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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended February 25, 2001
or
- -- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
-
Commission File Number: 1-6453
NATIONAL SEMICONDUCTOR CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-2095071
-------- ----------
(State of incorporation) (I.R.S. Employer Identification Number)
2900 Semiconductor Drive, P.O. Box 58090
Santa Clara, California 95052-8090
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 721-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Each Class Outstanding at February 25, 2001.
------------------- ---------------------------------
Common stock, par value $0.50 per share 173,428,952
NATIONAL SEMICONDUCTOR CORPORATION
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) for the
Three Months and Nine Months Ended February 25, 2001 and
February 27, 2000 3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
for the Three Months and Nine Months Ended February 25, 2001
and February 27, 2000 4
Condensed Consolidated Balance Sheets (Unaudited) as of
February 25, 2001 and May 28, 2000 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended February 25, 2001 and February 27, 2000 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18-19
Signature 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except per share amounts)
Three Months Ended Nine Months Ended
Feb. 25, Feb. 27, Feb. 25, Feb. 27,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 475.6 $ 548.9 $1,711.4 $1,544.6
Operating costs and expenses:
Cost of sales 242.6 285.2 838.3 863.4
Research and development 112.0 90.7 327.8 290.8
Selling, general and administrative 76.3 78.1 255.7 229.2
Special items 12.1 (5.7) 18.5 (35.6)
------------ ------------ ------------ ------------
Total operating costs and expenses 443.0 448.3 1,440.3 1,347.8
------------ ------------ ------------ ------------
Operating income 32.6 100.6 271.1 196.8
Interest income, net 13.4 4.8 42.7 5.0
Other income, net 3.0 227.7 48.9 284.9
------------ ------------ ------------ ------------
Income before income taxes and
extraordinary item 49.0 333.1 362.7 486.7
Income tax expenses 9.8 5.3 72.6 13.0
------------ ------------ ------------ ------------
Net income before extraordinary item 39.2 327.8 290.1 473.7
Extraordinary loss on early extinguishment
of debt, net of tax benefit of $0.4 million - - - 6.8
------------ ------------ ------------ ------------
Net income $ 39.2 $ 327.8 $ 290.1 $ 466.9
============ ============ ============ ============
Earnings per share before extraordinary item:
Basic $ 0.23 $ 1.88 $ 1.64 $ 2.75
Diluted $ 0.21 $ 1.68 $ 1.53 $ 2.49
Earnings per share:
Basic $ 0.23 $ 1.88 $ 1.64 $ 2.71
Diluted $ 0.21 $ 1.68 $ 1.53 $ 2.46
Weighted-average shares:
Basic 174.0 174.7 176.7 172.4
Diluted 183.0 194.8 190.2 189.9
Income used in basic and diluted
earnings per share calculation $ 39.2 $ 327.8 $ 290.1 $ 466.9
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (Unaudited)
(in millions)
Three Months Ended Nine Months Ended
Feb. 25, Feb. 27, Feb. 25, Feb. 27,
2001 2000 2001 2000
------------ ------------- ------------ -------------
Net income $ 39.2 $ 327.8 $ 290.1 $ 466.9
Other comprehensive income, net of tax:
Reclassification adjustment for net
realized gain included in net income (0.1) (195.6) (22.4) (195.6)
Unrealized gain (loss) on
available-for-sale securities (2.6) 7.5 41.3 193.6
------------ ------------- ------------ -------------
Comprehensive income $ 36.5 $ 139.7 $ 309.0 $ 464.9
============ ============= ============ =============
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions)
Feb. 25, May 28,
2001 2000
------------------------ -----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 841.8 $ 778.8
Short-term marketable investments 13.0 22.3
Receivables, net 156.0 258.6
Inventories 215.7 192.9
Deferred tax assets 125.7 125.7
Other current assets 39.0 40.5
------------------------ -----------------------
Total current assets 1,391.2 1418.8
Net property, plant and equipment 814.7 803.7
Long-term cash investments 47.4 48.8
Long-term marketable investments 30.5 12.7
Other assets 218.3 98.2
------------------------ -----------------------
Total assets $ 2,502.1 $ 2,382.2
======================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt $ 31.4 $ 31.4
Accounts payable 123.7 194.5
Accrued expenses 292.2 315.1
Income taxes payable 97.5 86.7
------------------------ -----------------------
Total current liabilities 544.8 627.7
Long-term debt 33.7 48.6
Other non-current liabilities 89.3 62.6
------------------------ -----------------------
Total liabilities 667.8 738.9
------------------------ -----------------------
Commitments and contingencies
Shareholders' equity
