Millions) 2006 2005 2004
------------- ------------- --------------
COMBINED OPERATING RESULTS (Unaudited)
Sales $ 5.4 $ 14.1 $ 20.8
Costs and expenses 17.5 43.1 49.3
------------- ------------- --------------
Operating loss $(12.1) $(29.0) $(28.5)
============= ============= ==============
Net loss $(12.6) $(26.8) $(35.2)
============= ============= ==============
The financial information in the table above is presented as of and for
periods ended closely corresponding to our fiscal years for fiscal 2005 and
2004. The financial information for fiscal 2006 is not consistent with the same
corresponding periods presented in fiscal 2005 and 2004, because two of the
investments were sold during fiscal 2006. As a result, we do not have a complete
year of operations reported for these two investments and their corresponding
balance sheet dates represent the financial period that ended just prior to
their respective sale.
Derivative Financial Instruments. As part of our risk management strategy we use
derivative financial instruments, including forwards, swaps and purchased
options, to hedge certain foreign currency and interest rate exposures. Our
intent is to offset gains and losses that occur from our underlying exposure
with gains and losses on the derivative contracts used to hedge them. As a
matter of company policy, we do not enter into speculative positions with
derivative instruments. The criteria we use for designating an instrument as a
hedge include the instrument's effectiveness in risk reduction and direct
matching of the financial instrument to the underlying transaction.
We record all derivatives on the balance sheet at fair value. Gains or
losses resulting from changes in the values of these derivatives are accounted
for based on the use of the derivative and whether it qualifies for hedge
accounting. See Note 2 to the Consolidated Financial Statements for a full
description of our hedging activities and related accounting policies.
Fair Values of Financial Instruments
The carrying amounts for cash and cash equivalents, short-term investments,
accounts receivable and accounts payable approximate their fair values due to
the short period of time until their maturity. Fair values of long-term
investments (including the deferred compensation plan assets), long-term debt,
interest rate derivatives, currency forward contracts and currency options are
based on quoted market prices or pricing models using prevailing financial
market information as of May 28, 2006 and May 29, 2005. The estimated fair value
of long-term debt was $21.1 million at May 28, 2006 and $23.0 million at May 29,
2005. See Note 2 to the Consolidated Financial Statements for fair values of
marketable securities and derivative financial instruments.
Employee Stock Plans
We account for our employee stock option and stock purchase plans in accordance
with the intrinsic method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." See Note 10 to the Consolidated
Financial Statements for more complete information on our stock-based
compensation plans. The adoption of SFAS No. 123 (revised 2004), "Share-Based
Payment," will be effective at the beginning of our 2007 fiscal year.
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 fiscal 2006, 2005 and 2004 was $14.82, $11.73 and
$8.45 per share, respectively. The weighted-average fair value of rights granted
under the stock purchase plans was $6.55, $5.01 and $3.90 per share for fiscal
2006, 2005 and 2004, respectively. The fair value of the stock-based awards to
employees was estimated using a Black-Scholes option pricing model that uses the
following weighted-average assumptions for fiscal 2006, 2005 and 2004:
2006 2005 2004
------------------ ----------------- ------------------
STOCK OPTION PLANS
Expected life (in years) 5.3 5.2 4.9
Expected volatility 66% 71% 75%
Risk-free interest rate 4.2% 3.4% 3.3%
Dividend Yield* 0.3% - -
2006 2005 2004
------------------ ----------------- ------------------
STOCK PURCHASE PLANS
Expected life (in years) 0.7 0.6 0.4
Expected volatility 31% 47% 46%
Risk-free interest rate 3.5% 1.9% 1.3%
Dividend Yield 0.4% 0.4% -
* The weighted-average expected dividend yield calculation for stock option
plans in fiscal 2005 was less than 0.01 percent since the majority of the stock
options included in the calculation were granted prior to any expectation of
dividend payments.
For pro forma purposes, the estimated fair value of stock-based awards to
employees is amortized over the options' vesting period for options and the
various quarterly purchase periods within the one-year offering period for stock
purchases under the stock purchase plan.
The pro forma information follows:
(In Millions, Except Per Share Amounts) 2006 2005 2004
-------------- -------------- ---------------
Net income - as reported $449.2 $415.3 $282.8
Add back: Stock compensation charge included in
net income determined under the intrinsic
value method, net of tax 10.6 3.2 2.2
Deduct: Total stock-based employee compensation
expense determined under the fair value method,
net of tax benefit (expense) 35.9 16.1 (187.0)
-------------- -------------- ---------------
Net income - pro forma $495.7 $434.6 $ 98.0
============== ============== ===============
Basic earnings per share - as reported $ 1.32 $ 1.17 $ 0.78
Basic earnings per share - pro forma $ 1.46 $ 1.23 $ 0.27
Diluted earnings per share - as reported $ 1.26 $ 1.11 $ 0.73
Diluted earnings per share - pro forma* $ 1.39 $ 1.16 $ 0.25
* Pro forma diluted earnings per share for fiscal 2005 and 2004 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 fiscal 2005 and 2004. Pro forma diluted earnings per share for fiscal
2006 reflects the effect of unamortized compensation.
The tax effect on the pro forma stock compensation expense for 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 obligation to provide continuous 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 in calculating the pro forma amounts
disclosed in the table above, the pre-tax stock-based compensation expense would
have been lower by $23.2 million in fiscal 2006 and $28.9 million in fiscal
2005, while it would have been higher by $21.5 million in fiscal 2004.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Accounting Change Affecting Results of Operations
In 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 fiscal 2006 operating results is approximately $0.7
million of net income and no impact to diluted earnings per 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.
New Accounting Pronouncements
We adopted SFAS No. 153, "Exchanges of Non-monetary Assets, an amendment of APB
Opinion No. 20, Accounting for Non-monetary Transactions," at the beginning of
our fiscal 2006 second quarter. The amendments made by this Statement are based
on the principle that exchanges of non-monetary assets should be measured based
on the fair value of the assets exchanged. This Statement also eliminates the
exception for non-monetary exchanges of similar productive assets and replaces
it with a broader exception for exchanges of non-monetary 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 fiscal 2006. This
amount is included in selling, general and administrative expense in the
consolidated statement of income.
Reclassifications
Certain amounts in the Consolidated Financial Statements and Notes to
Consolidated Financial Statements for prior years have been reclassified to
conform to the fiscal 2006 presentation. Net operating results have not been
affected by these reclassifications.
Note 2. Financial Instruments
Cash Equivalents
Our policy is to diversify our investment portfolio to minimize the exposure of
our principal to credit, geographic and investment sector risk. At May 28, 2006,
investments were placed with a variety of different financial institutions and
other issuers. Investments with maturity of less than one year have a rating of
A1/P1 or better. Investments with maturity of more than one year have a minimum
rating of AA/Aa2.
Our cash equivalents consisted of the following as of May 28, 2006 and May
29, 2005:
(In Millions) 2006 2005
-------------- ---------------
CASH EQUIVALENTS
Available-for-sale securities:
Institutional money market funds $354.0 $377.5
Commercial paper 115.7 -
-------------- ---------------
469.7 377.5
Held-to-maturity securities:
Bank time deposits 364.5 372.3
-------------- ---------------
Total cash equivalents $834.2 $749.8
============== ===============
Marketable investments at fiscal year-end comprised:
Gross Gross
Amortized Unrealized Unrealized Estimated
(In Millions) Cost Gains Losses Fair Value
------------- ------------- ------------- -------------
2006
SHORT-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Callable agencies $ 110.7 $ - $ (0.4) $ 110.3
------------- ------------- ------------- -------------
Total short-term marketable investments $ 110.7 $ - $ (0.4) $ 110.3
============= ============= ============= =============
LONG-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Equity securities $ 0.0 $ 0.1 $ - $ 0.1
------------- ------------- ------------- -------------
Total long-term marketable investments $ 0.0 $ 0.1 $ - $ 0.1
============= ============= ============= =============
2005
SHORT-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Callable agencies $ 157.6 $ - $ (2.5) $ 155.1
------------- ------------- ------------- -------------
Total short-term marketable investments $ 157.6 $ - $ (2.5) $ 155.1
============= ============= ============= =============
LONG-TERM MARKETABLE INVESTMENTS
Available-for-sale securities:
Equity securities $ 0.8 $ 2.1 $ - $ 2.9
------------- ------------- ------------- -------------
Total long-term marketable investments $ 0.8 $ 2.1 $ - $ 2.9
============= ============= ============= =============
Net unrealized losses on available-for-sale securities of $0.3 million at
May 28, 2006 and $0.4 million at May 29, 2005 are included in accumulated other
comprehensive loss. The related tax effects are not significant. Long-term
marketable investments of $0.1 million at May 28, 2006 and $2.9 million at May
29, 2005 are included in other assets.
We recognized gross realized gains of $4.7 million on available-for-sale
securities in fiscal 2006 and $0.5 million in fiscal 2004. No gross realized
gains on available-for-sale securities were recognized in fiscal 2005 and no
impairment losses on available-for-sale securities were recognized in fiscal
2006, 2005 and 2004.
For non-marketable investments, we recognized gross realized gains of $5.4
million in fiscal 2006, $0.7 million in fiscal 2005 and $6.4 million in fiscal
2004, which came primarily from the sale of shares and acquisitions by third
parties. We recognized impairment losses on non-marketable investments of $4.2
million in fiscal 2006 and $0.3 million in fiscal 2004. No impairment losses
were recognized in fiscal 2005.
Debt securities of $110.3 million at May 28, 2006 are all scheduled to
mature in fiscal 2007.
Derivative Financial Instruments
The objective of our foreign exchange risk management policy is to preserve the
U.S. dollar value of after-tax cash inflow in relation to non-U.S. dollar
currency movements. We are exposed to foreign currency exchange rate risk that
is inherent in orders, sales, cost of sales, expenses, and assets and
liabilities denominated in currencies other than the U.S. dollar. We enter into
foreign exchange contracts, primarily forwards and purchased options, to hedge
against exposure to changes in foreign currency exchange rates. These contracts
are matched at inception to the related foreign currency exposures that are
being hedged. Exposures which are hedged include sales by subsidiaries, and
assets and liabilities denominated in currencies other than the U.S. dollar. Our
foreign currency hedges typically mature within one year.
We measure hedge effectiveness for foreign currency forward contracts by
comparing the cumulative change in the hedge contract with the cumulative change
in the hedged item, both of which are based on forward rates. For purchased
options, we measure hedge effectiveness by the change in the option's intrinsic
value, which represents the change in the forward rate relative to the option's
strike price. Any changes in the time value of the option are excluded from the
assessment of effectiveness of the hedge and recognized in current earnings.
We designate derivative instruments that are used to hedge exposures to
variability in expected future foreign denominated cash flows as cash flow
hedges. We record the effective portion of the gains or losses on the derivative
instrument in accumulated other comprehensive loss as a separate component of
shareholders' equity and reclassify amounts into earnings in the period when the
hedged transaction affects earnings. For cash flow hedges the maximum length of
time we hedge our exposure is 3 to 6 months. Derivative instruments that we use
to hedge exposures to reduce or eliminate changes in the fair value of an asset
or liability denominated in foreign currency are designated as fair value
hedges. The gain or loss on the derivative instrument, as well as the offsetting
gain or loss on the hedged item attributable to the hedged risk, is included in
selling, general and administrative expenses. The effective portion of all
changes in these derivative instruments is reported in the same financial
statement line item as the changes in the hedged item.
We are also exposed to variable cash flow that is inherent in our
variable-rate debt. We use an interest rate swap to convert the variable
interest payments to fixed interest payments. We designate this derivative as a
cash flow hedge. We recognize interest expense as cash settlements are paid or
received.
We report hedge ineffectiveness from foreign currency derivatives for both
forward contracts and options in current earnings. We also report
ineffectiveness related to interest rate swaps in current earnings. Hedge
ineffectiveness was not material for fiscal 2006, 2005 or 2004. No cash flow
hedges were terminated as a result of forecasted transactions that did not
occur.
At May 28, 2006, there was no net amount of existing gains or losses from
cash flow hedges expected to be reclassified into earnings within the next year.
We recognized a $0.3 million net realized loss from cash flow hedges and a $0.1
million net realized gain from fair value hedges in fiscal 2006. In fiscal 2005,
we recognized a $0.3 million net realized loss from cash flow hedges and a $0.4
million net realized gain from fair value hedges. In fiscal 2004, we recognized
a $0.6 million net realized loss from cash flow hedges and a $1.6 million net
realized gain from fair value hedges.
Fair Value and Notional Principal of Derivative Financial Instruments
The table below shows the fair value and notional principal of derivative
financial instruments as of May 28, 2006 and May 29, 2005. The notional
principal amounts for derivative financial instruments provide one measure of
the transaction volume outstanding as of year-end and do not represent the
amount of the exposure to credit or market loss. The estimates of fair value are
based on applicable and commonly used pricing models using prevailing financial
market information as of May 28, 2006 and May 29, 2005. The fair value of
interest rate swap agreements represents the estimated amount we would receive
or pay to terminate the agreements taking into consideration current interest
rates. The fair value of forward foreign currency exchange contracts represents
the present value difference between the stated forward contract rate and the
current market forward rate at settlement. The fair value of foreign currency
option contracts represents the probable weighted net amount we would expect to
receive at maturity. The credit risk amount shown in the table represents the
gross exposure to potential accounting loss on these transactions if all counter
parties failed to perform according to the terms of the contract, based on the
then-current currency exchange rate or interest rate at each respective date.
