| NATIONAL SEMICONDUCTOR CORP Item 1A Risk Factors 12 ITEM 1A RISK FACTORS You should read the following Risk Factors in conjunction with the factors discussed elsewhere in this and our other filings with the Securities and Exchange Commission (SEC) and in materials incorporated by reference in these filings |
| These Risk Factors are intended to highlight certain factors that may affect our financial condition and results of operations and are not meant to be an exhaustive discussion of risks that apply to companies like National with broad international operations |
| Like other companies, we are susceptible to macroeconomic downturns in the United States or abroad that may affect the general economic climate and our performance and the performance of our customers |
| Similarly, the price of our stock is subject to volatility due to fluctuations in general market conditions, differences in our results of operations from estimates and projections generated by the investment community, and other factors beyond our control |
| Conditions inherent in the semiconductor industry may cause periodic fluctuations in our operating results |
| Rapid technological change and frequent introduction of new technology leading to more complex and integrated products characterize the semiconductor industry |
| The result is a cyclical environment with short product life cycles, even with analog products which form the core of our strategic focus |
| We have seen and may see in the future significant and rapid increases and decreases in product demand |
| Although less capital investment is needed for analog products than for many other semiconductor products, substantial capital and R&D investment are required to support products and manufacturing processes in the semiconductor industry |
| We have experienced in the past and may experience in the future periodic fluctuations in our operating results |
| Market shifts in product mix toward, or away from, higher margin products, including analog products, can also have a significant impact on our operating results |
| As a result of these and other factors, our financial results can fluctuate significantly from period to period |
| Our business will be harmed if we are unable to compete successfully in our markets |
| Competition in the semiconductor industry is intense |
| Our major competitors include Analog Devices, Linear Technology, Maxim and Texas Instruments |
| These companies sell competing products into some of the same markets that we target |
| In some cases, we may also compete with our customers |
| Competition is based on design and quality of products, product performance, price and service, with the relative importance of these factors varying among products, markets and customers |
| We cannot assure you that we will be able to compete successfully in the future against existing or new competitors or that our operating results will not be adversely affected by increased competition |
| A large portion of our revenues is dependent on the wireless handset market |
| The wireless handset market continues to be a significant source of our overall sales |
| New products are being developed to address new features and functionality in handsets, such as advanced color displays, advanced audio, lighting features and battery management that can adequately handle the demands of these advanced features |
| Due to high levels of competition, as well as complex technological requirements, there is no assurance that we will continue to be successful in this targeted market |
| Although the worldwide handset market is large, near-term growth trends are often uncertain and difficult to predict with accuracy |
| Since the wireless handset market is a consumer-driven market, downturns in the economy that affect consumer demand can impact our business and results |
| We may experience delays in introducing new products or market acceptance of new products may be below our expectations |
| Rapidly changing technologies and industry standards, along with frequent new product introductions, characterize the industries in which our primary customers operate |
| As our customers evolve and introduce new products, our success depends on our ability to anticipate and adapt to these changes in a timely and cost-effective manner by developing and introducing into the market new products that meet the needs of our customers |
| We believe that continued focused investment in research and development, especially the timely development and market acceptance of new analog products, is a key factor to successful growth and the ability to achieve strong financial performance |
| Successful development and introduction of these new products are critical to our ability to maintain a competitive position in the marketplace |
| We will continue to invest resources to develop more highly integrated solutions and building block products, both primarily based on our analog capabilities |
| These products will continue to be targeted towards applications such as wireless handsets, displays, other portable devices and applications in other broad markets that require analog technology |
| We cannot assure you that we will be successful in timely developing and introducing successful new products, and a failure to bring new products to market may harm our operating results |
| We also cannot assure you that products that may be developed in the future by our competitors will not render our products obsolete or non-competitive |
| We make forecasts of customer demand which need to be accurate |
| Our ability to match inventory and production mix with the product mix needed to fill current orders and orders to be delivered in any given quarter may affect our ability to meet that quarterapstas revenue forecast |
| To be able to accommodate customer requests for shorter shipment lead times, we manufacture product based on customer forecasts |
| These forecasts are based on multiple assumptions |
| While we believe our relationships with our customers, combined with our understanding of the end-markets we serve, provide us with the ability to make reliable forecasts, if we inaccurately forecast customer demand, it could result in inadequate, excess or obsolete inventory that would reduce our profit margins |
| Our performance depends on the availability and cost of raw materials, utilities, critical manufacturing equipment and third-party manufacturing services |
| Our manufacturing processes and critical manufacturing equipment require that certain key raw materials and utilities be available |
| Limited or delayed access to and high costs of these items, as well as the inability to implement new manufacturing technologies or install manufacturing equipment on a timely basis could adversely affect our results of operations |
| We subcontract a portion of our wafer fabrication and assembly and testing of our integrated circuits |
| We depend on a limited number of third parties to perform these functions |
