SEC Company Response from NATIONAL SEMICONDUCTOR CORP (CIK 0000070530) — Feb 18, 2005
NATIONAL SEMICONDUCTOR CORP (CIK 0000070530)
Date: Feb. 18, 2005 · CIK: 0000070530 · Accession: 0000070530-05-000007
AI Filing Summary & Sentiment
Letter
February 18, 2005 Ms. Heather Tress Staff Accountant Securities and Exchange Commission Washington, D.C. 20549
Re: National Semiconductor Corporation Form 10-K for the fiscal year ended May 30, 2004 Form 8-K filed December 9, 2004 File No. 1-06453
Dear Ms. Tress:
The following is in response to the letter from the Securities and Exchange Commission Staff (the "Staff") to National Semiconductor Corporation (the "Company") dated as of December 22, 2004 (the "Comment Letter"). Your comments are included for reference, along with the Company's response to those comments.
1. Comment: Please supplementally tell us why you have not included stock ------- compensation issues and the related stock valuations as a critical accounting policy.
Response: In determining which accounting policies to include as a -------- "critical accounting policy" in Management's Discussion and Analysis of Financial Condition and Results of Operations, the factors that we primarily consider are (a) the impact of the policy on our financial position and results of operations and (b) the level of judgment and/or subjectivity that would be involved in regularly applying the policy. We currently account for employee stock options under APB 25 and we provide footnote disclosure of the pro forma impact of expensing the estimated fair value of stock options under SFAS 123. In applying the requirements of APB 25, we have not incurred any meaningful amounts of compensation expense from employee stock options because we grant options with an exercise price equal to the market price on the date of grant. We have not included stock compensation issues and the related stock valuations as a critical accounting policy in past filings because we do not believe that either the impact on our financial position and results of operations or the level of judgment and subjectivity has been sufficient to warrant inclusion of these matters as a "critical accounting policy." <PAGE>
However, we recognize that the pending effective date for the implementation of FAS 123R will result in stock compensation expense being recorded in our statement of operations. Under the current guidelines, it is likely that the amounts recorded will be significant to our overall results of operations and could also entail a greater degree of judgment and estimation. Therefore, it is likely that we will include disclosures about stock compensation policy and use of estimates in our "critical accounting policies" in future filings once SFAS 123R becomes effective for the Company.
2. Comment: We note your programs with your distributors involving pricing ------- adjustments based on resales, scrap allowances and volume incentives. Please tell us and disclose in future filings the nature of each of these programs. Tell us and disclose in future filings how you account for any measure the accruals for these programs and tell us why. Address why you believe that the amount of your sales is fixed and determinable when you provide pricing adjustments based on resales. Supplementally provide us with a rollforward schedule, on a gross basis for each of these reserves for each period presented in your financial statements and through the latest interim period. Has your actual history of credit and allowances for each period been consistent with the reserves provided? Please explain the basis for your response.
Response: The following is our response to each of the points contained in -------- Staff comment (2) above:
Please tell us the nature of each of these programs ---------------------------------------------------
These programs consist of the following:
As background information, we note that the portion of the Company's consolidated net sales that are made to distributors historically ranges from 40% to 50%.
o Allowances involving pricing and volume. We refer to this as the "contract sales debit" program. o A discount for early payment. We refer to this as the "prompt payment" program. o An allowance for inventory scrap. We refer to this as the "scrap allowance" program.
Under the contract sales debit program, products are sold to distributors at standard published prices that are contained in price books that are broadly provided to our various distributors. Distributors are then required to pay for this product within our standard commercial terms, which are typically 30 days. After the initial purchase of the product, the distributor has the opportunity to request a price allowance for a particular part number depending on the current market conditions for that specific part as well as volume considerations. This request is made prior to the distributor reselling the part. Once we have approved an allowance to the distributor, the distributor proceeds with the resale of the product and the credits are issued to the distributor in accordance with the specific allowance that we approved. Approved allowances are tracked individually by distributor, part number and quantity. Each approved <PAGE>
allowance has a defined time period, typically 3 to 6 months. Periodically, we issue new distributor price books. For those parts for which the standard prices have been reduced, we provide an immediate credit to distributors for inventory quantities they have on hand. At the same time, we also reduce the amount of allowance that a distributor has available on those same parts, if applicable.
