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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended November 26, 2000
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 November 26, 2000.
------------------- ---------------------------------
Common stock, par value $0.50 per share 174,231,046
<PAGE>
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 26, 2000 and
November 28, 1999 3
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
for the Three Months and Six Months Ended November 26, 2000
and November 28, 1999 4
Condensed Consolidated Balance Sheets (Unaudited) as of
November 26, 2000 and May 28, 2000 5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended November 26, 2000 and November 28, 1999 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 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18-19
Signature 20
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Nov. 26, Nov. 28, Nov. 26, Nov. 28,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 595.0 $ 513.9 $1,235.8 $ 995.7
Operating costs and expenses:
Cost of sales 294.3 281.5 595.7 578.2
Research and development 112.1 85.0 215.8 200.1
Selling, general and administrative 78.8 75.1 179.4 151.1
Special items - (29.9) 6.4 (29.9)
------------ ------------ ------------ ------------
Total operating costs and expenses 485.2 411.7 997.3 899.5
Operating income 109.8 102.2 238.5 96.2
Interest income, net 15.2 1.6 29.3 0.2
Other income, net 8.4 0.2 45.9 57.2
------------ ------------ ------------ ------------
Income before income taxes and
extraordinary item 133.4 104.0 313.7 153.6
Income tax expenses 26.7 5.2 62.8 7.7
------------ ------------ ------------ ------------
Net income before extraordinary item 106.7 98.8 250.9 145.9
Extraordinary loss on early extinguishment
of debt, net of tax benefit of $0.4 million - 6.8 - 6.8
------------ ------------ ------------ ------------
Net income $ 106.7 $ 92.0 $ 250.9 $ 139.1
============ ============ ============ ============
Earnings per share before extraordinary item:
Basic $ 0.60 $ 0.57 $ 1.41 $ 0.85
Diluted $ 0.56 $ 0.52 $ 1.29 $ 0.78
Earnings per share:
Basic $ 0.60 $ 0.53 $ 1.41 $ 0.81
Diluted $ 0.56 $ 0.49 $ 1.29 $ 0.74
Weighted-average shares:
Basic 178.1 172.2 178.1 171.3
Diluted 191.9 189.5 193.9 187.5
Income used in basic and diluted
earnings per share calculation $ 106.7 $ 92.0 $ 250.9 $ 139.1
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (Unaudited)
(in millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Nov. 26, Nov. 28, Nov. 26, Nov. 28,
2000 1999 2000 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net income $ 106.7 $ 92.0 $ 250.9 $ 139.1
Other comprehensive income, net of tax:
Reclassification adjustment for net
realized gain included in net income (4.6) - (22.3) -
Unrealized gain (loss) on
available-for-sale securities (9.3) 13.8 43.9 186.1
------------ ------------- ------------ -------------
Comprehensive income $ 92.8 $ 105.8 $ 272.5 $ 325.2
============ ============= ============ =============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions)
<TABLE>
<CAPTION>
Nov. 26, May 28,
2000 2000
-------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 846.0 $ 778.8
Short-term marketable investments 30.3 22.3
Receivables, net 213.4 258.6
Inventories 201.8 192.9
Deferred tax assets 125.7 125.7
Other current assets 41.6 40.5
-------------------- --------------------
Total current assets 1,458.8 1,418.8
Net property, plant and equipment 821.5 803.7
Long-term cash investments 61.9 48.8
Long-term marketable investments 33.9 12.7
Other assets 106.4 98.2
-------------------- --------------------
Total assets $2,482.5 $2,382.2
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt $ 32.0 $ 31.4
Accounts payable 143.3 194.5
Accrued expenses 277.3 315.1
Income taxes payable 92.8 86.7
-------------------- --------------------
Total current liabilities 545.4 627.7
Long-term debt 39.5 48.6
Other non-current liabilities 66.6 62.6
-------------------- --------------------
Total liabilities 651.5 738.9
-------------------- --------------------
Put warrants 5.2 -
-------------------- --------------------
Commitments and contingencies
Shareholders' equity
Common stock 87.1 88.8
Additional paid-in capital 1,307.0 1,395.3
Retained earnings 437.6 186.7
Accumulated other comprehensive loss (5.9) (27.5)
-------------------- --------------------
Total shareholders' equity 1,825.8 1,643.3
-------------------- --------------------
Total liabilities and shareholders' equity $2,482.5 $2,382.2
==================== ====================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE>
NATIONAL SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
<TABLE>
<CAPTION>
Six Months Ended
Nov. 26, Nov. 28,
2000 1999
------------------------ -----------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 250.9 $ 139.1
Adjustments to reconcile net income
with net cash provided by operations:
Depreciation and amortization 118.0 137.7
Gain on investments (38.8) (48.5)
Loss on disposal of equipment 1.3 5.0
Donation of equity securities 20.5 -
Non-cash special items 6.4 (29.9)
Other, net 0.3 2.9
Changes in certain assets and liabilities, net:
Receivables 45.2 (42.0)
Inventories (8.9) (21.7)
Other current assets (2.7) (4.6)
Accounts payable and accrued expenses (87.4) (60.5)
Current and deferred income taxes 6.1 18.3
Other liabilities 4.0 3.8
------------------------ -----------------------
Net cash provided by operating activities 314.9 99.6
------------------------ -----------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (121.2) (58.7)
