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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________.
Commission File Number: 333-26897
FSC SEMICONDUCTOR CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3363001
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
333 WESTERN AVENUE
SOUTH PORTLAND, MAINE 04106
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (207) 775-8100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of the issuer's classes of common stock as of
the close of business on March 31, 1999:
Title of Each Class Number of Shares
------------------- ----------------
Class A Common Stock; $0.01 par value 29,562,160
Class B Common Stock; $0.01 par value 33,376,000
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FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
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PAGE
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Item 1 Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Nine Months Ended February 28, 1999 and
March 1, 1998 3
Condensed Consolidated Balance Sheets as of February 28, 1999
(Unaudited) and May 31, 1998 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended February 28, 1999 and
March 1, 1998 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 6 Exhibits and Reports on Form 8-K 14
SIGNATURE 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS) (UNAUDITED)
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Three Months Ended Nine Months Ended
---------------------- ----------------------
February 28, March 1, February 28, March 1,
1999 1998 1999 1998
------------ -------- ------------ --------
<S> <C> <C> <C>
Revenue:
Net sales--trade $147.0 $165.1 $434.1 $479.1
Contract manufacturing--National Semiconductor 22.4 41.5 54.5 122.8
------------ -------- ------------ --------
Total revenue 169.4 206.6 488.6 601.9
Operating expenses:
Cost of sales 111.5 116.0 336.2 329.4
Cost of contract manufacturing--National
Semiconductor 16.9 30.9 45.4 92.3
Research and development 9.6 9.8 27.9 24.7
Selling, general and administrative 22.3 24.6 68.5 66.6
Purchased in-process research and development -- 15.5 -- 15.5
Restructuring 2.7 -- 7.2 --
------------ -------- ------------ --------
Total operating expenses 163.0 196.8 485.2 528.5
------------ -------- ------------ --------
Operating income 6.4 9.8 3.4 73.4
Interest, net 15.1 14.7 44.7 41.1
------------ -------- ------------ --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (8.7) (4.9) (41.3) 32.3
Provision (benefit) for income taxes 2.4 (2.7) (4.1) 10.4
------------ -------- ------------ --------
Income (loss) before cumulative effect of change
in accounting principle (11.1) (2.2) (37.2) 21.9
Cumulative effect of change in accounting
principle, net of tax effect of $0.8 million -- (1.5) -- (1.5)
------------ -------- ------------ --------
Net income (loss) $(11.1) $ (3.7) $(37.2) $ 20.4
------------ -------- ------------ --------
------------ -------- ------------ --------
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See accompanying notes to condensed consolidated financial statements.
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FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
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<CAPTION>
(Unaudited)
February 28, May 31,
1999 1998
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ASSETS
Current assets:
Cash and cash equivalents $ 5.4 $ 6.5
Receivables, net 101.5 75.0
Inventories 105.6 108.0
Other current assets 19.7 20.0
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Total current assets. 232.2 209.5
Property, plant and equipment 305.9 342.9
Deferred income taxes 25.3 21.4
Intangible assets, net 29.0 31.5
Other assets 31.1 30.4
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Total assets $ 623.5 $ 635.7
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------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings and current portion
of long-term debt $ 35.5 $ 13.2
Accounts payable 79.1 75.4
Accrued expenses and other current
liabilities 56.0 55.9
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Total current liabilities 170.6 144.5
Long-term debt, less current portion 524.5 526.7
Other liabilities 1.7 0.6
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Total liabilities 696.8 671.8
Redeemable preferred stock 87.7 80.5
Commitments and contingencies
Stockholders' equity (deficit):
Class A common stock 0.3 0.3
Class B common stock 0.3 0.3
Additional paid-in capital 9.5 9.5
Accumulated deficit (171.1) (126.7)
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Total stockholders' equity (deficit) (161.0) (116.6)
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Total liabilities and stockholders'
equity (deficit) $ 623.5 $ 635.7
------- -------
------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS) (UNAUDITED)
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Nine Months Ended
----------------------
February 28, March 1,
1999 1998
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Cash flows from operating activities: $ (37.2) $ 20.4
Net income (loss)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Cumulative effect of change in accounting principle -- 1.5