For example: Assume a distributor purchased a part from us at $1.00 and then received approval for a contract sales debit allowance of 14 cents. Then assume that prior to the distributor reselling the part, we published a new price book in which the new standard price for that part was 97 cents. We would grant the distributor an immediate credit of 3 cents for each unit of inventory on hand. And we would also reduce its approved contract sales debit allowance from 14 cents to 11 cents. Upon resale, the distributor would be granted the 11-cent allowance.
Under the prompt payment program, distributors are granted a fixed percentage discount off the invoice price for payment earlier than our standard commercial terms.
Under the scrap allowance program, distributors are given a contractually defined allowance to cover the cost of any scrap they might incur. The amount of the allowance is specifically agreed with each distributor.
We will modify future filings on Form 10-K to include additional disclosure of the nature of these programs in Note 1 to our annual consolidated financial statements.
Tell us how you account for and measure the accruals for these programs and --------------------------------------------------------------------------- tell us why -----------
Under each of the contract sales debit and prompt payment programs, we reserve at the time of shipment a provision for estimated amounts that will be incurred for the program. This reserve is recorded as a net reduction in our recorded revenue and as an allowance against accounts receivable. The scrap allowance is also accrued at the time of shipment and recorded as a net reduction in our recorded revenue and as an accrued expense.
For the contract sales debit program, we determine the appropriate amount of a reserve by utilizing historical data, which we maintain at a detail level. For example, we track allowance activity, both approvals and actual credits granted, by distributor, geographic region, and part number. We aggregate this data into groupings based on product families. We then utilize this data to determine the actual experience rates of credit granted for the various groupings. Required rates of reserve are formalized based on our analyses and embedded into our routine processing systems. As parts are shipped to distributors, the required accrual rates that correspond to those parts are systematically reserved at the time of shipment from the Company to the distributor.
Both the prompt payment and scrap allowance programs are based on fixed percentage reductions from the invoice price. We base our reserves on these fixed percentages since our experience shows practically 100% usage rates. <PAGE>
Each quarter, we update all accrual rates as necessary based on changes to our standard published prices, the most recent data and analysis pertaining to allowances approved and actual credits issued. We note that average distributor turnover of products purchased from the Company in fiscal 2004 was less than one fiscal quarter (average of 2.6 months with a range of 2.3 to 2.8 months). This turnover rate is consistent with historical experience.
We have implemented electronic weekly resale and inventory reporting systems with each of our distributors that participates in the contract sales debit program. This provides us with accurate and timely feedback on our product resale and inventory levels in the distribution channel. In addition, we apply a combination of field and desk audit procedures within our internal control structure to periodically validate the information reported by our distributors. We believe the routine nature of our contract sale debit processes plus the business processes and controls we have implemented enable us to make timely and reasonable estimates of contract sales debit rates at the time of product shipment.
We will modify future filings on Form 10-K to include additional disclosure on how we account for the accruals for these programs in Note 1 to our annual consolidated financial statements.
Address why you believe that the amount of your sales is fixed and --------------------------------------------------------------------------- determinable when you provide pricing adjustments based on resales. -------------------------------------------------------------------
We account for sales of semiconductor products under SAB Topic 13A, which requires that the seller's price to the buyer be fixed or determinable as a criterion for revenue recognition. Neither SAB Topic 13A nor other authoritative literature specifically provide guidance on how to apply the fixed or determinable fee criterion to our contract sales debit program with distributors. Footnote 5 to SAB Topic 13A states the following:
Paragraphs 26-33 of SOP 97-2 discuss how to apply the fixed or determinable fee criterion in software transactions. The staff believes that the guidance in paragraphs 26 and 30-33 is appropriate for other sales transactions where authoritative guidance does not otherwise exist.
We use the guidance in paragraphs 26 and 30-33 of SOP 97-2 to evaluate the fixed or determinable criterion of SAB Topic 13a. Paragraph 30 of SOP 97-2 identifies factors that should be considered in evaluating the fixed or determinable fee criterion in connection with reseller arrangements. Some relevant considerations of these factors with respect to our distributor programs are as follows:
o There have been no historical business practices, informal communications, competitive pressures, or payment patterns that indicate that payment is substantially contingent on the distributors' resale of the product. o Our distributors are generally large global or regional companies that are not undercapitalized and sell products from a wide range of manufacturers. <PAGE>
o There is no general right of return. Distributors are compensated for damaged or obsolete products according to the contractual scrap allowance program described above. o We have determined that we have the ability to make timely and reliable estimates of pricing allowances as further discussed below.