Sale of equipment - 8.1
Sale and maturity of marketable investments 7.0 137.0
Purchase of marketable investments (28.0) (89.0)
Proceeds from sale of investment 29.9 52.3
Business acquisition, net of cash acquired (24.9) -
Disposition of Cyrix PC microprocessor business - 70.0
Purchase of investments and other, net (11.2) 2.2
------------------------ -----------------------
Net cash (used by) provided by investing activities (148.4) 121.9
------------------------ -----------------------
Cash flows from financing activities:
Redemption of convertible subordinated notes - (265.8)
Repayment of debt (8.5) (22.1)
Issuance of common stock, net 35.0 50.5
Purchase and retirement of treasury stock (125.8) -
------------------------ -----------------------
Net cash used by financing activities (99.3) (237.4)
------------------------ -----------------------
Net change in cash and cash equivalents 67.2 (15.9)
Cash and cash equivalents at beginning of period 778.8 418.7
------------------------ -----------------------
Cash and cash equivalents at end of period $ 846.0 $ 402.8
======================== =======================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
<PAGE>
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. Throughout these notes to the condensed consolidated financial
statements, National Semiconductor Corporation and its majority-owned
subsidiaries may be referred to as 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 28, 2000.
Earnings Per Share:
A reconciliation of the shares used in the computation for basic and diluted
earnings per share follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Nov. 26, Nov. 28, Nov. 26, Nov. 28,
(in millions) 2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income used for basic and
diluted earnings per share $ 106.7 $ 92.0 $ 250.9 $ 139.1
============ =========== =========== ===========
Number of shares:
Weighted average common shares outstanding
used for basic earnings per share 178.1 172.2 178.1 171.3
Effective of dilutive securities:
Stock options 13.8 17.3 15.8 16.2
------------ ----------- ----------- -----------
Weighted average common and potential
common shares outstanding used for
diluted earnings per share 191.9 189.5 193.9 187.5
============ =========== =========== ===========
</TABLE>
As of November 26, 2000, there were options outstanding to purchase 13.2 million
shares of common stock with a weighted-average exercise price of $48.10 which
could potentially dilute basic earnings per share in the future. These options
were not included in the calculation of diluted earnings per share because their
effect was antidilutive. As of November 28, 1999, options outstanding to
purchase 0.5 million shares of the company's common stock with a
weighted-average exercise price of $35.10 were not included in the computation
of diluted earnings per share because their effect was antidilutive.
Note 2. Consolidated Financial Statement Detail
<TABLE>
<CAPTION>
The components of inventories were:
Nov. 26, May 28,
(in millions) 2000 2000
--------------------------- ---------------------------
<S> <C> <C>
Raw materials $ 14.8 $ 16.6
Work in process 106.2 112.0
Finished goods 80.8 64.3
--------------------------- ---------------------------
Total inventories $ 201.8 $ 192.9
=========================== ===========================
The components of accumulated other comprehensive loss, net of tax, were:
Nov. 26, May 28,
(in millions) 2000 2000
--------------------------- ---------------------------
Unrealized gain on
available-for-sale securities $ 25.3 $ 3.7
Minimum pension liability (31.2) (31.2)
--------------------------- ---------------------------
Accumulated other comprehensive loss $ (5.9) $ (27.5)
=========================== ===========================
The components of special items were:
Three Months Ended Six Months Ended
Nov. 26, Nov. 28, Nov. 26, Nov. 28,
(in millions) 2000 1999 2000 1999
------------ ----------- ----------- -----------
In-process research and development charge $ - $ - $ 4.1 $ -
Restructuring of operations - (3.1) 2.3 (3.1)
Gain on disposition of Cyrix PC
microprocessor business - (26.8) - (26.8)
------------ ----------- ----------- -----------
Total special items $ - $ (29.9) $ 6.4 $ (29.9)
============ =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Components of interest income (expense), net and other income, net were:
Three Months Ended Six Months Ended
Nov. 26 Nov. 28 Nov. 26 Nov. 28
(in millions) 2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income, net
Interest income $ 16.4 $ 7.6 $ 31.8 $ 13.5
Interest expense (1.2) (6.0) (2.5) (13.3)
------------ ----------- ------------ -----------
Interest income, net 15.2 $ 1.6 $ 29.3 $ 0.2
============ =========== ============ ===========
Other income, net
Net intellectual property income $ 3.1 $ 0.1 $ 4.5 $ 6.9
Gain on investments, net 2.7 0.1 38.8 48.5
Other 2.6 - 2.6 1.8
------------ ----------- ----------- ------------
Total other income, net $ 8.4 $ 0.2 $ 45.9 $ 57.2
============ =========== =========== ============
</TABLE>
Included in gain on investments for the first six months of fiscal 2001 is a
gain of $20.5 million resulting from the charitable donation of equity
securities that were a part of the company's investment portfolio. The
securities were donated to establish the National Semiconductor Foundation. The
expense associated with the donation also totaled $20.5 million and this amount
is included in selling, general and administrative expenses for the first six
months of fiscal 2001.