Common stock 86.7 88.8
Additional paid-in capital 1,281.6 1,395.3
Retained earnings 476.8 186.7
Accumulated other comprehensive loss (8.6) (27.5)
Treasury stock, at cost (2.2) -
------------------------ -----------------------
Total shareholders' equity 1,834.3 1,643.3
------------------------ -----------------------
Total liabilities and shareholders' equity $ 2,502.1 $ 2,382.2
======================== =======================
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
Nine Months Ended
Feb. 25, Feb. 27,
2001 2000
------------------------ -----------------------
Cash flows from operating activities:
Net income $ 290.1 $ 466.9
Adjustments to reconcile net income
with net cash provided by operations:
Depreciation and amortization 179.0 202.3
Gain on investments (40.8) (272.5)
Loss on disposal of equipment 2.7 9.1
Donation of equity securities 20.5 -
Special items 18.5 (35.6)
Other, net 0.3 3.3
Changes in certain assets and liabilities, net:
Receivables 102.6 (75.6)
Inventories (22.8) (33.1)
Other current assets (0.9) (11.4)
Accounts payable and accrued expenses (115.7) (65.9)
Current and deferred income taxes 10.8 9.9
Other liabilities 4.5 2.9
------------------------ -----------------------
Net cash provided by operating activities 448.8 200.3
------------------------ -----------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (168.4) (94.1)
Sale of equipment - 8.6
Sale and maturity of marketable investments 39.3 127.7
Purchase of marketable investments (28.0) (106.7)
Proceeds from sale of investments 33.3 286.0
Business acquisition, net of cash acquired (98.3) (22.2)
Disposition of Cyrix PC microprocessor business - 75.0
Purchase of investments and other, net (23.8) (2.2)
------------------------ -----------------------
Net cash (used by) provided by investing activities (245.9) 272.1
------------------------ -----------------------
Cash flows from financing activities:
Redemption of convertible subordinated notes - (265.8)
Repayment of debt (14.9) (33.6)
Issuance of common stock, net 48.5 105.8
Purchase and retirement of treasury stock (173.5) -
------------------------ -----------------------
Net cash used by financing activities (139.9) (193.6)
------------------------ -----------------------
Net change in cash and cash equivalents 63.0 278.8
Cash and cash equivalents at beginning of period 778.8 418.7
------------------------ -----------------------
Cash and cash equivalents at end of period $ 841.8 $ 697.5
======================== =======================
See accompanying Notes to Condensed Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
National's management believes the condensed consolidated financial statements
presented in this Form 10-Q contain all adjustments that are necessary to
present fairly the financial position and results of operations of National
Semiconductor Corporation and its subsidiaries. National Semiconductor
Corporation and its majority-owned subsidiaries may be referred to as National
or the company in these notes to these financial statements. Interim results of
operations may not necessarily be indicative of the results that may be expected
for the full year. This report should be read in conjunction with the
consolidated financial statements and notes thereto included in the annual
report on Form 10-K for the fiscal year ended May 28, 2000.
Earnings Per Share:
A reconciliation of the shares used in the computation for basic and diluted
earnings per share follows:
Three Months Ended Nine Months Ended
Feb. 25, Feb. 27, Feb. 25, Feb. 27,
(in millions) 2001 2000 2001 2000
------------ ----------- ----------- -----------
Net income used for basic and
diluted earnings per share $ 39.2 $327.8 $290.1 $466.9
============ =========== =========== ===========
Number of shares:
Weighted average common shares outstanding
used for basic earnings per share 174.0 174.7 176.7 172.4
Effective of dilutive securities:
Stock options 9.0 20.1 13.5 17.5
------------ ----------- ----------- -----------
Weighted average common and potential
common shares outstanding used for
diluted earnings per share 183.0 194.8 190.2 189.9
============ =========== =========== ===========
As of February 25, 2001, the company had options outstanding to purchase 13.3
million shares of common stock with a weighted-average exercise price of $47.32,
which were excluded from the fiscal 2001 computation of diluted earnings per
share because their effect was antidilutive. These options could potentially
dilute the computation of basic earnings per share in the future. As of February
27, 2000, all options outstanding to purchase shares of the company's common
stock were considered dilutive and were included in the computation of diluted
earnings per share.
