UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - EXCHANGE ACT OF 1934
For the quarterly period ended November 29, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File Number: 1-6453
NATIONAL SEMICONDUCTOR CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 95-2095071
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(State of incorporation) (I.R.S. Employer Identification Number)
2900 Semiconductor Drive, P.O. Box 58090
Santa Clara, California 95052-8090
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(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 721-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
--- --
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Title of Each Class Outstanding at November 29, 1998.
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Common stock, par value $0.50 per share 167,025,645
NATIONAL SEMICONDUCTOR CORPORATION
INDEX
Page No.
Part I. Financial Information --------
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months and Six Months
Ended November 29, 1998 and November 23, 1997 3
Condensed Consolidated Statements of Other
Comprehensive Income(Loss) (Unaudited) for the
Three Months and Six Months Ended November 29, 1998
and November 23, 1997 4
Condensed Consolidated Balance Sheets (Unaudited)
as of November 29, 1998 and May 31, 1998 5
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Three Months and Six Months
Ended November 29, 1998 and November 23, 1997 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18-19
Item 6. Exhibits and Reports on Form 8-K 19-20
Signature 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except per share amounts)
Three Months Ended Six Months Ended
------------------ -------------------
Nov. 29, Nov. 23, Nov. 29, Nov. 23,
1998 1997 1998 1997
-------- -------- -------- --------
Net sales $ 510.1 $ 719.9 $ 979.7 $1,376.6
Operating costs and expenses:
Cost of sales 417.1 436.4 831.7 832.7
Research and development 112.9 118.0 235.0 230.0
Selling, general and
administrative 84.9 97.8 157.9 183.8
Special items:
Merger costs - 30.0 - 30.0
Restructuring of operations 12.5 - 12.5 -
In-process R&D charge - 2.5 - 2.5
------- ------ -------- -------
Total operating costs
and expenses 627.4 684.7 1,237.1 1,279.0
------- ------ -------- -------
Operating income(loss) (117.3) 35.2 (257.4) 97.6
Interest income(expense), net (0.3) 3.4 (0.2) 15.1
Other income(expense), net (8.3) 1.9 (8.0) 9.3
------- ------- -------- -------
Income(loss) before
income taxes (125.9) 40.5 (265.6) 122.0
Income tax provision(benefit) (31.5) 11.6 (66.4) 30.5
------- ------ -------- -------
Net income(loss) $(94.4) $ 28.9 $(199.2) $ 91.5
======= ====== ======== =======
Earnings(loss) per share:
Basic $(0.57) $ .18 $(1.20) $ .56
Diluted $(0.57) $ .17 $(1.20) $ .54
Weighted average shares:
Basic 166.6 163.7 166.2 163.0
Diluted 166.6 169.3 166.2 168.0
Income(loss) used in basic
and diluted earnings(loss)
per share calculation $(94.4) $ 28.9 $(199.2) $ 91.5
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME(LOSS) (Unaudited)
(in millions)
Three Months Ended Six Months Ended
------------------ ------------------
Nov. 29, Nov. 23, Nov. 29, Nov. 23,
1998 1997 1998 1997
-------- -------- -------- --------
Net income(loss) $ (94.4) $ 28.9 $ (199.2) $ 91.5
Other comprehensive
income(loss), net of tax:
Unrealized gain(loss) on
available-for-sale
securities (0.1) 0.5 0.1 2.1
Reclassification adjustment
for gain included in net
income - (0.8) - (5.1)
-------- -------- -------- --------
Comprehensive income(loss) $ (94.5) $ 28.6 $ (199.1) $ 88.5
======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions)
Nov. 29, May 31,
1998 1998
ASSETS -------- --------
Current assets:
Cash and cash equivalents $ 421.1 $ 460.8
Short-term marketable investments 103.9 112.4
Receivables, net 206.0 208.5
Inventories 179.7 283.9
Deferred tax assets 181.2 166.2
Other current assets 48.3 76.4
-------- --------
Total current assets 1,140.2 1,308.2
Property, plant and equipment 2,978.6 2,939.7
Less accumulated depreciation (1,369.6) (1,283.9)
-------- --------
Net property, plant and equipment 1,609.0 1,655.8
Other assets 187.0 136.7
-------- --------
Total assets $2,936.2 $3,100.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings and current
portion of long-term debt $ 44.3 $ 53.9
Accounts payable 198.3 237.0
Accrued expenses 325.4 310.9
Income taxes 237.7 191.8
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Total current liabilities 805.7 793.6
Long-term debt 394.0 390.7
Deferred income taxes 2.3 4.4
Other non-current liabilities 53.4 53.1
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Total liabilities 1,255.4 1,241.8
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Commitments and contingencies
Shareholders' equity:
Common stock 83.5 82.7
Additional paid-in capital 1,233.0 1,212.8
Retained earnings 376.6 575.8
Accumulated other comprehensive loss (12.3) (12.4)
-------- --------
Total shareholders' equity 1,680.8 1,858.9
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Total liabilities and shareholders' equity $2,936.2 $3,100.7
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions) Six Months Ended
--------------------
Nov. 29, Nov. 23,
1998 1997
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Cash flows from operating activities:
