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Article by DailyStocks_admin    (09-25-08 04:04 AM)

The Daily Magic Formula Stock for 09/25/2008 is National Semiconductor Corp. According to the Magic Formula Investing Web Site, the ebit yield is 11% and the EBIT ROIC is 50-75 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Overview

We are one of the world's leading semiconductor companies focused on analog and mixed-signal integrated circuits. Founded in 1959, we design, develop, manufacture and market high-value, high-performance, analog-intensive solutions that provide more energy efficiency, greater portability, better audio, sharper images and higher performance in electronic systems. We have a diversified product portfolio which includes products such as power management circuits, audio and operational amplifiers, display drivers, communication interface products, and data conversion solutions. Our portfolio of over 13,000 products is sold to a diversified group of end-customers. Energy-efficiency is our overarching theme and our Powerwise® products enable systems that consume less power, extend battery life and generate less heat.

We benefit from an extensive intellectual property portfolio that includes more than 3,000 patents. We are focused on supporting the innovation needed for a strong new product development pipeline. For fiscal 2008, our net sales were $1.9 billion, our operating income was $509.1 million and our net income was $332.3 million.



A large portion of our sales come from analog products that are classified within the standard linear categories (as defined by the World Semiconductor Trade Statistics or WSTS). Standard linear products are defined by WSTS as amplifiers, data converters, regulators and references (power management), and interface products, representing the fundamental circuits that electronic systems need in order to deal with continuously varying signals of the real world, such as light, sound, pressure, temperature and speed. Within the standard linear analog market, our greatest strengths have historically been in the power management, amplifier, and interface areas. We focus on high performance opportunities within the standard linear market, as high performance integrated circuits both have the most stringent performance requirements, enabling us to add the most value to our customers, and tend to be more proprietary in nature, typically resulting in higher gross margins.



Approximately 98 percent of our revenue in fiscal 2008 was generated from analog-based products. Our operations are organized into two groups: the Power Management Group and the Signal Path Group. The Power Management Group is responsible primarily for designing and developing a wide range of integrated circuits that convert and regulate voltages to ensure that electronic systems operate to their fullest potential with the lowest overall power consumption or the highest energy efficiency. The Signal Path Group primarily supplies integrated circuits that handle the requisite analog technology for information or data as it travels from the point where it enters the electronic system, and is conditioned, converted and processed to the point where it is sent out. In addition to providing real world interfaces, these products are used extensively in signal conditioning, signal conversion (from analog to digital and vice versa) and high-speed interfacing applications.

National was incorporated in the state of Delaware in 1959 and our headquarters have been in Santa Clara, California since 1967. Our common stock is listed on the New York Stock Exchange under the trading symbol "NSM." Our fiscal year ends on the last Sunday of May and references in this document to fiscal 2008 refer to our fiscal year ended May 25, 2008. References to fiscal 2007 refer to our fiscal year ended May 27, 2007 and references to fiscal 2006 refer to our fiscal year ended May 28, 2006. Our fiscal 2008, 2007 and 2006 each were 52-week years. On our "Investor Relations" website, located at www.national.com, we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, our proxy statement and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. All of the filings on our website are available free of charge. We also maintain certain corporate governance documents on our website, including our Code of Conduct and Ethics, Governance Committee Charter, Compensation Committee Charter, Audit Committee Charter and other Governance Policies. We will provide a printed copy of any of these documents to any shareholder who requests it. We do not intend for information found on our website to be part of this document or part of any other report or filing with the SEC.



Recent Highlights

Throughout fiscal 2008, we continued to focus on analog product areas, particularly higher-performance, higher-value areas where we are able to leverage the increasing need for energy efficiency. As a part of our business focus, we periodically identify opportunities to improve our cost structure or to divest or reduce involvement in product areas that are not in line with our business objectives, as well as pursue acquisitions or business investments to gain access to key technologies that we believe augment our existing technical capability and support our business objectives. For example, in January 2008, we announced that we would dispose of certain manufacturing equipment and reduce the workforce at our wafer fabrication facilities as part of an action to modernize our facilities and rationalize our capacity. In April 2008, we announced a workforce reduction, primarily in product line and support functions, as part of our effort to strategically align resources in connection with our focus on accelerating revenue growth in key market areas that require better power management and energy efficiency.



In June 2007, our Board of Directors approved (i) a $1.5 billion accelerated stock repurchase program; and (ii) an additional $500 million stock repurchase program similar to our existing stock repurchase program announced in March 2007. We entered into two agreements with Goldman, Sachs & Co. (Goldman Sachs) to conduct the accelerated stock repurchase program. See Note 12 to the Consolidated Financial Statements for a more complete discussion of these agreements. We also entered into a $1.5 billion unsecured bridge credit facility with an affiliate of Goldman Sachs and used the funds to finance the accelerated stock repurchase. See Note 9 to the Consolidated Financial Statements for a more complete discussion of the credit facility which was subsequently repaid. The $1.5 billion accelerated stock repurchase program was completed in December 2007 with a total of 58.0 million shares repurchased.



In connection with the accelerated stock repurchase program, we completed a public offering of $1.0 billion of senior unsecured notes in June 2007. The net proceeds from this offering were used to partially repay indebtedness under the unsecured bridge credit facility used to finance the accelerated stock repurchase. In July 2007, we entered into a $500 million unsecured term loan with a consortium of banks and used the funds to repay the remaining amounts outstanding under the unsecured bridge credit facility. See Note 9 to the Consolidated Financial Statements for a more complete discussion of the senior unsecured notes and the bank term loan.



In addition to the accelerated stock repurchase program, we repurchased an additional 27.9 million shares of our common stock during fiscal 2008 for $623.5 million as part of two $500 million stock repurchase programs: (i) the $500 million stock repurchase program announced in March 2007 and (ii) the $500 million stock repurchase program announced in June 2007. All of these shares were repurchased in the open market. For all of fiscal 2008, we repurchased a total of 85.9 million shares of our common stock for $2,123.5 million through both the $1.5 billion accelerated stock repurchase program and the two $500 million stock repurchase programs.



We also continued our dividend program in fiscal 2008, during which time we paid a total of $50.6 million in cash dividends. Subsequent to fiscal year end, on June 3, 2008, our Board of Directors declared a cash dividend of $0.06 per outstanding share of common stock, which was paid on July 7, 2008 to shareholders of record at the close of business on June 16, 2008.

Products

Semiconductors are integrated circuits (in which a number of transistors and other elements are combined to form a more complicated circuit) or discrete devices (such as individual transistors). In an integrated circuit, various components are fabricated in a small area or “chip” of silicon, which is then encapsulated in plastic, ceramic or other advanced forms of packaging and can then be connected to a circuit board or substrate.



We manufacture an extensive range of analog intensive and mixed-signal integrated circuits, which are used in numerous applications. While no precise industry definition exists for analog and mixed-signal devices, we consider products which process analog information or convert analog-to-digital or digital-to-analog as analog and mixed-signal devices.



We are a leading supplier of analog and mixed-signal products, serving both broad based markets such as the industrial, communications, computing, consumer, medical and automotive markets, and more narrowly defined markets such as wireless handsets, displays, personal computers and communications infrastructure.

Other product offerings that are not analog or mixed-signal include microcontrollers and embedded Bluetooth TM solutions that collectively serve a wide variety of applications in the wireless, personal computer, industrial, automotive, consumer and communication markets.



