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NATIONAL SEMICONDUCTOR CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) This MD&A contains a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in Part I of Form 10-K "Item 1A. Risk Factors." These statements relate to, among other things, the pending merger with TI, sales, gross margins, operating expenses, capital expenditures, economic and market conditions, research and development efforts, asset dispositions, and acquisitions of and investments in other companies, and are indicated by words or phrases such as "anticipate," "expect," "outlook," "foresee," "believe," "could," "should," "intend," "will," and similar words or phrases. These statements involve risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. For a discussion of some of the factors that could cause actual results to differ materially from our forward-looking statements, see the discussion on risk factors that appears in Part I, Item 1A. of this Form 10-K and other risks and uncertainties detailed in this and our other reports and filings with the SEC. We undertake no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof and disclaim any obligation to do so. This discussion should be read in conjunction with the consolidated financial statements and the accompanying notes included in this Annual Report on Form 10-K for the year ended May 29, 2011. Strategy and Business We design, develop, manufacture and market a wide range of semiconductor products, most of which are analog and mixed-signal integrated circuits. Our goal is to be the premier provider of high-performance, energy-efficient analog and mixed-signal solutions. Many of these solutions are marketed under our PowerWise® brand. We are focused on the following: º • º growing our core revenues by marketing our extensive portfolio of general purpose analog products to a broad base of customers utilizing our established distribution channels and industry leading design tools; º • º identifying and understanding the complex application specific system problems addressable by analog innovation; º • º providing energy efficient, analog-intensive solutions that enable customers to differentiate their products while reducing the power consumption of their systems; º • º targeting our analog solutions towards emerging areas or applications that can provide further growth on top of our core business (current examples would include LED lighting, automotive, personal mobile devices, renewable energy, communications infrastructure and portable medical); º • º consistently delivering competitive products with superior quality and supply chain execution to our customers, and º • º consistently delivering superior returns on invested capital to our shareholders. Approximately 93 percent of our net sales in fiscal 2011 came from Analog segment products. Beyond the general purpose analog categories defined by the World Semiconductor Trade Statistics (WSTS), we also sell analog subsystems specifically targeted at certain particular markets and applications. Energy efficiency is our overarching theme, and our PowerWise® products enable 29 -------------------------------------------------------------------------------- Table of Contents systems that consume less power, extend battery life and generate less heat. Our leading-edge products include power management circuits and sub-systems, audio and operational amplifiers, communication interface products and data conversion solutions. For more information on our business, see Part I, "Item 1. Business," in this Annual Report on Form 10-K for the fiscal year ended May 29, 2011. On April 4, 2011, we entered into the Merger Agreement with TI and Merger Sub, under which Merger Sub will, subject to the satisfaction or waiver of the conditions in the Merger Agreement, merge with and into National, and National will be the surviving corporation in the merger and a wholly owned subsidiary of TI. Pursuant to the terms and subject to the conditions of the Merger Agreement, at the Effective Time, each share of National common stock issued and outstanding immediately prior to the Effective Time (other than shares (i) held in treasury of National, (ii) owned by TI or Merger Sub or (iii) owned by shareholders who have perfected and not withdrawn a demand for appraisal rights under Delaware law) will be converted into the right to receive $25.00 in cash, without interest. Our Board of Directors unanimously approved the Merger Agreement and the merger on April 4, 2011, and on June 21, 2011, the Merger Agreement was adopted by our shareholders at a special meeting. The completion of the merger is subject to various closing conditions, including receiving certain foreign antitrust approvals. The transaction is expected to close before the end of the calendar year. Critical Accounting Policies and Estimates We believe the following critical accounting policies are those policies that have a significant effect on the determination of our financial position and results of operations. These policies also require us to make our most difficult and subjective judgments: º a) º Revenue Recognition We recognize revenue from the sale of semiconductor products upon shipment, provided we have persuasive evidence of an arrangement typically in the form of a purchase order, title and risk of loss have passed to the customer, the amount is fixed or determinable and collection of the revenue is reasonably assured. We record a provision for estimated future returns at the time of shipment. Approximately 71 percent of our semiconductor product sales were made to distributors in fiscal 2011, which includes approximately 9 percent of sales made through dairitens in Japan under local business practices. This compares to approximately 64 percent in fiscal 2010 and approximately 53 percent in fiscal 2009, which included sales made through dairitens in Japan of approximately 9 percent in fiscal 2010 and 8 percent in fiscal 2009. We have agreements with our distributors that cover various programs, including pricing adjustments based on resale pricing and volume, price protection for inventory and scrap allowances. The revenue we record for these distribution sales is net of estimated provisions for these programs. When determining this net distribution revenue, we must make significant judgments and estimates. Our estimates are based upon historical experience rates by geography and product family, inventory levels in the distribution channel, current economic trends and other related factors. We regularly monitor the claimed allowance against the rates assumed in our estimates of the allowances. Actual distributor claims activity has been materially consistent with the provisions we have made based on our estimates. However, because of the inherent nature of estimates, there is always a risk that there could be significant differences between actual amounts and our estimates. Our financial condition and operating results are dependent on our ability to make reliable estimates, and we believe that our 30 -------------------------------------------------------------------------------- Table of Contents estimates are reasonable. However, different judgments or estimates could result in variances that might be significant to our operating results. Service revenues are recognized as the services are provided or as milestones are achieved, depending on the terms of the arrangement. These revenues are included in net sales and totaled $18.4 million in fiscal 2011, $19.6 million in fiscal 2010 and $17.4 million in fiscal 2009. Certain intellectual property income is classified as revenue if it meets specified criteria established by company policy that defines whether it is considered a source of income from our primary operations. These revenues are included in net sales and totaled $0.3 million in fiscal 2011, $1.3 million in fiscal 2010 and $2.6 million in fiscal 2009. All other intellectual property income that does not meet the specified criteria is not considered a source of income from primary operations and is therefore classified as a component of other