0000070530-95-000018.txt : 19950925 0000070530-95-000018.hdr.sgml : 19950925 ACCESSION NUMBER: 0000070530-95-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950827 FILED AS OF DATE: 19950921 SROS: NYSE SROS: PSE 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: 95575123 BUSINESS ADDRESS: STREET 1: 2900 SEMICONDUCTORS DR STREET 2: PO BOX 58090 CITY: SANTA CLARA STATE: CA ZIP: 95052-8090 BUSINESS PHONE: 4087216782 MAIL ADDRESS: STREET 1: 2900 SEMICONDUCTOR DR CITY: SANTA CLARA STATE: CA ZIP: 95052-8090 10-Q 1 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 27, 1995 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 27,1995. ------------------- ------------------------------ Common stock, par value $0.50 per share 123,388,745 NATIONAL SEMICONDUCTOR CORPORATION INDEX Part I. Financial Information Page No. -------- Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended August 27, 1995 and August 28, 1994 3 Condensed Consolidated Balance Sheets (Unaudited) as of August 27, 1995 and May 28, 1995 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended August 27, 1995 and August 28, 1994 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Management's Discussion and Analysis of Results of Operations and Financial Condition 8 Part II. Other Information Legal Proceedings 11 Exhibits and Reports on Form 8-K 12 Signature 13 PART I. FINANCIAL INFORMATION NATIONAL SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in millions, except per share amounts) Three Months Ended ------------------ Aug. 27, Aug. 28, 1995 1994 ------- ------- Net sales $ 698.8 $ 553.8 Operating costs and expenses: Cost of sales 397.7 320.6 Research and development 84.9 65.9 Selling, general and administrative 129.2 102.9 ------ ------ Total operating costs and expenses 611.8 489.4 ------ ------ Operating income 87.0 64.4 Interest income, net 3.1 4.5 Other income, net 8.0 4.8 ------ ------ Income before income taxes 98.1 73.7 Income taxes 24.6 14.7 ------ ------ Net income $ 73.5 $ 59.0 ======== ======== Earnings per share: Primary $ 0.56 $ 0.44 Fully dilutive $ 0.53 $ 0.42 Weighted average shares: Primary 127.4 129.1 Fully dilutive 139.6 141.5 Income used in primary earnings per share (reflecting preferred dividends) $ 70.7 $ 56.2 See accompanying Notes to Condensed Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in millions) Aug. 27, May 28, 1995 1995 ASSETS ------- ------- Current assets: Cash and cash equivalents $ 315.3 $ 420.3 Short-term marketable investments 57.9 47.1 Receivables, net 348.3 318.0 Inventories 277.3 263.0 Deferred tax assets 79.3 77.4 Other current assets 81.5 52.5 ------- ------- Total current assets 1,159.6 1,178.3 Property, plant and equipment 2,240.4 2,147.6 Less accumulated depreciation 1,219.8 1,185.2 ------- ------- Net property, plant and equipment 1,020.6 962.4 Long-term marketable investments 28.0 20.2 Other assets 75.3 74.8 ------- ------- Total assets $2,283.5 $2,235.7 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings and current portion of long-term debt $ 25.0 $ 23.6 Accounts payable 208.2 272.0 Accrued expenses 208.6 230.7 Income taxes 175.6 159.6 ------- ------- Total current liabilities 617.4 685.9 Long-term debt 118.1 82.5 Deferred income taxes 20.1 20.1 Other noncurrent liabilities 41.7 40.5 ------- ------- Total liabilities 797.3 829.0 ------- ------- Commitments and contingencies Shareholders' equity: Convertible Preferred Stock 0.2 0.2 Common stock 62.0 63.1 Additional paid-in capital 948.6 992.3 Retained earnings 464.6 393.9 Unrealized gains on available-for-sale securities 24.4 17.1 Treasury stock, at cost (13.6) (59.9) ------- ------- Total shareholders' equity 1,486.2 1,406.7 ------- ------- Total liabilities and shareholders' equity $2,283.5 $2,235.7 ======== ======== See accompanying Notes to Condensed Consolidated Financial Statements NATIONAL SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions) Three Months Ended ------------------ Aug. 27, Aug. 28, 1995 1994 ------- ------- Cash flows from operating activities: Net income $ 73.5 $ 59.0 Adjustments to reconcile net income with net cash (used by) provided by operations: Depreciation and amortization 51.7 40.1 Gain on sale of investments (5.2) - Tax benefit associated with stock options 6.3 - Other, net 2.2 2.2 Changes in certain assets and liabilities, net: Receivables (30.3) 10.4 Inventories (14.3) (11.9) Other current assets (29.0) (0.3) Accounts payable and accrued expenses (84.5) (67.3) Current and deferred income taxes 14.7 (2.6) Other noncurrent liabilities 1.2 5.0 ------ ----- Net cash (used by) provided by operating activities (13.7) 34.6 ------ ----- Cash flows from investing activities: Purchases of property, plant and equipment (110.0) (54.7) Proceeds from the sale and maturity of marketable investments 145.2 270.8 