SAB Topic 13A (Paragraph 4b) addresses procedures registrants should employ in the estimation process:
Accounting for revenues and costs of revenues requires estimates in many cases; those estimates sometimes change. Registrants should ensure that they have appropriate internal controls and adequate books and records that will result in timely identification of necessary changes in estimates that should be reflected in the financial statements and notes thereto.
Our systems and controls, which utilize extensive histories of tracking, analyzing and verifying data, allow us to accurately estimate future contract sales debits and the required amounts to accrue in recording our net sales. We receive detailed weekly resale and inventory reporting from all our distributors participating in our contract sales debit program to maintain up-to-date market information about our products in distribution. It is important to note that we exclude the majority of our commodity products from the contract sales debit program. As a result, the main differentiator of our portfolio of products in our contract sales debit program is not price, so we have predictable market pricing patterns and predictable experience in future allowances to be granted.
For the prompt payment and scrap allowance programs, we accrue and pay amounts based on the fixed rates we have contractually agreed with the distributors.
We have concluded that the price is fixed or determinable on the date the shipment is made and the allowance is recorded based on our ability to make timely and reliable estimates of allowances to be processed under distributor programs.
Has your actual history of credit and allowances for each period been --------------------------------------------------------------------------- consistent with the reserves provided? --------------------------------------
We continuously monitor actual claimed rates against the rates assumed in our estimates to ensure that our estimates of future price allowances are reliable. To date, we have not experienced significant differences between our historical estimates and actual rates in our fiscal quarters or annual reporting periods. For example, at the end of the first quarter of fiscal 2005, we had accrued approximately $37.3 million for future price allowances as an estimate of future credits to be granted against those sales. During the second fiscal quarter of 2005, our actual credits processed approximated the same amount reflecting our history that our allowance for contract sales debits turnover mirrors our distributor inven
Show Raw Text
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
February 18, 2005
Ms. Heather Tress
Staff Accountant
Securities and Exchange Commission
Washington, D.C. 20549
Re: National Semiconductor Corporation
Form 10-K for the fiscal year ended May 30, 2004
Form 8-K filed December 9, 2004
File No. 1-06453
Dear Ms. Tress:
The following is in response to the letter from the Securities and Exchange
Commission Staff (the "Staff") to National Semiconductor Corporation (the
"Company") dated as of December 22, 2004 (the "Comment Letter"). Your comments
are included for reference, along with the Company's response to those comments.
1. Comment: Please supplementally tell us why you have not included stock
-------
compensation issues and the related stock valuations as a critical
accounting policy.
Response: In determining which accounting policies to include as a
--------
"critical accounting policy" in Management's Discussion and Analysis of
Financial Condition and Results of Operations, the factors that we
primarily consider are (a) the impact of the policy on our financial
position and results of operations and (b) the level of judgment and/or
subjectivity that would be involved in regularly applying the policy. We
currently account for employee stock options under APB 25 and we provide
footnote disclosure of the pro forma impact of expensing the estimated fair
value of stock options under SFAS 123. In applying the requirements of APB
25, we have not incurred any meaningful amounts of compensation expense
from employee stock options because we grant options with an exercise price
equal to the market price on the date of grant. We have not included stock
compensation issues and the related stock valuations as a critical
accounting policy in past filings because we do not believe that either the
impact on our financial position and results of operations or the level of
judgment and subjectivity has been sufficient to warrant inclusion of these
matters as a "critical accounting policy."
<PAGE>
However, we recognize that the pending effective date for the
implementation of FAS 123R will result in stock compensation expense being
recorded in our statement of operations. Under the current guidelines, it
is likely that the amounts recorded will be significant to our overall
results of operations and could also entail a greater degree of judgment
and estimation. Therefore, it is likely that we will include disclosures
about stock compensation policy and use of estimates in our "critical
accounting policies" in future filings once SFAS 123R becomes effective for
the Company.
2. Comment: We note your programs with your distributors involving pricing
-------
adjustments based on resales, scrap allowances and volume incentives.