Although the following table reflects the notional principal, fair value and
credit risk amounts of the derivative financial instruments, it does not reflect
the gains or losses associated with the exposures and transactions that the
derivative financial instruments are intended to hedge. The amounts ultimately
realized upon settlement of these financial instruments, together with the gains
and losses on the underlying exposures, will depend on actual market conditions
during the remaining life of the instruments.
Carrying Notional Estimated Credit
(In Millions) Amount Principal Fair Value Risk
-------------- ------------ ------------ -------------
2006
INTEREST RATE INSTRUMENTS
Swaps:
Variable to fixed $ - $ 20.9 $ - $ -
============== ============ ============ =============
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts - To sell dollars:
Pound sterling $ - $ 7.2 $ - $ 0.1
Singapore dollar 0.1 9.0 0.1 0.2
-------------- ------------ ------------ -------------
Total $ 0.1 $ 16.2 $ 0.1 $ 0.3
============== ============ ============ =============
Purchased options:
Japanese yen $ 0.2 $ 21.0 $ 0.2 $ 0.1
============== ============ ============ =============
2005
INTEREST RATE INSTRUMENTS
Swaps:
Variable to fixed $ - $ 22.7 $ (0.2) $ -
============== ============ ============ =============
FOREIGN EXCHANGE INSTRUMENTS
Forward contracts - To sell dollars:
Pound sterling $ - $ 3.7 $ - $ -
Singapore dollar - 6.1 - -
-------------- ------------ ------------ -------------
Total $ - $ 9.8 $ - $ -
============== ============ ============ =============
Purchased options:
Japanese yen $ - $ 3.0 $ - $ -
============== ============ ============ =============
Concentrations of Credit Risk
Financial instruments that may subject us to concentrations of credit risk are
primarily investments and trade receivables. Our investment policy requires cash
investments to be placed with high-credit quality counter parties and limits the
amount of investments with any one financial institution or direct issuer. We
sell our products to distributors and manufacturers involved in a variety of
industries including computers and peripherals, wireless communications and
automotive. We perform continuing credit evaluations of our customers whenever
necessary and we generally do not require collateral. Our top ten customers
combined represented approximately 64 percent of total accounts receivable at
May 28, 2006 and approximately 49 percent at May 29, 2005. In fiscal 2006, we
had two distributors who each accounted for approximately 12 percent of total
net sales. In fiscal 2005 and 2004, we had one distributor who accounted for
approximately 11 percent of total net sales and another distributor who
accounted for approximately 10 percent of total net sales in each year. Sales to
these distributors are mostly for our Analog segment products, but also include
some sales for our other operating segment products. Historically, we have not
experienced significant losses related to receivables from individual customers
or groups of customers in any particular industry or geographic area.
Note 3. Cost Reduction Programs and Restructuring of Operations
Fiscal 2006
We reported net charges of $33.7 million for severance and restructuring
expenses related to the actions described below. These actions reflect our
strategy of continued focus on our analog capabilities and on higher value-added
analog products that generate higher gross margins and produce higher returns on
invested capital.
In November 2005, we took steps to improve our competitive cost structure
by reducing indirect manufacturing costs, mainly at 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.
Severance payments are generally paid 30-60 days after the employee's actual
departure date.
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 has
impacted approximately 973 employees who were notified of termination at the
time we announced our decision to close the plant. Our management team in
Singapore has been working with local government agencies and other employers on
job placement opportunities for these affected employees. Departure dates of
these employees were to coincide with the phased timing of the plant closure
activities. As of May 28, 2006, 799 employees have departed and the remaining
employees are expected to depart by the end of our first quarter in fiscal 2007.
In connection with this action, we recorded a charge of $28.2 million, primarily
for severance. Non-cash charges of $0.1 million are also included in this amount
for 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 these charges, we recorded a net charge of $3.5 million for
additional cost reduction actions primarily 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 $2.6
million of severance for 29 employees, most of whom have departed, with the
remaining employees expected to depart early in the first quarter of fiscal 2007
and $0.9 million of other exit-related costs for a lease obligation.
The charges described above were partially offset by $0.7 million credit
for the release of severance and other exit-related cost accruals no longer
required due to completion of activities related to prior cost reduction
actions.
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 March 2006, we entered into an agreement to sell a small business unit
that was developing high definition products (HDP) to Marvell International Ltd.
Our HDP business unit was an operating segment with insignificant revenues that
was included within the Analog reportable segment. Under the terms of the
agreement Marvell acquired intellectual property and certain assets of the HDP
business for $7.0 million. The tangible assets of this unit, primarily machinery
and equipment, had a carrying value of $0.4 million. The remaining intangible
assets of the business were evaluated for impairment upon the signing of the
agreement. As a result of that evaluation, we recorded a $5.2 million goodwill
impairment loss and a $1.8 million impairment loss on an intangible asset in
fiscal 2006 to adjust the carrying values of the remaining assets of the
business to their recoverable fair values. The sale transaction was completed in
April 2006, at which time we recorded a $0.6 million gain that is included in
our results of operations for fiscal 2006. We also have a separate agreement
under which we will manufacture product for Marvell at prices specified by the
terms of the agreement, which we believe approximate market prices. The product
manufacturing agreement will be effective through November 2007, unless
terminated earlier in accordance with its terms.
In June 2005, we completed the sale of our cordless business unit to
HgCapital, a private equity investor based in London, U.K. The sale was
originally announced at the end of fiscal 2005. 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 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. At May 29, 2005, the assets
acquired by HgCapital were classified as "Assets Held for Sale" and are included
in Other Assets on the consolidated balance sheet. We also have separate
agreements under which we will manufacture product for HgCapital at prices
specified by the terms of the agreements, which we believe approximate market
prices; and we will also provide HgCapital 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.
The following table provides a summary of the cost reduction charges by
segment recorded in fiscal 2006:
Analog
(In Millions) Segment All Others Total
-------------- ------------- -------------
Cost reduction program charge:
Singapore plant closure:
Severance $ - $28.1 $28.1
Asset write-off - 0.1 0.1
Streamline operations:
Severance 0.4 2.3 2.7
Business reorganization:
Severance 0.7 1.9 2.6
Other exit-related costs - 0.9 0.9
-------------- ------------- -------------
1.1 33.3 34.4
Release of reserves:
Severance (0.2) (0.5) (0.7)
-------------- ------------- -------------
Total cost reduction program charge $ 0.9 $32.8 $33.7
============== ============= =============
Of the actions that resulted in charges being incurred in fiscal 2006,
some, but not all of these actions were commenced prior to fiscal 2006. The
following table presents a summary of cumulative charges for all actions that
had charges recorded in fiscal 2006:
Analog
(In Millions) Segment All Others Total
-------------- ------------- -------------
Singapore plant closure:
Fiscal 2006:
Severance $ - $28.1 $28.1
Asset write-off - 0.1 0.1
-------------- ------------- -------------
- 28.2 28.2
-------------- ------------- -------------
Streamline operations:
Fiscal 2006:
Severance 0.4 2.3 2.7
Fiscal 2005:
Severance 1.6 19.6 21.2
-------------- ------------- -------------
2.0 21.9 23.9
-------------- ------------- -------------
Business reorganization:
Fiscal 2006:
Severance 0.7 1.9 2.6
Other exit-related costs - 0.9 0.9
Fiscal 2005:
Severance 0.3 1.5 1.8
-------------- ------------- -------------
1.0 4.3 5.3
-------------- ------------- -------------
Release of reserves:
Fiscal 2006:
Severance (0.2) - (0.2)
-------------- ------------- -------------
Total $ 2.8 $54.4 $57.2
============== ============= =============
Fiscal 2005
We reported net charges of $23.9 million for cost reduction and restructuring
charges related to the actions described below. Our cost reduction and
restructuring actions in fiscal 2005 were consistent with our strategy of
focusing on our analog product capabilities.
In May 2005, we recorded net charges of $2.6 million for cost reduction
actions which included $1.8 million of severance for 26 employees, primarily
resulting from a reorganization of our business operations. The departure of
these employees was completed in the first quarter of fiscal 2006. Also included
was a charge of $1.3 million for a lease obligation on a facility we vacated in
connection with a prior cost reduction action that we believed we could not
sublease. These charges were partially offset by a $0.5 million credit
recognized upon the completion of activities related to prior cost reduction
actions.
In January 2005, we announced actions to reduce expenses and streamline
manufacturing in response to underutilization of our manufacturing facilities
experienced during fiscal 2005. This resulted in a reduction-in-force of 525
employees, consisting of 421 employees working in our manufacturing facilities
worldwide and 104 employees from product lines and support functions at various
sites, including our headquarters in Santa Clara. The majority of the affected
employees had departed by the end of fiscal 2005. The total charge of $21.2
million, primarily related to severance, was partially offset by a $1.1 million
credit recognized upon the completion of activities related to prior cost
reduction actions. The credit included a $0.6 million release of an accrual for
other exit-related costs, primarily coming from lease obligations where we were
able to obtain subleases on more favorable terms than originally estimated and a
$0.5 million release of an accrual for residual severance costs representing the
difference between the actual amounts paid and our original estimated amounts.
We recorded a gain of $8.8 million in fiscal 2005 upon completion of the
sale of certain intellectual property, inventory and equipment of our imaging
business to Eastman Kodak Company in September 2004. The imaging business was an
operating segment within our Analog reportable segment. The carrying value of
the assets sold was $0.9 million. As part of the transaction, Kodak also hired
47 former National employees. Since an intangible asset and certain employees
that directly supported the imaging business were not included in the sale, we
incurred cost reduction charges for severance for those employees and for the
impairment of the asset at the time we announced the sale of the imaging
business in late August 2004. Operating results for fiscal 2005 also include a
$1.2 million cost reduction charge for the imaging severance and impairment loss
as well as severance charges related to other cost reduction actions in the
first quarter.
We recorded a gain of $51.1 million upon close of the sale in May 2005 of
our PC Super I/O business to Winbond Electronics Corporation. The PC Super I/O
business was a part of our Advanced PC operating segment that was reported under
"All Others." Under the terms of the agreement, Winbond acquired intellectual
property and certain assets. The carrying value of the assets sold was $0.8
million. In addition, Winbond hired approximately 150 employees, most of whom
were based at our research and design center in Herzlia, Israel.
Further detail related to cost reduction and restructuring charges
discussed above is presented in the following table:
Analog
(In Millions) Segment All Others Total
-------------- --------------- --------------
Cost reduction and restructuring charges:
Business reorganization:
Severance $ 0.3 $ 1.5 $ 1.8
Streamline operations:
Severance 1.6 19.6 21.2
Imaging business divestiture:
Severance costs 0.3 0.4 0.7
Intangible asset write-off 0.5 - 0.5
Other exit-related costs - 1.3 1.3
-------------- --------------- --------------
2.7 22.8 25.5
-------------- --------------- --------------
Release of reserves:
Severance (0.1) (0.7) (0.8)
Other exit-related costs - (0.8) (0.8)
-------------- --------------- --------------
(0.1) (1.5) (1.6)
-------------- --------------- --------------
Total cost reduction and restructuring charges $ 2.6 $21.3 $23.9
============== =============== ==============
In the table above, the write-off of the intangible asset that was a part
of the imaging business was a non-cash charge. In connection with the PC Super
I/O and imaging dispositions, we also entered into separate agreements with the
buyers where we will manufacture product for them at prices specified by the
terms of the agreements, which we believe approximate market prices, and provide
certain transition services at rates that approximate fair market value. These
agreements are effective for one to three years, unless terminated earlier as
permitted under their terms.
Fiscal 2004
We reported a net charge of $19.6 million for cost reduction and restructuring
charges related to the actions described below. Our cost reduction and
restructuring charges in fiscal 2004 primarily related to the profit-improvement
actions begun in February 2003.
During fiscal 2004, we substantially completed all cost reduction
activities related to the strategic profit-improvement actions initially
launched in February 2003. Consistent with the objectives of those actions, we
also continued to take supplemental actions during fiscal 2004, primarily for
workforce reductions in various manufacturing, product development and support
areas. Cost reduction charges related to these supplemental actions included
severance costs, as well as asset write-offs and lease obligations we incurred
upon vacating certain manufacturing and design center facilities during the year
upon closure of those operations.
In addition to these supplemental actions, we also completed the exit and
sale of our information appliance business in late August 2003. This included
the sale to AMD of certain intellectual property and assets of the information
appliance business. As part of the transaction, AMD hired 125 former National
employees who were mostly located in Longmont, Colorado. However, certain
information appliance assets were not included in the sale and certain employees
that were directly supporting the information appliance business were not hired
by AMD, which resulted in additional severance and asset impairment charges.
These charges were reduced by proceeds of $10.1 million from the sale of assets
that had a carrying value of $7.5 million less transaction costs of $1.3
million. A total of 238 employees were terminated in fiscal 2004 as a combined
result of the exit from the information appliance business and the other
supplemental actions.
The charges for the supplemental actions and the exit of our information
appliance business were partially offset by a $3.9 million credit for the
release of severance and other exit-related cost accruals no longer required. A
large portion of the accruals for severance costs was for employees in the
information appliance business and the cellular baseband business (closed at the
end of fiscal 2003), but the actual severance costs were lower than originally
expected because of some voluntary terminations and more employees eventually
being hired by AMD in the information appliance disposition than originally
expected.