Purchase of marketable investments (156.2) (265.2) Proceeds from sale of investments 7.8 - Purchase of investments and other, net (6.1) (3.6) ------ ----- Net cash used by investing activities (119.3) (52.7) ------ ----- Cash flows from financing activities: Proceeds from borrowings 42.0 - Repayment of debt (5.0) (8.9) Issuance of common stock, net 12.5 1.0 Purchase of treasury stock (18.7) (16.7) Payment of preferred dividends (2.8) (2.8) ------ ----- Net cash provided by (used by) financing activities 28.0 (27.4) ------ ----- Net change in cash and cash equivalents (105.0) (45.5) Cash and cash equivalents at beginning of period 420.3 398.1 ------ ------ Cash and cash equivalents at end of period $ 315.3 $ 352.6 ======== ======== See accompanying Notes to Condensed Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position and results of operations of National Semiconductor Corporation and its subsidiaries ("National" or the "Company"). Interim results of operations are not necessarily indicative of the results to be expected for the full year. This report should be read in conjunction with the consolidated financial statements and notes thereto included in the annual report on Form 10-K for fiscal year ended May 28, 1995. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at cost. Effective May 29, 1995, the Company prospectively changed its method of accounting for depreciation from the 150 percent declining balance method to the straight-line method for machinery and equipment placed in service on or after that date. The change was adopted because it conforms with predominant industry practice and it is expected to result in a more appropriate distribution of the cost of the new machinery and equipment over its estimated useful lives. The effect of the change was not material to the Company's consolidated financial statements for the first quarter of fiscal 1996. Assets placed in service prior to 1996 and assets other than machinery and equipment continue to be depreciated using prior years' depreciation methods consisting of both straight-line and declining balance methods over estimated useful lives, or in the case of property under capital lease, over the lesser of the estimated useful life or lease term. Note 2. Components of Inventories The components of inventories were: (in millions) Aug. 27, May 28, 1995 1995 ------- ------- Raw materials $ 35.1 $ 33.9 Work in process 168.7 165.9 Finished goods 73.5 63.2 ----- ------ Total inventories $ 277.3 $ 263.0 ======= ======= Note 3. Other income, net The Company reclassified certain non-operating items that were previously reported as selling, general and administrative expenses as other income, net. The reclassifications had no impact on previously reported net income. Components of other income, net, were: (in millions) Aug. 27, Aug. 28, 1995 1994 ------- ------- Net intellectual property income $ 2.8 $ 4.8 Gain on sale of investments, net 5.2 - ------- ------- Total other income, net $ 8.0 $ 4.8 ======= ======= Note 4. Statement of cash flow information (in millions) Three Months Ended ------------------ Aug. 27, Aug. 28, 1995 1994 -------- -------- Supplemental disclosure of cash flow information: ------------ Cash paid for: Interest $ 2.9 $ 1.2 Interest on tax settlements 11.3 - Income taxes 4.1 16.5 Supplemental schedule of non-cash investing and financing activities: ------------------------- Issuance of stock for employee benefit plans $ 4.3 $ 4.0 Tax benefit for employee stock option plans 6.3 - Treasury stock purchases included in accrued liabilities 2.9 - Unrealized gain (loss) on available-for-sale securities 7.3 (0.1) MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sales Net sales of $698.8 million for the first quarter of fiscal 1996 increased 26.2 percent over net sales for the first quarter of fiscal 1995, led by a 35 percent increase in sales for analog and mixed signal products. Analog and mixed signal product sales grew to 59.4 percent of net sales during the quarter, compared to 55.5 percent for the comparable fiscal 1995 quarter, consistent with the Company's focus toward analog and mixed signal revenue growth. While sales increased overall by 15.0 percent for bipolar and CMOS logic and memory products for the first quarter of fiscal 1996 over the comparable quarter of fiscal 1995, their percentage share of sales decreased to 20.8 percent from 22.8 percent. Sales of the remaining product lines represented 19.8 percent of sales for the first quarter of fiscal 1996, a decrease from 21.7 percent for the comparable quarter of fiscal 1995. Gross Margin Gross margin rose to 43.1 percent of sales in the first quarter of fiscal 1996 compared to 42.1 percent for the comparable quarter of fiscal 1995. The improvement in the current quarter reflects the