Please tell us and disclose in future filings the nature of each of these
programs. Tell us and disclose in future filings how you account for any
measure the accruals for these programs and tell us why. Address why you
believe that the amount of your sales is fixed and determinable when you
provide pricing adjustments based on resales. Supplementally provide us
with a rollforward schedule, on a gross basis for each of these reserves
for each period presented in your financial statements and through the
latest interim period. Has your actual history of credit and allowances for
each period been consistent with the reserves provided? Please explain the
basis for your response.
Response: The following is our response to each of the points contained in
--------
Staff comment (2) above:
Please tell us the nature of each of these programs
---------------------------------------------------
These programs consist of the following:
As background information, we note that the portion of the Company's
consolidated net sales that are made to distributors historically ranges
from 40% to 50%.
o Allowances involving pricing and volume. We refer to this as the
"contract sales debit" program.
o A discount for early payment. We refer to this as the "prompt payment"
program.
o An allowance for inventory scrap. We refer to this as the "scrap
allowance" program.
Under the contract sales debit program, products are sold to distributors
at standard published prices that are contained in price books that are
broadly provided to our various distributors. Distributors are then
required to pay for this product within our standard commercial terms,
which are typically 30 days. After the initial purchase of the product, the
distributor has the opportunity to request a price allowance for a
particular part number depending on the current market conditions for that
specific part as well as volume considerations. This request is made prior
to the distributor reselling the part. Once we have approved an allowance
to the distributor, the distributor proceeds with the resale of the product
and the credits are issued to the distributor in accordance with the
specific allowance that we approved. Approved allowances are tracked
individually by distributor, part number and quantity. Each approved
<PAGE>
allowance has a defined time period, typically 3 to 6 months. Periodically,
we issue new distributor price books. For those parts for which the
standard prices have been reduced, we provide an immediate credit to
distributors for inventory quantities they have on hand. At the same time,
we also reduce the amount of allowance that a distributor has available on
those same parts, if applicable.
For example: Assume a distributor purchased a part from us at $1.00 and
then received approval for a contract sales debit allowance of 14 cents.
Then assume that prior to the distributor reselling the part, we published
a new price book in which the new standard price for that part was 97
cents. We would grant the distributor an immediate credit of 3 cents for
each unit of inventory on hand. And we would also reduce its approved
contract sales debit allowance from 14 cents to 11 cents. Upon resale, the
distributor would be granted the 11-cent allowance.
Under the prompt payment program, distributors are granted a fixed
percentage discount off the invoice price for payment earlier than our
standard commercial terms.
Under the scrap allowance program, distributors are given a contractually
defined allowance to cover the cost of any scrap they might incur. The
amount of the allowance is specifically agreed with each distributor.
We will modify future filings on Form 10-K to include additional disclosure
of the nature of these programs in Note 1 to our annual consolidated
financial statements.
Tell us how you account for and measure the accruals for these programs and
---------------------------------------------------------------------------
tell us why
-----------
Under each of the contract sales debit and prompt payment programs, we
reserve at the time of shipment a provision for estimated amounts that will
be incurred for the program. This reserve is recorded as a net reduction in
our recorded revenue and as an allowance against accounts receivable. The
scrap allowance is also accrued at the time of shipment and recorded as a
net reduction in our recorded revenue and as an accrued expense.
For the contract sales debit program, we determine the appropriate amount
of a reserve by utilizing historical data, which we maintain at a detail
level. For example, we track allowance activity, both approvals and actual
credits granted, by distributor, geographic region, and part number. We
aggregate this data into groupings based on product families. We then
utilize this data to determine the actual experience rates of credit
granted for the various groupings. Required rates of reserve are formalized
based on our analyses and embedded into our routine processing systems. As
parts are shipped to distributors, the required accrual rates that
correspond to those parts are systematically reserved at the time of
shipment from the Company to the distributor.
Both the prompt payment and scrap allowance programs are based on fixed
percentage reductions from the invoice price. We base our reserves on these
fixed percentages since our experience shows practically 100% usage rates.
<PAGE>
Each quarter, we update all accrual rates as necessary based on changes to
our standard published prices, the most recent data and analysis pertaining
to allowances approved and actual credits issued. We note that average
distributor turnover of products purchased from the Company in fiscal 2004
was less than one fiscal quarter (average of 2.6 months with a range of 2.3
to 2.8 months). This turnover rate is consistent with historical
experience.