Our diverse portfolio of intellectual property enables us to develop building block products, application-specific standard products and custom large-scale integrations for our customers. Our high-performance building blocks and application-specific standard products allow our customers to solve challenging technical problems and to differentiate their systems in a way that is beneficial to the end user.



With our leadership in innovative packaging and analog process technology, we can address growth opportunities that depend upon the critical elements of efficiency, physical size and performance. We directly service top tier original equipment manufacturers (OEMs) in a number of markets and we reach a broader range of customers through our franchised distributors.



Corporate Organization

During fiscal 2008, our business operations were organized in two groups: the Power Management Group and the Signal Path Group. Each group is responsible for various product line business units. Many of our products in each group are part of our Powerwise® portfolio of products, which are parts that are deemed to be highly energy efficient relative to the function they are performing.



Power Management Group

The Power Management Group includes four different business units in the power management area: Advanced Power, Infrastructure Power, Mobile Devices Power and Performance Power. The Power Management Group also contains the ASIC & Telecom business unit.



Power management refers to the conversion and management of power consumption in electronic systems. Integrated circuits such as digital processors, analog-to-digital converters and light emitting diodes each require different power sources to operate efficiently. Power management integrated circuits convert and regulate voltages to ensure that electronic systems operate to their fullest potential while achieving the lowest overall power consumption. Our high-performance power management portfolio provides valuable solutions to our customers to solve design problems in space and energy-constrained applications from feature-rich handheld devices to large line-powered systems. We are focusing efforts on developing power management circuits for energy conservation applications.

The four business units that address power management design, develop and manufacture a wide range of products including:






high-efficiency switching voltage regulators and controllers




high-performance low drop-out voltage regulators




accurate LED drivers




precision voltage references




battery management integrated circuits




Mobile Pixel Link (MPL) serial bridges




display drivers



We are growing our power management business by balancing our focus between broad customer needs and specific target markets. We continue to strengthen our broad portfolio of power management integrated circuits which can address customer needs in a variety of end markets such as consumer, industrial, medical, automotive and communications infrastructure. At the same time, we focus on markets, such as personal mobile devices, which can provide more rapid growth opportunities from customers that value the performance our products deliver, such as energy efficiency and size or heat reduction.



We continue to enhance the performance of power management building blocks in terms of providing greater efficiency, increased power density, tighter accuracy and wider voltage ranges. These building block products serve as the foundation for the development of highly integrated application-specific standard products for high volume applications.



The ASIC & Telecom business unit supplies user-designed application-specific products in the form of standard cells, gate arrays and full custom devices. This business unit also supplies key telecommunications components for analog and digital line cards, as well as 8-bit and 16-bit microcontrollers.



Signal Path Group

Key business units under the Signal Path Group include the Amplifiers, Audio, Data Conversion and Interface business units, as well as Hi-Rel operations. The signal path refers to the analog technology that is applied to the path that information or data travels along from the point where it enters the electronic equipment and is conditioned, converted and processed to the point where it is sent out. Our signal path products provide a vital technology link that allows the user to connect to digital information and are used to enable and enrich the user experience of sight and sound from many electronic applications. In addition to providing the real-world interfaces, signal path products are used extensively in signal conditioning, signal conversion (from analog-to-digital and vice versa) and high-speed signal interfacing applications.






The Signal Path Group designs, develops and manufactures a wide range of products including:






high-speed and precision operational amplifiers




high-fidelity, low-power audio amplifiers




high-speed and precision analog-to-digital converters and digital-to-analog converters




precision timing products




high-speed communication interface and signal-conditioning products




thermal management products



We are expanding our presence in key market segments by developing more high-performance analog products that can address applications in the consumer, industrial, medical, automotive and communications infrastructure markets. With our growing product portfolio of high-performance building blocks, we continue to improve performance by providing greater precision, higher speed and lower power which our customers value. These building block products serve as the starting point for the development of highly integrated application-specific standard products for high volume applications.



The Hi-Rel business unit of the Signal Path Group supplies integrated circuits and contract services to the high reliability market, which includes avionics, defense and aerospace customers.

CEO BACKGROUND

Brian L. Halla
61
Mr. Halla is the Chairman of the Board and Chief Executive Officer of National. From 1996 until the beginning of the 2006 fiscal year, he was also President of National. He came to National from LSI Logic Corporation where he was Executive Vice President of LSI Logic Products. He had also held positions at LSI Logic Corporation as Senior Vice President and General Manager, Microprocessor/DSP Products Group and Vice President and General Manager, Microprocessor Products Group. Prior to that, he was with Intel Corporation for 14 years, where his last position was Director of Marketing for Intel's Microcomputer Group. Mr. Halla is a director of Cisco Systems, Inc.

Steven R. Appleton
48
Mr. Appleton is the Chairman of the Board and Chief Executive Officer of Micron Technology, Inc. From 1994 until 2007, he also served as President of Micron. Micron is a leading worldwide provider of semiconductor memory solutions for computer and computer-peripheral manufacturing, consumer electronics, CAD/CAM, office automation, telecommunications, networking, data processing, and graphics display. Mr. Appleton is a director of Micron Technology, Inc.

Gary P. Arnold
66
Mr. Arnold was Chairman, President and Chief Executive Officer of Analogy, Inc., a supplier of product design and simulation software, from 1993 (appointed Chairman in 1994) until 2000. Prior to that, Mr. Arnold was Vice President and Chief Financial Officer of Tektronix, Inc. and had also served as Vice President, Finance and Chief Financial Officer of National from 1983 to 1990. Mr. Arnold has a CPA certification and a B.S. degree in accounting and is a graduate of the law school at the University of Tennessee. Mr. Arnold is a director of Orchids Paper Products Company, Gulfstream International Group, Inc. and the privately held Fab-Tech Incorporated.

Richard J. Danzig
63
Mr. Danzig is a Senior Fellow at the Center for Naval Analyses, a consultant to the U.S. government, a member of the Department of Homeland Security "Net Assessment" Panel on Bioterrorism, a director of the Center for New American Security, a member of the U.S. Military Southern Command Advisory Board, and a Senior Advisor at the Center for Strategic and International Studies. He served as Secretary of the Navy from November 1998 to January 2001 and was Undersecretary of the Navy from November 1993 to May 1997. In between, he was a Traveling Fellow in Asia and Europe for the Center of International Political Economy and an Adjunct Professor at Maxwell's School of Citizenship and Public Affairs. He previously served on our Board from 1987 to 1993 while he was a partner at the law firm of Latham & Watkins. Mr. Danzig is a graduate of Reed College and also has degrees from Yale Law School and from Oxford University, where he was a Rhodes Scholar. Mr. Danzig is a director of Human Genome Sciences, Inc. and the privately held Saffron Hill Ventures.

John T. Dickson
62
Mr. Dickson is the former President and Chief Executive Officer of Agere Systems, Inc., a position he held from August 2000 until October 2005. Prior to that, he held positions as the Executive Vice President and Chief Executive Officer of Lucent's Microelectronics and Communications Technologies Group; Vice President of AT&T Corporation's integrated circuit business unit; Chairman and Chief Executive Officer of Shographics, Inc.; and President and Chief Executive Officer of Headland Technology Inc. Mr. Dickson is a director of Mettler-Toledo International Inc., KLA-Tencor Corporation and the privately held Frontier Silicon, Ltd.


Robert J. Frankenberg
61
Mr. Frankenberg is the former Chairman and acting CEO of Kinzan, Inc. and previously held positions as President and CEO of Encanto Networks, Inc. and Chairman, President and Chief Executive Officer of Novell, Inc. He has been a management consultant with NetVentures since 1996. He has a degree in computer engineering from San Jose State University and is a SEP graduate of Stanford University's Graduate School of Business. Mr. Frankenberg is a director of Nuance Communications, Inc. and Secure Computing Corporation.

