0000070530-01-500007.txt : 20011010 0000070530-01-500007.hdr.sgml : 20011010 ACCESSION NUMBER: 0000070530-01-500007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010826 FILED AS OF DATE: 20011004 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL SEMICONDUCTOR CORP CENTRAL INDEX KEY: 0000070530 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 952095071 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06453 FILM NUMBER: 1752272 BUSINESS ADDRESS: STREET 1: 2900 SEMICONDUCTOR DR STREET 2: PO BOX 58090 CITY: SANTA CLARA STATE: CA ZIP: 95052-8090 BUSINESS PHONE: 4087215000 MAIL ADDRESS: STREET 1: 2900 SEMICONDUCTOR DR CITY: SANTA CLARA STATE: CA ZIP: 95052-8090 10-Q 1 form10q_10032001.txt NATIONAL SEMICONDUCTOR CORPORATION 10Q 5 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 August 26, 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 August 26, 2001 ------------------- ------------------------------ Common stock, par value $0.50 per share 175,913,016 NATIONAL SEMICONDUCTOR CORPORATION INDEX Page No. Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended August 26, 2001 and August 27, 2000 3 Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three Months Ended August 26, 2001 and August 27, 2000 4 Condensed Consolidated Balance Sheets (Unaudited) as of August 26, 2001 and May 27, 2001 5 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended August 26, 2001 and August 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 13-16 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 Aug. 26, Aug. 27, 2001 2000 -------------- ------------- Net sales $339.3 $640.8 Operating costs and expenses: Cost of sales 229.2 301.4 Research and development 109.0 103.7 Selling, general and administrative 64.2 100.6 Special items 1.1 6.4 -------------- ------------- Total operating costs and expenses 403.5 512.1 -------------- ------------- Operating income (loss) (64.2) 128.7 Interest income, net 7.0 14.1 Other income, net 5.1 37.5 -------------- ------------- Net income (loss) before income taxes (52.1) 180.3 Income tax expense 2.5 36.1 -------------- ------------- Net income (loss) $(54.6) $144.2 ============== ============= Earnings (loss) per share: Basic $(0.31) $ 0.81 Diluted $(0.31) $ 0.74 Weighted-average shares: Basic 174.9 178.1 Diluted 174.9 195.8
See accompanying Notes to Condensed Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in millions)
Three Months Ended Aug. 26, Aug. 27, 2001 2000 ----------------- ---------------- Net income (loss) $(54.6) $144.2 Other comprehensive income, net of tax: Marketable securities: Reclassification adjustment for realized gain included in net income (5.6) (39.1) Unrealized gain (loss) on available-for-sale securities (8.3) 74.6 Derivative instruments: Unrealized loss on cash flow hedges (0.1) - ----------------- ---------------- Comprehensive income (loss) $(68.6) $179.7 ================= ================
See accompanying Notes to Condensed Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in millions)
Aug. 26, May 27, 2001 2001 ------------------- ------------------ ASSETS Current assets: Cash and cash equivalents $ 701.1 $ 817.8 Short-term marketable investments 10.0 5.0 Receivables, net 114.3 123.4 Inventories 182.8 195.5 Deferred tax assets 97.2 97.2 Other current assets 46.6 36.1 ------------------- ------------------ Total current assets 1,152.0 1,275.0 Net property, plant and equipment 798.7 815.7 Long-term marketable debt securities 81.6 46.6 Long-term marketable equity securities 3.5 18.5 Other assets 245.3 206.5 ------------------- ------------------ Total assets $2,281.1 $2,362.3 =================== ================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 16.2 $ 29.4 Accounts payable 119.0 126.4 Accrued expenses 211.5 262.9 Current income taxes payable 75.4 53.1 ------------------- ------------------ Total current liabilities 422.1 471.8 Long-term debt 24.8 26.2 Other non-current liabilities 98.1 96.4 ------------------- ------------------ Total liabilities $ 545.0 $ 594.4 ------------------- ------------------ Commitments and contingencies Shareholders' equity Common stock $ 87.9 $ 86.9 Additional paid-in capital 1,316.6 1,280.8 Retained earnings 377.8 432.4 Accumulated other comprehensive loss (46.2) (32.2) ------------------- ------------------ Total shareholders' equity $1,736.1 $1,767.9 ------------------- ------------------ Total liabilities and shareholders' equity $2,281.1 $2,362.3 =================== ==================
See accompanying Notes to Condensed Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions)
Three Months Ended Aug. 26, Aug. 27 2001 2000 ------------------ ------------------- Cash flows from operating activities: Net income (loss) $(54.6) $144.2 Adjustments to reconcile net income (loss) with net cash provided by (used by) operations: Depreciation and amortization 56.9 59.3 Gain on investments (5.6) (36.1) Loss on disposal of equipment 0.3 0.8 Donation of equity securities - 20.5 Noncash special items 1.1 6.4 Other, net - (1.0) Changes in certain assets and liabilities, net: Receivables 10.2 (19.8) Inventories 12.7 (3.1) Other current assets (10.6) (20.5) Accounts payable and accrued expenses (58.2) (63.1) Current and deferred income taxes 22.3 24.7 Other liabilities 1.7 3.7 ------------------ ------------------- Net cash provided by (used by) operating activities (23.8) 116.0 ------------------ ------------------- Cash flows from investing activities: Purchase of property, plant and equipment (35.1) (51.0) Maturity of marketable investments 10.0 2.1 Purchase of marketable investments (50.0) (20.0) Proceeds from sale of nonmarketable investment 6.7 21.3 Business acquisitions, net of cash acquired (27.5) (24.9) Purchase of software (7.3) (2.8) Restricted cash (13.3) - Other, net 6.4 2.5 ------------------ ------------------- Net cash used by investing activities (110.1) (72.8) ------------------ ------------------- Cash flows from financing activities: Repayment of debt (4.6) (4.2) Issuance of common stock, net 21.8 18.7 ------------------ ------------------- Net cash provided by financing activities 17.2 14.5 ------------------ ------------------- Net change in cash and cash equivalents (116.7) 57.7 Cash and cash equivalents at beginning of period 817.8 778.8 ------------------ ------------------- Cash and cash equivalents at end of period $701.1 $836.5 ================== ===================
See accompanying Notes to Condensed Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies In the opinion of our 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 our majority-owned subsidiaries. You should not expect interim results of operations to be 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 our annual report on Form 10-K for the fiscal year ended May 27, 2001. Earnings Per Share: A reconciliation of the shares used in the computation of basic and diluted earnings per share follows:
Three Months Ended Aug. 26, Aug. 27, (in millions) 2001 2000 ---------------- --------------- Net income (loss) used for basic and diluted earnings per share $(54.6) $144.2 ================ =============== Number of shares: Weighted-average common shares outstanding used for basic earnings per share 174.9 178.1 Effect of dilutive securities: Stock options - 17.7 ---------------- --------------- Weighted-average common and potential common shares outstanding used for diluted earnings per share 174.9 195.8 ================ ===============
On August 26, 2001, we had options outstanding to purchase 37.7 million shares of common stock with a weighted-average exercise price of $27.34, which could potentially dilute basic earnings per share in the future. These options are not included in diluted earnings per share because their effect was antidilutive. In contrast, on August 27, 2000, we had options outstanding to purchase 8.6 million shares of common stock with a weighted-average exercise price of $59.54, which could have potentially diluted basic earnings per share in the future. These options were also not included in diluted earnings per share as their effect was antidilutive. Note 2. Derivative Financial Instruments At the beginning of the first quarter of fiscal 2002, we adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS No. 133, as amended, requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of these derivatives are accounted for based on the use of the derivative and whether it qualifies for hedge accounting. The cumulative effect of adoption of this statement was immaterial to both our financial position and results of operations. As part of our risk management strategy we use derivative financial instruments, including forwards, swaps and purchased options, to hedge certain foreign currency and interest rate exposures. Our intent is to offset gains and losses that occur from our underlying exposures, with gains and losses on the derivative contracts used to hedge them. We do not enter into any speculative positions in derivative instruments. We record all derivatives on the balance sheet at fair value. Foreign Currency Risk We are exposed to foreign currency exchange rate risk that is inherent in orders, sales, cost of sales, and assets and liabilities denominated in currencies other than the U.S. dollar. We enter into foreign exchange contracts, primarily forwards and purchased options, to hedge against exposure to changes in foreign currency exchange rates. These contracts are designated at inception to the related foreign currency exposures that are being hedged, including sales by subsidiaries, and assets and liabilities denominated in currencies other than the U.S. Dollar. Our foreign currency hedges typically mature within one year. We designate derivative instruments that are used to hedge exposures to variability in expected future foreign denominated cash flows as cash flow hedges. We record the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive income as a separate component of stockholders' equity and reclassify into earnings in the period when the hedged transaction affects earnings. We recognize the ineffective portion of the gain or loss on the derivative in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, in other income, net during the period of change. Derivative instruments that we use to hedge exposures to reduce or eliminate changes in the fair value of a foreign currency denominated asset or liability are designated as fair value hedges. We recognize the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, in earnings in the current period. Interest Rate Risk We are also exposed to interest rate risk that is inherent in our debt. We use an interest rate swap to convert the variable interest rate to a fixed interest rate. For interest rate swaps, the critical terms of the interest rate swap and hedged item are designed to match up, enabling us to use the short-cut method of accounting as defined by SFAS No. 133. To the extent that the critical terms of the hedged item and the derivative are not identical, we report hedge ineffectiveness in earnings immediately. Measurement of Effectiveness of Hedge Relationships For foreign currency forward contracts, we measure hedge effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item, both of which are based on forward rates. For purchased options, we measure hedge effectiveness by the change in the option's intrinsic value, which represents the change in the option's strike price compared to the spot price of the underlying hedged transaction. For interest rate swaps, we measure effectiveness by offsetting the change in fair value of the long-term debt with the change in fair value of the interest rate swap. We measure ineffectiveness by the difference in the changes in fair value of the long-term debt and interest rate swap. We report hedge ineffectiveness from foreign currency derivatives for both options and forward contracts in other income, net. We report ineffectiveness related to interest rate swaps in other income, net. Hedge ineffectiveness was immaterial for the first quarter of fiscal 2002. The effective potion of all changes in derivatives is reported in the same financial statement line item as the changes in the hedged item. On August 26, 2001, the net fair value of foreign currency-related derivatives designated as cash flow hedges or fair value hedges assets was $0.1 million in other assets and $0.1 million in other accrued liabilities. On August 26, 2001, we had $0.1 million of unrealized gains on derivative instruments, net of taxes, in accumulated other comprehensive income. We estimate that $0.1 million of the unrealized gains after taxes will be reclassified into earnings within one year. We had no realized gains or losses from derivative instruments for the first quarter of fiscal 2002. Note 3. Consolidated Financial Statement Details
Balance sheets: (in millions) Aug. 26, May 27, 2001 2001 ------------------ ---------------- Inventories: Raw materials $ 8.3 $ 8.1 Work in process 105.2 113.8 Finished goods 69.3 73.6 ------------------ ---------------- Total inventories $182.8 $195.5 ================== ================ Accumulated other comprehensive loss: Unrealized gain on available-for-sale securities $ 1.1 $ 15.0 Unrealized loss on derivative instruments (0.1) - Minimum pension liability (47.2) (47.2) ------------------ ---------------- $(46.2) $(32.2) ================== ================