Net income(loss) $(199.2) $ 91.5
Adjustments to reconcile net income(loss)
with net cash provided by operations:
Depreciation and amortization 187.4 136.4
(Gain)loss on investments 0.1 (6.7)
Tax benefit associated with stock options 0.4 15.3
Loss on disposal of equipment 35.5 6.1
Provision for loss on note receivable 1.6 -
Non-cash special charges 12.5 32.5
Other, net (3.0) (3.7)
Changes in certain assets and liabilities, net:
Receivables 2.5 (71.8)
Inventories 104.2 (22.8)
Other current assets 28.1 (13.4)
Accounts payable and accrued expenses (31.2) 0.4
Current and deferred income taxes (32.2) 7.6
Other non-current liabilities 0.3 7.3
-------- --------
Net cash provided by operating activities 107.0 178.7
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (156.1) (366.3)
Sale and maturity of marketable investments 73.3 909.2
Purchase of marketable investments (64.7) (948.7)
Sale of investments 0.1 12.1
Business acquisition, net of cash acquired - (2.8)
Other, net (5.9) (0.5)
-------- --------
Net cash used by investing activities (153.3) (397.0)
-------- --------
Cash flows from financing activities:
Proceeds from bank borrowing 10.0 0.4
Repayment of debt (16.3) (6.4)
Issuance of common stock, net 12.9 43.3
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Net cash provided by financing activities 6.6 37.3
-------- --------
Net change in cash and cash equivalents (39.7) (181.0)
Adjustment to conform pooling of interests for
cash and cash equivalents at beginning of period - 17.6
Cash and cash equivalents at beginning of period 460.8 897.8
-------- --------
Cash and cash equivalents at end of period $ 421.1 $ 734.4
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
In the opinion of management, the accompanying condensed consolidated
financial statements contain all adjustments necessary to present fairly
the financial position and results of operations of National Semiconductor
Corporation and its subsidiaries ("National" or the "Company"). Interim
results of operations are not necessarily indicative of the results to 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 31, 1998.
Earnings Per Share:
- ------------------
A reconciliation of the shares used in the computation for basic and
diluted earnings per share follows:
Three Months Ended Six Months Ended
-------------------- --------------------
Nov. 29, Nov. 23, Nov. 29, Nov. 23,
(in millions) 1998 1997 1998 1997
------- -------- -------- --------
Net income(loss) used for
basic and diluted
earnings per share $ (94.4) $ 28.9 $ (199.2) $ 91.5
======= ======== ======== ========
Number of shares:
Weighted average common
shares outstanding used for
basic earnings per share 166.6 163.7 166.2 163.0
Effect of dilutive
securities:
Stock options - 5.6 - 5.0
------- -------- -------- --------
Weighted average common
and potential common shares
outstanding used for
diluted earnings per share 166.6 169.3 166.2 168.0
======= ======== ======== ========
As of November 29, 1998, there were options outstanding to purchase 29.9
million shares of the Company's common stock with a weighted-average
exercise price of $15.29, which could potentially dilute basic earnings per
share in the future, but which were not included in the computation of
diluted earnings per share as their effect was antidilutive. As of
November 29, 1998, the Company also had outstanding $258.8 million of
convertible subordinated notes, which are convertible into approximately
6.0 million shares of common stock. These notes were not assumed to be
converted in the computation of diluted earnings per share because they
were antidilutive in all periods presented.
Comprehensive Income:
- --------------------
Beginning in fiscal 1999, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive
income and its components. SFAS No. 130 requires the Company to include
unrealized gains or losses on the Company's available-for-sale securities
and minimum pension liability, which were previously reported as separate
components of shareholder's equity, in other comprehensive income.
The components of accumulated other comprehensive loss are as follows:
Nov. 29, May 31,
(in millions) 1998 1998
------- --------
Unrealized gain on available-for-sale
securities, net of tax $ 0.2 $ 0.1
Minimum pension liability (12.5) (12.5)
------- -------
$ (12.3) $ (12.4)
======= =======
Note 2. Short-term Borrowings
Included in short-term borrowings and current portion of long-term debt at
November 29, 1998, is $10 million which the Company borrowed under its
revolving credit agreement. The borrowing bears interest at 7.75 percent
and was repaid on November 30, 1998.
Note 3. Restructuring of Operations
In October 1998, the Company announced plans to consolidate its wafer
manufacturing operations in Greenock, Scotland and to seek investors to
acquire and operate the facility in Greenock as an independent foundry
business. This action was prompted by continued weakness in the
semiconductor market, which has resulted in overall lower capacity
utilization of the Company's manufacturing facilities. The Company will
close its 4-inch wafer fabrication facility ("Fab 1") and consolidate Fab 1
manufacturing into its 6-inch wafer fabrication facility on the same site.