<TABLE>
<CAPTION>
Note 3. Statement of Cash Flows Information
Six Months Ended
Nov. 26, Nov 28,
(in millions) 2000 1999
---------------------- -----------------------
<S> <C> <C>
Supplemental Disclosure of Cash Flows Information:
Cash paid (refunded) for:
Interest $ 2.6 $ 16.5
Income taxes $ 56.7 $ (11.0)
Supplemental Schedule of Non-cash Investing
and Financing Activities:
Issuance of stock for employee benefit plans $ 4.1 $ 0.9
Issuance of director stock $ 0.3 $ 0.3
Issuance of restricted stock $ 2.4 $ -
Issuance of common stock in connection
with the settlement of promissory note $ - $ 5.0
Issuance of common stock in connection
with the conversion of a subordinated notes $ - $ 0.1
Change in unrealized gain on
available-for-sales securities $ 21.6 $ 186.1
</TABLE>
Note 4. Restructuring of Operations
During the first six months of fiscal 2001, the company recorded a $2.3 million
restructuring charge in connection with its consolidation of the wafer
manufacturing operations in Greenock. This charge represented additional
severance costs associated with the termination of certain remaining employees
who were scheduled to depart the company in fiscal 2001, concurrent with final
closure of the 4-inch wafer fabrication facility. During the first quarter of
fiscal 2001, the terminating employees earned higher than expected salaries
because of unexpected overtime hours. The actual salaries earned directly impact
the amount of severance these employees have a right to receive at termination.
The closure of the 4-inch wafer fabrication facility and the transfer of
products and processes to the 6-inch wafer fabrication facility on the same site
were substantially completed by the end of September 2000. During the first six
months of fiscal 2001, the company paid $4.1 million in severance to 87
employees terminated in connection with the facility closure.
During the second quarter and first six months of fiscal 2001, the company also
paid $1.4 million and $3.8 million, respectively, for other exit-related costs,
primarily related to restructuring actions originally announced in May 1999.
Included in accrued liabilities at November 26, 2000, is $13.5 million related
to costs for restructuring actions discussed in Note 3 to the consolidated
financial statements for fiscal 2000 that were not yet completed as of November
26, 2000. These restructuring costs primarily represent facility clean-up costs
related to the closure of the Greenock 4-inch wafer fabrication facility and
lease obligations related to other restructuring actions.
Note 5. Acquisition
In July 2000, the company acquired the business and assets of Vivid
Semiconductor, Inc. a semiconductor company based in Chandler, Arizona. The
company expects the addition of Vivid's technologies and expert analog
engineering resources to expand its strengths in creating silicon solutions for
the flat-panel display market. The acquisition was accounted for using the
purchase method with a purchase price of $25.1 million in cash. In connection
with the acquisition, the company recorded a $4.1 million in-process research
and development charge, which is included as a component of special items in the
condensed consolidated statement of operations. 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
assets of $1.3 million and intangible assets of $19.7 million based on fair
values. The intangible assets primarily consist of goodwill which is to be
amortized over a useful life of 5 years.