operating income, net, in the consolidated statement of income. Intellectual property income is recognized when the license is delivered, the fee is fixed or determinable, collection of the fee is reasonably assured and remaining obligations are perfunctory or inconsequential to the other party. º b) º Valuation of Inventories Inventories are stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market. The total carrying value of our inventory is reduced for any difference between cost and estimated market value of inventory that is determined to be obsolete or unmarketable, based upon assumptions about future demand and market conditions. Reductions in carrying value are deemed to establish a new cost basis. Inventory is not written up if estimates of market value subsequently improve. We evaluate obsolescence by analyzing the inventory aging, order backlog and future customer demand on an individual product basis. If actual demand were to be substantially lower than what we have estimated, we may be required to write inventory down below the current carrying value. While our estimates require us to make significant judgments and assumptions about future events, we believe our relationships with our customers, combined with our understanding of the end-markets we serve, provide us with the ability to make reasonable estimates. The actual amount of obsolete or unmarketable inventory has been materially consistent with previously estimated write-downs we have recorded. We also evaluate the carrying value of inventory for lower-of-cost-or-market on an individual product basis, and these evaluations are intended to identify any difference between net realizable value and standard cost. Net realizable value is used as a measure of market for purposes of evaluating lower-of-cost-or-market and is determined as the selling price of the product less the estimated cost of disposal. When necessary, we reduce the carrying value of inventory to net realizable value. If actual market conditions and resulting product sales were to be less favorable than what we have projected, additional inventory write-downs may be required. º c) º Impairment of Goodwill, Intangible Assets and Other Long-lived Assets We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use and eventual disposition. Our long-lived assets subject to this evaluation include property, plant and equipment and amortizable intangible assets. Amortizable intangible assets subject to this evaluation include developed technology we have acquired, patents and technology 31 -------------------------------------------------------------------------------- Table of Contents licenses. We assess the impairment of goodwill annually in our fourth fiscal quarter and whenever events or changes in circumstances indicate that it is more likely than not that an impairment loss has been incurred. We are required to make judgments and assumptions in identifying those events or changes in circumstances that may trigger impairment. Some of the factors we consider include: º • º significant decrease in the market value of an asset; º • º significant changes in the extent or manner for which the asset is being used or in its physical condition; º • º significant change, delay or departure in our business strategy related to the asset; º • º significant negative changes in the business climate, industry or economic conditions; and º • º current period operating losses or negative cash flow combined with a history of similar losses or a forecast that indicates continuing losses associated with the use of an asset. Our impairment evaluation of long-lived assets includes an analysis of estimated future undiscounted net cash flows expected to be generated by the assets over their remaining estimated useful lives. If our estimate of future undiscounted net cash flows is insufficient to recover the carrying value of the assets over the remaining estimated useful lives, we record an impairment loss in the amount by which the carrying value of the assets exceeds the fair value. We determine fair value based on discounted cash flows using a discount rate commensurate with the risk inherent in our current business model. Major factors that influence our cash flow analysis are our estimates for future revenue and expenses associated with the use of the asset. Different estimates could have a significant impact on the results of our evaluation. If, as a result of our analysis, we determine that our amortizable intangible assets or other long-lived assets have been impaired, we will recognize an impairment loss in the period in which the impairment is determined. Any such impairment charge could be significant and could have a material adverse effect on our financial position and results of operations. We classify long-lived assets as assets held for sale when the criteria have been met, in accordance with ASC Topic 360, "Property, Plant, and Equipment." Upon classification of an asset as held for sale, we cease depreciation of the asset and classify the asset in other current assets at the lower of its carrying value or fair value (less cost to sell). If an asset is held for sale as a result of a restructuring of operations, any write down to fair value (less cost to sell) is included as a restructuring expense in the consolidated statement of income. When we commit to a plan to abandon a long-lived asset before the end of its previously estimated useful life, we revise depreciation estimates to reflect the use of the asset over its shortened useful life. We review depreciation estimates periodically, including both estimated useful lives and estimated salvage values. These reviews may result in changes to historical depreciation rates, which are considered to be changes in accounting estimates and are accounted for on a prospective basis. Our impairment evaluation of goodwill is based on comparing the fair value to the carrying value of our reporting units containing goodwill. Our reporting units are based on our operating segments as defined under ASC Topic 280, "Segment Reporting." The fair value of a reporting unit is measured at the business unit level using a discounted cash flow approach that incorporates our estimates of future revenues and costs for those business units. As of May 29, 2011 our reporting units containing goodwill include 32 -------------------------------------------------------------------------------- Table of Contents our high-speed products, mobile devices power, power products and precision signal path business units, all of which are operating segments within our Analog reportable segment, and our custom solutions business unit which is included in the category "All Others." Based upon our annual impairment assessment of goodwill completed in the fourth quarter of fiscal 2011, we concluded that the fair value of each reporting unit substantially exceeded its carrying value. The estimates we use in evaluating goodwill are consistent with the plans and estimates that we use to manage the underlying businesses. If we fail to deliver new products for these business units, if the products fail to gain expected market acceptance, or if market conditions for these business units fail to materialize as anticipated, our revenue and cost forecasts may not be achieved and we may incur charges for goodwill impairment, which could be significant and could have a material adverse effect on our results of operations. º d) º Income Taxes We determine deferred tax assets and liabilities based on the future tax consequences that can be attributed to net operating loss and credit carryovers and differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using the enacted tax rate expected to be applied when the taxes are actually paid or recovered. The recognition of deferred tax assets is reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which the net operating loss and credit carryovers and differences between financial statement carrying amounts and their respective tax bases become deductible. In determining a valuation allowance, we consider past performance, expected future taxable income and prudent and feasible tax planning strategies. We currently have a valuation allowance that has been established primarily against the reinvestment and investment tax credits related to our operation in Malaysia, as we have concluded that the deferred tax assets will not be realized in the foreseeable future due to a tax holiday granted by the Malaysian government that is effective for a ten-year period that began in our fiscal 2010 and the uncertainty of sufficient taxable income in Malaysia beyond fiscal 2019. Our forecast of expected future taxable income is based on historical taxable income and projections of future taxable income over the periods that the deferred tax assets are deductible. Changes in market conditions that differ materially from our current expectations and changes in future tax laws in the United States and international jurisdictions or changes in our tax structure may cause us to change our judgments of future taxable income. These changes, if any, may require us to adjust the existing tax valuation allowance higher or lower than the amount we currently have recorded and such an adjustment could have a material impact on the tax expense for the fiscal year. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Although ASC Topic 740, "Income Taxes," provides further clarification on the accounting for uncertainty in income taxes recognized in the financial statements, the threshold and measurement attribute prescribed by the FASB guidance will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what we have currently estimated, this could have a material impact on income tax expense. 33 -------------------------------------------------------------------------------- Table of Contents º e) º Share-based Compensation We measure and record compensation expense for all share-based payment awards based on estimated fair values in accordance with ASC Topic 718, "Compensation-Stock Compensation." We provide share-based awards to our employees, executive officers and directors through various equity compensation plans including our employee equity, stock option, stock purchase and restricted stock plans. The fair value of stock option and stock purchase equity awards is measured at the date of grant using a Black-Scholes option pricing model, and the fair value of restricted stock awards is based on the market price of our common stock on the date of grant. The cash awards that were paid on November 29, 2010 in connection with retention arrangements with each of our executive officers (approved by the Compensation Committee of our Board of Directors in November 2008) were considered a share-based payment award and measured at fair value since the award was indexed to the price of our common stock. The fair value of these cash awards was measured each reporting period and was calculated using the Monte Carlo valuation method. In determining fair value using the Black-Scholes option pricing model and the Monte Carlo valuation method, management is required to make certain estimates of the key assumptions such as expected life, expected volatility, dividend yields and risk free interest rates. The estimates of these key assumptions involve judgment regarding subjective future expectations of market price and trends. The assumptions used in determining expected life and expected volatility have the most significant effect on calculating the fair value of share-based awards. For all options granted after December 31, 2007, we determine expected life based on historical stock option exercise experience for the last four years, adjusted for our expectation of future exercise activity. For options granted prior to January 1, 2008, we use the simplified method specified by the SEC's Staff Accounting Bulletin No. 107 to determine the expected life of stock options. Expected volatility is based on implied volatility, as management has determined that implied volatility better reflects the market's expectation of future volatility than historical volatility. If we were to determine that another method to estimate these assumptions was more reasonable than our current methods, or if another method for calculating these assumptions were to be prescribed by authoritative guidance, the fair value for our share-based awards could change significantly. If the expected volatility and/or expected life were increased under our assumptions, then the Black-Scholes and Monte Carlo computations of fair value would also increase, thereby resulting in higher compensation costs being recorded. Under GAAP, we are required to estimate forfeitures at the date of grant. Our estimate of forfeitures is based on our historical activity, which we believe is indicative of expected forfeitures. In subsequent periods if the actual rate of forfeitures differs from our estimate, the forfeiture rates may be revised, as necessary. Changes in the estimated forfeiture rates can have a significant effect on share-based compensation expense since the effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. We have also granted performance share units to executive officers that require us to estimate expected achievement of performance targets over the performance period. This estimate involves judgment regarding future expectations of various financial performance measures such as those described in the overview section below. If there are changes in our estimate of the level of financial performance measures expected to be achieved, the related share-based compensation expense may be significantly increased or reduced in the period that our estimate changes. 34 -------------------------------------------------------------------------------- Table of Contents Overview We focus on providing leading-edge analog solutions with a large portion of our sales classified within the general purpose analog categories as defined by WSTS. In fiscal 2011, approximately 93 percent of our total sales came from our Analog segment. We believe that the success we have achieved in these markets has been driven by our knowledge of the analog markets, our circuit design capabilities and our understanding of electronic systems, especially as they pertain to energy efficiency that is enabled by our products. Our success has also been due to our innovative packaging and proprietary analog process technology, as well as our comprehensive manufacturing and supply chain competence. Net sales were higher in fiscal 2011 compared to net sales in fiscal 2010 due to higher overall demand from customers as the global economy continued to slowly recover. We also achieved a higher gross margin percentage in fiscal 2011 compared to fiscal 2010 as factory utilization increased to 64 percent in fiscal 2011 compared to 51 percent in fiscal 2010. Our performance in gross margin percentage is primarily attributable to continued improvement in manufacturing efficiencies from higher capacity utilization and benefits from factory consolidation activities that were completed by the end of fiscal 2010. We continue to direct our research and development investments on high-value growth areas in analog markets and applications, with particular focus on power management and energy efficiency where our PowerWise® products enable systems that consume less power, extend battery life and generate less heat. In reviewing our performance, we consider several key financial measures. When reviewing our net sales performance, we look at sales growth rates (both absolute and relative to competitors), new order rates (including turns orders, which are orders received with delivery requested in the same quarter), blended-average selling prices, sales of new products and market share. We gauge our operating income performance based on gross margin trends, product mix, blended-average selling prices, factory utilization rates and operating expenses relative to sales. Our profitability and earnings per share increased in fiscal 2011 compared to fiscal 2010. We remain focused on growing our revenue and earnings per share over time while generating a consistently high return on invested capital by concentrating on operating income, working