Depreciation and amortization 72.1 62.5
Restructing charges, net of cash expended 3.3 --
Non-cash interest expense 7.8 7.3
Purchased in-process research and development -- 15.5
Loss on disposal of property, plant and equipment 0.2 0.7
Deferred income taxes (4.0) (0.8)
Changes in operating assets and liabilities, net:
Accounts receivable (26.5) 6.9
Inventories 2.4 (12.9)
Prepaid expenses and other current assets 0.4 2.5
Current liabilities 3.2 5.0
Other assets and liabilities (1.7) 0.1
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Cash provided by operating activities 20.0 108.7
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Cash flows from investing activities:
Capital expenditures (31.5) (49.3)
Proceeds from sale of property, plant and equipment 1.0 --
Purchase of molds and tooling (2.9) (4.2)
Purchase of Raytheon Semiconductor, Inc.,
net of cash acquired -- (116.8)
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Cash used in investing activities (33.4) (170.3)
---------- -------
Cash flows from financing activities:
Proceeds from revolving credit facility, net 21.6 --
Issuance of long-term debt -- 90.0
Repayment of long-term debt (9.3) (55.6)
Debt issuance costs -- (1.1)
---------- -------
Cash provided by financing activities 12.3 33.3
---------- -------
Net change in cash and cash equivalents (1.1) (28.3)
Cash and cash equivalents at beginning of period 6.5 40.7
---------- -------
Cash and cash equivalents at end of period $ 5.4 $ 12.4
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See accompany notes to condensed consolidated financial statements.
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FSC SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheets of FSC Semiconductor
Corporation (the "Company") as of February 28, 1999 and May 31, 1998, the
Condensed Consolidated Statements of Operations for the three and nine month
periods ended February 28, 1999 and March 1, 1998 and the Condensed Consolidated
Statements of Cash Flows for the nine month periods ended February 28, 1999 and
March 1, 1998 were prepared by the Company. In the opinion of management, the
accompanying condensed consolidated financial statements contain all adjustments
(consisting of only normal recurring items) necessary to present fairly the
financial position and results of operations of the Company. Interim results of
operations are not necessarily indicative of the results to be expected for the
full year. This report should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the fiscal year ended May 31, 1998.
Certain prior period amounts have been reclassified to conform to their
current presentation.
NOTE 2 - INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
February 28, May 31,
1999 1998
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(In millions)
<S> <C> <C>
Raw materials $ 8.6 $ 13.0
Work in process 75.3 69.5
Finished goods 21.7 25.5
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Total inventories $105.6 $108.0
------ ------
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NOTE 3 - RESTRUCTURING CHARGES
In the first quarter of fiscal 1999, in connection with management's
plan to reduce costs and improve operating efficiencies, the Company recorded a
pre-tax restructuring charge of approximately $4.5 million. The restructuring
charge consisted of $0.8 million related to non-cash asset impairments and $3.7
million of employee separation costs. The charge for employee separation
arrangements provided for the termination and other severance costs associated
with the approximately 600 salaried, hourly and temporary employees severed as a
result of this action, a reduction of approximately 10% of the Company's
payroll.
In the third quarter of fiscal 1999, the Company recorded a pre-tax
restructuring charge of approximately $2.7 million related to the transfer of
all assembly and test work performed at its Mountain View, California facility
to its Penang, Malaysia facility. The charge consisted of $1.9 million of
non-cash asset write-offs and $0.8 million primarily for severance and other
benefits for 54 employees terminated as a result of the transfer.
NOTE 4 - SUBSEQUENT EVENT - FACILITY CLOSURE
On March 31, 1999, the Company agreed to sell its Mountain View,
California facility for approximately $35.0 million. The sale price is subject
to (i) a $1.0 million deposit, which is nonrefundable if the sale of the
property is not consummated by April 19, 1999 for reasons other than a title
defect; (ii) a $3.5 million holdback which will be paid to the Company unless
the city council rejects the buyer's application to increase its building
density from 35% to 50%; and (iii) a $0.5 million deposit which will be
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placed into an escrow account and will be released to the Company upon the
demolition of the existing structures on the property. At closing, which is
expected by the end of April 1999, the Company expects to receive approximately
$30.2 million (excluding the $0.5 million in escrow) after deducting closing
costs, contingency holdbacks, commissions and other fees and expenses.