Note 6. Segment Information
The following table presents information related to the company's reportable
segments:
<TABLE>
<CAPTION>
Information
Analog Appliance All Total
Segment Segment Others Eliminations Consolidated
Three months ended November 26, 2000:
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 416.4 $ 65.4 $ 113.2 $ - $ 595.0
=========== ============== ========== ================ ================
Net sales $ 416.4 $ 65.4 $ 113.2 $ - $ 595.0
=========== ============== ========== ================ ================
Segment income (loss)
before income
taxes $ 125.4 $ (19.6) $ 27.6 $ - $ 133.4
=========== ============== ========== ================ ================
Three months ended November 28, 1999:
Sales to unaffiliated
customers $ 368.8 $ 59.5 $ 85.6 $ - $ 513.9
Inter-segment sales - 0.1 - (0.1) -
----------- -------------- ---------- ---------------- ----------------
Net sales $ 368.8 $ 59.6 $ 85.6 $ (0.1) $ 513.9
=========== ============== ========== ================ ================
Segment income (loss)
before income
taxes and extraordinary
item $ 106.8 $ (24.6) $ 21.8 $ - $ 104.0
=========== ============== ========== ================ ================
Information Cyrix
Analog Appliance Business All Total
Segment Segment Unit Others Eliminations Consolidated
----------- -------------- ----------- ---------- ---------------- ----------------
Six months ended November 26, 2000:
Sales to unaffiliated
customers $ 877.6 $ 131.1 $ - $ 227.1 $ - $1,235.8
Inter-segment sales - 0.1 - - (0.1) -
----------- -------------- ----------- ---------- --------------- ----------------
Net sales $ 877.6 $ 131.2 $ - $ 227.1 $ (0.1) $1,235.8
=========== ============== =========== ========== ================ ================
Segment income (loss)
before income
taxes $ 284.0 $ (38.1) $ - $ 67.8 $ - $ 313.7
=========== ============== =========== ========== ================ ================
Six months ended November 28, 1999:
Sales to unaffiliated
customers $ 702.2 $ 111.5 $ 18.6 $ 163.4 $ - $ 995.7
Inter-segment sales - 0.2 - - (0.2) -
----------- -------------- ----------- ---------- ---------------- ----------------
Net sales $ 702.2 $ 111.7 $ 18.6 $ 163.4 $ (0.2) $ 995.7
=========== ============== =========== ========== ================ ================
Segment income (loss)
before income
taxes and extraordinary
item $ 189.3 $ (53.8) $ (22.6) $ 40.7 $ - $ 153.6
=========== ============== =========== ========== ================ ================
</TABLE>
Note 7. Put Warrants
In November 2000, the company sold put warrants on 300,000 shares of its common
stock. The warrants, which mature in February 2001, give the holders the right
at maturity to require the company to repurchase shares of National common stock
at $17.50. The company has the option to settle in cash or shares of common
stock. The amount related to the company's potential repurchase obligation has
been reclassified from shareholders' equity to put warrants. As of November 26,
2000, all the warrants were outstanding.
<PAGE>
Item 2. MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The company recorded net sales of $595.0 million and $1,235.8 million for the
second quarter and first six months of fiscal 2001, respectively. This
represents an increase of 16 percent and 24 percent from net sales of $513.9
million and $995.7 million for the second quarter and first six months of fiscal
2000, respectively. This growth was primarily attributable to improvement in
market conditions for the semiconductor industry. Net income was $106.7 million
and $250.9 million for the second quarter and first six months of fiscal 2001,
respectively, compared to net income of $92.0 million and 139.1 million for the
corresponding periods of fiscal 2000. The improvement in operating results is
attributable to growth in sales of higher margin analog products and improvement
in manufacturing efficiency achieved since the company exited the Cyrix PC
microprocessor business in May 1999. Net income for the first six months of
fiscal 2001 included special items in the amount of $6.4 million. The special
items represented an in-process R&D charge of $4.1 million related to an
acquisition (See Note 5) and a restructuring charge of $2.3 million related to
the consolidation of the manufacturing facility in Greenock, Scotland (See Note
4). No special items were included in net income for the second quarter of
fiscal 2001. For the second quarter and first six months of fiscal 2000, net
income included $29.9 million for special items. The special items included a
$26.8 million gain from the sale of the assets of the Cyrix PC microprocessor
business and a $3.1 million credit related to restructuring of operations. Net
income for the second quarter and first six months of fiscal 2000 also included
a $6.8 million extraordinary loss (net of tax benefit of $0.4 million) that the
company recorded in connection with the early redemption of its $258.8 million,
6.5 percent convertible subordinated notes.
Sales
The following discussion is based on the company's operating segments described
in Note 12 to the consolidated financial statements included in the Annual
Report on Form 10-K for the year ended May 28, 2000.
The increase in overall sales for the first half of fiscal 2001 was a result of
significantly higher volumes, while average selling prices were relatively flat
for most of the company's products. The Analog segment, whose sales now
represent 71 percent of the company's total sales, drove the growth in sales.