Note 2. Consolidated Financial Statement Details
The components of inventories were:
Feb. 25, May 28,
(in millions) 2001 2000
--------------------------- ---------------------------
Raw materials $ 14.5 $ 16.6
Work in process 113.0 112.0
Finished goods 88.2 64.3
--------------------------- ---------------------------
Total inventories $ 215.7 $ 192.9
=========================== ===========================
The components of accumulated other comprehensive
loss, net of tax, were:
Feb. 25, May 28,
(in millions) 2001 2000
--------------------------- ---------------------------
Unrealized gain on
available-for-sale securities $ 22.6 $ 3.7
Minimum pension liability (31.2) (31.2)
--------------------------- ---------------------------
Accumulated other comprehensive loss $ (8.6) $ (27.5)
=========================== ===========================
The components of special items were:
Three Months Ended Nine Months Ended
Feb. 25, Feb. 27, Feb. 25, Feb. 27,
(in millions) 2001 2000 2001 2000
------------ ----------- ----------- -----------
In-process research and development charge $ 12.1 $ 4.2 $ 16.2 $ 4.2
Restructuring of operations - (9.9) 2.3 (13.0)
Gain on disposition of Cyrix PC
microprocessor business - - - (26.8)
------------ ----------- ----------- -----------
Total special items $ 12.1 $ (5.7) $ 18.5 $ (35.6)
============ =========== =========== ===========
Components of interest income,
net and other income, net were:
Three Months Ended Nine Months Ended
Feb. 25, Feb. 27, Feb. 25, Feb. 27,
(in millons) 2001 2000 2001 2000
------------ ----------- ------------ -----------
Interest income, net
- --------------------
Interest income $ 14.6 $ 8.1 $ 46.4 $ 21.6
Interest expense (1.2) (3.3) (3.7) (16.6)
------------ ----------- ------------ -----------
Interest income, net $ 13.4 $ 4.8 $ 42.7 $ 5.0
============ =========== ============ ===========
Other income, net
- -----------------
Net intellectual property income $ 0.9 $ 3.7 $ 5.4 $ 10.6
Gain on investments, net 2.0 224.0 40.8 272.5
Other 0.1 - 2.7 1.8
------------ ---------- ----------- ------------
Total other income, net $ 3.0 $ 227.7 $ 48.9 $ 284.9
============ =========== =========== ============
Included in the gain on investments for the first nine months of fiscal 2001 is
a gain of $20.5 million resulting from the distribution of equity securities
relating to the company's investment portfolio. The securities were subsequently
donated to establish the National Semiconductor Foundation. The expense
associated with the donation also totaled $20.5 million and this amount is
included in selling, general and administrative expenses for the first nine
months of fiscal 2001.
Note 3. Statement of Cash Flows Information
Nine Months Ended
Feb. 25, Feb. 27,
(in millions) 2001 2000
---------------------- -----------------------
Supplemental Disclosure of Cash Flows Information:
Cash paid for:
Interest $ 3.6 $ 19.4
Income taxes $ 61.8 $ 2.7
Supplemental Schedule of Non-cash Investing
and Financing Activities:
Issuance of common stock for employee benefit plans $ 4.1 $ 2.6
Issuance of common stock to directors $ 0.3 $ 0.3
Issuance of restricted common stock $ 7.5 $ 8.2
Issuance of common stock in connection
with the settlement of promissory note $ - $ 5.0
Issuance of common stock in connection
with the conversion of subordinated notes $ - $ 0.1
Change in unrealized gain on
available-for-sale securities $ 18.9 $ 1.9
NOTE 4. RESTRUCTURING OF OPERATIONS
During the first nine months of fiscal 2001, the company recorded a $2.3 million
restructuring charge in connection with its consolidation of the wafer
manufacturing operations in Greenock, Scotland. This charge represented
additional severance costs associated with the termination of certain remaining
employees who were scheduled to depart the company in fiscal 2001, at the time
of the final closure of the 4-inch wafer fabrication facility. During the first
quarter of fiscal 2001, the terminating employees earned higher than expected
salaries because of unanticipated overtime hours. The actual salaries earned
directly impacted the amount of severance these employees had a right to receive
at termination. The closure of the 4-inch wafer fabrication facility and the
transfer of products and processes to the 6-inch wafer fabrication facility on
the same site were substantially completed by the end of September 2000. During
the first nine months of fiscal 2001, the company paid $4.4 million in severance
to 96 employees terminated in connection with the facility closure.
During the first nine months of fiscal 2001, the company also paid $4.4 million
for other exit-related costs that were primarily related to restructuring
actions originally announced in May 1999. Included in accrued liabilities at
February 25, 2001, is $12.6 million related to costs for restructuring actions
discussed in Note 3 to the consolidated financial statements for fiscal 2000
that were not yet completed as of February 25, 2001. These restructuring costs
primarily represent facility dismantling costs related to the closure of the
Greenock 4-inch wafer fabrication facility and lease obligations related to
other restructuring actions.
Note 5. Acquisitions
In February 2001, the company acquired innoCOMM Wireless, a developer of
chipsets for wireless networking applications based in San Diego, California.
InnoCOMM's expertise ranges from short-range wireless technologies, such as
Bluetooth and HomeRF, to full wireless local area networking based on the IEEE
802.11 standards, which allow interoperability for wireless LANs similar to how
ethernet allows interoperability of wired LANs. The acquisition is expected to
complement National's existing base of design and product expertise. The
acquisition was accounted for using the purchase method with a purchase price of
$118.8 million. Of the total purchase price, $74.3 million was paid in cash upon
the closing of the transaction. A liability of $44.5 million was recorded,
primarily representing two installments to be paid twelve and twenty-four months
after the closing date. In connection with the acquisition, the company recorded
a $12.1 million in-process research and development charge, which is included as
a component of special items in the condensed consolidated statement of
operations for the third quarter and first nine months of fiscal 2001. The
remainder of the purchase price was allocated to net assets of $0.2 million and
intangible assets of $106.5 million based on fair values. The intangible assets
primarily consist of goodwill, which is to be amortized over a useful life of 7
years. Under terms of employee retention arrangements, the company also expects
to pay a total of approximately $18.3 million to innoCOMM employees upon the
completion of their first and second year service anniversaries. These amounts
will be charged ratably to operations over the related service periods.