In connection with the sale of the Mountain View facility, on April 2,
1999 the Company announced the transfer of all wafer production to its South
Portland, Maine facility. The transfer is expected to be complete by the end of
the 1999 calendar year. Net of a gain on the sale of land and building of
approximately $4.2 million, the Company will record a one-time charge for
severance, equipment write-offs and other costs related to the transfer of
approximately $8.3 million in the fourth quarter of fiscal 1999.
NOTE 5 - SUBSEQUENT EVENT - ACQUISITION
On December 20, 1998, the Company entered into an agreement to acquire
the Power Device Business of Samsung Electronics Co., Ltd., for approximately
$455.0 million. The purchase includes substantially all of the worldwide
business and assets of the Power Device Business, comprising high volume wafer
fabs in Bucheon, South Korea, design and development personnel in Bucheon,
secured services for high volume assembly and test operations for the Power
Device Business, and worldwide sales and marketing personnel. The transaction,
which will be accounted for as a purchase, is expected to be completed by the
end of April, 1999.
In connection with the pending acquisition, on April 13, 1999 the
Company refinanced all of its existing senior credit facilities with the
proceeds from new senior term facilities of $310.0 million. The excess
proceeds, together with the net proceeds from the Company's $300.0 million
senior subordinated notes issued on April 7, 1999 and a $50.0 million
subordinated PIK note from Citicorp Mezzanine Partners, L.P., will be used to
finance the purchase price and related fees and expenses of the acquisition.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
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Cash paid for:
Income taxes $ 2.1 $ 8.3
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Interest $27.9 $24.5
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For the nine-month periods ended February 28, 1999 and March 1, 1998,
the Company accumulated dividends on the redeemable preferred stock of
approximately $7.2 million and $6.5 million, respectively. The accumulated
dividends were recorded as an increase to the carrying value of the redeemable
preferred stock and accumulated deficit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
FSC Semiconductor Corporation, through its wholly-owned subsidiary
Fairchild Semiconductor Corporation (collectively, the "Company"), is a leading
designer, manufacturer and supplier of high-performance logic, non-volatile
memory, discrete power and signal technology and analog and mixed signal
semiconductors, serving the telecommunications, consumer, industrial, personal
systems and automotive markets.
RESULTS OF OPERATIONS
The Company incurred net losses of $11.1 million and $37.2 million for
the third quarter and first nine months of fiscal 1999, respectively, compared
to a net loss of $3.7 million and net income of $20.4 million in the
corresponding periods last year. Net losses for the third quarter and first nine
months of fiscal
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1999 include pre-tax restructuring charges of $2.7 million and $7.2 million,
respectively. The corresponding periods in fiscal 1998 include both a
non-recurring pre-tax charge of $15.5 million for the write-off of purchased
in-process research and development associated with the acquisition of Raytheon
Semiconductor, Inc. ("Raytheon" or "Analog") in December 1997 and an after-tax
charge of $1.5 million for the cumulative effect of a change in accounting
principle.
Operating income was $6.4 million for the third quarter of fiscal 1999
as compared to operating income of $9.8 million in the same period last year.
Excluding restructuring and other non-recurring charges, the Company had
operating income of $9.1 million and $25.3 million in the third quarter of
fiscal years 1999 and 1998, respectively, and $10.6 million and $88.9 million
for the first nine months of fiscal 1999 and 1998, respectively. Operating
income for the third quarter and first nine months of fiscal 1999 includes
operating losses of $1.1 million and $0.3 million, respectively, for Analog. The
decrease in profitability in the third quarter of fiscal 1999 over the
comparable period a year ago is primarily driven by lower trade revenues and
margins as a result of declining prices, and lower contract manufacturing
profits due to reduced demand from National Semiconductor ("National"). The
decrease in profitability in the first nine months of fiscal 1999 over the
comparable period last year is primarily attributable to lower trade revenues
and corresponding deterioration in margins resulting from soft market
conditions, due to excess personal computer inventories in the sales channels
and adverse effects on semiconductor demand driven by economic uncertainty in
Southeast Asia, and lower contract manufacturing profits due to significantly
reduced demand from National.