The Company will also move some of the Greenock capacity to its
manufacturing facility in Arlington, Texas. This action will reduce the
Greenock workforce by approximately 600 employees and is expected to be
completed within 12 to 18 months. The Greenock assets have been treated as
assets to be held and used since they cannot be removed immediately from
operations. In connection with the closure of Fab 1, the Company recorded
a restructuring charge of $21.3 million in its second quarter ended
November 29, 1998. The charge included $11.9 million for severance, $3.9
million for costs associated with the dismantling of Fab 1 and
approximately $5.5 million for other related exit costs. Other costs
associated with this action, which will be charged to future operations,
include approximately $20-$25 million for process transfer costs and
approximately $6-$8 million for retention bonuses. The process transfer
costs will be expensed as incurred and the retention bonuses will be
expensed ratably as earned over the employees' service period. In
addition, accelerated depreciation on the Greenock assets of approximately
$9.0 million per quarter will be incurred over the next 12 to 18 months.
Subsequently in December 1998, the Company engaged the services of an
investment banker to assist in seeking a potential investor to acquire and
operate the Greenock facility.
The charge for consolidating Greenock was offset by an $8.8 million release
of excess reserves related to certain prior restructure actions. The
release included $2.8 million of severance, $2.3 million of asset write-
offs and $3.7 million of other exit costs. The release of excess reserves
was prompted by the completion during the quarter of remaining actions
associated with the closure of the Company's 5-inch and 6-inch wafer
fabrication facilities in Santa Clara, California and a worldwide workforce
reduction plan. The timing of these actions was consistent with the
timetable previously announced in April 1998. In addition, the Company was
able to sell or transfer to its other manufacturing facilities
substantially all of the surplus assets from the 5-inch and 6-inch wafer
fabrication facilities.
The net restructure charge is reported as a special item in the statement
of operations for the second quarter ended November 29, 1998.
Note 4. Consolidated Financial Statement Detail
The components of inventories were:
Nov. 29, May 31,
(in millions) 1998 1998
------- --------
Raw materials $ 19.1 $ 19.3
Work in process 99.7 176.0
Finished goods 60.9 88.6
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Total inventories $ 179.7 $ 283.9
======= =======
Components of other interest
Income(expense), net and other
income(expense), net, were:
Three Months Ended Six Months Ended
------------------ ------------------
Nov. 29, Nov. 23, Nov. 29, Nov. 23,
1998 1997 1998 1997
-------- -------- -------- --------
Interest income(expense), Net
- -----------------------------
Interest income $ 6.5 $ 12.5 $ 13.5 $ 26.5
Interest expense $ (6.8) $ (9.1) $ (13.7) $( 11.6)
-------- -------- -------- --------
Interest income(expense), net $ (0.3) $ 3.4 $ (0.2) $ 14.9
======== ======== ======== ========
Other income(expense), net
- --------------------------
Net intellectual property income $ 0.1 $ 1.9 $ 0.4 $ 2.6
Gain(loss)on investments, net (0.1) - (0.1) 6.7
Other (8.3) - (8.3) -
-------- -------- -------- --------
Total other income(expense), net $ (8.3) $ 1.9 $ (8.0) $ 9.3
======== ======== ======== ========
Note 5. Statement of Cash Flow Information
Six Months Ended
--------------------
Nov. 29, Nov. 23,
(in millions) 1998 1997
------- -------
Supplemental Disclosure of Cash Flow
- ------------------------------------
Information
-----------
Cash paid(refunded) for:
Interest $ 14.1 $ 17.4
Income taxes (42.2) 12.2
Interest on tax settlements 2.9 0.1
Supplemental Schedule of Noncash Investing
- ------------------------------------------
and Financing Activities
------------------------
Issuance of stock for employee benefit plans $ 1.3 $ 2.5
Issuance of restricted stock 0.7 -
Unrealized gain on available-for-sale
securities 0.1 (3.0)
Restricted stock cancellation 0.7 0.2
Note 6. One-Time Charge Associated with Contract Termination
On September 25, 1998, the Company announced that it had reached agreement
with International Business Machines Corporation ("IBM") for termination of
the wafer manufacturing and marketing agreement that previously existed
between its Cyrix Corporation ("Cyrix") subsidiary and IBM. Under terms of
the agreement, the Company's Cyrix subsidiary has been relieved of its
obligations to purchase wafers from IBM and IBM has ceased the competitive
sale of Cyrix-designed processors to customers other than National. In
addition, Cyrix transferred ownership of certain assets to IBM that
physically resided at an IBM facility. As a result of the contract
termination and asset transfers, the Company incurred a one-time charge of
$48.6 million recorded in cost of sales in its second quarter ended
November 29, 1998. The one-time charge included $30.6 million for the
write-off of manufacturing assets transferred to IBM and $18 million for the
write-off of prepaid wafer purchases and other costs associated with
terminating the original agreement.