Total net charges related to cost reduction actions in fiscal 2004,
including the sale to AMD of the assets of the information appliance business,
are presented in the following table:
Analog
(In Millions) Segment All Others Total
-------------- ------------- -------------
Cost reduction and restructuring charges:
Severance $ 5.7 $ 6.8 $12.5
Exit-related costs 2.9 3.7 6.6
Asset write-off 1.2 4.5 5.7
-------------- ------------- -------------
9.8 15.0 24.8
-------------- ------------- -------------
Release of reserves:
Severance (0.5) (2.8) (3.3)
Other exit-related costs (0.3) (0.3) (0.6)
-------------- ------------- -------------
(0.8) (3.1) (3.9)
-------------- ------------- -------------
Gain from sale of IA business assets - (1.3) (1.3)
-------------- ------------- -------------
Total cost reduction and restructuring charges $ 9.0 $10.6 $19.6
============== ============= =============
In the table above, the write-off of assets are non-cash charges and are
attributed primarily to equipment and a technology license that were dedicated
to the information appliance and cellular baseband businesses. The cellular
baseband business was closed at the end of fiscal 2003 as part of our
profit-improvement plan. In connection with the information appliance
disposition to AMD discussed above, we also entered into a separate supply
agreement where we manufacture product for AMD at prices specified by the terms
of the agreement, which we believe approximate market prices. This agreement is
effective for three years unless terminated earlier as permitted under its
terms.
Summary of Activities
The following table provides a summary of the activities related to our
cost reduction and restructuring accruals during fiscal 2006, 2005 and 2004:
Cost Reduction and
Restructuring Actions
Fiscal 2006 Actions * In Prior Years
--------------------------------- ------------------------
(A) (B) (C) Other
---------- ---------- ---------- Exit-Related
(In Millions) Severance Severance Costs Total
--------------------------------- ------------- ----------- -----------
Balance at May 25, 2003 $ - $ - $ - $ 17.5 $ 7.8 $ 25.3
Cost reduction charges - - - 12.5 6.6 19.1
Cash payments - - - (23.3) (6.3) (29.6)
Release of residual reserves - - - (3.3) (0.6) (3.9)
---------- ---------- ----------- ------------ ----------- -- -----------
Balance at May 30, 2004 - - - 3.4 7.5 10.9
Cost reduction charges - - - 23.7 1.3 25.0
Cash payments - - - (21.9) (2.1) (24.0)
Release of residual reserves - - - (0.8) (0.8) (1.6)
---------- ---------- ----------- ------------ ----------- -----------
Balance at May 29, 2005 - - - 4.4 5.9 10.3
Cost reduction charges 28.1 2.7 0.8 1.8 0.9 34.3
Cash payments (21.6) (2.7) (0.4) (4.0) (1.2) (29.9)
Release of residual reserves - - - (0.6) (0.1) (0.7)
---------- ---------- ----------- ------------ ----------- -----------
Balance at May 28, 2006 $ 6.5 $ - $ 0.4 $ 1.6 $ 5.5 $ 14.0
Less non-current portion of lease
obligations included in other
non-current liabilities - - - - (4.9) (4.9)
---------- ---------- ----------- ------------ ----------- -----------
Balance included in accrued expenses $ 6.5 $ - $ 0.4 $ 1.6 $ 0.6 $ 9.1
========== ========== =========== ============ =========== ===========
------------------------------------------ ---------- ---------- ----------- -- ------------ ----------- -- -----------
* Fiscal 2006 Actions:
(A) Streamline operations
(B) Singapore plant closure
(C) Business reorganization
During fiscal 2006 we paid severance to 897 employees in connection with
workforce reductions related to actions that occurred in fiscal 2006 and 2005.
Amounts paid for other exit-related costs during fiscal 2006 were primarily for
payments under lease obligations associated with actions taken in prior years.
The balances at May 28, 2006 represent all remaining estimated costs for
activities yet to be completed as a result of the described cost reduction
actions. Payments for the total remaining $8.5 million of severance balances are
expected to be substantially completed by the end of the first quarter in fiscal
2007. Other exit-related costs of $5.5 million primarily relate to lease
obligations, which are expected to be paid through lease expiration dates that
range from July 2006 through June 2009.
Note 4. Consolidated Financial Statement Details
Consolidated Balance Sheets
(In Millions) 2006 2005
-------------- ---------------
RECEIVABLE ALLOWANCES
Doubtful accounts $ 1.5 $ 1.7
Returns and allowances 37.3 25.0
-------------- ---------------
Total receivable allowances $ 38.8 $ 26.7
============== ===============
INVENTORIES
Raw materials $ 17.7 $ 11.0
Work in process 109.7 102.4
Finished goods 62.0 56.8
-------------- ---------------
Total inventories $ 189.4 $ 170.2
============== ===============
PROPERTY, PLANT AND EQUIPMENT
Land $ 30.0 $ 30.0
Buildings and improvements 544.0 539.8
Machinery and equipment 1,975.5 1,972.9
Internal-use software 111.3 113.4
Construction in progress 71.6 10.6
-------------- ---------------
Total property, plant and equipment 2,732.4 2,666.7
Less accumulated depreciation and amortization (2,104.7) (2,061.6)
-------------- ---------------
Property, plant and equipment, net $ 627.7 $ 605.1
============== ===============
OTHER ASSETS
Deposits $ 45.0 $ 44.6
Deferred compensation plan assets 42.6 37.2
Other 12.3 24.4
-------------- ---------------
Total other assets $ 99.9 $ 106.2
============== ===============
ACCRUED EXPENSES
Payroll and employee related $ 119.3 $ 77.3
Severance and restructuring expenses 9.1 5.3
Litigation accruals 3.3 3.3
Other 59.3 57.7
-------------- ---------------
Total accrued expenses $ 191.0 $ 143.6
============== ===============
OTHER NON-CURRENT LIABILITIES
Accrued pension cost $ 92.9 $ 83.8
Deferred compensation plan liability 42.6 37.2
Other 30.1 21.1
-------------- ---------------
Total other non-current liabilities $ 165.6 $ 142.1
============== ===============
ACCUMULATED OTHER COMPREHENSIVE LOSS
Unrealized loss on available-for-sale securities $ (0.3) $ (0.4)
Minimum pension liability (113.2) (97.8)
-------------- ---------------
Accumulated other comprehensive loss $ (113.5) $ (98.2)
============== ===============
Consolidated Statements of Income
(In Millions) 2006 2005 2004
------------- ------------- ------------
OTHER OPERATING (INCOME) EXPENSE, NET
Litigation $ - $ (7.1) $ 30.0
Manufacturer's Investment Credit refund - (7.4) -
Net intellectual property income (4.1) (5.2) (11.1)
Intangible asset impairment 1.8 - -
Net intellectual property settlements (3.4) 1.7 3.1
------------- ------------- ------------
Total other operating (income) expense, net $ (5.7) $ (18.0) $ 22.0
============= ============= ============
INTEREST INCOME, NET
Interest income $ 33.7 $ 17.4 $ 11.6
Interest expense (1.9) (1.5) (1.2)
------------- ------------- ------------
Interest income, net $ 31.8 $ 15.9 $ 10.4
============= ============= ============
OTHER NON-OPERATING EXPENSE, NET
Net gain on marketable and other investments, net:
Trading securities:
Change in net unrealized holding gains $ 2.4 $ 0.6 $ 2.4
Available-for-sale securities:
Gain from sale 4.7 - 0.5
Non-marketable investments:
Gain from sale 5.4 0.7 6.4
Impairment losses (4.2) - (0.3)
Other investments - - 0.4
------------ -------------- ------------
Total net gain on marketable and other investments, net 8.3 1.3 9.4
Share in net losses of equity-method investments (0.7) (5.7) (14.1)
Charitable contribution (9.7) - -
Other - (0.5) 0.2
------------ -------------- ------------
Total other non-operating expense, net $ (2.1) $ (4.9) $ (4.5)
============ ============== ============
Note 5. Goodwill and Intangible Assets
The following table presents goodwill by reportable segments:
Analog
(In Millions) Segment All Others Total
--------------- -------------- --------------
Balances at May 30, 2004 $ 150.6 $ 22.7 $ 173.3
Impairment (86.1) - (86.1)
--------------- -------------- --------------
Balances at May 29, 2005 64.5 22.7 87.2
Reduction in connection with the
sale of the cordless business (22.3) - (22.3)
Impairment (7.6) - (7.6)
--------------- -------------- --------------
Balances at May 28, 2006 $ 34.6 $ 22.7 $ 57.3
=============== ============== ==============
In fiscal 2006, we recorded a $5.2 million impairment loss for goodwill of
the HDP reporting unit, which arose in connection with our decision to sell the
HDP business. We also recorded an additional $2.4 million impairment loss for
goodwill of the CRT reporting unit, which arose in connection with our annual
evaluation of goodwill in our fiscal fourth quarter. In fiscal 2005, we recorded
an $86.1 million impairment loss for goodwill of the wireless reporting unit,
which arose in connection with our annual evaluation of goodwill in fiscal 2005.
The fair values of these reporting units were determined using a discounted cash
flow approach that incorporated our estimates of future sales and costs for
these business units.
In June 2005, we completed the sale of the cordless business unit which was
a reporting unit of the wireless operating segment within the Analog reportable
segment (See Note 3 to the Consolidated Financial Statements). As a result, the
remaining assets of the reporting unit, including goodwill, that were not
acquired by the buyer were written off against the proceeds from the sale.
Other intangible assets, which are included in other assets in the
accompanying consolidated balance sheet:
Weighted-Average Weighted-Average
Amortization Period Amortization Period
(In Millions) 2006 (Years) 2005 (Years)
------------- --------------------- --------------- ---------------------
Patents $ 4.9 5.0 $ 4.9 5.0
Unpatented technology 0.8 2.4 18.6 5.8
------------- ---------------
5.7 23.5
Less accumulated amortization (5.7) (13.6)
------------- ---------------
$ - 4.6 $ 9.9 5.7
============= ===============
Amortization expense was:
(In Millions) 2006 2005 2004
------------ ----------- -----------
Patent amortization $ 0.3 $ 1.0 $ 1.0
Technology amortization 2.2 3.0 3.3
------------ ----------- -----------
Total amortization $ 2.5 $ 4.0 $ 4.3
============ =========== ===========
Beginning in fiscal 2005, we have classified the amortization expense of
these intangible assets as R&D expenses. Amounts reported in fiscal 2004 have
been reclassified to conform with this presentation.
Note 6. Asset Retirement Obligations
We adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," at the
beginning of fiscal 2004. This Statement requires that the fair value of a legal
liability for an asset retirement obligation be recorded in the period in which
it is incurred if a reasonable estimate of fair value can be made. Upon
recognition of a liability, the asset retirement cost is recorded as an increase
in the carrying value of the related long-lived asset and then depreciated over
the life of the asset. Our asset retirement obligations arise primarily from
contractual commitments to decontaminate machinery and equipment used at our
manufacturing facilities at the time we dispose of or replace them. We also have
leased facilities where we have asset retirement obligations from contractual
commitments to remove leasehold improvements and return the property to a
specified condition when the lease terminates. As a result of our evaluation of
our asset retirement obligations, we recorded a $2.1 million non-current
liability for asset retirement obligations and a $0.4 million increase in the
carrying value of the related assets, net of $1.0 million of accumulated
depreciation at the beginning of fiscal 2004. The cumulative effect that was
recorded in the first quarter of fiscal 2004 upon the adoption of this
accounting standard resulted in a charge of $1.9 million, including a tax effect
of $0.2 million.
At the time we adopted SFAS No. 143, we did not recognize any asset
retirement obligations associated with the closure or abandonment of the
manufacturing facilities we own. Our legal asset retirement obligations for
manufacturing facilities arise primarily from local laws and statutes that
establish minimum standards or requirements for companies in that locale in the
event it were to shut down or otherwise exit or abandon a manufacturing
facility. The Financial Accounting Standards Board has since published FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations," which clarified that the timing and (or) method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. Therefore, we considered
these factors and evaluated the asset retirement obligations associated with the
closure or abandonment of our manufacturing facilities. As a result, we
determined that the asset retirement obligations related to these facilities
were immaterial to our financial condition and results of operations. However,
we announced in July 2005 that we were closing our assembly and test facility in
Singapore and consolidating its production volume into our other assembly and
test facilities in Malaysia and China. The majority of the activities associated
with the closure have occurred through fiscal 2006 and we expect the remaining
closure activities to be completed by the end of the first quarter in fiscal
2007. We do not expect to incur any significant asset retirement costs in excess
of amounts accrued associated with the closure of this facility (See Note 3 to
the Consolidated Financial Statements).
The following table presents the activity for the asset retirement
obligations included in other non-current liabilities for the years ended May
28, 2006 and May 29, 2005:
(In Millions)
-----------------------
Balance at May 30, 2004 $ 2.5
Liability incurred for assets acquired 0.1
Accretion expense 0.2
-----------------------
Balance at May 29, 2005 2.8
Liability incurred for assets acquired 0.4
Liability settled (0.1)
Revision in estimated cash flows (0.1)
Accretion expense 0.1
-----------------------
Balance at May 28, 2006 $ 3.1
=======================
Note 7. Debt
Debt at fiscal year-end consisted of the following:
(In Millions) 2006 2005
------------- ------------
Unsecured promissory note at 1.8% $20.9 $22.8
Other 0.2 0.2
------------- ------------
Total debt 21.1 23.0
Less current portion of long-term debt - -
------------- ------------
Long-term debt $21.1 $23.0
============= ============
The unsecured promissory note, due August 2007, is denominated in Japanese
yen (2,408,750,000). Interest is based on 1.375 percent over the 3-month
Japanese LIBOR rate and is reset quarterly. Under the terms of the note, we are
also required to comply with the covenants set forth under our multicurrency
credit agreement, which was renewed in October 2005. As of May 28, 2006,
maturities on our outstanding debt obligations were $20.9 million in fiscal 2008
and $0.2 million in fiscal 2013.