continued shift in the product portfolio towards higher margin analog and mixed signal products, which have had gross margins in excess of 50 percent for both the first quarter of fiscal 1996 as well as fiscal 1995. Research and Development Research and development ("R&D") expenses increased overall by 28.8 percent for the first quarter of fiscal 1996 over the comparable quarter of fiscal 1995 and as a percent of sales increased to 12.1 percent from 11.9 percent, respectively. The increase was attributable to increased spending in computer aided design and new product development. Selling, General, and Administrative Selling, general, and administrative ("SG&A") expenses remained relatively consistent as a percentage of sales at 18.5 percent for the first quarter of fiscal 1996 compared to 18.6 percent for the comparable quarter of fiscal 1995. The overall increase in SG&A expenses year to year of 25.6 percent was attributable to increases in sales support costs and marketing activities proportional to increased sales and increases in contributions to employee compensation and benefit plans, including the employee retirement and savings program, reflecting the Company's increased profitability. Interest Income and Interest Expense Interest income increased to $5.7 million for the first quarter of fiscal 1996, a 9.6 percent increase, compared to $5.2 million for the comparable fiscal 1995 quarter. The increase in net interest income related primarily to higher average earning rates on cash balances during the quarter. Interest expense increased to $2.6 million for the first quarter of fiscal 1996, compared to $.7 million for the first quarter of fiscal 1995, primarily due to increased borrowing levels. Other Income, net Other income was $8.0 million for the first quarter of fiscal 1996, compared to $4.8 million for first quarter of fiscal 1995. Included in other income for the first quarter of fiscal 1996 is $2.8 million of net intellectual property income, plus $5.2 million of realized gains from sale of investments, net of losses compared to $4.8 million of net intellectual property income for the comparable quarter of fiscal 1995. Income Taxes The effective tax rate for fiscal year 1996 is 25 percent compared to 20 percent for fiscal year 1995. The increase in the annual effective tax rate primarily relates to the exhaustion of certain net operating loss and tax credit carry forwards. Financial Condition During the first quarter of fiscal 1996, cash and cash equivalents decreased $105 million, compared to a $45.5 million decrease for the first quarter of fiscal 1995. The decrease was primarily caused by the Company's use of cash in operating activities of $13.7 million due to changes in working capital as compared to cash provided by operating activities of $34.6 million in the comparable quarter of fiscal 1995, together with the Company's continued investment in property, plant and equipment of $110 million, an increase of $55.3 million or 101.1% over the first quarter of fiscal 1995. The Company's financing activities provided cash of $28.0 million for the first quarter of fiscal 1996, primarily from the proceeds of new borrowing arrangements and issuance of common stock offset by the repayment of debt and purchase of treasury stock. Management foresees significant increased cash outlays for plant and equipment to continue throughout fiscal 1996. While existing cash and investment balances, together with existing lines of credit, are considered to be adequate for the near term, management is confident that additional lines of credit or other sources of financing to supplement these cash balances can be arranged if needed. The Company has announced the commencement of a private placement offering of up to $258.75 million (if the over-allotment option is exercised in full) of convertible subordinated notes. Outlook Despite continued improvement and profitability in the financial results, future trends for revenue and profitability continue to be difficult to predict. Risks and uncertainties facing the Company include business conditions and the rate of growth in the personal computer industry and the general economy; competitive factors and price pressures; market acceptance and timing of new products; capacity limitations; and international economic conditions. The Company believes gross margins as a percentage of sales will experience modest improvement through fiscal 1996 as new capacity comes on line and demand continues for its higher margin analog and mixed signal products. Operating expenses as a percentage of sales are expected to remain at existing levels. National continues to pursue opportunities to leverage its intellectual property; however, the timing and amount of future licensing income cannot be forecast with