In July 2000, the company acquired the business and assets of Vivid
Semiconductor, Inc. a semiconductor company based in Chandler, Arizona. The
company expects the addition of Vivid's technologies and analog engineering
resources to expand its strengths in creating silicon solutions for the
flat-panel display market. The acquisition was accounted for using the purchase
method with a purchase price of $25.1 million in cash. In connection with the
acquisition, the company recorded a $4.1 million in-process research and
development charge, which is included as a component of special items in the
condensed consolidated statement of operations for the first nine months of
fiscal 2001. The remainder of the purchase price was allocated to net assets of
$1.3 million and intangible assets of $19.7 million based on fair values. The
intangible assets primarily consist of goodwill, which is to be amortized over a
useful life of 5 years.
The amount allocated to the in-process research and development charge in each
of these acquisitions was determined through an established valuation technique
used in the high technology industry. The research and development charge was
expensed upon acquisition because technological feasibility had not been
established and no alternative uses exist. The costs of research and development
to bring the products to technological feasibility are not expected to have a
material impact on future operating results.
Note 6. Segment Information
The following table presents information related to the company's reportable
segments:
Information
Analog Appliance All Total
(in millions) Segment Segment Others Eliminations Consolidated
------- ------- ------ ------------ ------------
Three months ended
February 25, 2001:
Sales to unaffiliated
customers $ 346.2 $ 49.4 $ 80.0 $ - $ 475.6
============= =============== =============== =============== ====================
Segment income (loss)
before income
taxes $ 60.4 $ (25.6) $ 14.2 $ - $ 49.0
============= =============== =============== =============== ====================
Three months ended
February 27, 2000:
Sales to unaffiliated
customers $ 386.5 $ 59.8 $ 102.6 $ - $ 548.9
============= =============== =============== =============== ====================
Segment income (loss)
before income
taxes $ 120.3 $ (23.8) $ 236.6 $ - $ 333.1
============= =============== =============== =============== ====================
Information Cyrix
Analog Appliance Business All Total
(in millions) Segment Segment Unit Others Eliminations Consolidated
----------- -------------- ----------- ---------- ---------------- ----------------
Nine months ended
February 25, 2001:
Sales to unaffiliated
Customers $1,223.8 $ 180.5 $ - $ 307.1 $ - $1,711.4
Inter-segment sales - 0.1 - - (0.1) -
----------- -------------- ----------- ---------- ---------------- ----------------
Net sales $1,223.8 $ 180.6 $ - $ 307.1 $ (0.1) $1,711.4
=========== ============== =========== ========== ================ ================
Segment income (loss)
before income
taxes $ 344.4 $ (63.7) $ - $ 82.0 $ - $ 362.7
=========== ============== =========== ========== ================ ================
Nine months ended
February 27, 2000:
Sales to unaffiliated
customers $1,088.7 $ 171.3 $ 18.6 $ 266.0 $ - $1,544.6
Inter-segment sales - 0.2 - - (0.2) -
----------- -------------- ----------- ---------- ---------------- ----------------
Net sales $1,088.7 $ 171.5 $ 18.6 $ 266.0 $ (0.2) $1,544.6
=========== ============== =========== ========== ================ ================
Segment income (loss)
before income
taxes and extraordinary
item $ 309.6 $ (77.6) $ (22.6) $ 277.3 $ - $ 486.7
=========== ============== =========== ========== ================ ================
Note 7. Put Warrants
In November 2000, the company sold put warrants on 300,000 shares of its common
stock. The warrants, which matured in February 2001, gave the holders the right
at maturity to require the company to repurchase shares of National common stock
at $17.50. The company had the option to settle the warrants in cash or shares
of common stock. The amount related to the company's potential repurchase
obligation had been reclassified from shareholders' equity to put warrants. In
February 2001, all of the outstanding warrants expired unexercised and the
company was not required to settle them, either in cash or stock. The potential
repurchase obligation was reclassified back to shareholders' equity in February
2001.
Item 2. MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The company recorded net sales of $475.6 million and $1,711.4 million for the
third quarter and first nine months of fiscal 2001, respectively. Net sales for
the quarter represented a 13 percent decline from net sales of $548.9 million
for the third quarter of fiscal 2000, while net sales for the first nine-month
period represented an 11 percent increase over net sales of $1,544.6 million for
the same period of fiscal 2000. Strong sales in the first half of fiscal 2001
contributed to the growth in sales for the first nine months of fiscal 2001 over
the comparable period of fiscal 2000. Meanwhile recent weakness in semiconductor
industry business conditions contributed to the decline in sales for the third
quarter of fiscal 2001. Net income was $39.2 million and $290.1 million for the
third quarter and first nine months of fiscal 2001, respectively, compared to
net income of $327.8 million and $466.9 million for the corresponding periods of
fiscal 2000. Lower operating results were caused by a significant slowdown in
orders seen since the latter part of calendar 2000.
