Masthead: National Semiconductor 2004 Annual Report 2004 Annual Report PDF Downloads 2004 Annual Report Home page 2004 Annual Report Home page

national’s performance was propelled by an explosion of new technologies for consumer products

dear shareholders,

BRIAN H. HALLA, Chairman of the Board, President and CEO

National Semiconductor is an analog company and we are proud of our long heritage of innovation in the chip industry. We developed one of the first analog linear circuits more than 30 years ago and continue to develop and manufacture market-leading analog products today. In fiscal 2004, we had a rewarding year, achieving record-breaking margins and net profits of $283 million on nearly $2 billion in sales. Our strategy, product portfolio and positioning as a market-leading analog company also increased our momentum with key customers, which we believe gives us continued strength in the future.

National’s performance was propelled by an explosion of new technologies for consumer products, including cell phones, MP3 players, high-definition televisions, notebook computers, personal video recorders, video games and cordless residential phone systems. All of these consumer products are rich in analog. Analog makes them easier to use, improves their displays and audio, and extends their battery life. Together, these benefits create "killer experiences" that drive the popularity of consumer electronics.

National played a major role, along with our customers, in making these killer experiences come to life in fiscal 2004. Analog chips made by National Semiconductor increase battery life, enable high-resolution displays, light the keyboard and drive the display of cellular phones. Our chips also generate the ring tones heard in advanced digital handsets and ultimately convert the real-world signals of sight, sound, touch, and feel into the "0"s and "1"s that microprocessors and digital signal processors (DSPs) use for their calculations. Since the summer of 2003, there has been a strong resurgence of analog chip demand driven by consumer products where the thrill of the user’s experience, not the raw computing power, makes the difference.

analog makes the difference

Over the last several years, National Semiconductor has focused on and invested in our Analog product capabilities, particularly in the Standard Linear segments. The WSTS (World Semiconductor Trade Statistics) defines "Standard Linear" as Amplifiers, Data Converters, Regulators & References and Interface. In addition to R & D for new analog products, we invested in developing in-house process technologies, packaging and manufacturing techniques. Because of this commitment, we are now the number one manufacturer of power management circuits ("Regulators & References" from above), according to market research firms Databeans and iSuppli, with a 12.8 percent share of the global market at the end of calendar 2003. We grew this business more than 40 percent during the fiscal year. In "amplifier" products we moved up from number three to number two in the world, according to the same market research firms. At the same time, we continued to invest in design and process technology for "data conversion" and "interface" products so that we could strive to achieve leading market positions in these categories.

focus on financial results

In last year’s Letter to Shareholders, we said we were focusing on three main areas:

Let’s review our progress.

higher profitability

In this area, the numbers almost speak for themselves. For fiscal 2004, we grew our revenue by 19 percent from $1.7 billion in FY03 to just under $2 billion in FY04. We grew our gross margins from 43 percent in FY03 to 51 percent in FY04. And in the fourth quarter of FY04, we achieved a corporate historic record of 54 percent gross margin. At the same time, we lowered our operating expenses substantially. As a result, we achieved net income of $283 million or $0.73 earnings per share, up from a net loss of $33 million in FY03.

better return on invested capital

We focused the entire management team on ROIC, or Return on Invested Capital, which we were able to grow from about 2 percent in FY03 to 21 percent in FY04. We ended the fiscal year with an ROIC in the fourth quarter of more than 31 percent. As part of this focus, we continued to aggressively implement a capital spending model of 10 percent of our revenues while adding necessary capacity to keep up with increasing demand for National’s analog products. We also bought back approximately $543 million of National Semiconductor stock and, having done that, still ended the year with $782 million in cash reserves and virtually no debt. Looking forward into fiscal 2005, our ROIC efforts will focus heavily on increasing our gross margins and growing our analog revenues.

higher margin analog business

During FY04 we saw continuous growth in our gross margins. In the first part of the year, National’s increasing revenues allowed us to leverage our higher factory utilization to improve margins. Our continued improvement in the latter part of fiscal 2004 drew primarily from three factors:

increased revenues from new analog products

National generally defines "new products" as those launched within the last three years. We continue to focus on reducing design cycle times and getting products to market faster. Over the last several years we have dedicated major efforts towards increasing the number of new analog products that contribute to higher revenues and higher margins. These efforts are paying off. In FY04, our rate of growth in new product revenues was well above the overall growth rate of the company. During FY04, National also made several important product and technology announcements. I’ll scratch the surface by mentioning just a few examples:

improved product ASPs

New products that add unique value to our customers usually command higher ASPs or average selling prices. We are focusing on differentiated products where we are first to market, adding a unique value to our customers that allows us to command a premium price. Here again, our world leadership in packaging technology has enabled our handset customers, for example, to continue to shrink the form factors of their cell phones. In addition, our interactive, on-line design tools, known as WEBENCH®, enable engineers to design-in National products in record time and cut time-to-market significantly.

national is committed to shareholder value

National Semiconductor is committed to improving our long term shareholder value. We’ve demonstrated this through an increased emphasis on our core analog business and new analog products. In the coming year we will work hard to continue to expand our leadership in power management and amplifiers. We will also continue our efforts to grow significantly in data conversion and interface.

Back to Top

As I said at the outset, National Semiconductor is an analog company. Fiscal 2004 was a rewarding year, one that saw us increase performance and profitability. We generated good momentum for the company going forward. The most rewarding performance of all, however, was turned in by National’s employees. While holding down spending in engineering, marketing and administration, our employees produced more new products at higher margins and ASPs, increased our market share and further penetrated key accounts. All this was done, by the way, against a backdrop of their record charitable giving to their communities in each of our geographic population bases. I am extremely proud of our employees. In the new fiscal year, the management team at National Semiconductor will work hard to make it possible for our employees to continue the momentum of the tremendous successes they achieved in fiscal 2004.

Sincerely,

Brian L. Halla's Signature

Brian L. Halla
Chairman of the Board, President and CEO
National Semiconductor Corporation


ÿ