We have implemented electronic weekly resale and inventory reporting
systems with each of our distributors that participates in the contract
sales debit program. This provides us with accurate and timely feedback on
our product resale and inventory levels in the distribution channel. In
addition, we apply a combination of field and desk audit procedures within
our internal control structure to periodically validate the information
reported by our distributors. We believe the routine nature of our contract
sale debit processes plus the business processes and controls we have
implemented enable us to make timely and reasonable estimates of contract
sales debit rates at the time of product shipment.
We will modify future filings on Form 10-K to include additional disclosure
on how we account for the accruals for these programs in Note 1 to our
annual consolidated financial statements.
Address why you believe that the amount of your sales is fixed and
---------------------------------------------------------------------------
determinable when you provide pricing adjustments based on resales.
-------------------------------------------------------------------
We account for sales of semiconductor products under SAB Topic 13A, which
requires that the seller's price to the buyer be fixed or determinable as a
criterion for revenue recognition. Neither SAB Topic 13A nor other
authoritative literature specifically provide guidance on how to apply the
fixed or determinable fee criterion to our contract sales debit program
with distributors. Footnote 5 to SAB Topic 13A states the following:
Paragraphs 26-33 of SOP 97-2 discuss how to apply the fixed or determinable
fee criterion in software transactions. The staff believes that the
guidance in paragraphs 26 and 30-33 is appropriate for other sales
transactions where authoritative guidance does not otherwise exist.
We use the guidance in paragraphs 26 and 30-33 of SOP 97-2 to evaluate the
fixed or determinable criterion of SAB Topic 13a. Paragraph 30 of SOP 97-2
identifies factors that should be considered in evaluating the fixed or
determinable fee criterion in connection with reseller arrangements. Some
relevant considerations of these factors with respect to our distributor
programs are as follows:
o There have been no historical business practices, informal
communications, competitive pressures, or payment patterns that
indicate that payment is substantially contingent on the distributors'
resale of the product.
o Our distributors are generally large global or regional companies that
are not undercapitalized and sell products from a wide range of
manufacturers.
<PAGE>
o There is no general right of return. Distributors are compensated for
damaged or obsolete products according to the contractual scrap
allowance program described above.
o We have determined that we have the ability to make timely and
reliable estimates of pricing allowances as further discussed below.
SAB Topic 13A (Paragraph 4b) addresses procedures registrants should employ
in the estimation process:
Accounting for revenues and costs of revenues requires estimates in many
cases; those estimates sometimes change. Registrants should ensure that
they have appropriate internal controls and adequate books and records that
will result in timely identification of necessary changes in estimates that
should be reflected in the financial statements and notes thereto.
Our systems and controls, which utilize extensive histories of tracking,
analyzing and verifying data, allow us to accurately estimate future
contract sales debits and the required amounts to accrue in recording our
net sales. We receive detailed weekly resale and inventory reporting from
all our distributors participating in our contract sales debit program to
maintain up-to-date market information about our products in distribution.
It is important to note that we exclude the majority of our commodity
products from the contract sales debit program. As a result, the main
differentiator of our portfolio of products in our contract sales debit
program is not price, so we have predictable market pricing patterns and
predictable experience in future allowances to be granted.
For the prompt payment and scrap allowance programs, we accrue and pay
amounts based on the fixed rates we have contractually agreed with the
distributors.
We have concluded that the price is fixed or determinable on the date the
shipment is made and the allowance is recorded based on our ability to make
timely and reliable estimates of allowances to be processed under
distributor programs.
Has your actual history of credit and allowances for each period been
---------------------------------------------------------------------------
consistent with the reserves provided?
--------------------------------------
We continuously monitor actual claimed rates against the rates assumed in
our estimates to ensure that our estimates of future price allowances are
reliable. To date, we have not experienced significant differences between
our historical estimates and actual rates in our fiscal quarters or annual
reporting periods. For example, at the end of the first quarter of fiscal
2005, we had accrued approximately $37.3 million for future price
allowances as an estimate of future credits to be granted against those
sales. During the second fiscal quarter of 2005, our actual credits
processed approximated the same amount reflecting our history that our
allowance for contract sales debits turnover mirrors our distributor
inven