We have a multicurrency credit agreement with a bank that provides for
multicurrency loans, letters of credit and standby letters of credit. The total
amount of credit under the agreement is $20 million. The agreement expires in
October 2006, and we expect to renew or replace it prior to expiration. At May
28, 2006, we had committed $7.6 million of the credit available under the
agreement. This agreement contains restrictive covenants, conditions and default
provisions that, among other terms, restrict payment of dividends and require
the maintenance of financial ratios and certain levels of tangible net worth.
Under the agreement as it was last amended, 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
May 28, 2006, we were in compliance with all financial covenants under the
agreement.
Note 8. Income Taxes
Worldwide pretax income from operations and income taxes consist of the
following:
(In Millions) 2006 2005 2004
-------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE
U.S. $ 555.1 $ 338.0 $ 267.3
Non-U.S. 140.1 71.9 66.4
-------------- ------------- -------------
$ 695.2 $ 409.9 $ 333.7
INCOME TAX EXPENSE (BENEFIT)
Current:
U.S. federal, state and local $ 157.0 $ 30.4 $ 33.8
Non-U.S. 18.7 29.3 15.2
-------------- ------------- -------------
175.7 59.7 49.0
Deferred:
U.S. federal and state 64.6 (41.0) (1.7)
Non-U.S. 5.7 (24.1) 1.7
-------------- ------------- -------------
70.3 (65.1) -
-------------- ------------- -------------
Income tax expense (benefit) $ 246.0 $ (5.4) $ 49.0
============== ============= =============
The fiscal 2006 income tax expense of $246.0 million includes $24.5 million
of tax expense related to the repatriation of accumulated foreign earnings under
provisions of the American Jobs Creation Act of 2004. The fiscal 2005 income tax
benefit of $5.4 million included income tax expense of $160.8 million, which
consisted primarily of U.S. and non-U.S. income taxes, offset by a benefit from
the change in the beginning of the year valuation allowance of $166.2 million.
The tax benefit from employee stock plans was $104.5 million in fiscal 2006,
$20.1 million in fiscal 2005 and $22.2 million in fiscal 2004.
The tax effects of temporary differences that constitute significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
(In Millions) 2006 2005
-------------- --------------
DEFERRED TAX ASSETS
Equity investments $17.6 $17.9
Inventory 36.2 5.8
Accrued liabilities 35.5 43.1
R&D expenditures 101.2 117.6
Deferred compensation 38.6 32.1
Non-U.S. loss carryovers and other allowances 90.5 83.5
Federal and state credit carryovers 72.6 141.8
Other 3.8 7.3
-------------- ---------------
Total deferred tax assets 396.0 449.1
Valuation allowance (101.9) (91.5)
-------------- ---------------
Net deferred tax assets 294.1 357.6
DEFERRED TAX LIABILITIES
Property, plant and equipment and amortization (17.8) (28.5)
Other liabilities (15.9) (10.0)
-------------- ---------------
Total deferred tax liabilities (33.7) (38.5)
-------------- ---------------
Net deferred tax assets $260.4 $319.1
============== ===============
The decrease in deferred tax assets during fiscal 2006 of $58.7 million is
from continuing operations and from the tax effect on other comprehensive income
items.
We record a valuation allowance to reflect the estimated amount of deferred
tax assets that may not be realized. The valuation allowance has been
established primarily against the reinvestment and investment tax allowances
related to Malaysia because we have concluded that a significant portion of the
deferred tax asset will not be realized owing to the uncertainty of sufficient
taxable income in Malaysia beyond the foreseeable future. The valuation
allowance for deferred tax assets increased by $10.4 million in fiscal 2006
compared to a decrease of $282.4 million in fiscal 2005. Since we recognized a
$164.4 million tax benefit from the reduction in the valuation allowance related
to employee stock options in fiscal 2005, which was credited to shareholders'
equity, there is no longer any valuation allowance against deferred tax assets
for stock option deductions.
The ultimate realization of deferred tax assets depends upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. As of May 28, 2006, based on historical taxable income and
projections for future taxable income over the periods that the deferred tax
assets are deductible, we believe it is more likely than not that we will
realize the benefits of these deductible differences, net of valuation
allowance.
The reconciliation between the income tax rate computed by applying the
U.S. federal statutory rate and the reported worldwide tax rate follows:
2006 2005 2004
--------------- -------------- --------------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
Non-U.S. income taxed at different rates (1.7) 2.9 2.1
U.S. state and local taxes net of federal benefits 1.2 1.7 0.1
Dividends repatriated 3.5 - -
Changes in beginning of year valuation allowances (0.8) (40.5) (18.9)
Export sales benefit (2.9) (4.5) (3.5)
Tax credits (1.0) (1.7) (0.9)
Impairment of goodwill 0.7 5.8 -
Other 1.4 - 0.8
--------------- -------------- --------------
Effective tax rate 35.4% (1.3)% 14.7%
=============== ============== ==============
During fiscal 2005, the American Jobs Creation Act of 2004 (AJCA) was
signed into law, creating a one-time incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent
dividends-received deduction for certain dividends from controlled foreign
corporations. As a result, we undertook a comprehensive evaluation to decide
whether, and to what extent, foreign earnings that had not yet been remitted to
the U.S. might be repatriated. In fiscal 2006, our Chief Executive Officer and
our Board of Directors approved a Domestic Reinvestment Plan pursuant to the
AJCA guidelines. We completed our evaluation of the AJCA's provisions in our
fourth quarter of fiscal 2006 and we made the determination to repatriate a
total of $578.0 million in foreign earnings. Of this amount, $496.0 million
qualified as extraordinary dividends as defined under the AJCA, and the
associated income tax expense of $24.5 million was recorded in our fourth
quarter of fiscal 2006.
Aside from the foreign earnings repatriated under the AJCA, we intend to
continue reinvesting certain foreign earnings from non-U.S. subsidiaries
indefinitely. No U.S. income taxes have been provided on the cumulative
unremitted earnings of approximately $112.0 million from non-U.S. subsidiaries.
It is not practicable to determine the U.S. income tax liability that would be
payable if such earnings were not reinvested indefinitely.
At May 28, 2006, we had $3.3 million of federal net operating loss
carryovers and $68.5 million of state net operating loss carryovers, which
expire between 2007 and 2024. We also had $3.9 million of federal credit
carryovers and $98.1 million of state credit carryovers, which primarily expire
between 2007 and 2026. Included in the state tax credits is a California R&D
credit of $86.2 million, which can be carried forward indefinitely. In addition,
we had net operating loss and other tax allowance carryovers of $374.3 million
from certain non-U.S. jurisdictions, most of which do not expire.
The IRS has completed its field examinations of our tax returns for fiscal
years 1997 through 2000 and on July 29, 2003 issued a notice of proposed
adjustment seeking additional taxes of approximately $19.1 million (exclusive of
interest) for those years. We are contesting the adjustments through the IRS
administrative process. We are undergoing tax audits in several international
locations and from time to time our tax returns are audited in the U.S. by state
agencies and at international locations by local tax authorities. We believe we
have made adequate tax payments and/or accrued adequate amounts such that the
outcome of these audits will have no material adverse effects on our financial
statements.
Note 9. Shareholders' Equity
Stock Split
On May 13, 2004, we completed a two-for-one stock split of our common stock. The
stock split was payable in the form of a 100 percent stock dividend and entitled
each shareholder of record on April 29, 2004, to receive one share of common
stock for each outstanding share of common stock held on that date. All
information about capital stock accounts, share and per share amounts included
in the accompanying Consolidated Financial Statements for fiscal 2004 have been
retroactively adjusted to reflect this stock split.
Stock Purchase Rights
Our common stock carries a preferred stock purchase right. The rights have the
anti-takeover effect of causing substantial dilution to a person or group that
attempts to acquire us on terms not approved by our Board of Directors. Each
right entitles stockholders to purchase one two-thousandth of a share of series
A junior participating preferred stock at a price of $60.00 per one
one-thousandth share, subject to adjustment. The rights are not immediately
exercisable and will become exercisable only upon the occurrence of certain
events.
If a person or group acquires or announces a tender or exchange offer that
would result in the acquisition of 20 percent or more of our common stock while
the stockholder rights remain in place, the rights become exercisable by all
rights holders except the acquiring person or group, for shares of our stock or
of the third party acquirer having a value of twice the right's then-current
exercise price. We may redeem the rights at $0.005 per right at any time prior
to the acquisition by a person or group of 20 percent or more of the outstanding
common stock. Unless they are redeemed earlier, the rights will expire on August
8, 2006.
Stock Repurchase Program
Fiscal 2006:
We repurchased a total of 37.2 million shares of our common stock for $950.7
million during fiscal 2006 under three programs: (i) the $400 million stock
repurchase program announced in March 2005 (of which we used $96.0 million to
repurchase 4.9 million shares of common stock in fiscal 2005) which was
completed in September 2005, (ii) the $400 million stock repurchase program
announced in September 2005 which was completed in January 2006 and (iii)
another $400 million stock repurchase program announced in December 2005. All
shares were purchased in the open market. As of the end of fiscal 2006, we had
$153.3 million remaining for future repurchases under the December 2005 program.
After the end of fiscal 2006, we announced that our Board of Directors had
approved a $500 million stock repurchase program, also similar to our prior
stock repurchase programs. During the period after the end of our 2006 fiscal
year through July 21, 2006, we repurchased a total of 10.7 million shares for
$248.4 million under the program announced in December 2005 and the program
announced in June 2006.
Fiscal 2005:
We repurchased a total of 20.3 million shares of common stock for $353.5 million
during fiscal 2005 under two programs: (i) the $400 million stock repurchase
program announced in March 2004, which was completed in March 2005 and (ii) the
$400 million stock repurchase program announced in March 2005. Of these shares,
17.6 million shares were repurchased in the open market for $298.5 million. The
other 2.7 million shares were repurchased through privately negotiated
transactions with a major financial institution and include the repurchase of
1.5 million shares for $30.0 million in June 2004 upon the settlement of an
advance repurchase contract entered into in fiscal 2004. At the end of fiscal
2005, we had $304.0 million remaining available for future common stock
repurchases.
Fiscal 2004:
We began to repurchase stock in fiscal 2004 pursuant to a stock repurchase
program announced in July 2003. During September and October 2003, we
repurchased a total of 25.4 million shares of our common stock for $400 million.
A portion (15.0 million shares) of the shares was repurchased through a
privately negotiated transaction with a major financial institution and the
remainder was purchased in the open market. We began another $400 million stock
repurchase program in March 2004 and at the end of fiscal 2004, we had
repurchased an additional 7.0 million shares of our common stock for $142.5
million, of which 730,988 shares were purchased through a privately negotiated
transaction with a major financial institution, with the remainder purchased in
the open market. As noted above, we continued this repurchase program in fiscal
2005.
All stock repurchased has been cancelled and is not held as treasury stock.
Dividends
We paid $34.2 million in dividends in fiscal 2006 and $14.1 million in dividends
in fiscal 2005. In June 2006, our Board of Directors declared a cash dividend of
$0.03 per outstanding share of common stock, which was paid on July 10, 2006 to
shareholders of record at the close of business on June 19, 2006.
Note 10. Stock-Based Compensation Plans
Stock Option Plans
As of May 28, 2006, under all stock option plans there were 105.9 million shares
reserved for issuance, including 48.8 million shares available for future option
grants. More information on our stock option plans follows:
We have four stock plans under which employees and officers may be granted
stock options to purchase shares of common stock. One plan, which has been in
effect since 1977 when it was first approved by shareholders, authorizes the
grant of up to a total of 78,709,858 shares of common stock for non-qualified or
incentive stock options (as defined in the U.S. tax code) to officers and key
employees. As of the end of fiscal 2006, only 70,888 shares remained available
for option grants under this plan. Another plan, which has been in effect since
1997, authorizes the grant of up to a total of 140,000,000 shares of common
stock for non-qualified stock options to employees who are not executive
officers. There is also an executive officer stock option plan, which was
approved by shareholders in fiscal 2000 and which authorizes the grant of up to
a total of 12,000,000 shares of common stock for non-qualified options only to
executive officers. The 2005 Executive Officer Equity Plan approved by
shareholders in fiscal 2004 authorizes the issuance of a total of 3,000,000
shares, 1,000,000 of which can be pursuant to the exercise of stock options. All
plans provide that options are granted at the market price on the date of grant
and can expire up to a maximum of between six years and one day and ten years
and one day after grant or three months after termination of employment (up to
five years after termination due to death, disability or retirement), whichever
occurs first. The plans provide that options can vest six months after grant.
All options granted since the beginning of fiscal 2004 expire six years and one
day after grant and begin vesting with one fourth of the total grant after one
year and the rest in equal monthly installments over the next three years.
We have a director stock option plan that was approved by shareholders in
fiscal 1998 which authorized the grant of up to 2,000,000 shares of common stock
to eligible directors who are not employees of the company. Options were granted
automatically upon approval of the plan by shareholders and were granted
automatically to eligible directors upon their appointment to the board and
subsequent election to the board by shareholders. Director stock options vested
in full after six months. Under this plan, options to purchase 520,000 shares of
common stock with a weighted-average exercise price of $14.26 and
weighted-average remaining contractual life of 5.4 years were outstanding and
exercisable as of May 28, 2006. In connection with the approval of amendments to
the directors' stock plan in fiscal 2006, options have ceased to be granted
under this plan.