capital management, capital expenditures and cash management. We determine return on invested capital based on net operating income after tax divided by invested capital, which generally consists of total assets reduced by goodwill and non-interest bearing liabilities. The following table and discussion provide an overview of our operating results for fiscal 2011, 2010 and 2009: Years Ended: May 29, May 30, May 31, (In Millions) 2011 % Change 2010 % Change 2009 Net sales $ 1,520.4 7.1 % $ 1,419.4 (2.8 %) $ 1,460.4 Gross margin $ 1,038.4 $ 935.2 $ 916.3 As a % of net sales 68.3 % 65.9 % 62.7 % Operating income $ 451.6 $ 325.8 $ 183.2 As a % of net sales 29.7 % 23.0 % 12.5 % Net income $ 298.8 $ 209.2 $ 73.3 As a % of net sales 19.7 % 14.7 % 5.0 % 35 -------------------------------------------------------------------------------- Table of Contents Net income for fiscal 2011 also includes a net charge of $25.6 million for severance and restructuring expenses, of which $22.6 million relates to activities associated with the closures of our manufacturing facilities in Texas and China announced in March 2009 and $3.0 million relates to exit activities associated with the realignment of certain product line business units announced in May 2010 (See Note 6 to the Consolidated Financial Statements). Net income also includes $0.3 million of other operating expense (See Note 4 to the Consolidated Financial Statements). In addition, our fiscal 2011 net income includes approximately $14 million of expenses related to the merger transaction with TI that was announced on April 4, 2011. The vast majority of these expenses are not tax-deductible and are mostly embedded within selling, general and administrative expenses. These charges and credits described above are all pre-tax amounts. Net income for fiscal 2010 included a net charge of $20.1 million for severance and restructuring expenses, of which $1.7 million related to exit activities associated with the realignment of certain product line business units and $21.5 million related to the planned closures of our manufacturing facilities in Texas and China announced in March 2009. These severance and restructuring expenses were partially offset by a $3.1 million reduction of accrued expenses related to prior actions (See Note 6 to the Consolidated Financial Statements). Net income also included $0.4 million of other operating income (See Note 4 to the Consolidated Financial Statements). These charges and credits are all pre-tax amounts. Net income for fiscal 2009 included $143.9 million for severance and restructuring expenses related to the actions taken to reduce overall expenses in response to weak economic conditions and related business levels. Those actions included workforce reductions (in November 2008 and March 2009) and the planned closures of our manufacturing facilities in Texas and China announced in March 2009 (See Note 6 to the Consolidated Financial Statements). Net income also included a $2.9 million in-process R&D charge related to the acquisition of ActSolar, Inc. (See Note 7 to the Consolidated Financial Statements) and $2.7 million of other operating income (See Note 4 to the Consolidated Financial Statements). These charges and credits are all pre-tax amounts. Income tax expense for fiscal 2009 included incremental tax expense of $16.7 million related to the write down of foreign deferred tax assets that resulted from a tax holiday granted by the Malaysian government that is effective for a ten-year period that began in our fiscal 2010. The effect of the write down of foreign deferred tax assets was partially offset by $15.0 million of tax benefits associated with R&D tax credits, net of the portion of the tax benefit that did not meet the more-likely-than-not recognition threshold. Share-based Compensation Expense Our operating results include the recognition of share-based compensation expense, which totaled $55.0 million in fiscal 2011, $73.8 million in fiscal 2010 and $70.9 million in fiscal 2009. Our share-based compensation expense in fiscal 2011 was lower compared to fiscal 2010 since we granted fewer stock options and more restricted stock units as part of our annual equity award grant in fiscal 2011. Stock options are subject to accelerated expense associated with employees who are eligible for retirement or expected to be eligible for retirement during the nominal vesting period. In contrast, we do not incur accelerated expense for restricted stock units since retirement-eligible employees do not receive accelerated vesting privileges. In addition, share-based compensation expense in fiscal 2010 contained an incremental $1.7 million charge related to the stock option exchange that occurred in November 2009. No such expense is included in fiscal 2011. The overall increase in our share-based compensation expense in fiscal 2010 compared to fiscal 2009 was primarily due to higher expense related to the share-based awards for our executive officers, as the company underwent a transition of its Chief Executive Officer during fiscal 2010. For further information and a description of 36 -------------------------------------------------------------------------------- Table of Contents our share-based compensation plans, see Note 1 and Note 14 to the Consolidated Financial Statements. Net Sales Years Ended: May 29, May 30, May 31, (In Millions) 2011 % Change 2010 % Change 2009 Analog segment $ 1,418.9 7.7 % $ 1,316.9 (0.4 %) $ 1,322.8 As a % of net sales 93.3 % 92.8 % 90.6 % All others 101.5 (1.0 %) 102.5 (25.5 %) 137.6 As a % of net sales 6.7 % 7.2 % 9.4 % Total net sales $ 1,520.4 $ 1,419.4 $ 1,460.4 100.0 % 100.0 % 100.0 % The chart above and the following discussion are based on our reportable segments described in Note 16 to the Consolidated Financial Statements. The information for fiscal 2010 and 2009 has been reclassified to present segment information based on the structure of our operating segments in fiscal 2011. Beginning in fiscal 2011, we combined the activities of the former key market segments group together with certain emerging product lines that were previously a part of two separate power business units to form a new business unit called the strategic growth markets business unit. This business unit concentrates its efforts on selected high-growth emerging markets that represent promising opportunities to the company. The remaining product lines that were previously a part of the former performance power products business unit were combined with the remaining product lines within the infrastructure power business unit and renamed the power products business unit. As a result, the Analog segment now comprises five operating segments which include the high-speed products, mobile devices power, power products, precision signal path and strategic growth markets business units. Analog segment sales were higher in fiscal 2011 compared to fiscal 2010 due to higher overall demand from customers as the global economy continued to slowly recover. Sales of products for the industrial and the communications and networking markets were major contributors to year-over-year growth in sales. Unit shipments in our Analog segment were higher by 7 percent in fiscal 2011 compared to the volume shipped in fiscal 2010. Blended-average selling prices were essentially flat in fiscal 2011 compared to fiscal 2010. For purposes of this discussion, we have combined as one group the business units whose products fundamentally entail power management technology (mobile devices power, power products and strategic growth markets). Net sales from this group increased by 8 percent in fiscal 2011 compared to fiscal 2010. Net sales from our high-speed products and precision signal path business units in fiscal 2011 compared to fiscal 2010 increased by 13 percent and 2 percent, respectively. For other operating business units included in "All Others," sales were slightly lower in fiscal 2011 compared to fiscal 2010 as shipping volume and blended-average selling prices from non-analog business units that are no longer a part of our core focus have been declining. The sales from these non-analog business units also include sales generated from foundry and contract service arrangements. 