Net income for the third quarter of fiscal 2001 included a special item of $12.1
million for an in-process R&D charge related to the acquisition of innoCOMM
Wireless (See Note 5). In addition to this charge, special items reported in net
income for the first nine months of fiscal 2001 included a $4.1 million
in-process R&D charge related to the acquisition of Vivid Semiconductor (See
Note 5) and a $2.3 million restructuring charge related to the consolidation of
the manufacturing facility in Greenock, Scotland (See Note 4). Net income for
the third quarter and first nine months of fiscal 2000 included special items of
$5.7 million and $35.6 million, respectively. For the third quarter of fiscal
2000, special items included a $9.9 million credit related to restructuring of
operations and a $4.2 million in-process R&D charge. For the first nine months
of fiscal 2000, special items included an additional $3.1 million credit related
to restructuring of operations and a $26.8 million gain from the sale of the
assets of the Cyrix PC microprocessor business. Net income for the first nine
months of fiscal 2000 also included a $6.8 million extraordinary loss (net of
tax benefit of $0.4 million) that the company recorded in connection with the
early redemption of its 6.5 percent convertible subordinated notes.
SALES
The following discussion is based on the company's operating segments described
in Note 12 to the consolidated financial statements included in the Annual
Report on Form 10-K for the year ended May 28, 2000.
The increase in overall sales for the first nine months of fiscal 2001 was a
result of higher volumes that were primarily shipped in the first half of the
fiscal year, as sales in the third quarter declined significantly. Average
selling prices remained unchanged for most of the company's products. The Analog
segment, whose sales now represent 72 percent of the company's total sales, led
the growth in sales for the first nine months. Analog product sales for the
first nine months of fiscal 2001 grew 12 percent over sales for the comparable
period of fiscal 2000, but declined 10 percent for the third quarter from sales
for the comparable period of fiscal 2000. The growth for the first nine months
of fiscal 2001 was primarily attributable to higher unit volume with slightly
increased average selling prices. A significant decline in unit volume caused
the decrease in the current third quarter sales, while average selling prices
were fairly stable. Sales of application specific wireless products, including
radio frequency building blocks, grew 5 percent and 17 percent for the third
quarter and first nine months of fiscal 2001 over the comparable periods of
fiscal 2000. Interface, amplifiers and power management products also
contributed to the growth in sales for the first nine months of fiscal 2001 with
increases of 23 percent, 22 percent and 16 percent, respectively, over the
comparable period of fiscal 2000. However, these product areas experienced a
noticeably different trend in the third quarter of fiscal 2001 with decreases of
11 percent, 7 percent and 10 percent, respectively, compared to the same quarter
of fiscal 2000. Sales in the third quarter of fiscal 2001 for the Information
Appliance segment decreased 17 percent from sales for the comparable quarter of
fiscal 2000 due to decreases in both unit shipments and average selling prices.
The slowdown in demand for personal computers and PC-related products
contributed to the decline in sales for the Information Appliance segment
because a large part of the portfolio of information appliance products is still
focused on the traditional PC marketplace. For the first nine months of fiscal
2001, information appliance product sales increased 5 percent over sales for the
comparable period of fiscal 2000. This increase was primarily due to higher unit
volume, as average selling prices remained relatively flat. The nine-month
period comparison excludes sales from the Cyrix PC microprocessor unit, which
the company sold in September 1999. Network product sales declined 24 percent in
the third quarter and 20 percent year to year from sales in the comparable
periods of fiscal 2000. Although the company has introduced network products
employing new digital signal processing technology primarily focused on higher
bandwidth gigabit applications, minimal shipments of these new products and
decreasing demand for mature ethernet products contributed to the network
product sales decline. Unit volume and average selling prices were both lower
for network products compared to last year.
GROSS MARGIN
Gross margin as a percentage of sales increased to 49 percent and 51 percent for
the third quarter and first nine months of fiscal 2001, respectively, from gross
margin of 48 percent and 44 percent for the same periods of fiscal 2000. The
increase in gross margin for fiscal 2001 was primarily driven by improved
product mix, as the company shipped more high contribution analog and wireless
products, combined with improved factory utilization during the first half of
fiscal 2001. Wafer capacity utilization over the first nine months of fiscal
2001 ran at 78 percent, reflecting high utilization in the earlier part of the
fiscal 2001, offset by substantially reduced utilization in the latter part of
the fiscal 2001. Utilization in the same period of fiscal 2000 was 71 percent,
which reflected the effect of lower capacity utilization in Maine caused by the
company's decision made at the end of fiscal 1999 to exit the Cyrix PC
microprocessor business.