Excluding depreciation and amortization of $24.7 million and $72.1
million in the third quarter and first nine months of fiscal 1999, respectively,
and $22.2 million and $62.5 million in the comparable periods of fiscal 1998,
and restructuring and other non-recurring charges, earnings before interest,
taxes and depreciation and amortization ("EBITDA") were $33.8 million and $82.7
million in the third quarter and first nine months of fiscal 1999, respectively,
compared to $47.5 million and $151.4 million in the comparable periods of fiscal
1998. EBITDA is presented because the Company believes that it is a widely
accepted financial indicator of an entity's ability to incur and service debt.
EBITDA should not be considered as an alternative to net income, operating
income, or other consolidated operations and cash flow data prepared in
accordance with generally accepted accounting principles, as an indicator of the
operating performance of the Company, or as an alternative to cash flows as a
measure of liquidity.
REVENUES
The Company's revenues consist of trade sales to unaffiliated customers
(86.8% and 88.8% of total revenues in the third quarter and first nine months of
fiscal 1999, respectively, and 79.9% and 79.6% in the comparable periods of
fiscal 1998) and revenues from contract manufacturing services provided to
National (13.2% and 11.2% of total revenues in the third quarter and first nine
months of fiscal 1999, respectively, and 20.1% and 20.4% in the comparable
periods of fiscal 1998). Trade sales decreased 11.0% to $147.0 million in the
third quarter of fiscal 1999 compared to $165.1 million in the third quarter of
fiscal 1998. Trade sales for the third quarter of fiscal 1999 were only down
slightly from the second quarter, primarily the result of the seasonality of our
business. We continue to see improvement to the adverse industry market
conditions, which have impacted pricing and demand since the second half of
fiscal 1998. On a year-to-date basis, trade sales decreased 9.4% to $434.1
million compared to $479.1 million for the comparable period of fiscal 1998.
Trade sales for the first nine months of fiscal 1999 include those of Analog,
while the comparable period in fiscal 1998 includes only two months. Excluding
Analog's trade sales for the non-comparable periods, trade sales decreased 17.5%
for the nine month period ending February 28, 1999 over the same period a year
ago. Sales declines impacted all product groups. Logic, Discrete and Memory
trade sales decreased by 13.0%, 5.4% and 31.4%, respectively, in the third
quarter of fiscal 1999 over the third quarter of fiscal 1998. For the first nine
months of fiscal 1999, Logic, Discrete and Memory trade sales decreased by
17.2%, 9.1% and 33.3%, respectively, over the comparable period a year ago.
Geographically, 33%, 19% and 48% of trade sales were derived from North
America, Europe and Asia/Pacific, respectively, in the third quarter of fiscal
1999, compared to 35%, 23% and 42% in the third quarter of fiscal 1998. Trade
sales were down in all regions in the current quarter over the corresponding
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quarter of the previous year. Trade sales decreased by 17.4%, 25.2% and 2.3% in
North America, Europe and Asia/Pacific, respectively. North American decreases
can be attributed to a combination of soft demand, particularly in the
distribution channel, and price competition. North American revenues were also
down from the second quarter of fiscal 1999 resulting largely from seasonality,
particularly in the personal computer market. Europe's decline is more specific
to pricing, particularly in the telecommunications sector. The Asia/Pacific
region, down only slightly year over year, continues its recovery. Strengthening
in the Asian personal computer market and market share gains, particularly in
Japan, during the third quarter of fiscal 1999 helped to drive Asia/Pacific
revenues up 8.1% over the second quarter. On a year-to-date basis, 35%, 20% and
45% of trade sales were derived in North America, Europe and Asia/Pacific,
respectively, compared to 36%, 21% and 43% in the first nine months of fiscal
1998. Trade sales in all regions were lower in the first nine months of fiscal
1999 compared to a year ago. Trade sales decreased 17.4%, 25.1% and 11.6% in
North America, Europe and Asia Pacific, respectively.