Modesto A. Maidique
68
Dr. Maidique has been President of Florida International University, a public research university with an enrollment of 38,000 students, since 1986. He has served on the faculties of Stanford University, Harvard University and the Massachusetts Institute of Technology. He was a co-founder of Analog Devices, Inc. and served as Vice President and General Manager of the Linear IC Division at Analog Devices. Dr. Maidique is a director of Carnival Corporation and Carnival PLC.

Edward R. McCracken
64
Mr. McCracken retired as Chairman and Chief Executive Officer of Silicon Graphics, Inc. in 1998. Silicon Graphics designs, manufactures and markets visual computer systems used for conceptual design, analysis and simulation. He was previously employed by Hewlett-Packard for 16 years. Mr. McCracken has an MBA from Stanford University.

MANAGEMENT DISCUSSION FROM LATEST 10K




Overview



Throughout fiscal 2008, we continued to focus on providing leading-edge analog solutions with a large portion of our sales classified within the analog standard linear categories, which the WSTS defines as amplifiers, data converters, regulators and references (power management products), and interface products. In fiscal 2008, approximately 98 percent of our total net sales came from our Analog segment, compared to approximately 95 percent in fiscal 2007 and approximately 89 percent in fiscal 2006. We believe that the success we have experienced in these markets has been driven by our understanding of the analog markets and our circuit design capabilities, 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 supply and logistics network.



Net sales in fiscal 2008 were lower than net sales in fiscal 2007. During the first half of fiscal 2008, we experienced sequential quarterly growth in sales for each of the first two quarters as demand for our new analog products increased, particularly in the wireless handset and personal mobile device markets. However, by the third quarter of fiscal 2008 our sales declined nearly 9 percent from the second quarter of fiscal 2008 due to a combination of lower demand in the wireless handset market and holiday seasonality. Net sales improved in the last quarter of fiscal 2008, as new orders increased sequentially by 12 percent over the third quarter of fiscal 2008.



Although net sales in fiscal 2008 were lower compared to fiscal 2007, our gross margin of 64.4 percent was higher than fiscal 2007 gross margin of 60.7 percent. Our performance in gross margin percentage is attributable to continuing improvement in manufacturing efficiencies and execution relative to the level of factory utilization, as well as

improvements in our sales mix of higher-value analog products. 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.



In reviewing our performance, we consider several key financial measures. When reviewing our net sales performance, we look at sales growth rates, 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 define new products as those introduced within the last three years. 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. We are focused on growing our 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.



We repurchased a total of 85.9 million shares of our common stock during fiscal 2008 for $2,123.5 million. Of these shares, 58.0 million shares were repurchased through the $1.5 billion accelerated stock repurchase program announced in June 2007. The other 27.9 million shares were repurchased in the open market for $623.5 million in connection with two $500 million stock repurchase programs, one announced in March 2007 and the other in June 2007. The stock repurchase activity is one element of our overall program to deliver a consistently high return on invested capital, which we believe improves shareholder value over time. See Note 12 to the Consolidated Financial Statements for a more complete discussion of the stock repurchase program and Note 9 to the Consolidated Financial Statements for a more complete discussion of the debt we incurred as part of the accelerated stock repurchase program.



We also continued with the dividend program in fiscal 2008, during which time we paid a total of $50.6 million in cash dividends. On June 3, 2008, our Board of Directors declared a cash dividend of $0.06 per outstanding share of common stock, which was paid on July 7, 2008 to shareholders of record at the close of business on June 16, 2008.

Net income for fiscal 2008 includes $27.2 million for severance and restructuring expenses related to a factory modernization effort announced in January 2008 and a workforce reduction announced in April 2008 (See Note 5 to the Consolidated Financial Statements). Net income for fiscal 2008 also includes a charge of $3.3 million related to settlement of a legal matter (See Note 14 to the Consolidated Financial Statements), a gain of $3.1 million from the sale of the Singapore plant assets (See Note 5 to the Consolidated Financial Statements) and other operating income of $0.6 million (See Note 3 to the Consolidated Financial Statements). These charges and credits are all pre-tax amounts. Income tax expense for fiscal 2008 includes $31.9 million of tax benefits that arose primarily from the resolution of international tax inquiries, the expiration of statute of limitations associated with international tax matters and costs related to the manufacturing restructure and workforce reduction actions.



Net income for fiscal 2007 included an in-process R&D charge of $6.1 million related to the acquisition of Xignal (See Note 6 to the Consolidated Financial Statements), severance and restructuring expenses of $4.6 million that mostly related to our Scotland and Texas manufacturing facilities (See Note 5 to the Consolidated Financial Statements) and other operating income of $2.8 million (See Note 3 to the Consolidated Financial Statements). These charges and credits are all pre-tax amounts. Income tax expense for fiscal 2007 included a tax benefit of approximately $18.5 million from the retroactive reinstatement to January 1, 2006 of the U.S. federal R&D tax credit under the Tax Relief and Health Care Act of 2006 enacted into law during fiscal 2007. Of the $18.5 million, $12.4 million was related to fiscal 2007 R&D expenses and $6.1 million was related to fiscal 2006 R&D expenses. The tax benefit from the federal R&D tax credit was partially offset by the non-deductible nature of the in-process R&D charge related to the Xignal acquisition.



Net income for fiscal 2006 included a net charge of $33.7 million for severance and restructuring expenses arising from cost reduction actions taken during the year (See Note 5 to the Consolidated Financial Statements), goodwill impairment losses of $7.6 million (See Note 7 to the Consolidated Financial Statements), gain from sale of businesses of $28.9 million (See Note 5 to the Consolidated Financial Statements) and other operating income of $5.7 million (See Note 3 to the Consolidated Financial Statements). All of these charges and credits are pre-tax amounts. Income tax expense for fiscal 2006 included $24.5 million of tax expense related to the repatriation of accumulated foreign earnings under provisions of the American Jobs Creation Act of 2004.

Although net sales for the company in total were lower in fiscal 2008 compared to fiscal 2007, net sales for our Analog segment in fiscal 2008 were slightly higher than in fiscal 2007 due to increased sales for new analog products, primarily in the wireless handset and personal mobile device markets where we have experienced growth associated with feature-rich devices that utilize our analog solutions to enable features as well as enhance power efficiency and battery life. Unit shipments of Analog segment products were 2 percent lower in fiscal 2008 compared to fiscal 2007, but this decline in volume was favorably offset by higher blended-average selling prices that increased 3 percent in fiscal 2008 over fiscal 2007. The increase in blended-average selling prices was driven mainly by improved sales mix from higher-value analog products.



Within the Analog segment, net sales from our power management business units in fiscal 2008 grew 8 percent compared to fiscal 2007. Net sales from our amplifiers business units (including audio amplifier products) in fiscal 2008 also grew 7 percent compared to fiscal 2007. However, net sales from our interface and data conversion business units decreased in fiscal 2008 by 14 percent and 6 percent, respectively, compared to fiscal 2007.



The decline in net sales in fiscal 2008 compared to fiscal 2007 for other operating business units included in the category described as “All Others” was primarily driven by a significant decrease in foundry sales associated with previously sold businesses. This decline was consistent with our original plans and expectations.