For the second quarter and first six months of fiscal 2001, analog product sales
grew 13 percent and 25 percent, respectively, over sales for the comparable
periods of fiscal 2000. This growth was primarily attributable to significantly
higher unit volume, while average selling prices increased slightly. Sales in
the wireless cellular markets were strong in the first quarter of fiscal 2001,
but were up only slightly in the second quarter compared to last year's second
quarter. Amplifiers and interface products led the growth in Analog segment
sales for the second quarter of fiscal 2001 over the comparable quarter of
fiscal 2000 with increases of 31 percent and 21 percent, respectively. These
product areas also led the growth in sales for the first half of fiscal 2001
over the comparable fiscal 2000 period with increase of 39 percent and 42
percent, respectively. Power management products also contributed to the growth
in sales for the first half of fiscal 2001 with a 31 percent increase over the
comparable fiscal 2000 period. Sales in the second quarter and first six months
of fiscal 2001 for the Information Appliance segment grew 10 percent and 18
percent, respectively, over sales for the comparable periods of fiscal 2000
primarily due to higher unit volume as average selling prices remained
relatively flat. For the first six-month periods the comparison excludes sales
of the Cyrix PC microprocessor unit, which the company sold in September 1999.
Network product sales declined 15 percent in the second quarter and 13 percent
year to year from sales in the comparable periods of fiscal 2000. Although the
company introduced network products employing new digital signal processing
technology primarily focused on higher bandwidth gigabit applications, minimal
shipments of these new products and decreasing demand for mature ethernet
products contributed to the sales decline. Unit volume and average selling
prices were both lower for network products compared to last year.
Gross Margin
Gross margin as a percentage of sales increased to 51 percent and 52 percent for
the second quarter and first six months of fiscal 2001, respectively, from gross
margin of 45 percent and 42 percent for the same periods of fiscal 2000. The
increase in gross margin for fiscal 2001 was primarily driven by improved
product mix, as the company shipped more high contribution analog and wireless
products, combined with improved factory utilization. Wafer capacity utilization
over the first half of fiscal 2001 ran at 88 percent despite lower production
activity in the latter part of the second quarter, particularly in the Maine
manufacturing facility. This compares to 67 percent in the same period of fiscal
2000, which reflected the effect of lower capacity utilization in Maine caused
by the company's decision to exit the Cyrix PC microprocessor business at the
end of fiscal 1999.
Research and Development
Total research and development expenses for the second quarter and first six
months of fiscal 2001 increased 32 percent and 10 percent, respectively, over
R&D expenses for the comparable periods of fiscal 2000. Included in total R&D
expenses for the first six months of fiscal 2001 is the effect of a $4.1 million
in-process R&D charge related to the acquisition of Vivid Semiconductor in July
2000. Excluding the charge for Vivid, R&D expenses for the first six months of
fiscal 2001 increased 8 percent over expenses for the corresponding fiscal 2000
period. Higher R&D expenses for the second quarter and first six months of
fiscal 2001 reflect increased investment of resources to develop new cores and
integrate those cores with other technological capabilities to create
system-on-a-chip products aimed at the emerging information appliance market. It
also reflects increased investment in the development of new analog and
mixed-signal technology-based products for applications in the wireless
communications, personal systems and consumer markets, as well as in the process
technologies needed to support those products. Beginning in the second quarter
of fiscal 2001, the company began recording expense associated with a licensing
agreement with Taiwan Semiconductor Manufacturing Company. The agreement enables
National to gain access to a variety of TSMC's advanced sub-micron processes for
use in its Maine facility, if and when those processes are developed by TSMC.
The advanced process technologies are expected to accelerate the development of
high performance digital and mixed-signal products for the information
appliances, wireless and networking markets. The commencement of this expense
contributed to the increase in R&D expense compared to last quarter and last
year. Through the first six months of fiscal 2001, the company devoted
approximately 80 percent of its R&D effort towards new product development and
20 percent towards the development of process technology. Compared to the
corresponding period of fiscal 2000, this represents a 16 percent increase in
spending for new product development and a 9 percent decrease in spending for
process technology.
Selling, General and Administrative
Selling, general and administrative expenses increased 5 percent and 19 percent
for the second quarter and first six months of fiscal 2001, respectively, from
SG&A expenses for the comparable periods of fiscal 2000. Included in SG&A
expenses for the first six months of fiscal 2001 is an expense of $20.5 million
associated with the charitable donation of equity securities that were part of
the company's investment portfolio which were donated to establish the National
Semiconductor Foundation. Excluding this expense, SG&A expenses for the first
six months of fiscal 2001 increased 5 percent over SG&A expenses for the same
period of fiscal 2000. The increase in expenses for the current reporting
periods is primarily attributable to increases in payroll and employee benefit
expenses, including incentive programs reflecting the company's increased
profitability.