Statements of operations: (in millions) Three Months Ended Aug. 26, Aug. 27, 2001 2000 ------------------ ----------------- Special items: In-process research and development charge $ 1.1 $ 4.1 Restructuring of operations - 2.3 ------------------ ----------------- $ 1.1 $ 6.4 ================== ================= Interest income, net: Interest income $ 8.2 $15.4 Interest expense (1.2) (1.3) ------------------ ----------------- Interest income, net $ 7.0 $14.1 ================== ================= Other income, net: - Net intellectual property income $ 1.3 $ 1.4 Net gain on investments 3.8 36.1 ------------------ ----------------- Total other income, net $ 5.1 $37.5 ================== =================
Included in gain on investments for the first quarter of fiscal 2001 is a gain of $20.5 million from the distribution of equity securities that were a part of our investment portfolio. We donated the securities to establish the National Semiconductor Foundation. The expense associated with the donation also totaled $20.5 million and is included in selling, general and administrative expenses for the first quarter of fiscal 2001. Note 4. Statement of Cash Flow Information
Three Months Ended (in millions) Aug. 26, Aug. 27, 2001 2000 ---------------- ---------------- Supplemental Disclosure of Cash Flow Information: Cash paid (refunded) for: Interest $ 0.3 $ 1.1 Income taxes $(19.8) $11.4 Supplemental Schedule of Non-cash Investing and Financing Activities: Issuance of stock for employee benefit plans $ 4.3 $ 4.1 Issuance of restricted stock $ 0.6 $ 1.7 Issuance of common stock in connection with the conversion of promissory notes $ 10.0 $ - Change in unrealized loss in derivative instruments $ (0.1) $ - Change in unrealized gain on available-for-sale securities $(13.9) $35.5
Note 5. Goodwill and Intangible Assets Beginning in fiscal 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." As a result, we no longer amortize goodwill. Instead we periodically evaluate goodwill for recoverability. We also evaluate goodwill whenever events and changes in circumstance suggest that the carrying amount may not be recoverable from its estimated future cash flows. Upon adoption, we established reporting units based on our current reporting structure. We then assigned all goodwill to the reporting units, as well as other assets and liabilities, to the extent that they relate to the reporting unit. We have completed the first step of the transitional goodwill impairment test and have determined that no potential impairment exists. As a result, we have recognized no transitional impairment loss in fiscal 2002 in connection with the adoption of SFAS No. 142. The changes in the carrying amount of goodwill for the first quarter of fiscal 2002 are as follows:
(in millions) Analog Segment All Others Total --------------- -------------- -------------- Balances at May 27, 2001 $130.4 $1.7 $132.1 Goodwill acquired during the period 27.6 - 27.6 --------------- -------------- -------------- Balances at August 26, 2001 $158.0 $1.7 $159.7 =============== ============== ==============
Other intangible assets, which will continue to be amortized, consist of the following:
Aug. 26, May 27, 2001 2001 ---------------------- ---------------------- Patents $4.9 $4.9 Less accumulated amortization 1.0 0.7 ---------------------- ---------------------- $3.9 $4.2 ====================== ======================
We expect future estimated annual amortization expense to be:
(in millions) 2002 $1.0 2003 1.0 2004 1.0 2005 1.0 2006 0.2 -------- $4.2 ========
Amortization expense was:
Three Months Ended (in millions) Aug. 26, Aug. 27, 2001 2000 ---------------- ---------------- Goodwill amortization $- $1.7 Patent amortization 0.3 - ---------------- ---------------- $0.3 $1.7 ================ ================
Pro forma net income (loss) and net income (loss) per share exclusive of amortization expense was:
Three Months Ended (in millions) Aug. 26, Aug. 27, 2001 2000 ---------------- ---------------- Net income (loss), as reported $(54.6) $144.2 Add back: Goodwill amortization - 1.7 ---------------- ---------------- Net income (loss) - pro forma $(54.6) $145.9 ================ ================ Basic earnings (loss) per share, as reported $(0.31) $ 0.81 Add back: Goodwill amortization - 0.01 ---------------- ---------------- Basic earnings (loss) per share - pro forma $(0.31) $ 0.82 ================ ================ Diluted earnings (loss) per share, as reported $(0.31) $ 0.74 Add back: Goodwill amortization - 0.01 ---------------- ---------------- Diluted earnings (loss) per share - pro forma $(0.31) $ 0.75 ================ ================
Note 6. Restructuring of Operations and Cost Reduction Programs As part of the cost-reduction program we announced in May 2001, we paid severance of $12.0 million to 458 employees during the first quarter of fiscal 2002. We also paid another $1.5 million for other exit-related costs primarily associated with restructuring actions we originally announced in fiscal 1999. Included in accrued liabilities at August 26, 2001, is $16.8 million related to restructuring actions that were not yet completed. Of this amount, $8.6 million represents costs related to the May 2001 cost reduction program. The remaining amount represents facility dismantling costs for the closure of the Greenock 4-inch facility and lease obligations associated with other restructuring actions. Note 7. Acquisition In June 2001, we acquired Wireless Solutions Sweden AB, a leading developer of wireless solutions ranging from telemetry to mobile phones to wireless networking, including Bluetooth and 802.11 technologies. We expect this acquisition to enable us to deliver complete wireless reference designs, including silicon chipsets, hardware and software. The acquisition was accounted for using the purchase method, with a purchase price of $27.7 million. In connection with the acquisition, we recorded a $1.1 million in-process research and development charge, which is included as a component of special items in the condensed consolidated statement of operations. The amount allocated to the in-process research and development charge was determined through an established valuation technique used in the high technology industry and expensed upon acquisition, because technological feasibility had not been established and no alternative uses exist. Research and development costs to bring the products to technological feasibility are not expected to have a material impact on future operating results. The remainder of the purchase price was allocated to net liabilities of $1.0 million and intangible assets of $27.6 million, primarily representing goodwill. Note 8. Segment Information The following table presents information related to our reportable segments:
(in millions) Information Analog Appliance All Total Segment Segment Others Eliminations Consolidated ------------- -------------- -------------- ---------------- ----------------- Three months ended August 26, 2001: Sales to unaffiliated customers $252.0 $ 43.7 $ 43.6 $ - $339.3 ============= ============== ============== ================ ================= Segment income (loss) before income taxes $(22.8) $(29.8) $ 0.5 $(52.1) ============= ============== ============== ================ ================= Three months ended August 27, 2000: Sales to unaffiliated customers $461.2 $ 65.7 $113.9 $ - $640.8 Inter-segment sales - 0.1 - (0.1) - ------------- -------------- -------------- ---------------- ----------------- Net sales $461.2 $ 65.8 $113.9 $(0.1) $640.8 ============= ============== ============== ================ ================= Segment income (loss) before income taxes $158.6 $(18.5) $ 40.2 $180.3 ============= ============== ============== ================ =================
Item 2. MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in the 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. The forward-looking statements discussed or incorporated by reference in this section involve a number of risks and uncertainties. Other risks and uncertainties include, but are not limited to, the general economy, regulatory and international conditions, the changing environment of the semiconductor industry, competitive products and pricing, growth in the wireless, PC and communications infrastructure 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 our reports and filings with the SEC. Overview We recorded net sales of $339.3 million for the first quarter of fiscal 2002. This represented a 47 percent decline from sales of $640.8 million for the first quarter of fiscal 2001. The decline in sales came from lower demand seen broadly across semiconductor markets. For the first quarter of fiscal 2002, we had a net loss of $54.6 million, while we earned net income of $144.2 million for the first quarter of fiscal 2001. Operating results for fiscal 2002 were primarily affected by lower sales as a result of slower demand. The net loss for the first quarter of fiscal 2002 included a special item of $1.1 million for an in-process R&D charge related to the acquisition in the quarter of Wireless Solutions Sweden AB. In comparison, net income for the first quarter of fiscal 2001 included special items of $6.4 million. Those special items included a $4.1 million in-process R&D charge related to the acquisition of the Vivid Semiconductor business and a $2.3 million charge for restructuring of operations. Sales The following discussion is based on our operating segments described in Note 12 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended May 27, 2001. Our sales for the first quarter of fiscal 2002 declined significantly as market conditions for the semiconductor industry continued to weaken throughout the summer. The sales decline was primarily due to decreased volume of shipments. To a lesser extent, lower average selling prices were also a factor. The Analog segment, which represents 74 percent of our total sales, experienced a 45 percent decline in sales for the first quarter of fiscal 2002 compared to the first quarter of fiscal 2001. The decline was mostly due to a large decrease in unit volume together with some decreases in average selling prices. Within the Analog segment, sales of application-specific wireless products, including radio frequency building blocks, and sales of display products declined by 49 percent and 34 percent, respectively, in the first quarter of fiscal 2002 compared to the first quarter of fiscal 2001. In the broad-based analog markets, sales of power management and amplifier products were down in the first quarter of fiscal 2002 by 55 percent and 50 percent, respectively, from the same period last year. Sales in the first quarter of fiscal 2002 for the Information Appliance segment declined 33 percent from sales in the first quarter of fiscal 2001, primarily driven by lower unit volume as average selling prices remained fairly steady. Since a large part of our portfolio of information appliance products is still consumed in the PC marketplace, the year-to-year slowdown in demand for personal computers and PC-related products contributed to the decline in sales for the Information Appliance segment. In addition, the market adoption of emerging information appliances that are not PCs was slower than expected. Gross Margin Gross margin as a percentage of sales decreased to 32 percent for the first quarter of fiscal 2002 from gross margin of 53 percent for the first quarter of fiscal 2001. The erosion in gross margin was primarily driven by lower factory utilization. Wafer fabrication capacity utilization for the first quarter of fiscal 2002 dropped to 47 percent, as production activity was reduced considerably by the weakened business conditions in the semiconductor industry. This compares with wafer fabrication capacity utilization for the first quarter of fiscal 2001 of 97 percent, when business conditions in the semiconductor industry were very strong. Research and Development Our research and development expenses for the first quarter of fiscal 2002 were $109.0 million, or 32 percent of sales, compared to $103.7 million, or 16 percent of sales, in the same period last year. The fiscal 2002 and 2001amounts exclude $1.1 million and $4.1 million, respectively, for in-process R&D charges related to acquisitions. The in-process R&D charges are included as a component of special items in the condensed consolidated statements of operations. Higher R&D expenses for the first quarter of fiscal 2002 result mainly from a license agreement with Taiwan Semiconductor Manufacturing Company. This agreement, which began in fiscal 2001, allows us to gain access to a variety of TSMC's advanced sub-micron processes for use in our Maine facility as desired, if and when those processes are developed by TSMC. These advanced process technologies are expected to accelerate the development of high performance digital and mixed-signal products in the markets for wireless handsets, information appliances, information infrastructure and displays. During the first quarter of fiscal 2002, we devoted approximately 74 percent of our R&D effort towards new product development and 26 percent towards the development of process technology. Compared to fiscal 2001, this represents a 7 percent decrease in spending for new product development and a 43 percent increase in spending for process