For fiscal 2008, net sales in our geographic regions compared to fiscal 2007 decreased by 10 percent in the Americas and 8 percent in Japan, while remaining relatively flat in the Asia Pacific region and increasing by 3 percent in Europe. Regional sales as a percentage of total net sales in fiscal 2008 compared to fiscal 2007 were higher in the Asia Pacific region at 47 percent and Europe at 22 percent, while dropping to 20 percent in the Americas and 11 percent in Japan. The reported amount of net sales in U.S. dollars related to foreign currency-denominated sales in fiscal 2008 was favorably affected by foreign currency exchange rate fluctuations as the pound sterling, euro and Japanese yen all strengthened over the fiscal year against the dollar. However, the effect of currency exchange rate fluctuations on net sales reported in U.S. dollars was minimal since less than a quarter 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 in fiscal 2007 in total were lower than sales in fiscal 2006 due to lower shipments to distributors, who reduced their inventories during the year, and lower demand from customers, who were also affected by oversupply of inventory, as well as decelerating growth rates in end demand. Unit shipments in our Analog segment were lower by 16 percent in fiscal 2007 compared to fiscal 2006. Notwithstanding the lower volume, blended-average selling prices increased 13 percent in fiscal 2007 compared to fiscal 2006, driven mainly by improved sales mix from our analog standard linear product portfolio.



Comparing Analog segment sales in fiscal 2007 with those in fiscal 2006, net sales from our data conversion business unit grew 6 percent, which was more than offset by a decrease of 11 percent in net sales from the amplifiers business unit (including audio amplifier products) and a decrease of 23 percent in net sales from the interface business unit. During this period, sales from our power management business units were relatively flat.



For the other operating business units included in the “All Others” category, the decrease in net sales in fiscal 2007 compared to fiscal 2006 was primarily driven by a significant decline in foundry sales associated with previously sold businesses.



For fiscal 2007, net sales in our geographic regions compared to fiscal 2006 declined by 22 percent in Japan and 16 percent in the Asia Pacific region, while remaining fairly flat in the Americas and increasing by 2 percent in Europe. Regional sales as a percentage of total net sales in fiscal 2007 compared to fiscal 2006 were higher in the Americas at 22 percent and in Europe at 21 percent, while dropping to 46 percent in the Asia Pacific region and 11 percent in Japan. The reported amount of net sales in U.S. dollars related to foreign currency-denominated sales in fiscal 2007 was favorably affected by foreign currency exchange rate fluctuations in euro and pound sterling which strengthened over the fiscal year against the dollar and more than offset the unfavorable effect of the Japanese yen as it weakened over the fiscal year against the dollar. However, the effect of currency exchange rate fluctuations on net sales reported in U.S. dollars was minimal since less than a quarter of our total net sales in fiscal 2007 were denominated in foreign currency and we had hedging programs intended to minimize the effect of currency exchange rate fluctuations.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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 analog and mixed-signal solutions. We are focused on the following:




continuing to build our portfolio of high-performance, analog-intensive solutions that enable customers to effectively differentiate their products;




targeting our investments on high-growth and high-return markets, particularly by leveraging our strengths in creating energy efficient circuits and solutions, many of which will fall under our Powerwise TM brand;




strengthening and deepening our relationships with customers;




using our proprietary technologies to create and maintain high barriers to entry for our solutions; and




delivering superior returns on invested capital to our shareholders.



A large portion of our sales comes from analog products that are classified within the standard linear categories (as defined by the World Semiconductor Trade Statistics or WSTS). Beyond the standard linear categories, we also sell analog systems and subsystems that can be more specifically targeted at various applications. We look to create analog-intensive solutions that provide more energy efficiency, portability, better audio, sharper images and higher performance in electronic systems, with energy efficiency currently a particular focus. Our leading-edge products include power management circuits, audio and operational amplifiers, display drivers, communication interface products and data conversion solutions. Approximately 98 percent of our sales in the first nine months of fiscal 2008 was generated from Analog segment sales, compared to approximately 94 percent in the first nine months of fiscal 2007. For more information on our business, see Part I, Item 1, Business, in our Annual Report on Form 10-K for the fiscal year ended May 27, 2007.

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:






1.


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 54 percent of our semiconductor product sales were made to distributors in both the first nine months of fiscal 2008 and the first nine months of fiscal 2007. 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. 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 estimates are reasonable. However, different judgments or estimates could result in variances that might be significant to reported 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 $1.1 million in the first nine months of fiscal 2008 and $1.7 million in the first nine months of fiscal 2007.



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 $1.3 million in the first nine months of fiscal 2008 and $2.3 million in the first nine months of fiscal 2007. 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.






2.


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 net of any reductions we have recorded to reflect the 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.






3.


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 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:




significant decrease in the market value of an asset;




significant changes in the extent or manner for which the asset is being used or in its physical condition;




significant change, delay or departure in our business strategy related to the asset;




significant negative changes in the business climate, industry or economic conditions; and




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 the estimated future undiscounted net cash flows are 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.



Our impairment evaluation of goodwill is based on comparing the fair value to the carrying value of our reporting units with goodwill. Our reporting units are based on our operating segments as defined under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” 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 February 24, 2008 our reporting units with goodwill include our advanced power, ASIC & telecom, data conversion, displays, high voltage, interface, ISP, non-audio amplifier and portable core business units, which are operating segments within our Analog reportable segment. 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.






4.


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 Malaysia, as we have concluded that a significant portion of the deferred tax assets will not be realized due to the uncertainty of sufficient taxable income in Malaysia beyond the foreseeable future. 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; 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 FIN 48, which we adopted at the beginning of fiscal 2008, provides further clarification on the accounting for uncertainty in income taxes recognized in the financial statements, the new threshold and measurement attribute prescribed by FIN 48 will continue to require significant judgment by management. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on income tax expense.






5.


Share-Based Compensation

We measure and record compensation expense for all share-based payment awards based on estimated fair values in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment.” 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. In determining fair value using the Black-Scholes option pricing model, 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. When we began to record compensation expense for share-based payment awards at the beginning of fiscal 2007, we used the simplified method specified by the SEC’s Staff Accounting Bulletin No. 107 to determine the expected life of stock options. 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. 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 computation of fair value would also increase, thereby resulting in higher compensation costs being recorded.



SFAS No. 123(R) also requires forfeitures to be estimated 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 also grant performance share units to executive officers that require us to estimate expected achievement of performance targets over a two-year performance period. This estimate involves judgment regarding future expectations of various financial performance measures such as those described in the overview section below. If our estimate of the level of financial performance measures expected to be ultimately achieved changes, the related share-based compensation expense may be significantly increased or reduced in the period that our estimate changes.

Overview

We continue to focus on providing leading-edge analog solutions with a large portion of our sales classified within the analog standard linear categories, which the WSTS defines as amplifiers, data converters, regulators and references (power management products), and interface products. In the first nine months of fiscal 2008, approximately 98 percent of our total sales came from our Analog segment, compared to 94 percent in the first nine months of fiscal 2007. We believe that the success we have experienced in these markets has been driven by our understanding of the analog markets and our circuit design capabilities, especially as it pertains 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 supply and logistics network.



Although higher sales in the third quarter of fiscal 2008 compared to sales in the third quarter of fiscal 2007 contributed to higher gross margin percentage in the third quarter of fiscal 2008, we also achieved a higher gross margin percentage on lower sales in the first nine months of fiscal 2008 compared to the first nine months of fiscal 2007. Gross margin of 64.3 percent in the third quarter of fiscal 2008 remained very close to gross margin of 64.4 percent in the second quarter of fiscal 2008 even though sales were down approximately 9 percent sequentially as our business was affected by lower-than-expected shipments into the wireless handset and personal mobile device markets. Our performance in gross margin percentage is attributable to continuing improvement in our sales mix of higher-value analog products, as well as improvements in manufacturing execution and efficiencies relative to the level of factory utilization. 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.