Restructuring of Operations
In connection with its consolidation of the wafer manufacturing operations in
Greenock, Scotland, the company recorded a $2.3 million restructuring charge
included as a special item for the first six months of fiscal 2001. The charge
represented additional severance costs associated with the termination of
certain remaining employees concurrent with the closure of the 4-inch
fabrication facility, which was substantially completed by the end of September
2000. Further detail and discussion of other activity for the second quarter and
first six months of fiscal 2001 related to restructuring actions are described
in Note 4.
Interest Income and Interest Expense
Net interest income was $15.2 million and $29.3 million for the second quarter
and first six months of fiscal 2001, respectively, compared to $1.6 million and
$0.2 million for the same periods of fiscal 2000. Both higher average cash
balances and higher interest rates in fiscal 2001 contributed to an increase in
interest income. Interest expense for fiscal 2001 was significantly lower than
fiscal 2000 due to the redemption of the company's $258.8 million convertible
subordinated notes, which were repaid in November 1999.
Other Income, Net
Other income, net was $8.4 million and $45.9 million for the second quarter and
first six months of fiscal 2001, respectively, compared to $0.2 million and
$57.2 million for the same periods of fiscal 2000. The components of other
income, net for the second quarter of fiscal 2001 included $3.1 million of net
intellectual property income, a net gain of $2.7 million from the company's
equity investments and $2.6 million of non-operating income associated with an
investment partnership. In addition to these items, other income, net for the
first six months of fiscal 2001 included an additional net gain of $36.1 million
from the company's equity investments and $1.4 million of net intellectual
property income. The net gain from equity investments in fiscal 2001 included a
gain of $20.5 million resulting from the charitable donation of equity
securities that were part of the company's investment portfolio, which were
donated to establish the National Semiconductor Foundation. An expense for the
same amount associated with the donation is included in SG&A expenses for the
first six months of fiscal 2001. This compares to other income, net of $0.2
million for the second quarter of fiscal 2000, which included $0.1 million of
net intellectual property income and a net gain of $0.1 million from the
company's equity investments. In addition to these items, other income, net for
the first six months of fiscal 2000 included an additional gain of $48.4 million
from the sale of a portion of the company's investment in Fairchild stock and
$6.8 million of net intellectual property income. Other income, net for the
first six months of fiscal 2000 also included other miscellaneous income of $1.8
million.
Income Tax Expense
The company recorded income tax expense of $26.7 million and $62.8 million for
the second quarter and first six months of fiscal 2001, respectively. This
compares to income tax expense before extraordinary item of $5.2 million and
$7.7 million for the corresponding periods of fiscal 2000. This is based on the
company's expected effective tax rate of 20 percent for fiscal 2001, which is a
combination of U.S. alternative minimum tax and foreign tax expense. This
compares to a 2 percent effective tax rate for fiscal 2000, which primarily
represented foreign income tax expense, as U.S. taxable income was offset by net
operating loss carryforwards.
Financial Condition
During the first six months of fiscal 2001, cash and cash equivalents increased
by $67.2 million compared to a decrease of $15.9 million for the first six
months of fiscal 2000. The primary sources contributing to the improvement are
described below.
For the first six months of fiscal 2001, operating activities generated cash of
$314.9 million compared to $99.7 million for the first six months of fiscal
2000. The primary contributor to the improvement in operating cash for fiscal
2001 was an increase in net income. In addition for fiscal 2001, the negative
effect on cash flow from changes in working capital items had less impact than
in fiscal 2000. This is primarily due to a decrease in account receivables which
has been partially offset by a decrease in accounts payable.
The company's investing activities used cash of $148.4 million in the first six
months of fiscal 2001, while they generated cash of $121.8 million for the first
six months of fiscal 2000. Use of cash during fiscal 2001 primarily related to
the company's investment in property, plant and equipment of $121.2 million and
the Vivid business acquisition for $24.9 million (See Note 5). In comparison,
the company's investment in property, plant and equipment for the same period of
fiscal 2000 was $58.7 million, offset by proceeds of $52.2 million from the sale
of Fairchild stock, $70.0 million from the sale of the Cyrix PC microprocessor
business and $48.0 million generated from marketable securities.