technology. While total fiscal 2002 spending for new product development declined slightly, we continue to focus our R&D investment on our key strategic programs. We continue to invest in the development of new analog and mixed-signal technology-based products for applications in the wireless handsets, displays, information appliances and information infrastructure markets. We also continue to devote resources towards developing new cores and integrating those cores with other technological capabilities to create system-on-a-chip solutions. Selling, General and Administrative Our selling, general and adminstrative expenses in the first quarter of fiscal 2002 were $64.2 million, or 19 percent of sales, compared to $100.6 million, or 16 percent of sales in the first quarter of fiscal 2001. The fiscal 2001 SG&A expenses included a $20.5 million expense associated with the charitable donation of equity securities that were part of our investment portfolio. We donated the securities to establish the National Semiconductor Foundation. Excluding this expense, SG&A expenses in fiscal 2002 declined 20 percent from SG&A expenses in fiscal 2001. The decline reflects actions that we implemented in the second half of fiscal 2001 to reduce spending in response to weakened business conditions. Interest Income and Interest Expense For the first quarter of fiscal 2002, we earned net interest income of $7.0 million, compared to $14.1 million for the first quarter of fiscal 2001. The decrease in net interest income was primarily due to lower average interest rates on lower average cash balances in the first quarter of fiscal 2002 compared to the first quarter of fiscal 2001. Offsetting interest expense was slightly lower for fiscal 2002 as we continued to reduce our outstanding debt balances. Other Income, Net Other income, net was $5.1 million for the first quarter of fiscal 2002 compared to $37.5 million for the first quarter of fiscal 2001. The components of other income, net for the first quarter of fiscal 2002 included a net gain of $5.6 million from equity investments, $1.3 million of net intellectual property income and $1.8 million of non-operating losses associated with an investment partnership. In comparison the components of other income, net for the first quarter of fiscal 2001 included a net gain of $36.1 million from equity investments and $1.4 million of net intellectual property income. The net gain from equity investments included a gain of $20.5 million from the distribution of equity securities that were part of our investment portfolio, which we donated to establish the National Semiconductor Foundation. An expense for the same amount associated with the donation was included in SG&A expenses for the first quarter of fiscal 2001. Income Tax Expense We recorded income tax expense of $2.5 million for the first quarter of fiscal 2002 compared to $36.1 million for the first quarter of fiscal 2001. The fiscal 2002 tax expense represents taxes due on international income, while we have not recognized a tax benefit on operating losses in the U.S. The fiscal 2001 tax expense is based on a 20 percent effective rate on both our U.S. and international operations. Financial Condition During the first quarter of fiscal 2002, cash and cash equivalents decreased $116.7 million compared to an increase of $57.7 million for the first quarter of fiscal 2001. The primary factors contributing to these changes are described below. For operating activities we used cash of $23.8 million in the first quarter of fiscal 2002, while we generated cash of $116.0 million in the first quarter of fiscal 2001. The use of operating cash for the first quarter of fiscal 2002 resulted from the net loss and changes in working capital components. Changes in working capital components for fiscal 2002 had a negative impact as the payment of income taxes and decreases in accounts payable and accrued liabilities more than offset decreases in receivables and inventories. For fiscal 2001, operating cash was primarily generated from net income, which was partially offset by a negative impact from changes in working capital components. The negative impact from changes in working capital components were from decreases in accounts payable and accrued liabilities combined with increases in receivables and inventories. Our investing activities used cash of $110.1 million in the first quarter of fiscal 2002, compared to $72.8 million used in the first quarter of fiscal 2001. Major uses of cash in fiscal 2002 included investment in property, plant and equipment of $35.1 million, net purchases of marketable securities of $40.0 million and the acquisition of Wireless Solutions Sweden AB for $27.5 million. Major uses of cash in fiscal 2001 included investment in property, plant and equipment of $51.0 million, net purchases of marketable securities of $17.9 million and the acquisition of the Vivid Semiconductor business for $24.9 million. Our financing activities generated cash of $17.2 million in the first quarter of fiscal 2002 and $14.5 million in the first quarter of fiscal 2001. The primary source of cash was from the issuance of common stock under employee benefits plans in the amount of $21.8 million in fiscal 2002 compared to $18.7 million in fiscal 2001. This was slightly offset by repayment of our outstanding debt balances of $4.6 million in the first quarter of fiscal 2002 and $4.2 million in the first quarter of fiscal 2001. Management foresees substantial cash outlays for plant and equipment throughout the remainder of fiscal 2002, with primary focus on new capabilities that support our target growth markets, as well as improvements to provide better manufacturing efficiency and productivity. However, we will continue to manage that activity relative to business conditions. Based on current economic conditions, the fiscal 2002 capital expenditure level is expected to be slightly lower than the fiscal 2001 level. We expect existing cash and investment balances, together with existing lines of credit, to be sufficient to finance planned fiscal 2002 capital investments. Recently Issued Accounting Standards At the beginning of the first quarter of fiscal 2002, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption of this statement did not have a material impact on our financial statements as described in Note 2 to the condensed consolidated financial statements. At the beginning of the first quarter of fiscal 2002, we also adopted SFAS No. 142, "Goodwill and Other Intangible Assets." The impact of adoption of this statement is described in Note 5 to the condensed consolidated financial statements. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, thereby eliminating the use of the pooling-of-interests method. In June 2001, the Financial Accounting Standards Board also issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We are currently analyzing this statement and have not yet determined its impact on our consolidated financial statements. This Statement will be effective for our fiscal year 2003. Outlook Although semiconductor market conditions in our first quarter continued to be weak compared to last year, we began to experience more stability in our orders. During the quarter we saw improvement in lead-time patterns from new orders with orders coming from a broader cross section of customers including PC suppliers, wireless handset makers and contract manufacturers. We also saw improvement over the preceding quarter in fill orders, which are orders received and shippable in the same quarter. The sequential increase in quarterly orders allowed us to grow our backlog during the first quarter of fiscal 2002. As a result of this growth, combined with the recent order patterns, we anticipate that sales in the second quarter of fiscal 2002 will be higher than sales in the first quarter we just completed. The actual level of sales we achieve in the second quarter of fiscal 2002 will depend upon the amount of fill orders we receive. If the level and pattern of fill orders that we experienced in the first quarter are not sustained, the expected growth in sales for the second quarter of fiscal 2002 may not be achieved. We also expect our gross margin percentage for the second quarter of fiscal 2002 to be similar to that of the recently completed first quarter, as wafer fabrication capacity utilization is expected to remain below 50 percent. Until we see more accelerated improvement in new orders, we plan to continue to control the level of production activity in our manufacturing facilities. For the second quarter of fiscal 2002, we currently anticipate operating results to be comparable to the results we had for the first quarter of fiscal 2002. The recent terrorist attacks on the U.S. have created additional uncertainty on the state of the U.S. economy overall. Although we did not experience any immediate direct adverse effect on our operations from the terrorist attacks, the longer-term and indirect consequences from this catastrophic event are not yet known. There can be no assurance that the economic and political climate will improve in the near future. If the slow business conditions in the global economy continue or become more severe, our future sales and operating results could be negatively impacted. 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 our Annual Report on Form 10-K for the year ended May 27, 2001 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 our Annual Report on Form 10-K for the year ended May 27, 2001 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 our 2001 Form 10-K. There have been no material changes from the information reported in these sections. PART II. OTHER INFORMATION Item 1. Legal Proceedings Customs Proceedings In April 1988, we received a notice from the U.S. Customs Service in San Francisco alleging that we had underpaid duties of approximately $19.5 million on goods that we had imported from our subsidiaries from June 1, 1979 to March 1, 1985. We had been contesting the notice in various proceedings since 1988. In March 1998, the Assistant Commissioner of Customs reduced the alleged underpayment to approximately $3.6 million. The underpayment was subject to penalties computed as a multiple of the underpayment. In July 2001, the Customs Service accepted our offer to settle the matter for $2,500,000, which had been previously paid to the Customs Service. The matter is now concluded. 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 our Registration Statement on Form S-3 Registration No. 33-52775, which became effective March 22, 1994); Certificate of Amendment of Certificate of Incorporation dated September 30, 1994 (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-09957, which became effective August 12, 1996); Certificate of Amendment of Certificate of Incorporation dated September 22, 2000 (incorporated by reference from the Exhibits to our Registration Statement on Form S-8 Registration No. 333-48424, which became effective October 23, 2000). 3.2 By Laws of the Company, as amended effective January 24, 2001 (incorporated by reference from the Exhibits to our Form 10-Q for the quarter ended February 25, 2001 filed April 11, 2001). 4.1 Form of Common Stock Certificate (incorporated by reference from the Exhibits to our Registration Statement on Form S-3 Registration No. 33-48935, which became effective October 5, 1992). 4.2 Rights Agreement (incorporated by reference from the Exhibits to our Registration Form 8-A filed August 10, 1988); First Amendment to the Rights Agreement dated as of October 31, 1995 (incorporated by reference from the Exhibits to our Amendment No. 1 to the Registration Statement on Form 8-A filed December 11, 1995); Second Amendment to the Rights Agreement dated as of December 17, 1996 (incorporated by reference from the Exhibits to our Amendment No. 2 to the Registration Statement on Form 8-A filed January 17, 1997). 4.3 Indenture dated as of September 15, 1995 (incorporated by reference from the Exhibits to our 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 our 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). 10.1 Management Contract or Compensatory Plan or Arrangement: Fiscal Year 2002 Executive Officer Incentive Plan Agreement (b) Reports on Form 8-K No reports on form 8-K were filed for the quarter ending August 26, 2001. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL SEMICONDUCTOR CORPORATION Date: October 4, 2001 /s/ Robert E. DeBarr -------------------- Robert E. DeBarr Controller Signing on behalf of the registrant and as principal accounting officer EX-10 3 form10q_exh10.txt 2002 EXECUTIVE OFFICER INCENTIVE PLAN AGREEMENT EXHIBIT 10.1 NATIONAL SEMICONDUCTOR CORPORATION 2002 EXECUTIVE OFFICER INCENTIVE PLAN AGREEMENT ARTICLE 1 Definitions Whenever used in the Agreement, unless otherwise indicated, the following terms shall have the respective meanings set forth below: Agreement: ---------- This Executive Officer Incentive Plan Agreement. Award: ------ The amount to be paid to a Plan Participant. Award Date: ----------- The date set by the Committee for payment of Awards, usually approximately forty days after the Company makes public its consolidated financial statements for the fiscal year. Annual Incentive Base Salary: ----------------------------- Generally, the annualized base remuneration received by a Participant