| We do not have long-term contracts with all of these third parties |
| Reliance on these third parties involves risks, including possible shortages of capacity in periods of high demand |
| Although we did not experience any material difficulties with supplies or subcontractors in the last year, we have had difficulties in the past and could experience them in the future |
| We are subject to warranty claims, product recalls and product liability |
| We could be subject to warranty or product liability claims that could lead to significant expenses as we defend such claims or pay damage awards |
| In the event of a warranty claim, we may also incur costs if we compensate the affected customer |
| We maintain product liability insurance, but there is no guarantee that such insurance will be available or adequate to protect against all such claims |
| We may incur costs and expenses relating to a recall of one of our customers &apos products containing one of our devices |
| Although costs or payments we have made in connection with warranty claims or product recalls in the past have not adversely affected our results of operations and financial condition, they could in the future |
| Our profit margins may vary over time |
| Our profit margins may be adversely affected by a number of factors, including decreases in our shipment volume, reductions in, or obsolescence of our inventory and shifts in our product mix |
| In addition, the competitive market environment in which we operate may adversely affect pricing for our products, although we try to emphasize higher margin products |
| Because we own most of our manufacturing capacity, a significant portion of our operating costs are fixed, including costs associated with depreciation expense |
| In general, these costs do not decline with reductions in customer demand or utilization of our manufacturing capacity |
| If we are unable to utilize our manufacturing facilities at a high level, the fixed costs associated with these facilities will result in higher average unit costs and lower gross margins |
| We may be harmed by natural disasters and other disruptions |
| Our worldwide operations could be subject to natural disasters and other disruptions |
| Our corporate headquarters are located near major earthquake fault lines in California |
| In the event of a major earthquake, or other natural or manmade disaster, we could experience loss of life of our employees, destruction of facilities or other business interruptions |
| The operations of our suppliers could also be subject to natural disasters and other disruptions, which could cause shortages and price increases in various essential materials |
| This includes ground, sea and air freight |
| Any significant disruption of our freight business globally or in certain parts of the world, particularly where our operations are concentrated, would materially affect our operations |
| We may not be able to attract or retain employees with skills necessary to remain competitive in our industry |
| Our continued success depends in part on the recruitment and retention of skilled personnel, including technical, marketing, management and staff personnel |
| Experienced personnel in the semiconductor industry, particularly in our targeted analog areas, are in high demand and competition for their skills is intense |
| There can be no assurance that we will be able to successfully recruit and retain the key personnel we require |
| Our products are dependent on the use of intellectual property which we need to protect |
| We rely on patents, trade secrets, trademarks, mask works and copyrights to protect our products and technologies |
| Some of our products and technologies are not covered by any patent or patent application and we cannot assure you that: o the patents owned by us or numerous other patents which third parties license to us will not be invalidated, circumvented, challenged or licensed to other companies o any of our pending or future patent applications will be issued within the scope of the claims sought by us, if at all In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in some countries |
| We also seek to protect our proprietary technologies, including technologies that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors &apos rights agreements with our collaborators, advisors, employees and consultants |
| We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of such research |
| Some of our technologies have been licensed on a non-exclusive basis from other companies, which may license such technologies to others, including our competitors |
| If necessary or desirable, we may seek licenses under patents or intellectual property rights claimed by others |
| However, we cannot assure you that we will obtain such licenses or that the terms of any offered licenses will be acceptable to us |
| The failure to obtain a license from a third party for technologies we use could cause us to incur substantial liabilities and to suspend the manufacture or shipment of products or our use of processes requiring the technologies |
| We face risks from our international operations |
| We have operations in many countries and, as a result, we are subject to risks associated with doing business globally |
| International sales accounted for approximately 80prca of our revenue in fiscal 2006 and we expect that international sales will continue to account for a significant majority of our total revenue in future years |
| We are subject to various challenges and risks related to the management of global operations and international sales, including, but not limited to: o trade balance issues o economic and political conditions o health concerns o security concerns o inefficient and limited infrastructure and disruptions o local business and cultural factors that differ from our normal standards and practices o changes in currency controls o differences in our ability to acquire and enforcement of intellectual property and contract rights in varying jurisdictions o our ability to develop relationships with local suppliers o compliance with US and international laws and regulations, including export restrictions and laws affecting trade and investments o fluctuations in interest and currency exchange rates o difficulties in staffing and managing foreign operations and other labor problems o support required abroad for demanding manufacturing requirements Although we did not experience any materially adverse effects from our international operations as a result of these factors in the last year, one or more of these factors has had an adverse effect on us in the past and could adversely affect us in the future |
| Many of the challenges noted above are applicable in China |
| The risk factors specifically associated with our manufacturing and other operations in China are discussed below |
| We have significantly expanded our manufacturing operations in China and, as a result, will be increasingly subject to risks inherent in doing business in China |