RESEARCH AND DEVELOPMENT
Total research and development expenses for the third quarter and first nine
months of fiscal 2001 increased 31 percent and 17 percent, respectively, over
R&D expenses for the comparable periods of fiscal 2000. Total R&D expenses for
the third quarter include the effect of a $12.1 million in-process R&D charge
related to the acquisition of innoCOMM Wireless in February 2001 and for the
first nine months of fiscal 2001 also include the effect of a $4.1 million
in-process R&D charge related to the acquisition of Vivid Semiconductor in July
2000. The comparable periods of fiscal 2000 include the effect of a $4.2 million
in-process R&D charge related to the acquisition of Algorex, Inc. in December
1999. Excluding these charges, R&D expenses for the third quarter and first nine
months of fiscal 2001 increased 23 percent and 13 percent, respectively, over
expenses for the corresponding fiscal 2000 periods. Higher R&D expenses for the
third quarter and first nine months of fiscal 2001 reflect increased investment
in the development of new analog and mixed-signal technology-based products for
applications in the wireless communications, personal systems and consumer
markets, as well as in the process technologies needed to support these
products. It also reflects increased resource investment to develop new cores
and integrate those cores with other technological capabilities to create
system-on-a-chip products. Beginning in the second quarter of fiscal 2001, the
company also began recording expense associated with a licensing agreement with
Taiwan Semiconductor Manufacturing Company. The agreement allows National to
gain access to a variety of TSMC's advanced sub-micron processes for use in its
Maine facility as desired, if and when those processes are developed by TSMC.
The advanced process technologies are expected to accelerate the development of
high performance digital and mixed-signal products for the information
appliances, wireless and networking markets. The start of this expense also
contributed to the increase in R&D expense over the comparable fiscal 2000
periods. Through the first nine months of fiscal 2001, the company devoted
approximately 79 percent of its R&D effort towards new product development and
21 percent towards the development of process technology. Compared to the
corresponding period of fiscal 2000, this represents a 19 percent increase in
spending for new product development and a 9 percent increase in spending for
process technology.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the third quarter of fiscal
2001 decreased 2 percent from the third quarter of fiscal 2000, while for the
first nine months of fiscal 2001 they increased 12 percent over the
corresponding period of fiscal 2000. Included in SG&A expenses for the first
nine months of fiscal 2001 is an expense of $20.5 million associated with the
charitable donation of equity securities that were part of the company's
investment portfolio which were donated to establish the National Semiconductor
Foundation. Excluding this expense, SG&A expenses for the first nine months of
fiscal 2001 increased 3 percent over SG&A expenses for the same period of fiscal
2000. Actions implemented by the company to reduce spending in response to the
recent weakness in business conditions resulted in a decline in these expenses
for the third quarter of fiscal 2001. These cost reduction actions had a lesser
effect on overall SG&A expenses for the first nine months of fiscal 2001 and the
increase in these expenses for the first nine months of fiscal 2001 over the
comparable fiscal 2000 period is primarily attributable to increases in payroll
and employee benefit expenses.
RESTRUCTURING OF OPERATIONS
In connection with its consolidation of the wafer manufacturing operations in
Greenock, Scotland, the company recorded a $2.3 million restructuring charge,
which is included as a special item for the first nine months of fiscal 2001.
The charge represented additional severance costs associated with the
termination of certain remaining employees concurrent with the closure of the
4-inch fabrication facility, which was substantially completed by the end of
September 2000. Further detail and discussion of other activity for the third
quarter and first nine months of fiscal 2001 related to restructuring actions
are described in Note 4.
INTEREST INCOME AND INTEREST EXPENSE
Net interest income was $13.4 million and $42.7 million for the third quarter
and first nine months of fiscal 2001, respectively, compared to $4.8 million and
$5.0 million for the same periods of fiscal 2000. Both higher average cash
balances and higher interest rates in fiscal 2001 contributed to an increase in
interest income while offsetting interest expense for fiscal 2001 was
significantly lower than fiscal 2000. Lower interest expense was due to the
redemption of $258.8 million of the company's convertible subordinated notes,
which were repaid in November 1999.
OTHER INCOME, NET
Other income, net was $3.0 million and $48.9 million for the third quarter and
first nine months of fiscal 2001, respectively, compared to $227.7 million and
$284.9 million for the same periods of fiscal 2000. The components of other
income, net for the third quarter of fiscal 2001 included a net gain of $2.0
million from the sale of equity investments, $0.9 million of net intellectual
property income and $0.1 million of non-operating income associated with an
investment partnership. Other income, net for the first nine months of fiscal
2001 included a net gain of $40.8 million from the sale of equity investments,
$5.4 million of net intellectual property income and $2.7 million of
non-operating income associated with an investment partnership. The net gain
from equity investments in fiscal 2001 included a gain of $20.5 million
resulting from the distribution of equity securities relating to the company's
investment portfolio which were subsequently donated to establish the National
Semiconductor Foundation. An expense for the same amount associated with the
donation is included in SG&A expenses for the first nine months of fiscal 2001.
This compares to other income, net, for the third quarter of fiscal 2000, which
included a net gain of $224.0 million from the sale of equity investments. This
included a gain of $222.3 million attributable to the sale of the remaining
investment in Fairchild Semiconductor stock acquired in conjunction with the
disposition of the company's Fairchild Semiconductor Group in fiscal 1997. The
third quarter of fiscal 2000 also included net intellectual property income of
$3.7 million. Other income, net for the first nine months of fiscal 2000
included a gain of $272.5 million from the sale of equity investments, of which
$270.7 million was attributable to the sale of the investment in Fairchild
Semiconductor stock. The first nine months of fiscal 2000 also included $10.6
million of net intellectual property income and other miscellaneous income of
$1.8 million.