Changes in shares of common stock outstanding under the option plans during
fiscal 2006, 2005 and 2004 (but excluding director options), were as follows:
Number of Shares Weighted-Average
(In Millions) Exercise Price
--------------------------- ------------------------------
Outstanding at May 25, 2003 91.7 $13.57
Granted 15.0 $13.50
Exercised (19.7) $ 9.14
Cancelled (5.3) $16.01
---------------------------
Outstanding at May 30, 2004 81.7 $14.47
Granted 7.0 $19.04
Exercised (8.2) $10.16
Cancelled (3.8) $16.18
---------------------------
Outstanding at May 29, 2005 76.7 $15.26
Granted 5.8 $24.67
Exercised (22.9) $11.71
Cancelled (3.0) $20.50
---------------------------
Outstanding at May 28, 2006 56.6 $17.38
===========================
Expiration dates for options outstanding at May 28, 2006 range from July 9,
2006 to May 19, 2013.
The following tables summarize information about options outstanding under
these plans (excluding director options) at May 28, 2006:
Outstanding Options
---------------------------------------------------------------------------
Weighted-Average Remaining
Number of Shares Contractual Life Weighted-Average
(In Millions) (In Years) Exercise Price
--------------------- ---------------------------- ------------------------
RANGE OF EXERCISE PRICES
$ 4.72-$ 8.03 8.7 4.8 $ 6.83
$ 8.15-$11.63 8.7 3.9 $10.99
$11.63-$15.69 7.7 4.7 $13.40
$15.75-$17.10 8.0 5.8 $17.09
$17.15-$19.15 7.2 4.0 $19.09
$19.21-$29.83 6.5 5.0 $24.28
$29.94-$29.94 9.5 3.9 $29.94
$30.19-$39.03 0.3 4.1 $33.60
---------------------
Total 56.6 4.6 $17.38
=====================
Options Exercisable
--------------------------------------------------
Number of Shares Weighted-Average Exercise
(In Millions) Price
--------------------- ----------------------------
RANGE OF EXERCISE PRICES
$ 4.72-$ 8.03 6.8 $ 6.78
$ 8.15-$11.63 5.5 $10.95
$11.63-$15.69 7.6 $13.39
$15.75-$17.10 8.0 $17.09
$17.15-$19.15 3.2 $19.09
$19.21-$29.83 0.7 $23.74
$29.94-$29.94 9.5 $29.94
$30.19-$39.03 0.3 $33.81
---------------------
Total 41.6 $17.21
=====================
Stock Purchase Plans
During fiscal 2004, we implemented a new employee stock purchase plan that
authorizes the issuance of up to 16,000,000 shares in quarterly offerings to
eligible employees worldwide at a price that is equal to 85 percent of the lower
of the common stock's fair market value at the beginning of a one year offering
period or at the end of the applicable quarter in the offering period. Once
implemented, we terminated our employee stock purchase plans that had been in
effect in the U.S. and at international locations. Our purchase plan uses a
captive broker and we deposit shares purchased by the employee with the captive
broker. In addition, for international participants, the National subsidiary
that the participant is employed by is responsible for paying to us the
difference between the purchase price set by the terms of the plan and the fair
market value at the time of the purchase. We have amended the stock purchase
plan which will change the price paid by the employee to 85 percent of the lower
of the common stock's fair market value at the time of enrollment in one of two
six month purchase periods in a one year offering period or the end of the
purchase period. These changes are to be implemented in fiscal 2007. All current
and prior purchase plans have been approved by shareholders.
Under the terms of our purchase plans, we issued 1.7 million shares in
fiscal 2006, 2.2 million shares in fiscal 2005 and 2.7 million shares in fiscal
2004 to employees for $30.8 million, $33.2 million and $30.0 million,
respectively. As of May 28, 2006, there were 11.7 million shares reserved for
issuance under the stock purchase plan. The prior purchase plans were terminated
before the end of fiscal 2004 and the reserves maintained for them were
cancelled.
Other Stock Plans
We have a director stock plan, which has been approved by shareholders, that
authorizes the issuance of up to 900,000 shares of common stock to eligible
directors who are not employees of the company. The stock is issued
automatically to eligible new directors upon their appointment to the board and
to all eligible directors on their subsequent election to the board by
shareholders. Directors may also elect to take their annual retainer fees for
board and committee membership in stock under the plan. The shares issued to the
directors under the plan are restricted from transfer for between six and
thirty-six months. As of May 28, 2006, we had issued 361,041 shares under the
director stock plan and had reserved 538,959 shares for future issuances.
We have a restricted stock plan, which authorizes the issuance of up to
4,000,000 shares of common stock to employees who are not officers of the
company. The plan also permits the granting of restricted stock units; once the
units are vested, stock is issued to the plan participant. The plan has been
made available primarily as a retention vehicle for employees with technical
skills and expertise that are important to us. We issued 166,000, 134,420 and
194,000 shares under the restricted stock plan during fiscal 2006, 2005 and
2004, respectively and also granted 20,300 restricted stock units in fiscal
2006. Restrictions and vesting of restricted stock units expire over time,
ranging from one to six years after issuance. Based upon the market value on the
dates of issuance, we recorded $5.1 million, $2.6 million and $3.1 million of
unearned compensation during fiscal 2006, 2005 and 2004, respectively. This
unearned compensation is included as a separate component of shareholders'
equity in the Consolidated Financial Statements and is amortized to operations
ratably over the applicable restriction periods. As of May 28, 2006, we have
1,875,898 shares reserved for future issuances under the restricted stock plan
and 20,300 restricted stock units outstanding. Compensation expense for fiscal
2006, 2005 and 2004 related to shares of restricted stock was $3.2 million, $3.2
million and $3.1 million, respectively. At May 28, 2006, the weighted-average
grant date fair value for all outstanding shares of restricted stock was $19.87
and for restricted stock units was $28.75.
As noted in the discussion on stock option plans, stockholders approved the
2005 Executive Officer Equity Plan in October 2004. This plan authorizes the
issuance of up to a total of 3,000,000 shares through stock options, performance
share units and stock appreciation rights. Of these, 1,000,000 shares may be
issued upon the exercise of stock options and 2,000,000 shares may be issued in
any combination upon the settlement of stock appreciation rights and/or as
payment for performance share units. As of May 28, 2006, no options had been
granted under this plan. Targets for the performance share units for the first
performance period, which is still in process, were established in fiscal 2006,
but no shares have been issued under the plan.
Note 11. Retirement and Pension Plans
U.S. Plans
Our retirement and savings program for U.S. employees consists of a salary
deferral 401(k) plan. Until the beginning of fiscal 2005, it also included a
profit sharing plan. More information on each of these plans follows.
The salary deferral 401(k) plan allows employees to defer up to 15 percent
of their salaries, subject to certain limitations, with partially matching
company contributions. To encourage employee participation, we make a matching
contribution of 150 percent of the first 4 percent of the employee's
contribution to the 401(k) plan. Contributions are invested in one or more of
eighteen investment funds at the discretion of the employee. One of the
investment funds is a stock fund in which contributions are invested in National
common stock at the discretion of the employee. 401(k) investments made by the
employee in National common stock may be sold at any time at the employee's
direction. Although 10,000,000 shares of common stock are reserved for issuance
to the stock fund, shares purchased to date with contributions have been
purchased on the open market and we have not issued any stock directly to the
stock fund.
Until fiscal 2004, the profit sharing plan required contributions of the
greater of 5 percent of consolidated net earnings before income taxes (subject
to a limit of 5 percent of payroll) or 1 percent of payroll. Contributions were
made 25 percent in National common stock and 75 percent in cash. During fiscal
2004, the profit sharing plan was amended and terminated beginning fiscal 2005.
The final profit sharing contribution was made in cash and consisted of the
profit sharing contribution that would have been made for fiscal 2004 less the
amount for increased 401(k) matching contributions made during fiscal 2004.
Total shares contributed to the profit sharing plan during fiscal 2004 for the
fiscal 2003 contribution were 76,884 shares.
We also have a deferred compensation plan, which allows highly compensated
employees (as defined by IRS regulations) to receive a higher profit-sharing
plan allocation than would otherwise be permitted under IRS regulations and to
defer greater percentages of compensation than would otherwise be permitted
under the salary deferral 401(k) plan and IRS regulations. The deferred
compensation plan is a non-qualified plan of deferred compensation maintained in
a rabbi trust. Participants can direct the investment of their deferred
compensation plan accounts in the same investment funds offered by the 401(k)
plan.
International Plans
Certain of our international subsidiaries have varying types of defined benefit
pension and retirement plans that comply with local statutes and practices.
The annual expense for all plans was as follows:
(In Millions) 2006 2005 2004
------------- ------------ ------------
Profit sharing plan $ - $ - $ 14.5
Salary deferral 401(k) plan $ 21.4 $ 22.0 $ 14.6
Non-U.S. pension and retirement plans $ 16.6 $ 18.8 $ 19.9
Defined benefit pension plans maintained in the U.K., Germany, Japan and
Taiwan cover all eligible employees within each respective country. Pension plan
benefits are based primarily on participants' compensation and years of service
credited as specified under the terms of each country's plan. The funding policy
is consistent with the local requirements of each country. We may also
voluntarily fund additional annual contributions as determined by management.
For fiscal 2007, we currently expect contributions to total approximately $8.5
million. This amount excludes any voluntary contribution, which is yet to be
determined by management. The plans use measurement dates of February 28th and
May 31st to determine the measurements of plan assets and obligations.
Plan assets of the funded defined benefit pension plans are invested in an
index based fund held by a third-party fund manager or are deposited into
government-managed accounts in which we are not actively involved with and have
no control over investment strategy. One of the plans is a self-funded plan. The
plan assets held by the third-party fund manager consist primarily of U.S. and
foreign equity securities, bonds and cash. The fund manager monitors the fund's
asset allocation within the guidelines established by the plan's Board of
Trustees. In line with plan investment objectives and consultation with company
management, the Trustees set an allocation benchmark between equity and bond
assets based on the relative weighting of overall international market indices.
The overall investment objectives of the plan are 1) the acquisition of suitable
assets of appropriate liquidity which will generate income and capital growth to
meet current and future plan benefits, 2) limit the risk of the asset failing to
meet the long term liabilities of the plan and 3) minimize the long term costs
of the plan by maximizing the return on the assets. Performance is regularly
evaluated by the Trustees and is based on actual returns achieved by the fund
manager relative to their benchmark. The expected long-term rate of return for
plan assets is based on analysis of historical data and future expectations
relevant to the investments and consistency with the assumed rate of inflation
implicit in the market.
For all of our plans the discount rates represent the rates at which
benefits could have been settled at the measurement date and were determined
based on an analysis of the investment returns underlying annuity contracts, or
alternatively the rates of return currently available on high quality fixed
interest investments for liability durations that match the timing and amount of
the expected benefit payments. The source data used to determine the discount
rates for the U.K. and Germany plans are based on the published iBoxx index of
AA bond yields for durations of 15 to 18.8 years. The yields at the plans'
measurement dates were approximately 4.7 to 4.8 percent. While no formal
liability cash flow projections were made for these plans, the mean term of its
liabilities were determined for assessing appropriate bond durations. Our plans
in Japan and Taiwan are immaterial.
The following table presents target allocation percentages and the year end
percentage for each major category of plan assets:
2006 2005
---------------------------------- -----------------------------------
Asset Target Actual Target Actual
Category Allocation Percentage Allocation Percentage
---------------- ----------------- ----------------- -----------------
Equities 80% 71% 80% 80%
Bonds 20% 19% 20% 20%
Other 0% 10% 0% 0%
---------------- ----------------- ----------------- -----------------
Total 100% 100% 100% 100%
================ ================= ================= =================
Net annual periodic pension cost of these non-U.S. defined benefit pension
plans is presented in the following table:
(In Millions) 2006 2005 2004
----------------- ----------------- -----------------
Service cost of benefits earned during the year $ 5.2 $ 6.0 $ 5.8
Plan participant contributions (1.0) (1.5) (0.9)
Interest cost on projected benefit obligation 13.5 12.9 11.5
Expected return on plan assets (11.5) (9.7) (6.3)
Net amortization and deferral 4.9 4.8 5.8
----------------- ----------------- -----------------
Net periodic pension cost $11.1 $12.5 $15.9
================= ================= =================
(In Millions) 2006 2005
----------------- -----------------
BENEFIT OBLIGATION
Beginning balance $274.8 $224.7
Service cost 5.2 6.0
Interest cost 13.5 12.9
Benefits paid (5.7) (3.9)
Actuarial loss 52.3 20.4
Exchange rate adjustment (19.0) 14.7
----------------- -----------------
Ending balance $321.1 $274.8
================= =================
PLAN ASSETS AT FAIR VALUE
Beginning balance $168.2 $125.9
Actual return on plan assets 38.6 9.4
Company contributions 23.1 26.5
Plan participant contributions 1.0 1.5
Benefits paid (4.5) (3.6)
Exchange rate adjustment (11.7) 8.5
----------------- -----------------
Ending balance $214.7 $168.2
================= =================
RECONCILIATION OF FUNDED STATUS
Fund status - Benefit obligation in excess of
plan assets $106.4 $106.6
Unrecognized net loss (144.6) (131.5)
Unrecognized net transition obligation 2.3 2.1
Adjustment to recognize minimum liability 128.8 106.6
----------------- -----------------
Accrued pension cost $ 92.9 $ 83.8
================= =================
ACCUMULATED BENEFIT OBLIGATION
Fiscal year end balance $317.2 $271.1
================= =================
The net periodic pension cost and projected benefit obligations were
determined using the following assumptions:
2006 2005 2004
----------------- ----------------- -----------------
NET PERIODIC PENSION COST
Discount rate 1.8%-5.4% 1.8%-5.7% 1.8%-5.5%
Rate of increase in compensation levels 2.0%-4.3% 2.3%-4.1% 1.0%-3.8%
Expected long-term return on assets 2.3%-7.5% 2.3%-7.5% 2.8%-7.5%
PROJECTED BENEFIT OBLIGATIONS
Discount rate 1.8%-4.8% 1.8%-5.4%
Rate of increase in compensation levels 1.8%-3.0% 2.0%-4.3%
The following table presents the total expected benefits to be paid to plan
participants for the next ten years as determined based on the same assumptions
used to measure the benefit obligation at the end of the year:
(In Millions)
-----------------
2007 $ 4.6
2008 4.7
2009 5.0
2010 5.2
2011 5.3
2012-2016 30.3
-----------------
Total $55.1
=================
As required by the current pension accounting standards, in each of the
fiscal years presented, we recorded adjustments for minimum pension liability to
equal the amount of the unfunded accumulated benefit obligation in one of our
plans. For fiscal 2006, the adjustment was $22.1 million and a corresponding
amount, net of a $6.7 million tax effect, is reflected in the Consolidated
Financial Statements as a component of accumulated other comprehensive loss.