37 -------------------------------------------------------------------------------- Table of Contents For fiscal 2011, net sales in our geographic regions increased by 21 percent in Europe, 12 percent in Japan and 5 percent in the Americas while it remained flat in the Asia Pacific region compared to fiscal 2010. With respect to the profile of our various regions relative to the whole company, Europe increased to 25 percent of total sales, Japan remained flat at 9 percent of total sales, the Asia Pacific region decreased to 43 percent of total sales and the Americas declined to 23 percent of total sales. Although the euro strengthened against the dollar during fiscal 2011, the reported amount of net sales in U.S. dollars related to foreign currency-denominated sales in fiscal 2011 was unfavorably affected by foreign currency exchange rate fluctuations since the weighted-average exchange rate for the euro was weaker overall in fiscal 2011 than it was in fiscal 2010. This was partially offset by the favorable effect from the Japanese yen which strengthened over the fiscal year against the dollar. The overall effect of currency exchange rate fluctuations on net sales reported in U.S. dollars was minimal since only 17 percent of our total net sales were denominated in foreign currency and we have hedging programs intended to minimize the effect of currency exchange rate fluctuations. Analog segment sales were slightly lower in fiscal 2010 compared to fiscal 2009 due to lower overall demand from customers, particularly from customers in the wireless handset market, who were negatively affected by the downturn in the overall global economy throughout calendar 2009. Despite the effect of the economic downturn in fiscal 2010, analog sales were higher in the second half of fiscal 2010 over sales in the second half of fiscal 2009. As a result, unit shipments in our Analog segment were down by less than 1 percent in fiscal 2010 compared to the volume shipped in fiscal 2009 due to higher unit shipments in the second half of fiscal 2010. Blended-average selling prices were essentially flat in fiscal 2010 compared to fiscal 2009. For purposes of this discussion, we have combined as one group the business units whose products fundamentally entail power management technology (mobile devices power, power products and strategic growth markets). Net sales from this group decreased by 3 percent in fiscal 2010 compared to fiscal 2009. Net sales from our high-speed products and precision signal path business units in fiscal 2010 compared to fiscal 2009 increased by 5 percent and 1 percent, respectively. For other operating business units included in "All Others," sales were lower in fiscal 2010 compared to fiscal 2009 due to a lower volume of demand from non-analog business units that are no longer a part of our core focus. The sales from these non-analog business units also include sales generated from foundry and contract service arrangements. For fiscal 2010, net sales in our geographic regions increased by 7 percent in Japan and 2 percent in Europe while it decreased by 2 percent in the Americas and 7 percent in the Asia Pacific region compared to fiscal 2009. Sales in each region as a percentage of total net sales in fiscal 2010 compared to fiscal 2009 increased to 24 percent in the Americas, 22 percent in Europe and 9 percent in Japan while it declined in the Asia Pacific region to 45 percent. The reported amount of net sales in U.S. dollars related to foreign currency-denominated sales in fiscal 2010 was favorably affected by foreign currency exchange rate fluctuations as the Japanese yen strengthened over the fiscal year against the dollar. Although the euro weakened over the fiscal year against the dollar, it did not have a material effect on foreign currency-denominated sales in fiscal 2010. The overall effect of currency exchange rate fluctuations on net sales reported in U.S. dollars was minimal since only 16 percent of our total net sales were denominated in foreign currency and we have hedging programs intended to minimize the effect of currency exchange rate fluctuations. 38 -------------------------------------------------------------------------------- Table of Contents Gross Margin Years Ended: May 29, May 30, May 31, (In Millions) 2011 % Change 2010 % Change 2009 Net sales $ 1,520.4 7.1 % $ 1,419.4 (2.8 %) $ 1,460.4 Cost of sales 482.0 (0.5 %) 484.2 (11.0 %) 544.1 Gross margin $ 1,038.4 $ 935.2 $ 916.3 As a % of net sales 68.3 % 65.9 % 62.7 % Our gross margin percentage was higher in fiscal 2011 compared to fiscal 2010 mainly due to higher factory utilization, higher sales and the favorable effect of cost savings from the closures of our manufacturing facilities in Texas and China. Wafer fabrication capacity utilization (based on wafer starts) was 64 percent in fiscal 2011 compared to 51 percent in fiscal 2010. Although our blended-average selling prices in our Analog segment were flat in fiscal 2011 compared to fiscal 2010, product mix within our portfolio of analog products had a positive influence on our performance in gross margin percentage. Gross margin includes share-based compensation expense of $7.6 million in fiscal 2011 compared to $10.3 million in fiscal 2010. Our gross margin percentage was higher in fiscal 2010 compared to fiscal 2009, primarily due to the favorable effects of cost control measures, including cost savings from the closures of our manufacturing facilities in Texas and China. Although our blended-average analog selling prices were essentially flat compared to fiscal 2009, product mix within our portfolio of analog products continues to have a positive influence on our performance in gross margin percentage. Lower inventory obsolescence and scrap rates also affected our gross margin percentages favorably in fiscal 2010 compared to fiscal 2009. Wafer fabrication capacity utilization (based on wafer starts) was 51 percent in fiscal 2010 compared to 53 percent in fiscal 2009. Share-based compensation expense included in gross margin was $16.0 million in fiscal 2009. Research and Development Years Ended: May 29, May 30, May 31, (In Millions) 2011 % Change 2010 % Change 2009 Research and development $ 278.6 2.2 % $ 272.7 (10.9 %) $ 306.0 As a % of net sales 18.3 % 19.2 % 21.0 % The increase in research and development expenses in fiscal 2011 compared to fiscal 2010 primarily reflects higher annual payroll expenses. Share-based compensation expense included in R&D expense was $15.8 million in fiscal 2011 compared to $17.8 million in fiscal 2010. We are continuing to concentrate our research and development spending on analog products and underlying analog capabilities with particular emphasis on circuits that enable greater energy efficiency. We continue to invest in the development of new analog products that can serve applications in a wide variety of end markets such as portable electronics, industrial and automotive, LED lighting, communications infrastructure, renewable energy products and medical applications. Because of our focus on markets and applications that require or involve greater energy efficiency, a significant portion of our research and development is directed at power management technology. The decrease in research and development expenses in fiscal 2010 compared to fiscal 2009 primarily reflected cost savings associated with the cost reduction actions announced in fiscal 2009, including lower payroll and employee benefit expenses. Share-based compensation expense included in R&D expense was $24.3 million in fiscal 2009. R&D expenses for fiscal 2009 excluded an 39 -------------------------------------------------------------------------------- Table of Contents in-process R&D charge of $2.9 million related to the acquisition of ActSolar, Inc. (See Note 7 to the Consolidated Financial Statements), which was included as a separate component of operating expenses in the consolidated statement of income for fiscal 2009. Selling, General and Administrative Years Ended: (In Millions) May 29, 2011 % Change May 30, 