The company's financing activities used cash of $99.3 million for the first six
months of fiscal 2001, compared to $237.4 million for the first six months of
fiscal 2000. The primary use of cash in fiscal 2001 was for the company's
repurchase of 5.3 million shares of common stock on the open market for $125.8
million. All of the shares of treasury stock were retired during the same
period. The cash outlay was partially offset by proceeds of $35.0 million from
the issuance of common stock under employee benefit plans. For fiscal 2000 the
primary use of cash during the comparable period was associated with the
company's redemption of the 6.5 percent convertible subordinated notes for
$265.8 million, which was partially offset by proceeds of $50.5 million from the
issuance of common stock under employee benefit plans.
Management foresees substantial cash outlays for plant and equipment throughout
the remainder of fiscal 2001, with primary focus on new process capabilities, as
well as improvements to provide better manufacturing efficiency and
productivity. While management has reduced its capital expenditure plan in
response to a recent slowdown in market demand, the fiscal 2001 capital
expenditure level is still expected to be higher than the fiscal 2000 level.
Existing cash and investment balances, together with existing lines of credit,
are expected to be sufficient to finance planned fiscal 2001 capital
investments.
Outlook
The statements contained in this outlook section and within certain sections of
management's discussion and analysis are forward-looking based on current
expectations and management's estimates. Actual results may differ materially
from those set forth in these forward-looking statements. In addition to the
risk factors discussed in the Financial Condition and Results of Operations on
pages 21 through 24 of the company's 2000 Annual Report on Form 10-K for the
fiscal year ended May 28, 2000 filed with the Securities and Exchange
Commission, the following factors may also affect the company's operating
results for fiscal 2001:
During the second quarter of fiscal 2001, the company experienced a significant
slowdown in new orders as market conditions weakened. New orders, particularly
from the distribution channel, fell significantly as distributors attempted to
reduce inventory levels in response to resale growth rates that were lower than
previously anticipated. Continued inventory corrections by some customers in the
wireless handset market and lower than expected demand in the PC market also
contributed to the slowdown. The company does expect new orders to improve once
its customers, particularly distributors, work through their inventory
corrections. However, there has been no current evidence that this process will
be resolved in the near term. There is a risk that the slowdown may be
prolonged. A gradual stabilization of sales in the mobile phone market offset by
the typical post-Christmas seasonal slowdown in the PC market is expected to
result in lower sales in the third quarter of fiscal 2001 compared to the second
quarter just ended. The level of sales expected for the third quarter is
dependent on meeting a specified level of fill orders, which are orders received
and shippable in the same quarter. If the company does not receive the specified
level of fill orders, it will be unable to achieve the level of sales expected
for the third quarter of fiscal 2001.
The wireless handset market continues to be an important part of the company's
growth. New integrated chipsets are being developed to allow added dollar
content in targeted entry level handsets. Although end market unit growth for
wireless handsets was very high for calendar 2000 as a whole, the timing of
future growth expectations for the near term is subject to a high level of
uncertainty. The growth rate of unit builds by some of National's key wireless
customers was reduced during the latter part of calendar 2000. Growth of other
customers has increased but is dependent on gains in market share, which cannot
be assured. As a result, the company remains cautious on near-term trends in its
wireless-related business.
Although the company remains optimistic regarding its future for products in the
information appliance market, market adoption has been slower than originally
anticipated and it is not yet clear which form factors or specific customers'
models will ultimately be successful for this new emerging market. Revenue for
the company's IA products is therefore dependent on the outcome and the timing
of product acceptance trends.
If these factors discussed above, combined with general uncertain worldwide
semiconductor market conditions, result in a decline in the growth of new orders
received, the company may be unable to achieve the level of revenue growth as
originally expected for the remainder of fiscal 2001 and operating results will
be unfavorably affected.
The forward-looking statements discussed or incorporated by reference in this
outlook section involve a number of risks and uncertainties. Other risks and
uncertainties include, but are not limited to, the general economy, regulatory
and international economic conditions, the changing environment of the
semiconductor industry, competitive products and pricing, growth in the PC and
communications industries, the effects of legal and administrative cases and
proceedings, and such other risks and uncertainties as may be detailed from time
to time in the company's SEC reports and filings.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures
About Market Risk, in the company's Annual Report on Form 10-K for the year
ended May 28, 2000 and to the subheading "Financial Market Risks" under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on page 21 of the company's Annual Report on Form 10-K for the
year ended May 28, 2000 and in Note 1, "Summary of Significant Accounting
Policies," and Note 2, "Financial Instruments," in the Notes to the Consolidated
Financial Statements included in Item 8 of Form 10-K. There have been no
material changes from the information reported in these sections.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
An action was filed in the U.S. District Court for Delaware in November
2000 by Mark Levy, a shareholder of Fairchild Semiconductor International, Inc.