Note 7. Contingencies
In July 1996, the Company received notices of assessment from the Malaysian
Inland Revenue Department totaling approximately 146.9 million Malaysian
ringitts ($38.7 million). In December 1998, the Company received
additional notices of assessment totaling approximately 53.0 million
Malaysian ringitts ($14.0 million). The issues giving rise to the July
1996 and December 1998 assessments primarily relate to intercompany
transfer pricing for the Company's manufacturing operations in Malaysia for
fiscal year 1985 through 1993. The Company believes the assessments are
without merit and has been contesting them administratively. The Company
believes it has adequate tax reserves to satisfy the ultimate resolution of
the assessments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview The Company recorded net sales of $510.1 million and $979.7
million for the second quarter and first six months of fiscal 1999,
respectively. This represents a 29.1 percent and 28.8 percent decrease
from net sales of $719.9 million and $1,376.6 million, respectively, for
the same periods of fiscal 1998. Lower sales were partially due to a
general slowdown in new orders driven by continued economic uncertainties
in the Asia Pacific region, which the Company experienced through the
second quarter of fiscal 1999. Also contributing to lower sales was
continuing weak demand for network (formerly local area networks) products,
due to the Company's delays in introducing key new network products. And
in the Company's processor business, significant price reductions were
experienced in the Cyrix 6X86 line of products due to increased competition
and availability of new higher speed processor products from competitors.
A net loss of $94.4 million and $199.2 million was recorded for the second
quarter and first six months of fiscal 1999, respectively, compared to net
income of $28.9 million and $91.5 million for the same periods of fiscal
1998. The net loss was primarily attributable to lower sales and margin
erosion mainly due to lower factory utilization. In addition, the Company
recorded certain charges in the second quarter of fiscal 1999. The charges
included a $21.3 million charge for restructuring of operations related to
the announced consolidation of its wafer manufacturing operations in
Greenock, Scotland (See Restructuring of Operations). This restructure
charge was offset by an $8.8 million release of excess reserves related to
certain prior restructure actions, which were substantially completed
during the quarter. The net restructure charge is reported as a special
item in the statement of operations. The Company also recorded a one-time
charge of $48.6 million included in cost of sales for costs associated with
the termination of a wafer manufacturing and marketing agreement between
its Cyrix subsidiary and IBM. Special items included in the comparable
quarter of fiscal 1998 included a $2.5 million charge for in-process
research and development ("R&D") related to the acquisition of Future
Integrated Systems, Inc. ("FIS"), plus a $30.0 million charge related to
certain merger and related expenses in connection with the Cyrix
Corporation acquisition.
Sales The decline in sales was a result of lower volume combined with
price erosion in most of the Company's product areas. Sales for analog
products declined in the second quarter and first six months of fiscal 1999
by 23.9 percent and 23.3 percent, respectively, from sales for the same
periods of fiscal 1998. General weakness experienced by the Company in the
personal computer and communications product related markets caused the
overall decline in sales for the Company's analog products, as well as,
sales for personal computer related peripheral products and wide area
networks ("WAN") products. Sales for network products declined 65.3
percent and 67.1 percent in the second quarter and first six months of
fiscal 1999, respectively, over sales for the same periods of fiscal 1998,
as the Company continued to experience declining shipments and price
erosion in its existing mature 10/100 megabit ethernet products. The
Company's failure to introduce key new network products during fiscal 1998
was the primary cause of the sharp drop in fiscal 1999. Despite
significant improvement in unit sales of Cyrix M II products, competitive
price pressure caused processor revenue to decline 6.0 percent and 16.6
percent in the second quarter and first six months, respectively, from the
same periods in fiscal 1998. Sales of certain other personal computer
related peripheral products declined by approximately 50 percent and 46
percent in the second quarter and first six months of fiscal 1999,
respectively, compared to the same periods of fiscal 1998. Sales for
WAN products (including application specific wireless communication
products), a product area which had previously experienced continued growth,
also declined. WAN product sales declined 24.0 percent and 7.8 percent in
the second quarter and first six months of fiscal 1999, respectively, from
the same periods of fiscal 1998, reflecting lower unit shipments while unit
prices generally remained flat.
Gross Margin Gross margin as a percentage of sales declined to 18.2
percent and 15.1 percent for the second quarter and first six months of
fiscal 1999, respectively, compared to 39.4 percent and 39.5 percent for
the same periods in fiscal 1998. Excluding the effect of the one-time
charge related to the IBM contract termination, gross margin for the second
quarter and first six months of fiscal 1999, was 27.8 percent and 20.1
percent, respectively. The primary factor contributing to the decline in
gross margin continued to be lower factory utilization. While the IBM
action has enabled the Company to ramp-up its own microprocessor
manufacturing and more fully utilize the capacity available in its
0.35/0.25 micron wafer fabrication facility in Maine, factory utilization
declined from 86 percent for the second quarter of fiscal 1998 to 62
percent for the second quarter of fiscal 1999. However, the Company has
achieved sequential quarterly improvements in gross margin as factory
utilization in the second quarter of fiscal 1999 increased over the rate of
41 percent for the first quarter. With the exception of Maine, the Company
continued to run its other manufacturing facilities at reduced capacity
utilization rates in order to manage inventory levels and control cost.