2010 % Change May 31, 2009 Selling, general and administrative $ 282.3 (10.9 %) $ 317.0 12.0 % $ 283.0 As a % of net sales 18.6 % 22.3 % 19.4 % We record a charge or credit in selling, general and administrative expenses for the change in the liability associated with the employee deferred compensation plan due to an increase or decrease in the market value of the employees' corresponding investment assets for the plan. See the discussion of the corresponding gain and loss on the employees' investment assets described in the paragraph, "Other Non-Operating Income (Expense), Net." SG&A expenses include charges of $6.4 million in fiscal 2011 and $5.3 million in fiscal 2010 due to increases in the liability related to market fluctuation in the plan's investment assets. Excluding these amounts, SG&A expenses for fiscal 2011 decreased compared to fiscal 2010 by $35.8 million, or 12 percent. We believe that excluding these charges relating to changes in the liability associated with the employee deferred compensation plan liability provides a better understanding of the changes in our SG&A expenses that are related to our core operating performance during the relevant fiscal periods. The decrease in SG&A expenses reflect lower payroll and employee compensation expenses and lower share-based compensation expense. Share-based compensation expense included in SG&A expenses was $31.6 million in fiscal 2011 compared to fiscal 2010, which was $45.7 million. SG&A expenses in fiscal 2011 also include merger related expenses. Excluding the effect from the change in the liability associated with the employee deferred compensation plan, which included a credit of $7.7 million in fiscal 2009, SG&A expenses for fiscal 2010 compared to fiscal 2009 increased by $21.0 million, or 7.2 percent. The increase included higher employee benefit expenses and higher share-based compensation expenses related to executive officers, which are offset by cost savings associated with the cost reduction actions announced in fiscal 2009. Share-based compensation expense for fiscal 2010 included in SG&A expenses was $45.7 million compared to fiscal 2009, which was $30.6 million. Severance and Restructuring Expenses Related to Cost Reduction Programs Our fiscal 2011 results include a net charge of $25.6 million for severance and restructuring expenses, of which $22.6 million relates to activities associated with the closures of our manufacturing facilities in Texas and China announced in March 2009 and $3.0 million relates to exit activities associated with the realignment of certain product line business units announced in May 2010. For a more complete discussion of these actions and related charges, see Note 6 to the Consolidated Financial Statements. Our fiscal 2010 results included a net charge of $20.1 million for severance and restructuring expenses, of which $1.7 million related to exit activity associated with the realignment of certain product line business units and $21.5 million related to the planned closures of our manufacturing facilities in Texas and China announced in March 2009. These severance and restructuring expenses were partially offset by a $3.1 million reduction of accrued expenses related to prior actions. For a more complete discussion of these actions and related charges, see Note 6 to the Consolidated Financial Statements. 40 -------------------------------------------------------------------------------- Table of Contents Our fiscal 2009 results included a net charge of $143.9 million for severance and restructuring expenses, of which $117.3 million related to the actions announced in March 2009 when we eliminated approximately 850 positions worldwide and announced the planned closures of our manufacturing facilities in Texas and China. It also included severance and restructuring expenses of $26.4 million related to a global workforce reduction announced in November 2008 and $0.2 million of residual charges related to other prior actions. For a more complete discussion of these actions and related charges, see Note 6 to the Consolidated Financial Statements. Charge for Acquired In-Process Research and Development In connection with the acquisition of ActSolar, Inc. in fiscal 2009, we allocated $2.9 million of the total purchase price to the value of in-process R&D (IPR&D). This amount was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed for the technology. There were no charges for acquired IPR&D in either fiscal 2011 or 2010 due to the change in accounting for business combinations beginning in fiscal 2010. See Note 7 to the Consolidated Financial Statements for a more complete discussion of our acquisitions. Interest Income Years Ended: May 29, May 30, May 31, (In Millions) 2011 2010 2009 Interest income $ 2.6 $ 1.8 $ 10.4 The increase in interest income in fiscal 2011 compared to fiscal 2010 is due to higher average cash balances and higher interest rates. The decrease in interest income in fiscal 2010 compared to fiscal 2009 is due to lower interest rates. Interest Expense Years Ended: May 29, May 30, May 31, (In Millions) 2011 2010 2009 Interest expense $ 55.1 $ 60.3 $ 72.7 The decrease in interest expense in fiscal 2011 and 2010 is due to lower overall debt balances. Other Non-Operating Income (Expense), Net Years Ended: May 29, May 30, May 31, (In Millions) 2011 2010 2009 Gain (loss) on investments $ 6.7 $ 5.6 $ (7.3 ) Loss on extinguishment of debt - (2.1 ) - Net loss on derivative instruments in fair value hedge (2.1 ) (2.2 ) - Loss on liquidation of interest rate swap (0.7 ) - - Total other non-operating income (expense), net $ 3.9 $ 1.3 $ (7.3 ) A primary component of other non-operating income (expense), net is derived from activities or market value fluctuations related to investment assets. The gain on investments in fiscal 2011 and 2010 reflects an increase in the market value of the investment assets held in a trust for the employee deferred compensation plan while the loss on investments in fiscal 2009 reflected a decline in its market value. As described in the paragraph, "Selling, General and Administrative," SG&A expenses 41 -------------------------------------------------------------------------------- Table of Contents for the same period include the related charge or credit pertaining to the corresponding liability. The gain on investments also includes gains of $0.3 million in both fiscal 2011 and fiscal 2010 from the liquidation of a non-marketable investment we previously held. The loss on investments in fiscal 2009 included a gain of $0.4 million from non-marketable investments that were not associated with the deferred compensation plan. The loss on derivative instruments is a result of our interest rate swap agreement against the April 2010 $250 million debt issuance, which was liquidated in September 2010 (See Note 3 to the Condensed Consolidated Financial Statements). Income Tax Expense Years Ended: May 29, May 30, May 31, (In Millions) 2011 2010 2009 Income tax expense $ 104.2 $ 59.4 $ 40.3 Effective tax rate 25.9 % 22.1 % 35.5 % The effective tax rate was higher in fiscal 2011 compared to fiscal 2010 primarily because of higher U.S. income in fiscal 2011. Our fiscal 2011 effective tax rate was also higher because we incurred certain expenses associated with the Merger Agreement with TI that are not tax-deductible. The effective tax rate was lower in fiscal 2010 compared to fiscal 2009 due to a tax benefit of $7.4 million primarily arising from the repatriation of previously unremitted Japanese earnings. In addition, a portion of our earnings comes from our Malaysian subsidiary and is not taxable because of a tax holiday granted by the Malaysian government that is effective for a ten-year period that began in our fiscal 2010. Our ability to realize the net deferred tax assets ($273.2 million at May 29, 2011) is primarily dependent on our ability to generate future U.S. taxable income. We believe it is more likely than not that we will generate sufficient taxable income to utilize these tax assets. Our ability to utilize these tax assets is dependent on future results and it is therefore possible that we will