Note 12. Commitments and Contingencies
Commitments
We lease certain facilities and equipment under operating lease arrangements.
Rental expenses under operating leases were $36.8 million, $34.6 million and
$25.4 million in fiscal 2006, 2005 and 2004, respectively.
Future minimum commitments under non-cancelable operating leases are as
follows:
(In Millions)
------------------------------
2007 $ 27.0
2008 13.2
2009 6.7
2010 4.1
2011 0.8
Thereafter 0.9
------------------------------
Total $ 52.7
==============================
During fiscal 2004 we entered into a master operating lease agreement for
capital equipment under which individual operating lease agreements are executed
as the delivery and acceptance of scheduled equipment occurs. The required
future minimum lease payments under these operating leases are included in the
table above. These individual operating lease agreements under the master lease
provide for guarantees of the equipment's residual value at the end of their
lease terms for up to a maximum of $52.8 million. At May 28, 2006, the fair
value of the lease guarantees was $0.6 million and is included in other
non-current liabilities.
In fiscal 2006, we entered into two agreements with local energy suppliers
in Maine and Texas to purchase electricity for our manufacturing facilities
located there. One of the agreements is a three-year term bulk contract where
service began in June 2006. This agreement requires us to purchase a minimum
level of electricity each year at a specified price as determined by the terms
of the agreement. No amounts were spent in fiscal 2006 under this agreement.
Future minimum purchases are $6.5 million in each of fiscal 2007, 2008 and 2009.
The other agreement began in January 2006 and is a five-year term full
requirement contract with no minimum purchase commitments. The agreement allows
for a fixed purchase price if the annual volume purchased falls within a
specified range as determined by the terms of the agreement. In fiscal 2006, we
spent $2.5 million for electricity usage under this agreement.
We had a manufacturing agreement with Fairchild Semiconductor Corporation
where we were committed to purchase a minimum level of goods and services based
on specified wafer prices, which were intended to approximate market prices. The
agreement expired in December 2004. Total purchases from Fairchild were $4.5
million in fiscal 2005 and $16.7 million in fiscal 2004.
Contingencies -- Legal Proceedings
Environmental Matters. We have been named to the National Priorities List for
our Santa Clara, California, site and we have completed a remedial
investigation/feasibility study with the Regional Water Quality Control Board
(RWQCB), acting as an agent for the Federal Environmental Protection Agency. We
have agreed in principle with the RWQCB to a site remediation plan and we are
conducting remediation and cleanup efforts at the site. In addition to the Santa
Clara site, from time to time we have been designated as a potentially
responsible party (PRP) by international, federal and state agencies for certain
environmental sites with which we may have had direct or indirect involvement.
These designations are made regardless of the extent of our involvement. These
claims are in various stages of administrative or judicial proceedings and
include demands for recovery of past governmental costs and for future
investigations and remedial actions. In many cases, the dollar amounts of the
claims have not been specified, and in the case of the PRP matters, claims have
been asserted against a number of other entities for the same cost recovery or
other relief as is sought from us. We accrue costs associated with environmental
matters when they become probable and can be reasonably estimated. The amount of
all environmental charges to earnings, including charges for the Santa Clara
site remediation, (excluding potential reimbursements from insurance coverage),
were not material during fiscal 2006, 2005 and 2004.
As part of the disposition in fiscal 1996 of the Dynacraft assets and
business, we retained responsibility for environmental claims connected with
Dynacraft's Santa Clara, California, operations and for other environmental
claims arising from our conduct of the Dynacraft business prior to the
disposition. As part of the Fairchild disposition in fiscal 1997, we also agreed
to retain liability for current remediation projects and environmental matters
arising from our prior operation of 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 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.
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 (See Note 8 to the Consolidated Financial Statements). We are
contesting the claims through the IRS administrative process and believe
adequate provision has been made for the ultimate outcome.
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 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 awaiting 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 have filed our appellate briefs. We intend to
continue 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 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.
Contingencies -- Other
In connection with our past divestitures, we have routinely provided indemnities
to cover the indemnified party for matters such as environmental, tax, product
and employee liabilities. We also routinely include intellectual property
indemnification provisions in our terms of sale, development agreements and
technology licenses with third parties. Since maximum obligations are not
explicitly stated in these indemnification provisions, the potential amount of
future maximum payments cannot be reasonably estimated. To date we have incurred
minimal losses associated with these indemnification obligations and as a
result, we have not recorded any liabilities in our Consolidated Financial
Statements.
Note 13. Segment and Geographic Information
We design, develop, manufacture and market a wide range of semiconductor
products, most of which are analog and mixed-signal integrated circuits. We are
organized by various product line business units. For segment reporting
purposes, each of our product line business units represents an operating
segment as defined under SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," and our chief executive officer is
considered the chief operating decision-maker. Business units that have
similarities, including economic characteristics, underlying technology, markets
and customers, are aggregated into larger segments. For fiscal 2006, our Analog
segment, which accounted for 86 percent of net sales, is the only operating
segment that meets the criteria of a reportable segment under SFAS No. 131.
Operating segments that do not meet the criteria in SFAS 131 of a reportable
segment are combined under "All Others." Segment information for fiscal 2005 and
2004 has been reclassified to conform to the fiscal 2006 presentation.
Product line business units that make up the Analog segment include
amplifiers, audio, interface, data conversion and power management. These
business units represent the core analog standard linear focus and receive the
majority of our research and development investment funds. Other business units
in our Analog segment that feature a variety of mixed-signal products, which
combine analog and digital circuitry onto the same chip, include flat panel
displays, CRT displays, RF products, ASIC & telecom and Hi-Rel. The Analog
segment is focused on utilizing our analog and mixed-signal design expertise to
develop high-performance building blocks and integrated solutions aimed at end
markets such as wireless handsets, portable electronic devices, displays, and at
applications for broader markets, such as industrial and medical equipment,
automotive and communications infrastructure.
Aside from these operating segments, our corporate structure in fiscal
years 2006, 2005 and 2004 also included the centralized Worldwide Marketing and
Sales Group, the Technology Development Group, the Manufacturing Operations
Group, and the Corporate Group. Certain expenses of these groups are allocated
to the operating segments and are included in their segment operating results.
With the exception of the allocation of certain expenses, the significant
accounting policies and practices used to prepare the Consolidated Financial
Statements as described in Note 1 are generally followed in measuring the sales,
segment income or loss and determination of assets for each reportable segment.
We allocate certain expenses associated with centralized manufacturing, selling,
marketing and general administration to operating segments based on either the
percentage of net trade sales for each operating segment to total net trade
sales or headcount, as appropriate. Certain R&D expenses primarily associated
with centralized activities such as process development are allocated to
operating segments based on the percentage of dedicated R&D expenses for each
operating segment to total dedicated R&D expenses. Interest income and expense
are combined with other treasury related income/expenses and then allocated to
operating segments based on the percentage of net trade sales for each operating
segment to total net trade sales.
The following table presents specified amounts included in the measure of
segment results or the determination of segment assets:
Analog
(In Millions) Segment All Others Total
------------- -------------- ---------------
2006
Sales to unaffiliated customers $ 1,845.2 $ 312.9 $ 2,158.1
============= ============== ===============
Segment income before income taxes $ 660.2 $ 35.0 $ 695.2
============= ============== ===============
Depreciation and amortization $ 12.5 $ 153.8 $ 166.3
Interest income $ - $ 33.7 $ 33.7
Interest expense $ - $ 1.9 $ 1.9
Goodwill impairment loss $ 7.6 $ - $ 7.6
Gain on sale of businesses $ 28.9 $ - $ 28.9
Share in net losses of equity-method
investments $ 0.6 $ 0.1 $ 0.7
Segment assets $ 192.8 $ 2,318.3 $ 2,511.1
2005
Sales to unaffiliated customers $ 1,666.3 $ 246.8 $ 1,913.1
============= ============== ===============
Segment income before income taxes $ 353.5 $ 56.4 $ 409.9
============= ============== ===============
Depreciation and amortization $ 16.3 $ 178.1 $ 194.4
Interest income $ - $ 17.4 $ 17.4
Interest expense $ - $ 1.5 $ 1.5
Goodwill impairment loss $ 86.1 $ - $ 86.1
Gain on sale of businesses $ - $ 59.9 $ 59.9
Share in net losses of equity-method
investments $ 2.1 $ 3.6 $ 5.7
Segment assets $ 213.7 $ 2,290.5 $ 2,504.2
2004
Sales to unaffiliated customers $ 1,677.5 $ 305.6 $ 1,983.1
============= ============== ===============
Segment income (loss) before income taxes $ 419.4 $ (85.7) $ 333.7
============= ============== ===============
Depreciation and amortization $ 17.0 $ 192.9 $ 209.9
Interest income $ - $ 11.6 $ 11.6
Interest expense $ - $ 1.2 $ 1.2
Share in net losses of equity-method
investments $ 6.6 $ 7.5 $ 14.1
Segment assets $ 307.0 $ 1,973.4 $ 2,280.4
Segment assets consist only of those assets that are specifically dedicated
to an operating segment and include inventories, equipment, equity investments,
goodwill and amortizable intangibles assets. As of May 28, 2006, there were no
equity method investments included in segment assets of the Analog segment.
Depreciation and amortization presented for each segment include only such
charges on dedicated segment assets. The measurement of segment profit and loss
includes an allocation of depreciation expense for shared manufacturing
facilities contained in the standard cost of product for each segment.
Our revenues from external customers are derived from the sales of
semiconductor product and engineering-related services. For fiscal 2006, 2005
and 2004, sales from engineering-related services were immaterial and are
included with semiconductor product sales. Our semiconductor product sales
consist of integrated circuit components and are considered a group of similar
products.
We operate our marketing and sales activities in four main geographic areas
that include the Americas, Europe, Japan and the Asia Pacific region. Total
sales by geographical area include sales to unaffiliated customers and
inter-geographic transfers, which are based on standard cost. To control costs,
a substantial portion of our products are transported between the Americas,
Europe and the Asia Pacific region in the process of being manufactured and
sold. In the information presented below, we have excluded these
inter-geographic transfers.
The following tables provide geographic sales to and asset information by
major countries within the main geographic areas:
(In Millions) 2006 2005 2004
---------------- ---------------- ---------------
Sales to unaffiliated customers:
People's Republic of China $ 573.5 $ 502.9 $ 544.0
Singapore 479.7 395.6 377.8
United States 428.9 378.6 421.2
Japan 280.1 248.6 250.3
Germany 219.5 194.9 218.9
United Kingdom 176.4 192.4 170.9
Rest of World - 0.1 -
---------------- ---------------- ---------------
Total $ 2,158.1 $ 1,913.1 $ 1,983.1
================ ================ ===============
(In Millions) 2006 2005
----------------- ---------------
Long-lived assets:
United States $ 516.1 $ 523.7
Malaysia 154.6 133.6
Rest of World 114.2 138.3
----------------- ---------------
Total $ 784.9 $ 795.6
================= ===============
Our top ten customers combined represented approximately 64 percent of
total accounts receivable at May 28, 2006 and approximately 49 percent at May
29, 2005. In fiscal 2006, we had two distributors who each accounted for
approximately 12 percent of total net sales. In fiscal 2005 and 2004, we had one
distributor who accounted for approximately 11 percent of total net sales and
another distributor who accounted for approximately 10 percent of total net
sales in each year. Sales to these distributors are mostly for our Analog
segment products, but also include some sales for our other operating segment
products.