In reviewing our performance, we consider several key financial measures. When reviewing our net sales performance, we look at sales growth rates, 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 in the analog standard linear category as defined by WSTS. We define new products as those introduced within the last three years. 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. We are focused on growing our 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.



We continued our stock repurchase activity during the third quarter of fiscal 2008 by repurchasing a total of 5.6 million shares of our common stock in the quarter for $119.7 million as part of two $500 million stock repurchase programs, one announced in March 2007 and the other in June 2007. All of these shares were purchased in the open market. In addition, we received final delivery of an additional 7.2 million shares of our common stock upon the completion in December 2007 of the transactions under the $1.5 billion accelerated stock repurchase program announced in June 2007. For the first nine months of fiscal 2008 we have repurchased a total of 74.2 million shares of our common stock for $1,899.8 million through both the $1.5 billion accelerated stock repurchase program and the two $500 million stock repurchase programs. The stock repurchase activity is one element of our overall program to deliver a consistently high return on invested capital, which we believe improves shareholder value over time. See Note 9 to the Condensed Consolidated Financial Statements for a more complete discussion of the stock repurchase program. See also Note 6 to the Condensed Consolidated Financial Statements for a more complete discussion of the debt we undertook as part of the accelerated stock repurchase program.



We also continued with the dividend program in the third quarter of fiscal 2008 during which time we paid a total of $14.9 million in cash dividends ($0.06 per outstanding share of common stock). Through the first nine months of fiscal 2008, we have paid a total of $36.2 million in cash dividends. On March 6, 2008, our Board of Directors declared a cash dividend of $0.06 per outstanding share of common stock. This cash dividend will be paid on April 7, 2008 to shareholders of record at the close of business on March 17, 2008.

Net income for the third quarter of fiscal 2008 includes a charge of $19.6 million for severance and restructuring expenses related to a factory modernization effort announced in January 2008 (See Note 4 to the Condensed Consolidated Financial Statements) and other operating expenses of $0.4 million (See Note 2 to the Condensed Consolidated Financial Statements). In addition, net income for the third quarter of fiscal 2008 includes $12.4 million of discrete tax benefits that were recognized in the quarter. In addition to these amounts, net income for the first nine months of fiscal 2008 includes a charge of $3.3 million related to settlement of a legal matter, a gain of $3.1 million from the sale of the Singapore plant assets, a recovery of $1.5 million arising from the release of a restructuring-related accrual (See Note 4 to the Condensed Consolidated Financial Statements) and an additional $0.6 million of other operating income (See Note 2 to the Condensed Consolidated Financial Statements). Net income for the third quarter of fiscal 2007 included a $6.1 million charge for in-process research and development related to the acquisition of Xignal Technologies AG and other operating income of $0.2 million (See Note 2 to the Condensed Consolidated Financial Statements). In addition to these amounts, net income for the first nine months of fiscal 2007 included a charge of $4.0 million related to severance and restructuring expenses plus an additional $2.0 million of other operating income (See Note 2 to the Condensed Consolidated Financial Statements). Aside from the discrete tax benefits, all of the charges and credits described above are pretax amounts.

Share-Based Compensation Expense

Beginning in fiscal 2007, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards based on estimated fair values. Our operating results include the recognition of share-based compensation expense, which totaled $22.4 million in the third quarter of fiscal 2008 compared to $29.5 million in the third quarter of fiscal 2007. In the first nine months of fiscal 2008, share-based compensation expense was $70.0 million compared to $86.6 million in the first nine months of fiscal 2007. 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. For further detail and a description of these plans, see Note 13 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended May 27, 2007. See also Note 1 and Note 10 to the Condensed Consolidated Financial Statements in this Form 10-Q for additional discussion of and updates regarding our share-based compensation plans and the effect of share-based compensation expense for the third quarter and first nine months of fiscal 2008 and 2007.

The chart above and the following discussion are based on our reportable segments described in Note 15 to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended May 27, 2007 and Note 11 to the Condensed Consolidated Financial Statements included in this Form 10-Q.



The increase in Analog segment sales in the third quarter and first nine months of fiscal 2008, compared to the third quarter and first nine months of fiscal 2007, reflects increased sales since a year ago for new analog products, primarily in the wireless handset and personal mobile device markets where we have experienced growth due to feature-rich devices that utilize our analog solutions to enable features as well as enhance power efficiency and battery life. Analog segment unit shipments were slightly higher by 1 percent in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007, but decreased 3 percent in the first nine months of fiscal 2008 compared to the first nine months of fiscal 2007. Analog segment blended-average selling prices increased 5 percent in the third quarter and 3 percent in the first nine months of fiscal 2008 over the corresponding periods of fiscal 2007, driven mainly by improved sales mix from higher-value analog products.



Within the Analog segment, sales from our amplifiers business units (including audio amplifier products) in fiscal 2008 grew 5 percent in the third quarter and 11 percent in the first nine months of fiscal 2008 compared to the corresponding periods of fiscal 2007. Sales from our power management business units were also up by 3 percent in the third quarter and 1 percent in the first nine months of fiscal 2008 compared to the corresponding periods of fiscal 2007. In addition, sales from our interface and data conversion business units increased in the third quarter of fiscal 2008 by 8 percent and 3 percent, respectively, but sales decreased in the first nine months of fiscal 2008 by 12 percent and 8 percent, respectively, compared to the corresponding periods of fiscal 2007.



Although sales for other operating business units included in the category described as “All Others,” were slightly higher in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007, sales were lower in the first nine months of fiscal 2008 compared to the first nine months of fiscal 2007 primarily due to a decline in foundry sales related to businesses that had been previously sold.

Although we have continued to increase our investment in research and development on analog product areas, research and development expenses were lower in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007, mainly due to a decrease in share-based compensation expense. There was also a drop in spending for non-analog products that was not completely offset by increased spending in analog product areas. Nevertheless, R&D expenses were higher in the first nine months of fiscal 2008 compared to the first nine months of fiscal 2007. The increase reflects higher spending associated with the acquisition of Xignal Technologies AG in January 2007, as well as higher payroll and employee benefit expenses. Share-based compensation expense included in R&D expense for fiscal 2008 was $6.6 million in the third quarter and $21.3 million in the first nine months compared to fiscal 2007 which was $8.4 million in the third quarter and $24.7 million in the first nine months. We are continuing to concentrate our research and development spending on analog products and underlying analog capabilities such as DC to DC power conversion, signal conditioning, high-speed amplification and low-power analog-to-digital conversion. During the first nine months of fiscal 2008, research and development spending in the Analog segment was 2 percent higher compared to the first nine months of fiscal 2007 and 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, flat-panel displays, communications infrastructure, industrial and medical. A significant portion of our research and development is directed at power management technology.

Selling, general and administrative expenses in the third quarter of fiscal 2008 include a $5.4 million credit that represents a reduction in the liability for the employee deferred compensation plan due to the decline in the market value of the corresponding investment assets for the plan. Until recently, the effect from a change in the market value of these same investment assets has not been significant. Excluding the effect of this credit, SG&A expenses were higher in the third quarter and first nine months of fiscal 2008 compared to the third quarter and first nine months of fiscal 2007. The increase was primarily due to higher payroll and employee benefit expenses, which more than offset a decrease in share-based compensation expense. Share-based compensation expense for fiscal 2008 included in SG&A expenses was $10.6 million in the third quarter and $33.1 million in the first nine months compared to fiscal 2007 which was $14.6 million in third quarter and $46.3 million in the first nine months. We focus on managing our cost structure, including SG&A expenses, in line with our overall business model objectives, as well as current business conditions.