The decline in gross margin also reflects continued price erosion,
particularly in the Cyrix microprocessor products.
Research and Development Research and Development ("R&D") expense
for the second quarter of fiscal 1999 decreased 6.3 percent from the
comparable quarter of fiscal 1998, while year over year for the first six
month period R&D expenses increased slightly by 1.0 percent. R&D expenses
for the second quarter and first six months of fiscal 1998 included a $2.5
million special charge for in-process R&D related to the acquisition of
FIS. Excluding the effect of this special charge from the comparable
periods in fiscal 1998, R&D expenses in the second quarter and first six
months of fiscal 1999 decreased 4.3 percent and increased 2.1 percent,
respectively. The decrease in R&D expense quarter to quarter, reflects the
Company's efforts to align its R&D spending with current business
conditions. Overall, the Company's R&D expenses continue to be heavily
focused on advanced submicron CMOS process technology, which is consistent
with one of the Company's stated strategic imperatives. The Company has
also invested resources in the development of Cyrix microprocessor-based
products. Its efforts have been focused on the development of new
microprocessor cores and the integration of those cores with the Company's
other technological capabilities in order to develop system-on-a-chip
products. The Company also continues to invest resources in the
development of new analog and mixed-signal technology based products for
applications in the personal systems, communications and consumer markets.
R&D spending for fiscal 1999 for process technology continued to grow over
the fiscal 1998 spending levels. However, this growth was offset by a
decline in spending for product development as part of management's
alignment of spending with current business conditions. Through the first
six months of fiscal 1999, the Company devoted approximately 33 percent of
its R&D effort towards the development of process technology and 67 percent
towards new product development.
Selling, General and Administrative Selling, general and administrative
("SG&A") expenses for the second quarter and first six months of fiscal
1999 decreased by 13.2 percent and 14.0 percent, respectively, from the
same periods in fiscal 1998. The decrease reflects certain cost reduction
actions taken by the Company to reduce its overall cost structure in
response to weakened business conditions in both the current fiscal year
and second half of fiscal 1998. As a percentage of sales, SG&A expenses
for the second quarter and first six months of fiscal 1999 remained nearly
flat compared to the same periods of fiscal 1998.
Restructuring of Operations In October 1998, the Company announced plans
to consolidate its wafer manufacturing operations in Greenock, Scotland and
to seek investors to acquire and operate the facility in Greenock as an
independent foundry business. This action was prompted by continued
weakness in the semiconductor market, which has resulted in overall lower
capacity utilization of the Company's manufacturing facilities. The
Company will close its 4-inch wafer fabrication facility ("Fab 1") and
consolidate Fab 1 manufacturing into its 6-inch wafer fabrication facility
on the same site. The Company will also move some of the Greenock capacity
to its manufacturing facility in Arlington, Texas. This action will reduce
the Greenock workforce by approximately 600 employees and is expected to be
completed within 12 to 18 months. The Greenock assets have been treated as
assets to be held and used since they cannot be removed immediately from
operations. In connection with the closure of Fab 1, the Company recorded
a restructuring charge of $21.3 million in its second quarter ended
November 29, 1998. The charge included $11.9 million for severance, $3.9
million for costs associated with the dismantling of Fab 1 and
approximately $5.5 million for other related exit costs. Other costs
associated with this action, which will be charged to future operations,
include approximately $20-$25 million for process transfer costs and
approximately $6-$8 million for retention bonuses. The process transfer
costs will be expensed as incurred and the retention bonuses will be
expensed ratably as earned over the employees' service period. In
addition, accelerated depreciation on the Greenock assets of approximately
$9 million per quarter will be incurred over the next 12 to 18 months.
Subsequently in December 1998, the Company engaged the services of an
investment banker to assist in seeking a potential investor to acquire and
operate the Greenock facility.
The charge for consolidating Greenock was offset by an $8.8 million release
of excess reserves related to certain prior restructure actions. The
release included $2.8 million of severance, $2.3 million of asset write-
offs and $3.7 million of other exit costs. The release of excess reserves
was prompted by the completion during the quarter of remaining actions
associated with the closure of the Company's 5-inch and 6-inch wafer
fabrication facilities in Santa Clara, California and a worldwide workforce
reduction plan. The timing of these actions was consistent with the
timetable previously announced in April 1998. In addition, the Company was
able to sell or transfer to its other manufacturing facilities
substantially all of the surplus assets from the 5-inch and 6-inch wafer
fabrication facilities. The net restructure charge is reported as a
special item in the statement of operations for the second quarter ended
November 29, 1998.