be unable to ultimately realize some portion or all of the benefits of these recognized deferred tax assets. This could result in additions to the deferred tax asset valuation allowance and an increase to tax expense. Foreign Operations Our foreign operations include manufacturing facilities in the Asia Pacific region and Europe and sales offices throughout the Asia Pacific region, Europe and Japan. A portion of the transactions at these facilities is denominated in local currency, which exposes us to risk from exchange rate fluctuations. Our exposure from expenses at foreign manufacturing facilities during fiscal 2011 was concentrated primarily in U.K. pound sterling and Malaysian ringgit. Where practical, we hedge net non-U.S. dollar denominated asset and liability positions using forward exchange and purchased option contracts. Our exposure from foreign currency denominated revenue is limited to the Japanese yen and the euro. We hedge up to 100 percent of the notional value of outstanding customer orders denominated in foreign currency using forward exchange contracts and over-the-counter foreign currency options. A portion of anticipated foreign sales commitments is at times hedged using purchased option contracts that have an original maturity of one year or less. Financial Market Risks We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks, we use derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes. 42 -------------------------------------------------------------------------------- Table of Contents The credit quality of our investment portfolio (classified as cash and cash equivalents) remains very high. Our investment portfolio is mainly comprised of debt instruments that are with A/A2 or better rated issuers, of which the majority is rated AA-/Aa2 or better. We limit our exposure to any one counterparty by diversifying our investments and continually evaluating each counterparty's relative credit standing. As of May 29, 2011, the total credit exposure from most single counterparties typically does not exceed $40 million with the exception of AAA rated government-backed bonds and deposits. Our debt instruments also have very short average maturities that are generally less than 60 days, and we have not encountered any delays or disruption in their redemptions or maturities nor have we experienced any losses in connection with our cash investments. Our short-term investments include bank time deposits with financial institutions that have a combined capital and surplus of not less than $100 million and have maturities of less than a year. Due to the short-term nature of our investment portfolio, changes in interest rates would have a corresponding effect on our interest income. Our interest expense would not necessarily be affected by changes in interest rates since our long-term debt totaling approximately $1 billion has fixed interest rates. A substantial majority of our revenue and capital spending is transacted in U.S. dollars. However, we do enter into transactions in other currencies, primarily the Japanese yen, pound sterling, euro and various other Asian currencies. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we have established programs to hedge our exposure to these changes in foreign currency exchange rates. Our hedging programs reduce, but do not always eliminate, the impact of foreign currency exchange rate movements. An adverse change (defined as 15 percent in all currencies) in exchange rates would result in a decline in income before taxes of less than $10 million. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, these changes typically affect the volume of sales or the foreign currency sales price as competitors' products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in sales levels or local currency selling prices. All of these potential changes are based on sensitivity analyses performed as of May 29, 2011. Liquidity and Capital Resources Years Ended: May 29, May 30, May 31, (In Millions) 2011 2010 2009 Net cash provided by operating activities $ 373.5 $ 402.9 $ 360.8 Net cash used in investing activities (134.1 ) (41.7 ) (81.7 ) Net cash used in financing activities (172.9 ) (34.5 ) (315.6 ) Net change in cash and cash equivalents $ 66.5 $ 326.7 $ (36.5 ) The primary factors contributing to the changes in cash and cash equivalents in fiscal 2011, 2010 and 2009 are described below: In fiscal 2011, cash provided by operating activities was generated by net income adjusted for non-cash items (primarily depreciation and amortization, and share-based compensation expense), which was partially offset by the negative effect from changes in working capital components. The negative effect in changes in working capital components was primarily caused by a decrease in accounts payable and accrued liabilities combined with an increase in other current assets. In fiscal 2010, cash from operating activities was positively affected by net income, adjusted for non-cash 43 -------------------------------------------------------------------------------- Table of Contents items (primarily depreciation and amortization, and share-based compensation expense), combined with a positive effect from changes in working capital components. The positive changes in working capital were from a decrease in inventory plus increases in accounts payable and accrued expenses, as well as other non-current liabilities. These positive changes were partially offset by the negative change in working capital from an increase in receivables and other current assets. In fiscal 2009, cash from operating activities was generated by net income, adjusted for non-cash items (primarily depreciation and amortization, and share-based compensation expense), combined with a positive effect from changes in working capital components. The positive changes in working capital were mainly attributable to decreases in receivables and inventories. These positive changes were partially offset by the negative change from decreases in accounts payable and accrued expenses, as well as the decrease in other non-current liabilities. The primary use of cash for investing activities in fiscal 2011 was the purchase of property, plant and equipment of $100.0 million, mainly representing the purchase of machinery and equipment, and the purchase of short-term investments of $80.0 million. This was partially offset by proceeds of $40 million from the maturity of short-term investments. The primary use of cash for investing activities in fiscal 2010 was the purchase of property, plant and equipment of $43.3 million, mainly representing the purchase of machinery and equipment. The primary use of cash for investing activities in fiscal 2009 was the purchase of property, plant and equipment of $83.7 million, mainly representing the purchase of machinery and equipment. The primary use of cash for financing activities in fiscal 2011 was for the repayment of our $250 million senior notes due June 2010. We also used cash to make payments of $91.6 million for cash dividends and $6.6 million for software license obligations in fiscal 2011. These amounts were partially offset by proceeds of $154.8 million from the issuance of common stock under employee benefit plans and $13.0 million from the liquidation of the interest rate swap agreement related to our $250 million senior unsecured notes due April 2015. The primary use of cash for financing activities in fiscal 2010 was for payments of $265.6 million of principal payments on the bank term loan, $75.7 million for cash dividends, and $6.3 million for software license obligations. This amount was partially offset by cash proceeds of $244.9 million (net of issuance costs and discount on principal) from our issuance of $250 million principal amount of senior unsecured notes in a public offering in April 2010 and $71.2 million from the issuance of common stock under employee benefit plans. The primary use of cash for financing activities in fiscal 2009 was for the repurchase of 6.2 million shares of our common stock in the open market for $128.4 million and payments of $187.6 million for principal payments on the