Contract manufacturing revenues decreased sharply to $22.4 million in
the third quarter of fiscal 1999, compared to $41.5 million in the third quarter
of fiscal 1998. On a year-to-date basis, contract manufacturing revenues
decreased to $54.5 million from $122.8 million for the comparable period in
fiscal 1998. Contract manufacturing revenue includes $4.2 million and $15.8
million of billings, recorded in the third quarter and first nine months of
fiscal 1999, respectively, under the fixed cost recovery and guaranteed annual
revenue provisions of the Company's manufacturing agreements with National. The
aforementioned decreases are reflective of greatly reduced demand from National.
GROSS PROFIT
Gross profit decreased 31.3% to $41.0 million in the third quarter of
fiscal 1999, compared to $59.7 million in the third quarter of fiscal 1998. As a
percentage of trade sales, gross trade profit was 24.1% in the third quarter of
fiscal 1999, compared to 29.7% in the third quarter of fiscal 1998. On a
year-to-date basis, gross profit decreased 40.6% to $107.0 million, compared to
$180.2 million in the first nine months of fiscal 1998. As a percentage of trade
sales, gross trade profit for the first nine months of fiscal 1999 was 22.6%
compared to 31.2% in the same period of fiscal 1998. The decrease in gross trade
profit as a percentage of trade sales in the third quarter of fiscal 1999 from
the third quarter of fiscal 1998 is due primarily to lower average selling
prices. The decrease in the first nine months of fiscal 1999 over the comparable
period of fiscal 1998 is due to lower average selling prices and decreased
factory utilization, particularly in the first half of fiscal 1999, resulting
from soft market conditions. The Company also experienced inefficiencies,
particularly in the second quarter of fiscal 1999, due to the start-up of its
own shipping and logistics systems (independent of National's), part of its
ongoing enterprise system implementation.
Contract manufacturing gross profit decreased 48.1% and 70.2% in the
third quarter and first nine months of fiscal 1999, respectively, over the
corresponding periods in the prior year. As a percentage of contract
manufacturing revenue, gross contract manufacturing profits were 24.6% and 16.7%
in the third quarter and first nine months of fiscal 1999, respectively,
compared to 25.5% and 24.8% in the comparable periods of fiscal 1998. The
decreases in contract manufacturing gross profits as a percent of contract
manufacturing revenues result from factory under-utilization driven by reduced
demand from National.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $9.6 million, or 6.5% of
trade sales, in the third quarter of fiscal 1999, compared to $9.8 million, or
5.9% of trade sales, in the third quarter of fiscal 1998. On a year-to-date
basis, R&D was $27.9 million, or 6.4% of trade sales, compared to $24.7 million,
or 5.2% of trade sales, for the comparable period of fiscal 1998. The decrease
in the third quarter of fiscal 1999 from the third quarter of fiscal 1998 is due
to reprioritizing projects in light of the Company's performance. The increase
in year-to-date R&D expenditures is driven by R&D costs incurred by Analog in
fiscal 1999. Only two months of R&D for Analog was recorded in the first nine
months of fiscal 1998. R&D efforts are focused on the Company's growth products:
CMOS Logic, DMOS, EEPROM and Analog. In the third quarter and first nine months
of fiscal 1999, R&D expenditures were 8.7% and 9.0% of trade
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sales, respectively, for these growth products. R&D expenditures for the
Company's mature products (Bipolar Logic, Bipolar Discretes and EPROM) were less
than 1% of trade sales for both the third quarter and first nine months of
fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses were $22.3
million, or 15.2% of trade sales, in the third quarter of fiscal 1999, compared
to $24.6 million, or 14.9% of trade sales, in the third quarter of fiscal 1998.
On a year-to-date basis, SG&A expenses were $68.5 million, or 15.8% of trade
sales, compared to $66.6 million, or 13.9% of trade sales for the comparable
period of fiscal 1998. The decrease in SG&A expenses in the third quarter of
fiscal 1999 from the third quarter of fiscal 1998 is due to cost reduction
activities and lower selling expenses due to lower sales. The increase in
year-to-date SG&A expenses is primarily the result of the incremental SG&A
expenses of Analog. Only two months of SG&A expenses for Analog were recorded in
the comparable period of fiscal 1998.