Interest Income and Interest Expense Net interest expense was $0.3
million and $0.2 million for the second quarter and first six months of
fiscal 1999, respectively, compared to net interest income of $3.4 million
and $15.1 million for the same periods in fiscal 1998. Net interest
expense was attributable to less interest earned on lower cash balances
combined with lower interest expense due to reduced debt balances.
Capitalized interest associated with capital expansion projects had no
effect on interest expense quarter to quarter. For the first six months of
fiscal 1999, the Company capitalized $0.2 million of interest associated
with capital expansion projects, which was recorded in the first quarter.
This compares to $5.4 million of interest capitalized for the first six
months of fiscal 1998, which was also recorded in the first quarter.
Other Income/Expense, Net Other expense, net was $8.3 million and $8.0
million for the second quarter and first six months of fiscal 1999,
respectively. This compares to other income, net of $1.9 million and $9.3
million for the same periods in fiscal 1998. For the second quarter of
fiscal 1999, other expense, net included $0.1 million of net intellectual
property income and a $0.3 million gain on the sale of technology. This
was offset by a $7.0 million settlement of intellectual property rights and
a $1.7 million net loss on equity investments primarily attributable to the
write-down of an investment to net realizable value. For the second
quarter of fiscal 1998, other income, net included $1.9 million of net
intellectual property income and a $1.8 million gain from the sale of stock
from the Company's investment holdings. This was offset by a $1.8 million
loss from foreign exchange forward contracts. Including the items
previously described, other expense, net for the first six months of fiscal
1999 included an additional $0.3 million of net intellectual property
income for a total $0.4 million. This compares to other income, net for
the first six months of fiscal 1998, which included a $8.4 million net gain
from the sale of stock from the Company's investment holdings and $2.7
million of net intellectual property income, offset by a $1.8 million loss
from foreign exchange forward contracts.
Income Tax Provision/Benefit Income tax benefit for fiscal 1999 is based
on the Company's expected effective tax rate of 25 percent.
Financial Condition During the first six months of fiscal 1999, cash
and cash equivalents decreased by $39.7 million compared to a $181.0
million decrease for the first six months of fiscal 1998. A decrease in
capital expenditures for fiscal 1999 from fiscal 1998 was a primary factor
in the difference. The Company expended $156.1 million for investment in
property, plant and equipment in fiscal 1999 compared to a $366.3 million
investment in fiscal 1998. This was partially offset by less cash
generated from operating activities of $107 million in fiscal 1999 compared
to $178.7 million in fiscal 1998, as well as less cash generated from
financing activities of $6.6 million in fiscal 1999 compared to $37.3
million in fiscal 1998. Operating cash was negatively impacted by the
losses incurred in fiscal 1999, but was positively impacted by the
Company's efforts to increase working capital. The primary contributor to
improved working capital trends was a significant reduction in inventories.
The decline in cash generated from financing activities in fiscal 1999 was
primarily due to less proceeds from the issuance of common stock under the
Company's employee stock programs due to the decline in the Company's stock
price.
Management foresees substantial cash outlays for plant and equipment
throughout fiscal 1999 with primary focus on capacity expansion in the
Maine 8-inch wafer fabrication facility, next generation process capability
and implementation and expansion of in-house assembly and test capacity for
Cyrix microprocessors. In the second quarter of fiscal 1999, management
increased the planned level of capital expenditure for the year from the
level originally estimated in the first quarter. However, total capital
expenditures in fiscal 1999 are still expected to be significantly lower
than in fiscal 1998. Existing cash and investment balances, together with
existing lines of credit, are expected to be sufficient to finance planned
fiscal 1999 capital investments.
Outlook The statements contained in this Outlook and in the Financial
Condition section 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 Outlook sections of Management's Discussion and Analysis of
Financial Condition and Results of Operations on pages 24 through 28 of the
Company's 1998 Annual Report on Form 10-K for the fiscal year ended May 31,
1998 filed with the Securities and Exchange Commission, the following
factors may also affect the Company's operating results for fiscal 1999:
Business conditions for the semiconductor industry and the Company remained
weak through the fall quarter, although the Company experienced improvement
in order rates in the second quarter over the previous quarter. In
particular, orders for personal computer related products showed signs of
seasonal improvement. The Company also saw a very high order turns
environment in the second quarter. However, this higher turns rate of
orders results in a lack of forward visibility into the post-Christmas
period. As a result, there is no assurance that the improvement in order
rates is more than the seasonal pick-up typically experienced through the
end of the calendar year. Therefore, the Company continues to be cautious
about its future outlook. The Company also has traditionally faced the
risk of a drop in order rates in the personal computer industry after the
Christmas holiday. While the Company may experience sequential growth in
sales for the third quarter, based on current conditions, it expects to
incur a loss for the third quarter of fiscal 1999.