from the Company at the end of the fiscal year. Extraordinary items, including but not limited to prior awards, relocation expenses, car allowances, international assignment allowances and tax adjustments, sales incentives, amounts recognized as income from stock or stock options, disability benefits (whether paid by the Company or a third party) and other similar kinds of extra or additional remuneration are excluded from the computation of Annual Incentive Base Salary. Company: -------- National Semiconductor Corporation ("NSC"), a Delaware corporation, and any other corporation in which NSC controls directly or indirectly fifty percent (50%) or more of the combined voting power of voting securities, and which has adopted this Plan. Committee: ---------- A committee comprised of directors of NSC who are not employees of the Company, as more fully defined in the Executive Officer Incentive Plan. Disability: ----------- Inability to perform any services for the Company and eligible to receive disability benefits under the standards used by the Company's disability benefit plan or any successor plan thereto. Executive Officer: ------------------ An officer of the Company who is subject to the reporting and liability provisions of Section 16 of the Securities and Exchange Act of 1934. Incentive Levels: ----------------- Percentage of Annual Incentive Base Salary assigned to a Participant as a Target Award. Participant: ------------ An Executive Officer designated as a Participant in accordance with the provisions of Article 3. Performance Goal: ----------------- Factors considered and scored to determine the amount of a Participant's Award, which shall be based on one or more of the business criteria listed in Section 5(b) of the Plan. Individual Performance Goals may have two levels of performance as follows: (i) Target -- Expected performance, as established by the Committee, reflecting a degree of difficulty which has a reasonable probability of achievement. (ii) Stretch -- Better than Target performance and reflecting a greater degree of difficulty. Corporate financial Performance Goals will also have a Threshold level of performance, which will be a minimum acceptable level of performance. Retirement: ----------- Permanent termination of employment with the Company, and (a) the Participant's age is either sixty-five (65) or age is at least fifty-five (55) and age plus years of service in the employ of the Company is sixty-five (65) or more, and (b) the retiring Participant has confirmed to the Vice President-Finance of the Company that he or she does not intend to engage in a full-time vocation. Target Award: ------------- The Award, expressed as a percentage of Annual Incentive Base Salary at the assigned Incentive Level, that may be earned by a Participant for achievement of the Target level of performance. All capitalized terms used in this Agreement and not otherwise defined herein have the meanings assigned to them in the Executive Officer Incentive Plan. ARTICLE 2 Effective Date -------------- The Agreement will become effective as of May 28, 2001, to be effective for the Company's fiscal year 2002. ARTICLE 3 Eligibility for Plan Participation ---------------------------------- A. Within ninety (90) days after the commencement of the Company's fiscal year, the Committee shall designate those Executive Officers who shall be Plan Participants for the fiscal year and their respective Incentive Levels. B. Participants will be notified once the Committee has designated Participants for the fiscal year. Continued participation will be re-evaluated by the Committee annually pursuant to Article 3A supra at the beginning of each fiscal year. C. Newly hired Executive Officers and persons who are promoted to Executive Officers may be added as Participants to the Plan by the Committee during the fiscal year. Such Participants will receive a prorated Award based on time of participation in the Plan. D. Participants may be removed from the Plan during the fiscal year at the discretion of the Committee. Participants so removed will receive a prorated Award based on length of participation in the Plan. ARTICLE 4 Target Awards/Incentive Levels ------------------------------ A. Each Participant will be assigned an Incentive Level with associated Target Awards expressed as percentages of the Participant's Annual Incentive Base Salary. B. In the event that a Participant changes positions during the Plan Period and the change results in a change in Incentive Level, whether due to promotion or demotion, the Incentive Level will be prorated to reflect the time spent in each position. ARTICLE 5 Plan Performance Goals ---------------------- A. Performance Goals and associated weights will be established by the Committee within ninety (90) days after the start of the fiscal year. Each individual Performance Goal will have a defined Target level of performance and may have defined Stretch levels as well. Corporate financial Performance Goals will have defined Threshold, Target and Stretch levels of performance. All Participants will be given the same corporate financial Performance Goals. Performance Goals and their associated weights may change from one fiscal year to another fiscal year to reflect the Company's operational and strategic goals, but must be based on one or more of the business criteria listed in Section 5(b) of the Plan. B. Actual Award amounts may range between 0% and 200% of Target based on actual achievement on Performance Goals. Each Performance Goal will be scored at the end of the fiscal year. The sum of the scoring on the Performance Goals will determine the total performance level for the year. ARTICLE 6 Calculation and Payment of Awards --------------------------------- A. A Participant's Award will be calculated as a percentage of Annual Incentive Base Salary at the end of the fiscal year as follows: 1) The Participant's Target Award is determined prior to the beginning of the fiscal year, based on the Participant's Incentive Level and the Annual Incentive Base Salary as reflected by the Company's human resources information systems. 2) The performance of each Participant is scored at the end of the fiscal year, with the sum of the scoring on each Performance Goal determining the total performance level. 3) The total performance level shall be multiplied by the Participant's Incentive Level. No one individual Award may exceed 200% of the Participant's Target Award amount. 