unsecured bank term loan and $64.4 million for cash dividends. These amounts were partially offset by cash proceeds of $60.2 million from the issuance of common stock under employee benefit plans. We will continue to manage the level of capital expenditures relative to sales levels, capacity utilization and industry business conditions. At May 29, 2011, our total long term debt was $1.0 billion. We expect that existing cash and investment balances, together with existing lines of credit and cash generated by operations, will be sufficient to finance the capital investments currently planned for fiscal 2012, as well as our debt service payments. We also believe that such available cash and investment balances would also be sufficient to finance any termination fee that may be payable to TI pursuant to the Merger Agreement and our costs incurred in connection with the pending merger. However, we cannot assure that if economic conditions were to substantially further deteriorate within the next year, we would have the appropriate financial resources to meet our business requirements. Our cash and investment balances are dependent in part on continued collection of customer receivables and the ability to sell inventories. Although we have not experienced major problems 44 -------------------------------------------------------------------------------- Table of Contents with our customer receivables, continual declines in overall economic conditions could lead to deterioration in the quality of customer receivables in the future. Since we no longer hold marketable investments with maturities greater than 90 days, we did not experience any major declines in our cash equivalents or marketable investments as a result of the downturn in the financial markets. However, major declines in financial markets could cause reductions in our cash equivalents and marketable investments in the future. As of May 29, 2011, the amount of cash and short-term investments held by foreign subsidiaries was $316.2 million. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to indefinitely reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. The following table provides a summary of the effect on liquidity and cash flows from our contractual obligations as of May 29, 2011: Payments due by period: Less than 1 - 3 3 - 5 More than (In Millions) Total 1 Year Years Years 5 Years Contractual obligations: Long-term debt $ 1,029.7 $ - $ 404.7 $ 250.0 $ 375.0 Operating lease obligations: Non-cancelable operating leases 31.0 12.6 13.3 4.6 0.5 Purchase obligations: Other software licensing agreements 1.8 1.8 - - - Industrial gas contracts 5.7 0.5 1.0 1.0 3.2 Other purchase obligations 17.5 8.1 6.8 2.6 - Total $ 1,085.7 $ 23.0 $ 425.8 $ 258.2 $ 378.7 Commercial commitments: Standby letters of credit under bank multicurrency agreement $ 2.2 $ 2.2 $ - $ - $ - In addition to amounts included in the table above, we have agreed to pay Qatalyst a fee of $28.0 million, $5.0 million of which was paid upon delivery of Qatalyst's opinion and the remainder of which will be paid upon, and subject to, the consummation of the merger with TI. The above table also excludes $195.8 million of long-term income taxes payable since we are unable to reliably estimate the timing of future payments related to uncertain tax positions. As of May 29, 2011, capital purchase commitments were $10.3 million. We do not currently have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might be established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in trading activities involving non-exchange traded contracts. As a result, we do not believe we are materially exposed to financing, liquidity, market or credit risks that could arise if we had engaged in these relationships. 45 -------------------------------------------------------------------------------- Table of Contents Recently Issued Accounting Pronouncements In June 2011, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Update (ASU) No. 2011-05, "Comprehensive Income (Topic 220) - Presentation of Comprehensive Income." This ASU increases the prominence of items reported in other comprehensive income and facilitates convergence of U.S. GAAP and IFRS by eliminating the option to present components of comprehensive income as part of the statement of changes in stockholders' equity. It requires those components to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU is effective and should be applied retrospectively beginning in our fiscal 2013. We do not expect the adoption of this ASU to have a significant effect on our consolidated financial statements. In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." This ASU achieves the objectives of the FASB to develop common requirements for defining fair value and for the measurement of and disclosure about fair value between U.S. GAAP and IFRS. The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. This ASU is effective on a prospective basis beginning in our fiscal 2013 and we do not expect the adoption of this ASU to have a significant effect on our consolidated financial statements. In December 2010, the FASB issued ASU No. 2010-29, "Business Combinations (Topic 805) - Disclosure of Supplementary Pro Forma Information for Business Combinations - a consensus of the FASB Emerging Issues Task Force." This ASU clarifies the acquisition date that should be used for reporting the pro forma financial information disclosures in Topic 805 when comparative financial statements are presented. It also improves the usefulness of the pro forma revenue and earnings disclosures by requiring a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly attributable to the business combination. This ASU is effective for us beginning in fiscal 2012. The adoption of this ASU may expand the existing disclosure requirements, but we do not expect the adoption to have a significant effect on our consolidated financial statements. In December 2010, the FASB issued ASU No. 2010-28, "Intangibles - Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts - a consensus of the FASB Emerging Issues Task Force." This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts and it provides guidance on when Step 2 of the goodwill impairment test is required for those reporting units. This ASU is effective for us beginning in fiscal 2012. We do not expect the adoption of this ASU to have a significant effect on our consolidated financial statements. Outlook Although we experienced a declining trend in new orders during the first three quarters of fiscal 2011, new orders grew in the fourth quarter of fiscal 2011 over the preceding third quarter by 21 percent. All of the improvement in new orders came from the distribution channel as new orders were down from our OEM customers. A portion of the improvement in new orders was attributable to better-than-expected turns orders, which represent orders received with delivery requested in the same quarter. These short-term orders also came primarily from our distributors who saw resales of our products increase by approximately 16 percent in the fourth quarter over the previous third quarter. 46 -------------------------------------------------------------------------------- Table of Contents In light of the pending merger with TI, we are not providing guidance for net sales in the first quarter of fiscal 2012. We incurred approximately $14 million of expenses during the fourth quarter of fiscal 2011 that were attributable to the pending merger with TI. Most of these amounts are embedded within SG&A expenses. We anticipate that we will continue to incur merger-related expenses in the first quarter of fiscal 2012. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See information/discussion appearing under the subcaption "Financial Market Risks" of Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Form 10-K and the information appearing in Note 1, "Summary of Significant Accounting Policies," and Note 3, "Financial Instruments," in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. 47 -------------------------------------------------------------------------------- Table of Contents |