The Company's focus also has shifted toward the consumer segment of the
personal computer market since the acquisition of Cyrix. As a result, the
Company faces the risk that its overall business will be affected by the
higher degree of seasonality associated with the consumer segment. Based
on a growing supply of microprocessor products in the PC industry, the
Company anticipates a more aggressive pricing environment for its
microprocessor business during calendar 1999. The Company will also
experience increased pressure to rapidly release new processors with higher
operating speeds to respond to growing competition in the sub-$1,000 PC
market. The Company's inability to endure future price competition or to
release new processors in a timely fashion will cause an unfavorable impact
on future sales and results of operations.
The Company's future sales and results of operations may also be
unfavorably affected by the following additional factors. Since the spring
quarter of fiscal 1998, the Company has devoted efforts to develop new
network products based on digital signal processing technology in order to
recover its market position in the networks business. The Company
anticipates the development of those products, which include the QuadPhyter
and the MacPhyter to generate sample revenue beginning in the fourth
quarter of fiscal 1999 and production revenue in the first quarter of
fiscal 2000. The effect of these new products to the Company's sales and
results of operations is dependent on whether the Company encounters
unforeseen obstacles or schedule delays, and receives acceptance by
customers. During the second quarter the Company also experienced
increased order activity from its European and Korean customers for the
Company's products that support mobile phone handsets. There is a risk
that this increased activity is seasonal or that these orders may be
subsequently cancelled similar to a trend experienced by the Company last
year.
Unless new orders substantially improve from the rate of orders currently
experienced, the Company will continue to run its manufacturing facilities
at reduced capacity utilization rates to manage inventories and reduce
cost. Consequently, gross margin will continue to be adversely affected.
The Company will continue to ramp-up wafer starts in its 8-inch wafer
fabrication facility in Maine to support the Cyrix products. It will also
continue to aggressively transfer processes out of the 4-inch wafer
fabrication facility in Greenock into the 6-inch wafer fabrication facility
on the same site. The Company will also move some of the capacity to its
manufacturing facility in Arlington, Texas. These actions are expected to
improve future capacity utilization. In the short-term, the Company will
incur incremental transfer costs and accelerated depreciation related to
the 4-inch wafer fabrication facility action. As a result, the Company
expects gross margin to improve just slightly over gross margin in the fall
quarter.
In October 1998, the Company announced plans to consolidate its wafer
manufacturing operations in Greenock, Scotland. It also plans to seek
investors to acquire and operate the facility in Greenock as an independent
foundry business. As a result, the Company will close its 4-inch wafer
fabrication facility ("Fab 1") and consolidate Fab 1 manufacturing into the
remaining 6-inch wafer fabrication facility on the same site. This action
will reduce the Greenock workforce by approximately 600 employees and is
expected to be completed within 12 to 18 months. In connection with this
action, the Company recorded a restructure charge of $21.3 million in its
second quarter ended November 29, 1998. Other costs associated with this
action, which will be charged to future operations, include approximately
$20-$25 million for process transfers costs and approximately $6-$8 million
for retention bonuses. The process transfer costs will be expensed as
incurred and the retention bonuses will be expensed ratably as earned over
the employees' service period. In addition, accelerated depreciation on
the Greenock assets of approximately $9.0 million per quarter will be
incurred over the next 12 to 18 months. Future operating results may be
unfavorably affected if the Company encounters unexpected delays or other
problems related to these actions. The Company may be unsuccessful in
seeking investors to acquire the operations under terms acceptable to the
Company. Retention of the manufacturing operations may have an unfavorable
impact on the Company's future operating results. It is also difficult to
predict the final impact on the Company's future operating results of the
planned spinout, since the structure and timing have not yet been
determined.
The following discussion supplements the discussion included in the Outlook
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Company's 1998 Annual Report on Form 10-K for
the fiscal year ended May 31, 1998, related to the Company's efforts to
undertake year 2000 projects. To date the Company has devoted a
substantial portion of its year 2000 efforts evaluating, modifying and
testing its critical business applications, manufacturing tools and
computer systems to be year 2000 ready by the beginning of calendar 1999.
Failure to successfully complete year 2000 projects could cause significant
disruption of operations. Such disruptions may include, but are not
limited to, interruption of manufacturing activities, and inability to
process invoices, payments or other systematic business transactions. The
Company believes that the largest remediation effort and greatest risk from
year 2000 issues arise from its manufacturing and logistics operations.
Failure to successfully implement year 2000 modifications in manufacturing
tools and related systems could result in the inability to manufacture and
deliver products to customers. Projects related to the Company's
manufacturing processes are expected to be completed by May 1999. The
Company is also currently evaluating its exposure to contingencies related
to the year 2000 issues for products it has sold. The Company believes
that its products do not directly contain specific calendar year functions.
However, customers may use the Company's products in conjunction with
customer supplied software over which the Company has no control that may
perform non-compliant year 2000 date computations. As a result, there is a
risk of litigation associated with the use of such products by customers.