Severance and Restructuring Expenses

In January 2008, we announced that we would dispose of certain manufacturing equipment and reduce the workforce at our wafer fabrication facilities as part of an action to modernize our facilities and rationalize our capacity. In connection with this action, we eliminated approximately 200 positions, primarily at our manufacturing plants located in Arlington, Texas; South Portland, Maine; and Greenock, Scotland. As a result, we recorded a charge of $19.6 million for severance and restructuring expenses in the third quarter of fiscal 2008. Severance and restructuring expenses for the first nine months of fiscal 2008 also include a recovery of $1.5 million for the release of the residual accrued balance of a settled lease obligation. See Note 4 to the Condensed Consolidated Financial Statements for a more complete discussion.

CONF CALL

Mark Veeh

I’d like to welcome everyone to National Semiconductor’s first quarter fiscal year 2009 earnings call. Joining me on the call today are Brian Halla, Chairman and Chief Executive Officer, Lewis Chew, Chief Financial Officer, and Don Macleod, President and Chief Operating Officer. In today’s call I will provide a recap of the first quarter financial results, Brian Halla will give an overview of the business environment and an update on the company’s focus and priorities going forward, Lewis Chew will expand on the first quarter results and provide the background to our outlook for the second quarter of fiscal year 2009, and lastly, Don Macleod will then discuss market trends and products in more detail. We will then take questions until approximately 9:30 a.m. Pacific Daylight Time.

As a reminder, this call will contain forward-looking statements that involve risk factors that could National’s results to differ materially from management’s current expectations. You should review the Safe Harbor statement contained in the press release published today as well as our most recent SEC filings for a complete description of those risks.

Also in compliance with SEC Regulation FD, this call is being broadcast live over our Investor Relations website. For those of you who have missed the press release or would like a replay of the call, you can find it on National’s IR website at www.national.com.

Now moving on to our first quarter results. Sales were $465.6 million, up 1% from $462 million in Q4 fiscal year 2008 and down 1% from $471.5 million in last year’s first quarter. Gross margins in Q1 of 66% set another company record up from 65.9% in the prior quarter and 63% in last year’s first quarter. Operating expenses in the first quarter were $171.4 million. Severances and restructuring was $1.1 million in connection with our previously announced actions. Net interest expense was $14.5 million and the effective tax rate for the quarter was 32.3%. As a result, National posted GAAP net earnings of $79.6 million or $0.33 per diluted share in Q1 fiscal year 2009. The fully diluted share count for the first quarter was 241.3 million shares.

So before I turn it over to Brian, there are a couple of administrative items that I would like to highlight.

First I’d like to inform everyone of our joint upcoming annual shareholders meeting and analyst day which will be held at the American Conference Center in New York on Thursday, September 25, at 10:00 a.m. Eastern Time. We will have the formal annual meeting of stockholders immediately held by the analyst meeting. Please visit National’s IR website for more information on these events.

Second of all, we will be holding our Q2 earnings call on Monday, December 8, 2008 instead of Thursday, December 4. The reason for the change is that the company will lose two working days the first week of the quarter as we will be closed to observe the Thanksgiving holiday.

And lastly, approximately every six years we must add an additional week to our fiscal year to end on the last Sunday in May. As a result, this year we will be adding one additional week to our third quarter of fiscal year 2009 or our February ending quarter.

With that I will now turn it over to Brian.

Brian L. Halla

Actually business is reasonable. Revenues came in at $465.6 million and gross margins at 66%, another historic time. Earnings per share came in at $0.33 which includes a minor restructuring charge. Bookings were down after some up quarter trimming but the opening backlog is up. So with expectations for reasonable turns, we’re comfortable guiding a $470 million to $480 million kind of number, 1% to 3% growth for another reasonable quarter.

Over the last several days I’ve been scratching my head sifting through all the data and events of these times trying to prepare for this call. Quite a few of you listening to the call probably look at National Semiconductor as somewhat of an industry bellwether or industry proxy that can hopefully shed some light on where we are in the cycle and how close we are to the next upturn. Most of you are also interested in what’s happening in the handset market and since about a third of our revenues come from that segment and since our top customers are all the leaders in that market, you’re justified in thinking that these guys ought to have some reasonable level of visibility. And some of you are on this call to track the progress of National Semiconductor, specifically “How is business?” “Have you hit the limits of your gross margin pursuits?” “Are the other guys gaining market share at your expense?” “And now that you’ve cleared the decks of the non-analog businesses, when can we expect to return to growth?”

All these are valid questions and all deserve our most thoughtful and insightful response. As to the National specific questions, I’ll do my best to construct a framework of our direction strategy and philosophy and then I’ll let Lewis and Donnie provide more of the drywall, stucco and landscaping.

As to asking us to be a proxy for the analog semiconductor industry or worse, for the whole semiconductor industry, let me offer up that I hope we can become more of a standout as we aggressively pursue markets arising out of the new megatrends with technology born out of collaboration across our product lines and underscored by our leadership and power management allowing us to consistently offer high performance at the lowest power consuming circuits. We believe this direction sets us apart from the peer group and we’re already beginning to see positive results. So while I’d be naïve to think that I could dissuade you from using us as somewhat of a bellwether, I would at least ask you to listen to our report card and see if there might be a contrast or two compared with the other analog companies.

National just completed its fifth consecutive fiscal year of ROIC or return on invested capital of over 20%, 23% as we head into 09. National today announced record gross margins of 66%. Our ASPs again saw yearly growth at +4% though I’ll grant you we’re coming from relatively low historic numbers.

Our manufacturing organization continues to reduce costs despite the low utilization rates and continues to win accolades from our customers as being head and shoulders above the rest. We’re a clear leader according to the SIAWSTS and others in the area of power management now at about half of our revenues. By the way being a leader in power efficient circuits and a world hurtling towards a global energy crisis gives us a unique opportunity to help solve the corresponding problems.

You’re still waiting for the answer to “Where’s the growth?” As part of our heritage of power management optimized processes, tools and circuits, we’ve developed a bunch of products optimized to work together for the most power efficient customer systems which we’ve grouped in a category called PowerWise. Over 300 power efficient circuits including amplifiers, data converters, regulators, references and simple switches have been optimized to work together to maximize power efficiency at a system level. And we provide a web based family of tools to help our customers design those systems.

With an eye toward looking ahead to tomorrow’s demanding growth drivers, we focused our company to attack these new markets and provide the early solutions driven by these new megatrends. Our increasing emphasis and larger percentage of new investments will be made more and more in key market segments or KMSs. Examples of today’s KMSs include healthcare, security, sensing and detection, personal mobile devices, and of course alternate energy sources.

Our first entry into this latter exciting market was launched last quarter. We call it SolarMagic, named by the way by one of our first prospects to see the demo. It’s a technology that’s panel agnostic; that is, it works with silicon, crystalline, and thin film panel technologies. It’s a device that bolts on to solar panels that restores power lost as a result of clouds going over, shade from trees or chimneys, bird droppings and even non-uniformity of glass. Field trial results showed that our technology SolarMagic can restore up to 40% to 50% of the power lost due to interference such as shade and can restore on average 10% to 20% of the power lost during a typical day.