certainty at this time. In addition, the Company continues to pursue opportunities to develop joint venture partnerships or potential acquisitions which enhance its product portfolio in analog and mixed signal products. Similarly, the Company continues to critically evaluate product lines and divisions where short or long term prospects do not coincide with its overall strategic direction. In these cases, the Company will consider dispositions of assets or business entities as necessary. The Company has recently disposed of its Ethernet adapter card business and is currently engaged in discussions for a potential sale of all or part of its wholly owned subsidiary, Dyna Craft, Inc., which manufactures semiconductor packaging material and tools for internal consumption by the Company and sales to other semiconductor companies. PART II. OTHER INFORMATION Item 1. Legal Proceedings -------------------------- In July 1983, the United States Internal Revenue Service ("IRS") issued an examination report for the fiscal years ended 1978 and 1979. The Company filed a protect with the appeals office of the IRS in September 1983. The IRS issued a Notice of Deficiency for these years in December 1988 seeking additional taxes of approximately $24 million (exclusive of interest). The issues giving rise to the proposed adjustments related primarily to intercompany product transfer prices and the application of Subpart F provisions of the United States Internal Revenue Code. The Company filed a petition with the United States Tax Court contesting the Notice of Deficiency in March 1989. The IRS' subsequent examination of the Company's United States tax returns for fiscal years 1980 through 1982 resulted in a Notice of Deficiency issued in January 1990 seeking additional taxes of approximately $52 million (exclusive of interest) for the fiscal years ended 1976, 1977, 1980, 1981 and 1982. The issues giving rise to the proposed adjustments for the earlier years related primarily to reductions in the available net operating loss carrybacks and, for the later years, to intercompany product transfer prices, full absorption inventory costing, deductibility of certain reserves and spare parts depreciation. The Company filed a petition with the United States Tax Court contesting this Notice of Deficiency in April 1990. By order dated August 8, 1991, the Tax Court granted the Company's and the IRS' motion to consolidate the two cases for trial. Prior to trial, which was held during February 1993, the Company and the IRS reached a settlement on all disputed issues except for the issue of intercompany product transfer prices; this settlement reduced the total of additional taxes being sought to approximately $52 million (exclusive of interest). An opinion was issued by the Tax Court on May 2, 1994. The opinion found that adjustments to income of $40.6 million were due. The IRS filed a motion for reconsideration of the opinion on June 3, 1994, seeking an additional $31 million in income adjustments. The motion was denied by the Court on June 10, 1994. The Company and the IRS have reached agreement on the allocation of the additional income, and this agreement was then presented to the Court. A final decision implementing the opinion was entered by the Tax Court on June 6, 1995. The period for appealing the decision expired in early September 1995. After giving effect to loss and credit carryovers, the final tax deficiency was $4.1 million. The associated interest has not been finally determined, but based upon preliminary IRS calculations, it is estimated to be $42.9 million. The Company has made advance payments of $47 million to the IRS with respect to the tax and interest deficiency. The decision in the Tax Court litigation did not have a material adverse effect on the Company's financial position. With respect to the IRS' examination of tax returns for other fiscal years, the Company and the IRS settled in January 1994 all issues for fiscal years 1983 through 1985, including issues relating to intercompany product transfer pricing, without the payment of additional federal tax. After giving effect to loss and credit carryovers, the tax deficiency was $120 thousand and the associated interest was $492 thousand, all of which has been paid. In April 1995, the IRS issued a Notice of Deficiency for fiscal years 1986 through 1989 seeking additional taxes of approximately $11 million (exclusive of interest). The issues giving rise to this set of proposed adjustments relate primarily to the Company's former Israeli operation and the purchase price paid for Fairchild Semiconductor Corporation. The Company has filed a protest with the appeals office of the IRS contesting the Notice of Deficiency. The IRS has begun examination of the Company's tax returns for fiscal years 