RESTRUCTURING
The Company incurred a pre-tax restructuring charge of approximately
$4.5 million in the first quarter of fiscal 1999 in connection with management's
plan to reduce costs and improve operating efficiencies. The charge consisted of
$0.8 million related to non-cash asset impairments and $3.7 million of employee
separation costs. During the third quarter of fiscal 1999, the Company recorded
a charge of $2.7 million in connection with the transfer of all assembly and
test activities related to its Analog and Mixed Signal product lines from its
Mountain View, California facility to its Penang, Malaysia facility or to
subcontractors. The charge consisted of $1.9 million of non-cash asset
write-offs and $0.8 million of employee separation costs that were substantially
paid during the third quarter of fiscal 1999.
INTEREST, NET
Interest, net was $15.1 million and $44.7 million in the third quarter
and first nine months of fiscal 1999, respectively, compared to $14.7 million
and $41.1 million in the comparable periods of fiscal 1998. The increases are
principally the result of indebtedness incurred to fund the Raytheon
acquisition, which occurred in the third quarter of fiscal 1998.
INCOME TAXES
Income tax expense (benefit) was $2.4 million and $(4.1) million for
the third quarter and first nine months of fiscal 1999, respectively, compared
to $(2.7) million and $10.4 million in the third quarter and first nine months
of fiscal 1998. The effective tax rate for the first nine months of fiscal 1999
was 10% compared to 32% in the comparable period last year. The reduction in the
Company's effective tax rate, down from 20% at the end of the second quarter of
fiscal 1999, primarily results from the Company's year-to-date loss and its
inability to carry-back current year net operating losses due to the short time
the Company has operated as a stand-alone entity.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 1999, the Company's cash and cash equivalents
balance was $5.4 million, a decrease of $1.1 million from May 31, 1998. In
addition, the Company had $108.4 million available under its Revolving Credit
Facility at February 28, 1999.
During the nine months ended February 28, 1999, the Company's
operations generated $20.0 million in cash compared to $108.7 million generated
in the first nine months of fiscal 1998. The decrease in cash provided by
operating activities reflects a decrease in net income adjusted for noncash
items of $64.9 million as well as a decrease in cash flows from changes in
operating assets and liabilities of $23.8 million. Cash used in investing
activities during the first nine months of fiscal 1999 totaled $33.4 million
compared to $170.3 million in the first nine months of fiscal 1998. During the
third quarter of fiscal 1998,
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the Company completed its purchase of Raytheon for approximately $116.8 million,
net of cash acquired. Capital expenditures in the first nine months of fiscal
1999 and fiscal 1998, respectively, were being made principally to purchase and
install the Company's enterprise-wide information system and to increase
capacity in the Company's assembly and test facilities. Cash provided by
financing activities of $12.3 million for the first nine months of fiscal 1999
was the result of net proceeds from the Company's Revolving Credit Facility of
$21.6 million and repayments of long-term debt of $9.3 million. Cash provided by
financing activities of $33.3 million for the first nine months of fiscal 1998
was primarily the result of borrowings used to fund the acquisition offset by
repayments of long-term debt.
On December 20, 1998 the Company signed an agreement to acquire the
Power Device Business of Samsung Electronics Co., Ltd. ("Samsung") for
approximately $455.0 million in cash less certain adjustments. The Company will
fund the purchase price through a combination of additional bank borrowings and
the issuance of senior subordinated notes (aggregating approximately $405.0
million), with the remainder provided by a $50.0 million subordinated PIK note
from Citicorp Mezzanine Partners, L.P.
The Company expects that its existing cash together with funds
available from its amended Senior Credit Facilities and funds generated from
operations will be sufficient to meet its anticipated operating requirements and
to fund its research and development and capital expenditures for the next
twelve months.
The Company utilizes financial instruments to hedge its overall
exposure to the effects of foreign currency and interest rate fluctuations. The
Company utilizes short-term forward and option contracts to hedge currency
exposure when deemed necessary for expenses denominated in Malaysian ringgit and
Philippine peso, as well as revenues denominated in Japanese yen and the major
European currencies. Deferred gains and losses from hedging transactions were
immaterial to the Company's operating results in the first nine months of fiscal
1999 and 1998. The Company does not speculate in these financial instruments.