Of course we face some interesting new challenges in this new market selling a module versus a chip. UL certification I guess is bad form if someone’s roof catches on fire, channels different than our traditional distributors, different trade show venues, etc. But everyone here is having a lot of fun with this product line. We’ll keep you posted here as we get closer to the rollout pending the various certifications.

“So Brian, does everything you’ve said here so far mean that you’re leaving the date that brought you to the party, the cell phone market, to strike out for bigger and better things, among them growth and profit?” Nope. Our date will be well attended as we still do 1/3 of our revenues in that space. The beauty here is that our growth in that space comes from the high end fully featured Smart Phones like the 3Gi phone and many of the new Rim Blackberry offerings.

Without going into detail, there’s some cool stuff on the horizon. By the way, we saw 14% year-on-year growth in our comms infrastructure business, a good portion of which was driven from the emerging markets like China and India putting in their GSM and Edge infrastructure. We believe that other exciting growth opportunities will come from the alternate lighting solutions like LEDs or lightomini diodes. In fact we’ve already seen more than 60 design wins in China alone for street lighting applications. Additionally, power efficient portable health care devices will begin to come on the market given what we’ve been seeing from a design perspective. Lowering health care costs through what we call distributed medical treatment will drive large volumes in that business and become an excellent example of what we call the quality of life megatrends.

Environmental and other sensing and detecting applications will provide not only health benefits but will find applications in security and surveillance systems such as gunshot and glass breaking detection and cargo container monitoring, and we’ll be rolling out future generations of our SolarMagic technology including technology designed to maximize mileage on electric vehicles.

So business is okay especially given the environment. Starting with a higher backlog and a reasonable expectation for turns gives us a chance to grow again in the quarter, not only growth in revenue but our plan in the short term is for continued growth in ASPs, gross margins and operating margins. And beyond the quarter and farther out we’ll look for growth in the new key market segments as those materialize.

Over to you Lewis.

Lewis Chew

Here are the items I’ll cover in my segment of the call today. I’ll talk about bookings and turns orders heading into Q2 and as part of that I’ll go over what we saw in the distribution channel in terms of resale rates and inventory levels as well as opening backlog. I’ll discuss our gross margin trends and what things were driving in that area right now, and I’ll go over the outlook for the various line items in our P&L for Q2 and explain the key drivers that impact our operating expenses as they transition from Q1 to Q2. Then I’ll make a couple of comments about the balance sheet and key operating measures before I turn it over to Don.

As I often do, let me start by looking back before I look forward. At the beginning of this quarter just completed, what did we say about our guidance and what assumptions did we bake into those estimates. And how did the quarter play out compared to those original assumptions and projections? We had originally guided Q1 revenue to a range of $460 million to $475 million and what I said was that we expected distributor resales to be seasonally down and OEM activity to be slightly up. I also said that turns would probably be sequentially down and that the high end of our revenue range would require the same level of turns as Q4.

So, during Q1 distributor resales were in fact seasonally down and as a result our turns orders were down quarter-on-quarter. Distributor inventory dollars were up very slightly for the quarter while weeks of inventory ended the quarter at around 9.5 weeks. From a geographical perspective, just the inventory weeks were down in Asia Pacific while they were flat in the Americas and up in Europe.

With respect to the overall order patterns during Q1, our bookings were down in June compared to May; then they increased modestly in July and August such that the weekly run rate of bookings was about the same in the last two months of this quarter. Overall bookings for the quarter were down about 7%. Some of this was in the form of lower turns orders which I already discussed above. Also, we truncated some longer dated backlog in our Japan region so that the aging profile would be more consistent with the other regions. Notwithstanding the overall bookings decline, our opening 13-week backlog for Q2 was higher compared to what it was at the beginning of Q1.

Going forward into the November quarter, we do expect a seasonal uptick in billed activity in our customer base. How much of an increase is really the question of the day. At this time we are assuming a modest increase that is probably slightly less than what you might consider to be normal seasonality. Based on the inputs we’ve received from our distributors we also expect that distributor resales will increase modestly, but at this point we are assuming that distributors will not be increasing their inventory levels during the quarter.

Factoring in the business elements I just went over, the second quarter revenue range we are guiding to as Brian said is $470 million to $480 million.

I will now move on to gross margin. In Q1 our gross margin of 66% was up from what we had in Q4 and was at the high end of what we had originally anticipated. The positive gross margin was due to a combination of better product mix along with improvement in manufacturing performance that was driven by the actions that we launched a couple of quarters ago. Our fab utilization in Q1 was essentially unchanged at approximately 70% and our internal inventories also remained flat in Q1 compared to Q4.

In Q2 gross margin is expected to increase slightly within the range up to 66.5%. This improvement will be driven mainly by better net manufacturing costs as we expect to hold our fab utilization percentage relatively steady.

Let me shift over now to discuss operating expenses. First, an overall comment. As we transition from Q1 to Q2 we will see a net increase in overall operating expenses. This increase in operating expenses is almost entirely due to (a) the focal salary increases that go into effect at the beginning of Q2 which is the same pattern we’ve had in past years and (b) a seasonal spike in stock compensation expense that always comes in Q2. This spike in Q2 is due to the accounting treatment of stock-based grants made to employees who are eligible for retirement and since we make our broad employee grants each year in the latter part of July, we get a spike in stock expense in Q2 with a subsequent drop-off in Q3 and Q4. This is the same pattern we have seen in each of the last two years since we started accounting for options, etc. under FAS B123R.

In Q2 R&D expense is expected to range from $91 million to $94 million. SG&A expense is projected to range from $87 million to $89 million in Q2. Other income and expense is expected to be around $1 million of expense. Net interest expense which factors in both interest income and interest expense is projected to be $14 million to $15 million of expenses which is relatively consistent with what we saw in Q1.

Included in the Q2 gross margin and operating expense estimates I just provided are approximately $25 million of total stock compensation expenses which can be broken down by category as follows: Cost of sales about $4 million, R&D $8 million, and SG&A about $13 million. And finally, the Q2 effective tax rate should range from 30% to 32%. I should note that the Q1 tax rate of 32.3% was a little higher than projected due to some discreet expense related to foreign taxes that we wouldn’t expect to see every quarter.

Let’s move on to the balance sheet. Our capital expenditures in Q1 were about $22 million. In Q2 we anticipate that capital spending will run between $30 million to $35 million. Our days of inventory at the end of Q1 was about 86 days, the same as it was last quarter. Our days of receivables at the end of Q1 was around 31 days, which was very good and at the low end of the range we typically like to see. By the way, the 27 days we achieved last quarter was due to stronger-than-usual collections at the end of the quarter. Our cash reserves ended Q1 at about $693 million compared to $736 million in Q4. We bought back $105 million of stock or roughly 5 million shares during the quarter, and going into Q2 we still have about $150 million of available buy-back authorization remaining.

Operating margin in Q1 was about 29% which is consistent with what we achieved in Q4 and return on invested capital was about 23% in Q1. Both of these measures include the impact of stock compensation expense.

As we focus on growing the top line, our business model continues to have good leverage opportunity to the bottom line. I mentioned earlier that our fab utilization is only around 70%. We can achieve higher gross margin with higher utilization. Also, our product mix keeps getting better over time which also has a positive impact on margins. And we will continue to manage our core operating expenses tightly in this current environment. Ultimately, the objective over time of course is to translate top line growth into even higher EPS growth.

With that let me turn it over to Don Macleod.