Note 14. Supplemental Disclosure of Cash Flow Information and Non-cash Investing
and Financing Activities
(In Millions) 2006 2005 2004
------------ ------------ --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for:
Interest $ 1.9 $ 1.4 $ 1.3
Income taxes $ 16.4 $ 76.1 $ 15.4
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Issuance of stock for employee benefit plans $ - $ - $ 0.9
Issuance of common stock to directors $ 2.6 $ 1.0 $ 0.4
Issuance of common stock in connection with the final installment
payment of the purchase price paid for DigitalQuake - - $ 0.6
Unearned compensation relating to restricted stock issuance $ 4.5 $ 2.6 $ 3.1
Unearned compensation relating to grants of restricted stock units $ 0.6 $ - $ -
Restricted stock cancellation $ 1.3 $ 1.4 $ 1.4
Change in unrealized gain on cash flow hedges $ - $ - $ 0.2
Change in unrealized gain on available-for-sale securities $ (0.1) $ (0.3) $ (3.4)
Minimum pension liability $ 15.4 $ 9.5 $ (29.1)
Acquisition of software license under long-term contracts $ 20.5 $ - $ 19.7
Repurchase of common stock upon settlement of an advance
repurchase contract $ - $ 30.0 $ -
Note 15. Financial Information by Quarter (Unaudited)
The following table presents the unaudited quarterly information for fiscal 2006
and 2005:
Fourth Third Second First
(In Millions, Except Per Share Amounts) Quarter Quarter Quarter Quarter
-------------- --------------- --------------- ---------------
2006
Net sales $572.6 $547.7 $544.0 $493.8
Gross margin $351.5 $332.2 $311.3 $277.7
Net income $118.8 $130.1 $114.7 $ 85.6
--------------------------------------------------- -------------- --------------- --------------- ---------------
Earnings per share:
Net income:
Basic $ 0.35 $ 0.39 $ 0.34 $ 0.25
Diluted $ 0.34 $ 0.37 $ 0.32 $ 0.24
--------------------------------------------------- -------------- --------------- --------------- ---------------
Weighted-average common and potential
common shares outstanding:
Basic 336.3 337.5 339.7 345.8
Diluted 352.3 354.6 356.7 363.9
--------------------------------------------------- -------------- --------------- --------------- ---------------
Common stock price - high $ 30.93 $ 29.55 $ 26.67 $ 25.81
Common stock price - low $ 24.98 $ 25.31 $ 21.24 $ 19.50
--------------------------------------------------- -------------- --------------- --------------- ---------------
2005
Net sales $467.0 $449.2 $448.9 $548.0
Gross margin $255.6 $236.6 $227.0 $301.6
Net income $130.2 $ 77.4 $ 90.0 $117.7
--------------------------------------------------- -------------- --------------- --------------- ---------------
Earnings per share:
Net income:
Basic $ 0.37 $ 0.22 $ 0.25 $ 0.33
Diluted $ 0.36 $ 0.21 $ 0.24 $ 0.31
--------------------------------------------------- -------------- --------------- --------------- ---------------
Weighted-average common and potential
common shares outstanding:
Basic 349.2 353.2 356.0 357.3
Diluted 365.8 374.0 374.2 381.7
--------------------------------------------------- -------------- --------------- --------------- ---------------
Common stock price - high $ 21.67 $ 20.35 $ 17.44 $ 22.44
Common stock price - low $ 18.36 $ 14.94 $ 11.85 $ 13.18
--------------------------------------------------- -------------- --------------- --------------- ---------------
Our common stock is traded on the New York Stock Exchange and the Pacific
Exchange. The quoted market prices are as reported on the New York Stock
Exchange Composite Tape. At May 28, 2006, there were approximately 6,163 holders
of common stock.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
National Semiconductor Corporation:
We have audited the accompanying consolidated balance sheets of National
Semiconductor Corporation and subsidiaries (the Company) as of May 28, 2006 and
May 29, 2005, and the related consolidated statements of income, comprehensive
income, shareholders' equity, and cash flows for each of the years in the
three-year period ended May 28, 2006. In connection with our audits of the
consolidated financial statements, we have also audited the accompanying
financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National
Semiconductor Corporation and subsidiaries as of May 28, 2006 and May 29, 2005,
and the results of their operations and their cash flows for each of the years
in the three-year period ended May 28, 2006, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of May 28, 2006, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
July 26, 2006 expressed an unqualified opinion on management's assessment of,
and the effective operation of, internal control over financial reporting.
KPMG LLP
Mountain View, California
July 26, 2006
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
National Semiconductor Corporation:
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting in Item
9A, that National Semiconductor Corporation and subsidiaries (the Company)
maintained effective internal control over financial reporting as of May 28,
2006, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that National Semiconductor Corporation
and subsidiaries maintained effective internal control over financial reporting
as of May 28, 2006, is fairly stated, in all material respects, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also,
in our opinion, National Semiconductor Corporation and subsidiaries maintained,
in all material respects, effective internal control over financial reporting as
of May 28, 2006, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
National Semiconductor Corporation and subsidiaries as of May 28, 2006 and May
29, 2005, and the related consolidated statements of income, comprehensive
income, shareholders' equity, and cash flows for each of the years in the
three-year period ended May 28, 2006, and the related financial statement
schedule and our report dated July 26, 2006 expressed an unqualified opinion on
those consolidated financial statements.
KPMG LLP
Mountain View, California
July 26, 2006
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures that are intended to ensure that
the information required to be disclosed in our Exchange Act filings is properly
and timely recorded, processed, summarized and reported. In designing and
evaluating our disclosure controls and procedures, our management recognizes
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives
and that management necessarily is required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures. Since we have
investments in certain unconsolidated entities which we do not control or
manage, our disclosure controls and procedures with respect to such entities are
necessarily substantially more limited than those we maintain for our
consolidated subsidiaries.
We have a disclosure controls committee comprised of key individuals from a
variety of disciplines in the company that are involved in the disclosure and
reporting process. The committee meets regularly to ensure the timeliness,
accuracy and completeness of the information required to be disclosed in our
filings containing financial statements. As required by SEC Rule 13a-15(b), the
committee reviewed this Form 10-K and also met with the Chief Executive Officer
and the Chief Financial Officer to review this Form 10-K and the required
disclosures and the effectiveness of the design and operation of our disclosure
controls and procedures. The committee performed an evaluation, under the
supervision of and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of
the year covered by this report. Based on that evaluation and their supervision
of and participation in the process, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective at the reasonable assurance level.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance
with authorization of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could have a
material effect on the financial statements.
Management assessed our internal control over financial reporting as of May
28, 2006, the end of our 2006 fiscal year. Management conducted its evaluation
of the effectiveness of our internal control over financial reporting based on
the framework established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management's
assessment included evaluation of such elements as the design and operating
effectiveness of key reporting controls, process documentation, accounting
policies, and our overall control environment. This assessment is supported by
testing and monitoring performed by our internal audit and finance personnel.
Based on our assessment, our management has concluded that our internal
control over financial reporting was effective as of the end of our 2006 fiscal
year to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external reporting
purposes in accordance with U.S. generally accepted accounting principles. We
reviewed the results of this assessment with the audit committee of our board of
directors.
Our independent registered public accounting firm, KPMG LLP, audited our
management's assessment and independently assessed the effectiveness of our
internal control over financial reporting. KPMG has issued an attestation report
concurring with management's assessment, which is included under Item 8 as a
separate Report of Independent Registered Public Accounting Firm.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls or our internal control
over financial reporting will prevent or detect all error and all fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met. The design of a control system must reflect the fact that there are
resource constraints and the benefits of controls must be considered relative to
their costs. Further, because of inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud,
if any, within the company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Projections of any
evaluation of controls effectiveness to future periods are subject to risks.
Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree on compliance with policies or procedures.
Changes in Internal Controls
As part of our efforts to ensure compliance with the requirements of Section 404
of the Sarbanes-Oxley Act of 2002, we conduct a continual review of our internal
control over financial reporting. The review is an ongoing process and it is
possible that we may institute additional or new internal controls over
financial reporting as a result of the review. During the fourth quarter of
fiscal 2006, 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.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information appearing in our Proxy Statement for the 2006 annual
meeting of shareholders to be held on or about October 6, 2006 and which will be
filed in definitive form pursuant to Regulation 14A on or about September 1,
2006 (hereinafter "2006 Proxy Statement"), is incorporated herein by reference:
o information concerning our directors appearing in the section on the
proposal relating to election of directors;
o information appearing under the subcaptions "Audit Committee,"
"Section 16(a) Beneficial Ownership Reporting Compliance," and "Code
of Business Conduct and Ethics" appearing in the section titled
"Corporate Governance, Board Meetings and Committees."
Information concerning our executive officers is set forth in Part I of the
Form 10-K under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information appearing in the section titled "Executive Compensation"
(including all related subcaptions thereof), under the subcaptions "Director
Compensation" and "Compensation Committee Interlocks and Insider Participation"
in the section titled "Corporate Governance, Board Meetings and Committees," in
the section titled "Compensation Committee Report on Executive Compensation,"
and in the section titled "Company Stock Price Performance" in the 2006 Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information concerning the only known ownership of more than 5 percent of
our outstanding common stock appearing in the section titled "Security Ownership
of Certain Beneficial Owners" in the 2006 Proxy Statement is incorporated herein
by reference. The information concerning the ownership of our equity securities
by directors, certain executive officers and directors and officers as a group,
appearing under the caption "Security Ownership of Management" in the 2006 Proxy
Statement is incorporated herein by reference.
Equity Compensation Plans
The following table summarizes share and exercise price information about our
equity compensation plans as of May 28, 2006.
Equity Compensation Plan Information
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under equity
exercise of outstanding compensation plans
outstanding options, options, warrants (excluding securities
Plan Category warrants, and rights and rights reflected in column (a))
(a) (b) (c)
------------------------ --------------------- ------------------------------
Equity compensation plans approved by
security holders:
Option Plans (1) 18,003,308 $16.18 1,445,888
Employee Stock Purchase Plan - - 11,663,945
Director Stock Plan - - 538,959
2005 Executive Officer Equity
Plan (2) - - 3,000,000
Equity compensation plans not
approved by security holders:
Option Plans (3) 39,134,993 $17.89 46,277,729
Restricted Stock Plan (4) 20,300 - 1,855,598
---------------------- --------------------- -----------------------------
Total 57,158,601 64,782,119
====================== ===================== =============================
(1) Includes shares to be issued upon exercise of options under the Stock
Option Plan, Executive Officer Stock Option Plan and Director Stock Option
Plan.
(2) Includes shares to be issued upon the exercise of options and/or stock
appreciation rights, as well as shares issued upon payment of performance
share awards.
(3) Includes shares to be issued upon exercise of options under the 1997
Employees Stock Option Plan.
(4) Includes shares to be issued upon vesting of restricted stock units.
Information about our Equity Compensation Plans not Approved by Stockholders
The 1997 Employees Stock Option Plan provides for the grant of non-qualified
stock options to employees who are not executive officers of the company.
Options are granted at market price on the date of grant and can expire up to a
maximum of six years and one day after grant or three months after termination
of employment (up to five years after termination due to death, disability or
retirement), whichever occurs first. Options can vest after six months; all
options granted since the beginning of fiscal 2004 begin to vest after one year,
with vesting completed on a monthly basis ratably over the next three years.
Our Restricted Stock Plan authorizes issuance of restricted stock to
employees who are not officers of the company. The plan has been made available
to employees with skills and technical expertise considered important to us. The
plan also allows for the issuance of stock upon expiration of restrictions
imposed on restricted stock units. The restrictions on the restricted stock and
the restricted stock units expire over time, ranging from one to six years after
issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information appearing in the section of the 2006 Proxy Statement relating to
the proposal on the Ratification of the Appointment of KPMG LLP as the
Independent Auditors of the Company is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Pages in
(a) 1. Financial Statements this document
---------------------------- -------------
National Semiconductor Corporation and Subsidiaries
For each of the years in the three-year period ended
May 28, 2006 - refer to Index in Item 8 40-86
iReady Corporation and Subsidiary
For the years ended September 30, 2003 and 2002; and the
four-month period ended January 31, 2004* Exhibit 99.1
(a) 2. Financial Statement Schedules
------------------------------------
Schedule II - Valuation and Qualifying Accounts 95
All other schedules are omitted since the required information is inapplicable
or the information is presented in the Consolidated Financial Statements or
notes thereto.
Separate financial statements of National are omitted because we are
primarily an operating company and all subsidiaries included in the Consolidated
Financial Statements being filed, in the aggregate, do not have minority equity
interest or indebtedness to any person other than us in an amount which exceeds
five percent of the total assets as shown by the most recent year end
consolidated balance sheet filed herein.
(a) 3. Exhibits
---------------
The exhibits listed in the accompanying Index to Exhibits on pages 99 to 102 of
this report are filed as part of, or incorporated by reference into, this
report.
*These financial statements are set forth in exhibit 99.1 and incorporated
herein by reference.
NATIONAL SEMICONDUCTOR CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In Millions)
Deducted from Receivables
in the Consolidated Balance Sheets
Doubtful
Description Accounts Returns Allowances Total
----------------- ----------------- ----------------- ---------------- ----------------
Balance at May 25, 2003 $ 6.7 $ 5.4 $ 26.1 $ 38.2
Additions charged against revenue - 12.4 179.7 192.1
Deductions (4.6) (1) (12.6) (166.4) (183.6)
----------------- ----------------- ---------------- ----------------
Balances at May 30, 2004 2.1 5.2 39.4 46.7
Additions charged against revenue - 8.2 149.8 158.0
Deductions (0.4) (1) (9.8) (167.8) (178.0)
----------------- ----------------- ---------------- ----------------
Balance at May 29, 2005 1.7 3.6 21.4 26.7
Additions charged against revenue - 5.9 210.9 216.8
Additions charged against cost and expenses 0.1 - - 0.1
Deductions (0.3) (1) (6.0) (198.5) (204.8)
----------------- ----------------- ---------------- ----------------
Balance at May 28, 2006 $ 1.5 $ 3.5 $ 33.8 $ 38.8
================= ================= ================ ================
________________________________________________
(1) Doubtful accounts written off, less recoveries.