INCOME TAX EXPENSE
The company recorded income tax expense of $9.8 million and $72.6 million for
the third quarter and first nine months of fiscal 2001, respectively. This
compares to income tax expense before extraordinary item of $5.3 million and
$13.0 million for the corresponding periods of fiscal 2000. This is based on the
company's expected effective tax rate of 20 percent for fiscal 2001, which is a
combination of U.S. alternative minimum tax and foreign tax expense. This
compares to a 2 percent effective tax rate for fiscal 2000, which primarily
represented foreign income tax expense, as U.S. taxable income was offset by net
operating loss carryforwards.
FINANCIAL CONDITION
During the first nine months of fiscal 2001, cash and cash equivalents increased
by $63.0 million compared to an increase of $278.8 million for the first nine
months of fiscal 2000. The primary factors contributing to these amounts are
described below.
For the first nine months of fiscal 2001, operating activities generated cash of
$448.8 million compared to $200.3 million for the first nine months of fiscal
2000. The increase in net income adjusted for non-cash items contributed to the
improvement. For fiscal 2000, changes in working capital items had minimal
impact as the decrease in accounts payable was substantially offset by a
decrease in receivables as sales declined and spending was reduced beginning in
the second half of fiscal 2001. For fiscal 2000, cash flow from changes in
working capital was negatively impacted by increases in receivables and
inventories combined with a decrease in accounts payable.
The company's investing activities used cash of $245.9 million in the first nine
months of fiscal 2001, while generating cash of $272.1 million in the first nine
months of fiscal 2000. Use of cash during fiscal 2001 primarily related to the
company's investment in property, plant and equipment of $168.4 million and the
acquisitions of innoCOMM and Vivid for a total of $98.3 million (See Note 5). In
comparison, the company's investment in property, plant and equipment for the
same period in fiscal 2000 was $94.1 million, offset by proceeds of $270.7
million from the sale of Fairchild stock and $75.0 million from the sale of the
Cyrix PC microprocessor business.
The company's financing activities used cash of $139.9 million in the first nine
months of fiscal 2001, compared to $193.6 million in the first nine months of
fiscal 2000. The primary use of cash in fiscal 2001 was for the company's
repurchase of 7.4 million shares of common stock on the open market for $173.5
million. Of these shares of treasury stock, 7.3 million were retired during the
same period. The cash outlay was partially offset by proceeds of $48.5 million
from the issuance of common stock under employee benefit plans. For fiscal 2000
the primary use of cash during the comparable period was for the company's
redemption of the 6.5 percent convertible subordinated notes for $265.8 million,
which was partially offset by proceeds of $105.8 million from the issuance of
common stock under employee benefit plans.
Management foresees substantial cash outlays for plant and equipment throughout
the remainder of fiscal 2001, with primary focus on new process capabilities, as
well as improvements to provide better manufacturing efficiency and
productivity. While management has reduced its capital expenditure plan in
response to the recent slowdown in market demand, the fiscal 2001 capital
expenditure level is still expected to be higher than the fiscal 2000 level.
Existing cash and investment balances, together with existing lines of credit,
are expected to be sufficient to finance the remaining capital investments
planned for fiscal 2001.
OUTLOOK
The statements contained in this outlook section and within certain sections of
management's discussion and analysis are forward-looking based on current
expectations and management's estimates. Actual results may differ materially
from those set forth in these forward-looking statements. In addition to the
risk factors discussed in the Financial Condition and Results of Operations on
pages 21 through 24 of the company's 2000 Annual Report on Form 10-K for the
fiscal year ended May 28, 2000 filed with the Securities and Exchange
Commission, the following factors may also affect the company's operating
results for fiscal 2001:
As semiconductor industry market conditions continued to weaken through the
third quarter of fiscal 2001, the company experienced a very significant
slowdown in new orders. New orders, particularly from the distribution channel,
fell significantly as distributors reduced inventory levels in response to
resale growth rates that were lower than previously anticipated. Continued
inventory corrections by major customers in the wireless handset market and
slower than expected unit growth for wireless handsets also contributed to the
order slowdown. The slower than expected demand in the PC market further added
to the slowdown in new orders. Contract manufacturers, who are faced with excess
inventories, are also making inventory corrections, which is negatively
impacting the company. The company does expect new orders to improve once
customers work through inventory corrections. However, there has been no current
evidence that this process will be resolved in the near term and therefore the
slowdown in new orders may be further prolonged. Fill orders, which are orders
received and shippable in the same quarter, were unusually low in the recent
third quarter and there has been no evidence of improvement to date. Combining
this trend with the overall weakness in the U.S. economy, the company
anticipates a decline in sales for the fourth quarter of fiscal 2001 from the
sales level achieved in the recent third quarter. The level of sales for the
fourth quarter is very dependent upon the amount of fill orders received. If the
company does not receive a sufficient level of fill orders, the expected level
of sales for the fourth quarter of fiscal 2001 will further decline.