Such risks include all the uncertainties and cost associated with
litigation. While there can be no assurance that unforeseen problems will
not be encountered, the Company expects that all critical year 2000
remediation projects will be completed on schedule. Because of its focus
in ensuring the remediation projects are on schedule, the Company has not
yet fully developed contingency plans to address alternative solutions in
the event the Company fails to successfully make any of its critical
systems year 2000 ready. The Company expects to begin the development of
contingency plans around the beginning of calendar 1999. At that time, the
Company believes it will be better able to identify any deficiencies and
appropriately develop specific contingency plans for further remediation
efforts.
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 personal computer 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. QUANTITIVE 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 31, 1998 and to the subheading "Financial Market
Risks" under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 28 of the Company's Annual
Report on Form 10-K for the year ended May 31, 1998.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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Except as noted below, there have been no material developments in the
legal proceedings reported in Item 3 in the Company's Annual Report on Form
10-K for the year ended May 31, 1998.
On November 12, 1997, a class action lawsuit was filed in California State
Court against the Company, Cyrix Corporation ("Cyrix"), Cyrix's Board of
Directors and Cyrix's Chief Executive Officer by Goodman Epstein,
individually and on behalf of Cyrix stockholders. The complaint alleges
that the named individual defendants breached their fiduciary duty to the
stockholders of Cyrix in connection with their approval of Cyrix's merger
with a subsidiary of the Company and that the Company further aided and
abetted the alleged breach of fiduciary duty. The complaint sought certain
declaratory and injunctive relief, an accounting to the plaintiff and
members of the class for the damages alleged to have been suffered, costs
and fees. An ex parte application filed by plaintiffs for a temporary
restraining order, preliminary injunction and an expedited discovery order
was scheduled to be heard on November 14, 1997, but was subsequently
dropped by plaintiffs and was not heard. In response to the demurrer filed
by the defendants, plaintiff has filed its first amended complaint, adding
as defendants the Company's directors, Donald Macleod, the Company's
Executive Vice President, Finance and Chief Financial Officer, and Richard
D. Crowley, Jr., the Company's Vice President and Controller. The amended
complaint alleged breach of fiduciary duty to the stockholders of Cyrix by
the Company, Cyrix and the Cyrix individual defendants and violations of
Sections 11 and 12(2) of the Securities Act of 1933 by all defendants and
seeks certain declaratory and injunctive relief, an accounting to the
plaintiff and class members for damages alleged to have been suffered,
costs and fees. The demurrer was granted in September 1998 with leave to
amend, and a second amended complaint was filed in October 1998. A motion
to dismiss the second amended complaint is due to be heard on January 14,
1999. The Company believes the action is without merit and intends to
contest it vigorously.
In July 1996, the Company received notices of assessment from the Malaysian
Inland Revenue Department totaling approximately 146.9 million Malaysian
ringitts ($38.7 million). In December 1998, the Company received
additional notices of assessment totaling approximately 53.0 million
Malaysian ringitts ($14.0 million). The issues giving rise to the July
1996 and December 1998 assessments primarily relate to intercompany
transfer pricing for the Company's manufacturing operations in Malaysia for
fiscal year 1985 through 1993. The Company believes the assessments are
without merit and has been contesting them administratively. The Company
believes it has adequate tax reserves to satisfy the ultimate resolution of
the assessments.
Item 4. Submission of Matters to a Vote of Security Holders
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(a) The Registrant's Annual Meeting was held on September 25, 1998.
(b) The following directors were elected at the Meeting:
AUTHORITY
DIRECTOR FOR WITHHELD
-------- --- ---------
Brian L. Halla 125,274,245 8,326,484
Gary P. Arnold 125,421,146 8,179,583
E. Floyd Kvamme 125,497,629 8,103,100
Modesto A. Maidique 125,378,399 8,222,332
Edward R. McCracken 125,469,300 8,131,429
Donald E. Weeden 125,435,239 8,165,490
Item 6. Exhibits and Reports on Form 8-K
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(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).
3.2 By Laws of the Company (incorporated by reference from the Exhibits to
the Company's Form 10-Q for the quarter ended August 30, 1998 filed
October 2, 1998).
4.1 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 (incorporated by reference from the
Exhibits to the Amendment No. 1 to the Company's 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).
4.2 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).
4.3 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 From 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
A report on Form 8-K was filed October 8, 1998 announcing the
Company's plans to consolidate its wafer manufacturing operations in
Greenock, Scotland and to seek investors to acquire and operate the
facility as an independent foundry business. The Company also reported
it expected to incur a restructure charge in connection with the
consolidation of $18-$25 million during the second quarter of fiscal
1999. In addition, the Company also reported that it expected the
depreciation expense associated with the Greenock assets would be
increased in the future.
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: January 12, 1999 /s/ Lewis Chew
----------------------------------
Lewis Chew
Vice President and Controller
Signing on behalf of the registrant
and as principal accounting officer