Our customers do not have contractual rights to return product to us except
under customary warranty provisions. The majority of returns and allowances are
related to the price adjustment programs we have with distributors, none of
which involve return of product. As discussed in Note 1 to the Consolidated
Financial Statements, we have agreements with our distributors that cover
various programs, including pricing adjustments based on resale pricing and
volume, price protection for inventory, discounts for prompt payment and scrap
allowances. The revenue we record for these distribution sales is net of
estimated provisions for these programs. Our estimates are based upon historical
experience rates by geography and product family, inventory levels in the
distribution channel, current economic trends, and other related factors. Our
history of actual credits granted in connection with the allowance programs has
been consistent with the reserves we have accrued.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONAL SEMICONDUCTOR CORPORATION
Date: July 24, 2006 /S/ BRIAN L. HALLA*
-------------------
Brian L. Halla
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities stated and on the 24th day of July 2006.
Signature Title
/S/ BRIAN L. HALLA* Chairman of the Board
-------------- and Chief Executive officer
Brian L. Halla (Principal Executive Officer)
/S/ LEWIS CHEW* Senior Vice President, Finance
---------- and Chief Financial Officer
Lewis Chew (Principal Financial Officer)
/S/ JAMIE E. SAMATH * Corporate Controller
---------------- (Principal Accounting Officer)
Jamie E. Samath
/S/ STEVEN R. APPLETON * Director
-------------------
Steven R. Appleton
/S/ GARY P. ARNOLD * Director
---------------
Gary P. Arnold
/S/ RICHARD J. DANZIG * Director
------------------
Richard J. Danzig
/S/ JOHN T. DICKSON * Director
----------------
John T. Dickson
/S/ ROBERT J. FRANKENBERG * Director
---------------------
Robert J. Frankenberg
/S/ E. FLOYD KVAMME* Director
---------------
E. Floyd Kvamme
/S/ MODESTO A. MAIDIQUE * Director
-------------------
Modesto A. Maidique
/S/ EDWARD R. McCRACKEN * Director
-------------------
Edward R. McCracken
*By \s\ Lewis Chew
-------------------------------------
Lewis Chew, Attorney-in-Fact
Consent of Independent Registered Public Accounting Firm
The Board of Directors
National Semiconductor Corporation:
We consent to the incorporation by reference in the registration statements
(Nos. 33-48943, 333-09957, 333-36733, 333-63614, 333-48424, 333-109348,
333-119963, 333-122652 and 333-129585) on Form S-8 of National Semiconductor
Corporation of our reports dated July 26, 2006, with respect to the consolidated
balance sheets of National Semiconductor Corporation and subsidiaries as of May
28, 2006 and May 29, 2005, and the related consolidated statements of income,
comprehensive income, shareholders' equity, and cash flows for each of the years
in the three-year period ended May 28, 2006 and the related financial statement
schedule, management's assessment of the effectiveness of Internal Control Over
Financial Reporting as of May 28, 2006, and the effectiveness of Internal
Control Over Financial Reporting as of May 28, 2006, which reports appear in the
2006 Annual Report on Form 10-K of National Semiconductor Corporation.
KPMG LLP
Mountain View, California
July 26, 2006
Consent of Independent Registered Public Accounting Firm
The Board of Directors
iReady Corporation:
We consent to the incorporation by reference in the registration statements
(Nos. 33-48943, 333-09957, 333-36733, 333-63614, 333-48424, 333-109348,
333-119963, 333-122652 and 333-129585) on Form S-8 of National Semiconductor
Corporation of our report dated February 18, 2004 relating to the consolidated
balance sheet of iReady Corporation and subsidiary (the Company) as of September
30, 2003, and the related consolidated statements of operations, mandatorily
redeemable convertible preferred stock and stockholders' deficit, and cash flows
for the year then ended, which report appears in the 2006 Annual Report on Form
10-K of National Semiconductor Corporation.
Our report dated February 18, 2004 contains explanatory paragraphs stating (i)
that the Company's consolidated balance sheet as of September 30, 2003, and the
related consolidated statements of operations, mandatorily redeemable
convertible preferred stock and stockholders' deficit, and cash flows for the
year ended September 30, 2003, have been restated and (ii) that the Company has
suffered recurring losses from operations and has a stockholders' deficit which
raise substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG LLP
Mountain View, California
July 26, 2006
INDEX TO EXHIBITS
Item 14(a) (3)
The following documents are filed as part of this report:
1. Financial Statements: reference is made to the Financial Statements
described under Part IV, Item 14(a) (1).
2. Other Exhibits:
3.1 Second Restated Certificate of Incorporation of the Company, as amended
(incorporated by reference from the Exhibits to our Registration Statement
on Form S-3 Registration No. 33-52775, which became effective March 22,
1994); Certificate of Amendment of Certificate of Incorporation dated
September 30, 1994 (incorporated by reference from the Exhibits to our
Registration Statement on Form S-8 Registration No. 333-09957 which became
effective August 12, 1996); Certificate of Amendment of Certificate of
Incorporation dated September 22, 2000 (incorporated by reference from the
Exhibits to our Registration Statement on Form S-8 Registration No.
333-48424, which became effective October 23, 2000).
3.2 By-Laws of the Company, as amended effective April 19, 2006 (incorporated
by reference from the Exhibits to our Form 8-K dated April 19, 2006 filed
April 20, 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 Registration Statement on Form 8-A filed
April 26, 2004).
10.1 Management Contract or Compensatory Plan or Arrangement: Executive Officer
Incentive Plan as amended effective July 14, 2004 (incorporated by
reference from the Exhibits to our Form 10-K for the fiscal year ended May
30, 2004 filed August 11, 2004). Fiscal Year 2006 Executive Officer
Incentive Plan Agreement (incorporated by reference to the Exhibits to our
Form 8-K dated July 19, 2005 filed July 22, 2005). Executive Officer
Incentive Plan - Suneil Parulekar (incorporated by reference to the
Exhibits to our Form 10-K for the fiscal year ended May 29, 2005 filed
August 9, 2005). Executive Officer Incentive Plan Agreement (incorporated
by reference to the Exhibits to our Form 8-K dated July 18, 2006 filed July
20, 2006). Executive Officer Incentive Plan - Lewis Chew.
10.2 Management Contract or Compensatory Plan or Agreement: Stock Option Plan,
as amended effective April 15, 2003 (incorporated by reference from the
Exhibits to our Form 10-K for the fiscal year ended May 25, 2003 filed July
22, 2003). Form of stock option agreement used for options granted under
the Stock Option Plan (incorporated by reference from the Exhibits to our
Form 10-Q for the quarter ended November 28, 2004 filed January 6, 2005).
10.3 Management Contract or Compensatory Plan or Agreement: Executive Officer
Stock Option Plan, as amended effective April 15, 2003 (incorporated by
reference from the Exhibits to our Form 10-K for the fiscal year ended May
25, 2003 filed July 22, 2003). Form of stock option agreement used for
options granted under the Executive Officer Stock Option Plan (incorporated
by reference from the Exhibits to our Form 10-Q for the quarter ended
November 28, 2004 filed January 6, 2005).
10.4 Management Contract or Compensatory Plan or Arrangement; Equity
Compensation Plan not approved by Stockholders: Non-Qualified Stock Option
Agreement with Peter J. Sprague dated May 18, 1995 (incorporated by
reference from the Exhibits to our Registration Statement on Form S-8
Registration No. 33-61381 which became effective July 28, 1995).
10.5 Management Contract or Compensatory Plan or Arrangement: Director Stock
Plan as amended and restated effective August 13, 2005 (incorporated by
reference from the Exhibits to our Registration Statement on Form S-8
Registration No. 333-129585 filed November 9, 2005).
10.6 Management Contract or Compensatory Plan or Arrangement: Director Stock
Option Plan (incorporated by reference from the Exhibits to the Form 10-K
for the fiscal year ended May 29, 2005 filed August 9, 2005). Form of stock
option agreement used for options granted under the Director Stock Option
Plan (incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended November 28, 2004 filed January 6, 2005).
10.7 Management Contract or Compensatory Plan or Arrangement: Director Deferral
Plan (plan terminated effective April 13, 2005). (Incorporated by reference
from the Exhibits to the Form 10-K for the fiscal year ended May 29, 2005
filed August 9, 2005.)
10.8 Management Contract or Compensatory Plan or Arrangement: Board Retirement
Policy (incorporated by reference from the Exhibits to the Form 10-K for
the fiscal year ended May 29, 2005 filed August 9, 2005).
10.9 Management Contract or Compensatory Plan or Arrangement: Preferred Life
Insurance Program (incorporated by reference from the Exhibits to the Form
10-K for the fiscal year ended May 29, 2005 filed August 9, 2005).
10.10 Management Contract or Compensatory Plan or Arrangement: Retired Officers
and Directors Health Plan.
10.11 Management Contract or Compensatory Plan or Agreement: Executive Long Term
Disability Plan as amended January 1, 2002 as restated July 2002
(incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended November 24, 2002 filed January 6, 2003).
10.12 Management Contract or Compensatory Plan or Agreement: Executive Staff
Long Term Disability Plan as amended January 1, 2002 as restated July 2002
(incorporated by reference from the Exhibits to our Form 10-Q for the
quarter ended November 24, 2002 filed January 6, 2003).
10.13 Management Contract or Compensatory Plan or Agreement: Form of Change of
Control Employment Agreement entered into with Executive Officers of the
Company (incorporated by reference from the Exhibits to our Form 10-K for
the fiscal year ended May 30, 2004 filed August 11, 2004).
10.14 Management Contract or Compensatory Plan or Agreement: National
Semiconductor Deferred Compensation Plan (incorporated by reference from
the Exhibits to our Form 10-Q for the quarter ended February 24, 2002 filed
April 10, 2002). Amendment One to Deferred Compensation Plan (incorporated
by reference from the Exhibits to our Form 10-K for the fiscal year ended
May 30, 2004 filed August 11, 2004). Amendment Two to Deferred Compensation
Plan (incorporated by reference from the Exhibits to our Form 8-K dated
December 15, 2005 filed December 16, 2005).
10.15 Equity Compensation Plan not approved by Stockholders: ComCore
Semiconductor, Inc. 1997 Stock Option Plan (incorporated by reference from
the Exhibits to our Registration Statement on Form S-8 Registration No.
333-53801 filed May 28, 1998).
10.16 Equity Compensation Plan not approved by Stockholders: Restricted Stock
Plan as amended effective July 19, 2006; Form of agreements used for grants
of restricted stock, restricted stock units and performance based
restricted stock units under the Restricted Stock Plan (all incorporated by
reference from the Exhibits to Form 8-K dated July 18, 2006 filed July 20,
2006).
10.17 Equity Compensation Plan not approved by Stockholders: 1997 Employees
Stock Option Plan, as amended effective July 14, 2004 (incorporated by
reference from the Exhibits to our Form 10-K for the fiscal year ended May
30, 2004 filed August 11, 2004). Form of stock option agreement used for
options granted under the 1997 Employees Stock Option plan (incorporated by
reference from the Exhibits to our Form 10-Q for the quarter ended November
28, 2004 filed January 6, 2005).
10.18 Equity Compensation Plan not approved by Stockholders: Retirement and
Savings Program (incorporated by reference from the Exhibits to our Form
10-K for the year ended May 26, 2002 filed August 16, 2002). Amendments One
to Seven to Retirement and Savings Program (incorporated by reference from
the Exhibits to our Form 10-K for the fiscal year ended May 30, 2004 filed
August 11, 2004). Amendment Eight to Retirement and Savings Program
(incorporated by reference from the Exhibits to our Form 8-K dated
September 22, 2005 filed September 22, 2005).
10.19 Management Contract or Compensatory Plan or Arrangement: Executive
Physical Exam Plan effective January 1, 2003 (incorporated by reference
from the Exhibits to our Form 10-Q for the quarter ended November 24, 2002
filed January 6, 2003).
10.20 Management Contract or Compensatory Plan or Arrangement: Executive
Preventive Health Program, January 2003 (incorporated by reference from the
Exhibits to our Form 10-Q for the quarter ended February 23, 2003 filed
April 2, 2003).
10.21 Management Contract or Compensatory Plan or Arrangement: Severance Benefit
Plan, as amended and restated as of January 1, 2003 (incorporated by
reference from the Exhibits to our Form 10-K for the fiscal year ended May
25, 2003 filed July 22, 2003).
10.22 Management Contract or Compensatory Plan or Arrangement: 2005 Executive
Officer Equity Plan (incorporated by reference from the Exhibits to our
Registration Statement on Form S-8 Registration No. 333-122652 which became
effective February 9, 2005). Form of option grant agreement under 2005
Executive Officer Equity Plan; form of performance share unit award
agreement under 2005 Executive Officer Equity Plan (both incorporated by
reference from the Exhibits to our Form 8-K dated April 12, 2005 filed
April 15, 2005).
10.23 Management Contract or Compensatory Plan or Arrangement: Director
Compensation Arrangements (incorporated by reference from the Exhibits to
our Form 8-K dated September 30, 2005 filed September 30, 2005).
10.24 Management Contract or Compensatory Plan or Arrangement: Executive
Financial Counseling Plan (incorporated by reference from the Exhibits to
the Form 10-K for the fiscal year ended May 29, 2005 filed August 9, 2005).
10.25 Management Contract or Compensatory Plan or Arrangement: Corporate
Aircraft Time Share Policy as amended July 21, 2006.
14.1 Code of Ethics (incorporated by reference from the Exhibits to our Form
10-K for the fiscal year ended May 30, 2004, filed August 11, 2004).
21.1 List of Subsidiaries and Affiliates.
23.1 Consent of Independent Registered Public Accounting Firm (included in Part
IV).
24.1 Power of Attorney.
31.1 Rule 13a-14 (a) /15d-14 (a) Certifications.
32.1 Section 1350 certifications.
99.1 iReady Corporation and subsidiary financial statements for the years ended
September 30, 2003 and 2002; and the four-month period ended January 31,
2004.