The defendants are National Semiconductor Corporation, Fairchild and Sterling
Holding Company, LLC. The action is brought under section 16(b) of the
Securities Exchange Act of 1934 and the rules promulgated thereunder by the
Securities and Exchange Commission and seeks disgorgement of alleged short-swing
insider trading profits. National originally acquired Fairchild common and
preferred stock in March 1997 at the time it disposed of the Fairchild business.
At the time of Fairchild's initial public offering in August 1999, National
received Fairchild common stock in exchange for the Fairchild preferred stock
previously held by National. The exchange was done automatically pursuant to
Fairchild's Certificate of Incorporation. Plaintiff alleges that this
acquisition of common stock through the exchange constitutes an acquisition that
should be matched for the purpose of computing short-swing trading profits
against National's sale in January 2000 of Fairchild common stock. The action
seeks to recover from National on behalf of Fairchild recoverable profits of
approximately $14 million. National believes that there is no basis for
plaintiff's allegations and intends to vigorously contest the action.
Item 4. Submission of Matters to a Vote of Security Holders
(a) National Semiconductor Corporation's Annual Meeting was held on
September 22, 2000.
(b) The following directors were elected at the meeting:
DIRECTOR FOR AUTHORITY WITHHELD
-------- --- ------------------
Brian L. Halla 153,401,080 2,735,856
Gary P. Arnold 153,545,136 2,591,800
Robert J. Frankenberg 153,470,940 2,665,996
E. Floyd Kvamme 153,533,714 2,603,222
Modesto A. Maidique 153,440,393 2,696,543
Edward R. McCracken 153,496,721 2,640,215
(c) The following matters were also voted on at the meeting:
(i) Proposal to approve the amendment to the company's certificat of
incorporation increasing the number of shares of common stock
from 300,000,000 to 850,000,000:
For: 128,150,058 Against: 27,395,315 Abstain:591,563
(ii) Proposal to approve the Executive Officer Stock Option Plan:
For: 102,888,071 Against: 52,245,242 Abstain: 1,003,623
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Second Restated Certificate of Incorporation of the Company as amended
(incorporated by reference from the Exhibits to the Company's
Registration Statement on Form S-3 Registration No. 33-52775, which
became effective March 22, 1994); Certificate of Amendment of
Certificate of Incorporation dated September 30, 1994 (incorporated by
reference from the Exhibits to the Company's Registration Statement on
Form S-8 Registration No. 333-09957, which became effective August 12,
1996). Certificate of Amendment of Certificate of Incorporation dated
September 22, 2000. (incorporated by reference from the Exhibits to
the Company's Registration Statement on Form S-8 Registration No.
333-48424, which became effective October 23, 2000).
3.2 By Laws of the Company.
4.1 Form of Common Stock Certificate (incorporated by reference from the
Exhibits to the Company's Registration Statement on Form S-3
Registration No. 33-48935, which became effective October 5, 1992).
4.2 Rights Agreement (incorporated by reference from the Exhibits to the
Company's Registration Form 8-A filed August 10, 1988). First Amendment
to the Rights Agreement dated as of October 31, 1995 (incorporated by
reference from the Exhibits to the Company's Amendment No. 1 to the
Registration Statement on Form 8-A filed December 11, 1995). Second
Amendment to the Rights Agreement dated as of December 17, 1996
(incorporated by reference from the Exhibits to the Company's Amendment
No. 2 to the Registration Statement on Form 8-A filed January 17,
1997).
4.3 Indenture dated as of September 15, 1995 (incorporated by reference
from the Exhibits to the Company's Registration Statement on Form S-3
Registration No. 33-63649, which became effective November 6, 1995).
4.4 Form of Note (incorporated by reference from the Exhibits to the
Company's Registration Statement on Form S-3 Registration No. 33-63649
which became effective November 6, 1995).
4.5 Indenture dated as of May 28, 1996 between Cyrix Corporation ("Cyrix")
and Bank of Montreal Trust Company as Trustee (incorporated by
reference from the Exhibits to Cyrix's Registration Statement on Form
S-3 Registration No. 333-10669, which became effective August 22,
1996).
4.6 Registration Rights Agreements dated as of May 28, 1996 between Cyrix
and Goldman, Sachs & Co. (incorporated by reference from the Exhibits
to Cyrix's Registration Statement on Form S-3 Registration
No. 333-1066, which became effective August 22, 1996).
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ending November 26,
2000.
<PAGE>
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: January 9, 2001 /s/ Lewis Chew
--------------
Lewis Chew
Vice President and Controller
Signing on behalf of the registrant
and as principal accounting officer