4) The Committee may adjust Awards to reflect discretion it deems appropriate. As a result, some or all Award amounts may be adjusted to reflect the exercise of the Committee's discretion. B. The Committee will score the performance of the Plan Participants. Awards will be paid only after the Committee certifies in writing that the ratings on the Performance Goals have been attained. C. Awards will be paid in cash on or about the Award Date. D. Awards will reflect the Participant's Annual Incentive Base Salary in effect at the end of the fiscal year. Participants who take a leave of absence during the fiscal year for good cause shown to the satisfaction of the Committee will have their Awards prorated to reflect actual pay earned during the fiscal year. E. Any Awards that are prorated for any reason under the terms of the Plan or this Agreement will be prorated based on the effective date of the change that resulted in the proration. ARTICLE 7 Termination of Employment ------------------------- A. To be eligible to receive an Award, the Participant must be employed by the Company on the last working day of the fiscal year. A Participant whose employment has terminated prior to that date will forfeit the Award, except as otherwise provided in this Article 7. B. If a Participant's employment is terminated during the fiscal year by Disability, Retirement, or death, the Participant will receive an Award reflecting the Participant's performance and actual period of full-time employment during the fiscal year. C. Unless local law or regulation provides otherwise, payments of Awards made upon termination of employment by death shall be made on the Award Date to: (a) beneficiaries designated by the Participant; if none, then (b) to a legal representative of the Participant; if none, then (c) to the persons entitled thereto as determined by a court of competent jurisdiction. D. Participants whose employment is terminated by reduction in force during the fiscal year will receive no Award. If a Participant's employment is terminated by reduction in force after the fiscal year but before the Award Date, the Participant will receive the Award on the Award Date. E. The Committee reserves the right to reduce an Award to reflect a Participant's absence from work during a fiscal year. F. Notwithstanding any other provisions of this Agreement to the contrary, the right of a Participant to receive an Award, including Awards deferred pursuant to the provisions of Article 8, shall be forfeited if the Participant's employment is terminated for good cause shown such as acts of moral turpitude, a reckless disregard of the rights of other employees or because of or the Participant is discovered to have engaged in fraud, embezzlement, dishonesty against the Company, obtaining funds or property under false pretenses, assisting a competitor without permission, or interfering with the relationship of the Company with a customer. A Participant's Award will be forfeited for any of the above reasons regardless of whether such act is discovered prior to or subsequent to the Participant's termination of employment or payment of an Award. If an Award has been paid, such payment shall be repaid to the Company by the Participant. ARTICLE 8 Deferral of Awards ------------------ Participants eligible to participate in the Company's Deferred Compensation Plan (the "Deferred Compensation Plan") may elect to make an irrevocable election to defer receipt of all or any portion of any Award pursuant to and in accordance with the terms of the Deferred Compensation Plan. ARTICLE 9 Interpretations and Rule-Making ------------------------------- The Committee shall have the sole right and power to: (i) interpret the provisions of the Agreement, and resolve questions thereunder, which interpretations and resolutions shall be final and conclusive; (ii) adopt such rules and regulations with regard to the administration of the Plan as are consistent with the terms of the Plan and the Agreement, and (iii) generally take all action to equitably administer the operation of the Plan and this Agreement. ARTICLE 10 Declaration of Incentives, Amendment, or Discontinuance ------------------------------------------------------- The Committee may on or before the Award Date: (i) determine not to make any Awards to any or all Participants for any fiscal year; (ii) make any modification or amendment to this Agreement for any or all Participants provided such modification or amendment is in accordance with the terms of the Plan; or (iii) discontinue this Agreement for any or all Participants provided such modification or amendment is otherwise in accordance with the Plan. ARTICLE 11 Miscellaneous ------------- A. Except as provided in the Deferred Compensation Plan, no right or interest in the Plan is transferable or assignable except by will or the laws of descent and distribution. B. Participation in the Plan does not guarantee any right to continued employment and the Committee and management reserve the right to dismiss Participants for any reason whatsoever. Participation in one fiscal year does not guarantee a Participant the right to participation in any subsequent fiscal year. C. The Company reserves the right to deduct from all Awards under this Plan any sums due the Company as well as any taxes or other amounts required by law to be withheld with respect to Award payments. D. Maintenance of financial information relevant to measuring performance during the fiscal year will be the responsibility of the Chief Financial Officer of the Company. E. The provisions of the Plan shall not limit, or restrict, the right or power of the Committee to continue to adopt such other plans or programs, or to make salary, bonus, incentive, or other payments, with respect to compensation of Executive Officers, as in its sole judgment it may deem proper. F. Except to the extent superseded by federal law, this Agreement shall be construed in accordance with the laws of the State of California. G. No member of the Company's board of directors or any officer, employee, or agent of the Company shall have any liability to any person, firm or corporation based on or arising out of this Agreement or the Plan. H. Any dispute relating to or arising from this Agreement shall be determined by binding arbitration by a three member panel chosen under the auspices of the American Arbitration Association and acting pursuant to its Commercial Rules, sitting in San Jose, California. The panel may assess all fees, costs and other expenses, including reasonable counsel fees, as the panel sees fit. Notwithstanding the parties' election to use arbitration to resolve disputes under this Agreement, nothing contained in that election shall preclude either party, if the circumstances warrant, from seeking extraordinary relief, such as injunction and attachment, from any court of competent jurisdiction in California.