1990 through 1993. The Company believes that adequate tax payments have been made or accrued for all years in questions. A sales tax examination conducted by the California State Board of Equalization for the tax years 1984 to 1988 resulted in a proposed assessment of approximately $12 million (exclusive of interest and penalty) in October 1991. A final assessment in the amount of approximately $4 million (including interest and penalty) was made by the California State Board of Equalization and payment was made by the Company in August 1995. The Company has six (6) months from the date the assessment was paid to make a claim of refund for additional adjustments. The sales tax examination and assessment have not had a material adverse effect upon the Company's financial position. Reference is also made to Item 3, Legal Proceedings, in the Company's Annual Report on Form 10-K for the year ended May 28, 1995, which information is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- (a) Exhibits -------- 11.0 Additional Fully Diluted Calculation of Earnings Per Share 18.0 Letter re: Change in Accounting Principle (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during fiscal quarter ended August 27, 1995. 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: September 19, 1995 /s/ Robert B. Mahoney ---------------------------------- Robert B. Mahoney Vice President and Controller Signing on behalf of the registrant and as principal accounting officer NATIONAL SEMICONDUCTOR CORPORATION Exhibit 11.0 ADDITIONAL FULLY DILUTED CALCULATION OF EARNINGS PER SHARE (in millions, except per share amounts) Three Months Ended ------------------ Aug. 27, Aug. 28, 1995 1994 ------- ------- Net Income $ 73.5 $ 59.0 ======= ======= Number of shares: Weighted average common shares outstanding 123.1 122.4 Weighted average common equivalent shares, net of tax benefit 4.3 6.7 ------- ------- Weighted average common and common equivalent shares 127.4 129.1 Additional weighted average common equivalent shares assuming full dilution - 0.2 Shares issuable from assumed conversion of preferred shares 12.2 12.2 ------- ------- Weighted average common and common equivalent shares assuming full dilution 139.6 141.5 ======= ======= Income per share assuming full dilution $ 0.53 $ 0.42 ======= ======= Exhibit 18.0 September 18, 1995 National Semiconductor Corporation 2900 Semiconductor Drive Santa Clara, California 95052-8090 Gentlemen: We have been furnished with a copy of Form 10-Q of National Semiconductor Corporation (the Company) for the fiscal quarter ended August 27, 1995, and we have read the Company's statements contained in Note 1 thereto. As stated in Note 1, effective May 29, 1995, the Company prospectively changed its method of accounting for depreciation from the 150 percent declining balance method to the straight-line method for machinery and equipment placed in service on or after that date and states that the newly adopted accounting principle is preferable in the circumstances because it conforms with predominant industry practice and it is expected to result in a more appropriate distribution of the cost of the new machinery and equipment over its estimated useful lives. In accordance with your request, we have reviewed and discussed with Company officials the circumstances and business judgment and planning upon which the decision to make this change in the method of accounting was based. We have not audited any financial statements of National Semiconductor Corporation as of any date or for any period subsequent to May 28, 1995, nor have we audited the information set forth in Note 1 to the Company's Form 10-Q for the fiscal quarter ended August 27, 1995; accordingly, we do not express an opinion concerning the factual information contained therein. With regard to the aforementioned accounting change, authoritative criteria have not been established for evaluating the preferability of one acceptable method of accounting over another acceptable method. However, for purposes of the Company's compliance with the requirements of the Securities and Exchange Commission, we are furnishing this letter. Based on our review and discussion, with reliance on management's business judgment and planning, we concur that the newly adopted method of accounting is preferable in the Company's circumstances. Very truly yours, KPMG Peat Marwick LLP EX-27 2
5 Accounts receivable balances are shown net of allowances consistent with the balance sheet presentation. Interest expense amounts are shown net consistent with the income statement presentation. 0000070530 NATIONAL SEMICONDUCTOR 1000000 U.S. DOLLAR 3-MOS MAY-26-1996 MAY-29-1995 AUG-27-1995 1 315 58 348 0 277 1160 2240 1220 2284 617 20 62 0 0 1424 2284 699 699 398 398 0 0 (3) 98 25 74 0 0 0 74 0.56 0.53