| In fiscal 2005, we began production in our assembly and test facility in Suzhou, China |
| Our ability to operate in China may be adversely affected by changes in Chinaapstas laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters |
| Our operations in China are subject to the economic and political situation there |
| We believe that our operations in China are in compliance with all applicable legal and regulatory requirements |
| However, there can be no assurance that Chinaapstas central or local governments will not impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures |
| Changes in the political environment or government policies could result in revisions to laws or regulations or their interpretation and enforcement, increased taxation, restrictions on imports, import duties or currency revaluations |
| In addition, a significant destabilization of relations between China and the United States could result in restrictions or prohibitions on our operations in China |
| The legal system of China relating to foreign trade is relatively new and continues to evolve |
| Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent |
| Moreover, there is a high degree of fragmentation among regulatory authorities resulting in uncertainties as to which authorities have jurisdiction over particular parties or transactions |
| We are subject to fluctuations in the exchange rate of the US dollar and foreign currencies |
| While we transact business primarily in US dollars, and most of our revenues are denominated in US dollars, a portion of our costs and revenues is denominated in other currencies, such as the euro, the Japanese yen, pound sterling and certain other Asian currencies |
| As a result, changes in the exchange rates of these or any other applicable currencies to the US dollar will affect the costs of goods sold and operating margins |
| We have a program to hedge our exposure to currency rate fluctuations, but our hedge program may not be fully effective in preventing foreign exchange losses |
| We may pursue acquisitions, investments and divestitures, which could harm our operating results and may disrupt our business |
| We have made and will continue to consider making strategic business investments, alliances and acquisitions we consider necessary to gain access to key technologies that we believe augment our existing technical capability and support our business model objectives |
| Acquisitions and investments involve risks and uncertainties that may unfavorably impact our future financial performance |
| We may not be able to integrate and develop the technologies we acquire as expected |
| If the technology is not developed in a timely manner, we may be unsuccessful in penetrating target markets |
| Although we have not made any acquisitions since fiscal 2003, with any acquisition there are risks that future operating results may be unfavorably affected by acquisition related costs, including in-process R&D charges and incremental R&D spending |
| We have made and will continue to consider making strategic business divestitures |
| With any divestiture, there are risks that future operating results could be unfavorably impacted if targeted objectives, such as cost savings, are not achieved or if other business disruptions occur as a result of the divestiture or activities related to the divestiture |
| We are subject to litigation risks |
| All industries, including the semiconductor industry, are subject to legal claims |
| We are involved in a variety of routine legal matters that arise in the normal course of business |
| Further discussion of certain specific legal proceedings we are involved with is contained in Note 12 to the Consolidated Financial Statements |
| We believe it is unlikely that the final outcome of these legal claims will have a material adverse effect on our consolidated financial position or results of operation |
| However, litigation is inherently uncertain and unpredictable |
| An unfavorable resolution of any particular legal claim or proceeding could have a material adverse effect on our consolidated financial position or results of operations |
| We are subject to many environmental laws and regulations |
| Increasingly stringent environmental regulations restrict the amount and types of materials that can be released from our operations into the environment |
| While the cost of compliance with environmental laws has not had a material adverse effect on our results of operations historically, compliance with these and any future regulations could require significant capital investments in pollution control equipment or changes in the way we make our products |
| In addition, because we use hazardous and other regulated materials in our manufacturing processes, we are subject to risks of liabilities and claims, regardless of fault, resulting from accidental releases, including personal injury claims and civil and criminal fines |
| The following should also be considered: o we currently are remediating past contamination at some of our sites o we have been identified as a potentially responsible party at a number of Superfund sites where we (or our predecessors) disposed of wastes in the past o significant regulatory and public attention on the impact of semiconductor operations on the environment may result in more stringent regulations, further increasing our costs We may be impacted by higher than expected tax rates or exposure to additional income tax liabilities |
| As a global company, our effective tax rate is dependent upon the geographic composition of worldwide earnings and tax regulations governing each region |
| We are subject to income taxes in both the United States and various foreign jurisdictions, and significant judgment is required to determine worldwide tax liabilities |
| From time to time, we have received notices of tax assessments in various jurisdictions where we operate |
| We may receive future notices of assessments and the amounts of these assessments or our failure to favorably resolve such assessments may have a material adverse effect on our financial condition or results of operations |
| Our business is global and world events and changes in the world economy could adversely affect our financial performance and operating results |
| Terrorist activities worldwide and hostilities in and between nation states, including the continuing hostilities and insurgency in Iraq and the threat of future hostilities involving the US and other countries, cause uncertainty on the overall state of the global economy |
| We have no assurance that the consequences from these events will not disrupt our operations in the US or other regions of the world in the future |
| Although oil is not a major factor in our cost structure, continued wide fluctuations and large increases in oil prices may affect our future costs and revenues |
| As we have noted earlier, pandemic illness, and substantial natural, as well as geopolitical events, may affect our future costs, operating capabilities and revenues |