The company faces a risk that declining order rates will continue to reduce
wafer fabrication capacity utilization. As a result, future gross margin and
future operating results would be unfavorably impacted. While the company has
implemented some short-term actions in the fourth quarter of fiscal 2001 to
reduce costs and partially mitigate the decline in gross margins and operating
results, these actions may not be sustainable over a longer period of time. The
company is currently reviewing alternative cost reduction actions that would
positively impact the company's operating results on a more sustainable basis.
If the company decides to implement any such alternatives during the fourth
quarter of fiscal 2001, such action may have a negative impact on results for
the fourth quarter of fiscal 2001.
The wireless handset market continues to be an important to the company's future
growth plans. New integrated chipsets are being developed to provide added
dollar content in targeted entry level handsets. Due to high levels of
competition, as well as complex technological requirement, there is no assurance
that the company will ultimately be successful in this targeted market. Although
end market unit growth for wireless handsets was very high for calendar 2000 as
a whole, near-term growth expectations are highly uncertain. Delayed
introduction of next-generation wireless base stations also negatively impacts
potential growth in the wireless handset market. There is also uncertainty
related to the standards that ultimately will be adopted for the next-generation
wireless base stations. As a result, the company remains cautious on near-term
trends in its wireless-related business.
The company continues to hold numerous design wins in the information appliance
market, but end user adoption has been slower than anticipated. It is not yet
clear which form factors, specific customers' products or customers' business
models will ultimately be successful in this new emerging market. Revenue for
the company's information appliance products is dependent on the outcome and the
timing of product acceptance trends.
The forward-looking statements discussed or incorporated by reference in this
outlook section involve a number of risks and uncertainties. Other risks and
uncertainties include, but are not limited to, the general economy, regulatory
and international economic conditions, the changing environment of the
semiconductor industry, competitive products and pricing, growth in the PC and
communications industries, the effects of legal and administrative cases and
proceedings, and such other risks and uncertainties as may be detailed from time
to time in the company's SEC reports and filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures
About Market Risk, in the company's Annual Report on Form 10-K for the year
ended May 28, 2000 and to the subheading "Financial Market Risks" under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on page 21 of the company's Annual Report on Form 10-K for the
year ended May 28, 2000 and in Note 1, "Summary of Significant Accounting
Policies," and Note 2, "Financial Instruments," in the Notes to the Consolidated
Financial Statements included in Item 8 of Form 10-K. There have been no
material changes from the information reported in these sections.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 28, 2001, the U.S. Environmental Protection Agency served the company
with an administrative complaint, compliance order and notice of opportunity for
hearing. The complaint alleges that the EPA found certain violations of the
Resource Conservation and Recovery Act in an inspection conducted in August 1999
at the Maine facility. The compliance order requires the company to institute
and perform certain procedures and training in connection with the company's
handling of hazardous wastes at the facility. The order also seeks payment of a
penalty of $302,990. The company is evaluating a response to be presented in the
administrative proceedings but believes that any deficiencies found in the 1999
audit were corrected at or soon after the time of the audit.
The settlement reported in the Form 10-K for the first quarter of fiscal year
2001 involving the duty drawback claims and the U.S. Customs Service is only a
partial settlement of the duty drawback claims that have been at issue since
1988. The company is continuing to pursue settlement of the duty drawback claims
that remain open.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Second Restated Certificate of Incorporation of the Company as amended
(incorporated by reference from the Exhibits to the Company's
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 the Company's 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
the Company's 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 January 24, 2001.
4.1 Form of Common Stock Certificate (incorporated by reference from the
Exhibits to the Company's 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 the
Company's Registration 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 the Company's
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
the Company's Amendment No. 2 to the Registration Statement on Form
8-A filed January 17, 1997).
4.3 Indenture dated as of September 15, 1995 (incorporated by reference
from the Exhibits to the Company's Registration Statement on Form S-3
Registration No. 33-63649, which became effective November 6, 1995).
4.4 Form of Note (incorporated by reference from the Exhibits to the
Company's Registration Statement on Form S-3 Registration No.
33-63649, which became effective November 6, 1995).
4.5 Indenture dated as of May 28, 1996 between Cyrix Corporation ("Cyrix")
and Bank of Montreal Trust Company as Trustee (incorporated by
reference from the Exhibits to Cyrix's Registration Statement on Form
S-3 Registration No. 333-10669, which became effective August 22,
1996).
4.6 Registration Rights Agreements dated as of May 28, 1996 between Cyrix
and Goldman, Sachs & Co. (incorporated by reference from the Exhibits
to Cyrix's Registration Statement on Form S-3 Registration No.
333-10669, which became effective August 22, 1996).
(b) Reports on Form 8-K
No reports on form 8-K were filed for the quarter ending February 25, 2001.
SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL SEMICONDUCTOR CORPORATION
Date: April 10, 2001 \s\Lewis Chew
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Lewis Chew
Vice President and
Chief Financial Officer
(acting)
Vice President and Controller
Signing on behalf of the registrant
and as principal accounting officer