Donald Macleod

Let me now briefly cover some of the trends we saw in the quarter in our key markets and product areas. But I’d like to spend most of my time highlighting where we see opportunities to grow our top line in short to medium term.

So first, what did we see in our key markets? Sales to our largest market, mobile phones and other personal mobile devices, which accounted for about a third of our sales in the quarter grew between 3% and 4% sequentially and a similar percentage year-on-year. Growth for us mainly came from shipments to customers launching or ramping new Smart Phones in the quarter. Based on current backlog from our mobile phone customers we also expect to see this market place represent most of our sequential revenue growth in the second quarter.

Sales to communications and networking customers also held up in the first quarter at the same improved rate that we saw in the fourth quarter. Year sales went up about 14% on last year’s first quarter as we continue to grow our business with China based wireless infrastructure customers and GSM Edge infrastructure builds in China and India. This communications and networking sector accounted for just over 10% of our sales in the quarter.

From a product perspective using SIAWSTS industry product definitions, our largest product area power management at 47% of our sales was flat sequentially. Amplifier sales were down about 5% sequentially at 23% of our sales. Interface sales grew over 30% sequentially and accounted for 11% of our sales. Data converters were down about 4% sequentially at 5% of our sales.

As I discussed earlier product selling into the mobile phone and other personal mobile devices area showed growth while slower sales to our distributors over the summer quarter impacted sales of our product analog building block portfolio.

So enough about this quarter. Let me now move on to discuss the products and market areas where we see revenue growth opportunities as we look ahead to calendar year 09 and beyond.

Our power management capability is our crown jewel and this product category represents nearly half of our sales today. Our new national three point repositioning initiative launched just one year ago, we’ve built on this with our PowerWise theme with energy and power efficiency as the cornerstone of our product and system level offerings going forward. We want to be viewed by our customers as the experts in power and energy efficient solutions for their systems. This includes energy generation, energy conservation and energy storage applications all macro growth trend themes whether National Semiconductor’s enabling them or not.

The fast growing LED lighting area is an example of a market that can benefit from our new PowerWise system level energy conservation in power management. As I mentioned in our last quarter’s earnings call we’re allocating more of our R&D investments in this area. We actually reassigned two of our design centers to this new initiative in our May quarter. Last fiscal year we started addressing this LED lighting space by initially repositioning some of our existing voltage regulators as constant current drivers for LEDs. We followed this with higher voltage products from our proprietary ABCD fab processors that for example allowed us to drive longer strings of LEDs. Two of these products are incidentally shipping in the Mac Book Pro 15” and 17” Notebook PCs where they drive the display LEDs with much better lighting uniformity and increased dimming range than the older CCFL backlight LCD technologies.

Beyond these constant current drivers we recently introduced controllers which combined with our drivers further maximize the overall efficiency of our LED solution. In addition, we are now sampling to customers what we think is the most elegant full range integrated socket based LED dimming solutions. As you might know CCFL or compact fluorescent lighting solutions today do not dim very well.

Our next generation of products will further integrate more lighting control features including for example temperature sensor using our in-house multiple dye packaging capability. You can see that we’re taking a full system level approach here, not just a catalog of building block [youth]. A good market methodology is to partner with LED suppliers. If you go to our lighting web-based design tool, you can see many of the leading LED providers’ products matched with our specific power management solutions. We’re also working with our distributors on innovative ways to address new to us customer base across new markets such as signage, architectural, display lighting, street lighting, residential, etc. applications for LEDs. Based on our early work as Brian already mentioned, we have more than 60 design wins in street lighting applications in China alone. As an example of the diversity of our LED applications, in Europe we have design wins in automotive customers for deer lights, running lights and brake lights, etc. In the US we have design wins in military and public safety applications.

Outside mobile phones for portable device lighting applications where we’ve traditionally had a strong position in LED lighting, we did less than $5 million in revenue in the LED lighting application area in our fiscal year 08. We’re driving this to be a $100 million business for us in three to five years’ time.

In mobile devices where today we already have about a third of our revenues, we’re focused on increasing our value in Smart Phones and other high-end mobile devices leveraging our LED lighting capability. As I talked about earlier, new phones and multi-function handheld devices are already shipping with our display drivers and backlight drivers. In addition, new flash lighting devices are shipping with two of the market leaders and next calendar year we’ll be shipping our flash lighting for 5 megapixel phone camera applications. At National Semiconductor we have deep system level understanding of both display and lighting applications and how they’re efficiently powered.

In personal mobile devices we also have deep system level knowledge in efficiently managing power in the RF block. As higher-end mobile devices become multi-mode and even more multi-band capable, they often have multiple dedicated power amplifiers. So the RF section becomes extremely power hungry. Our power management supervisory units on our reference designs with a number of power amplifier manufacturers and Qualcomm and Erickson mobile platforms. Some are shipping today but more volume should ramp in calendar year 09. At the system level we can usually demonstrate 25% to 60% extra battery life in these companion powered amplifier applications.

Our energy efficiency focus is now being extended beyond mobile devices to bigger devices such as set-top boxes, switches and routers. Here you should see in calendar 09 are PowerWise adaptable and scaling intellectual property shipping in some other company’s [inaudible]. For example in 10 gig controllers it will dramatically improve on the 1 watt per 1 gig power consumption norm of today. This enables high-speed connectivity for faster access to information and also enables more power efficient virtualization.

In last quarter’s earnings call we also previewed our system level opportunity in the portable take area, our SolarMagic initiative. That improves the efficiency of solar panel installations. Our initial field trials working with solar panel installers demonstrated 10% to 20% improvement in energy conversion in whole panel of reinstallations over the course of a whole day and 40% to 50% energy recovery for the whole array during periods of shading. We’re now in the second phase of our field trials and getting ready for UL certification, and we expect to generate first sales in this new growth thrust in calendar Q1 of 09.

We’re now aiming to leverage this power management intellectual property that we used in our SolarMagic capability to address high voltage battery charging storage management; for example as used in electric vehicles.

Another more traditional business for us in the power management area where we expect to see an opportunity for future revenue growth and it is well over a $100 million of annual revenue is our simple switcher portfolio. Here National is identified as the go-to place for generalist power supply designers looking for what we call the ease of use to design and build their systems power supply. Our web-based designer tool provides to our customers not just our power ICs but the suggested full bill of materials which is often some eight to 10 components that are required to quickly build an appropriate power supply.

In October we’ll be extending our capability in this area with the introduction of our fifth generation of our simple switchers. This is 26 new parts with more customer usable features that we have on our power designer web tool, which by the way is used by our customers more than a thousand times every day to create new power supply designs. At the same time, in October we’ll also expand our simple switcher offering with our first family of simple switcher controllers. This extends the ease of use capability to designs for higher current and higher power efficiency power supplies. In the future we also plan to extend our power supply solutions much further into the system level where we can capture multiple dollar ASPs in our customers’ power supplies.

Talking about ASPs or average selling price our company ASP for this quarter was up about 4% year-on-year and was flat sequentially with the fourth quarter. We also achieved record gross margins at 66% in the quarter in a quarter where our sales to a high volume consumer application the mobile phone and personal mobile device space actually grew, and sales to our highest margin brought distribution driven customer base were slower over the summer. We aim to keep up this ASP and gross margin discipline as we expect to see a future growth benefit from the various energy initiatives that I mentioned earlier. As a reminder, in our last earnings call we set a target range of 65% to 70% for our gross margin and 30% or better operating margins. This quarter was yet another step consistent with these goals and with more leverage from future revenue growth still to come.

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