On January 1, 1999, 11 of the 15 countries, which are members of the
European Monetary Union, introduced a new currency called the "Euro." The
conversion rates between the Euro and the participating nations' currencies were
irrevocably fixed on January 1, 1999. Until January 1, 2002, either the Euro or
a participating country's present currency (a "national currency") will be
accepted as legal currency. The Company has incorporated the necessary changes
to its information systems to allow it to conduct business in Euros, the cost of
which was not material. While it is not possible to predict the impact the Euro
will have on the Company's business or on the economy in general with certainty,
management currently does not anticipate that the Euro conversion will have a
material adverse impact on the Company's results of operations or financial
condition.
OUTLOOK AND BUSINESS RISKS
The statements contained under this heading and elsewhere in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", other than statements of historical facts, are forward-looking
statements based on current expectations and management's estimates, which
involve risks and uncertainties. Actual results may differ materially from those
set forth in or contemplated by such forward-looking statements.
The following factors may affect the Company's operating results for
fiscal 1999: (i) the potential effect of the Company's substantially leveraged
financial condition on its liquidity, its ability to fund capital expenditures,
working capital, debt service and research and development and its ability to
withstand adverse general economic, market or competitive conditions and
developments; (ii) restrictive covenants contained in the Company's debt
instruments that could limit its ability to borrow additional funds, dispose of
or acquire assets or fund capital expenditures; (iii) the highly cyclical and
competitive nature of the semiconductor industry and the potential for continued
softness in demand; (iv) the Company's dependence on continued demand for the
end-products such as personal computers, telecommunications, automotive, and
consumer and industrial electronic goods that incorporate the Company's
products; (v) the need to
11
<PAGE>
design, develop, manufacture, market and support new products in order to remain
competitive in the Company's markets; (vi) the ability to complete the proposed
acquisition of the Power Device Business of Samsung, to efficiently integrate
the Power Device Business operations into the Company and the risk of losing
customers or employees of the acquired operation; (vii) the Company's dependence
on sales to National ; (viii) the Company's dependence on the availability and
cost of raw materials used in its products and upon key subcontractors providing
it with wafer fabrication, assembly and test services; (ix) the Company's
reliance on complex manufacturing processes and its sensitivity to maintaining
yields, efficiencies and continuous operations; (x) the Company's ability to
successfully execute on the transfer of wafer manufacturing processes from its
Mountain View facility to its South Portland facility without negatively
impacting yields and customer service; (xi) uncertainties and legal risks
associated with the dependence on, and potential disputes concerning, patents
and other intellectual property rights; and (xii) foreign currency and other
risks associated with operating a global business.
Market conditions have generally been improving since the first quarter
of fiscal 1999. Despite improving market conditions, prices have remained soft
as the industry continues to cope with excess capacity, although the Company is
seeing a trend toward firming prices in certain product segments. As a result,
the Company expects to see the normal seasonal upturn in trade sales in the
fourth quarter, with moderate growth in trade sales, driven primarily by higher
unit volume, over the comparable quarter a year ago. However, trade sales in
fiscal 1999 will be lower than fiscal 1998. No assurance can be given that
market conditions will continue to improve in the subsequent periods of fiscal
1999 and beyond.
In the fourth quarter of fiscal 1998, National informed the Company
that its demand would be significantly lower in fiscal 1999 than in fiscal 1998.
This has resulted in significantly lower contract manufacturing revenues in the
third quarter and first nine months of fiscal 1999 as compared to the comparable
periods of fiscal 1998 and will result in substantially lower contract
manufacturing revenues throughout fiscal 1999 as compared to fiscal 1998. Such
reduced demand negatively impacted factory utilization, particularly in the
6-inch fab in South Portland, Maine. National, under the terms of the Asset
Purchase Agreement (the "Agreement"), is obligated to purchase an aggregate of
$330.0 million of contract manufacturing services during the 39 month period
which began March 11, 1997, including a minimum of $90.0 million of contract
manufacturing services in fiscal 1999. In addition, National is obligated to
cover a contractually agreed-upon amount of fixed costs in the Company's 6-inch
fab in South Portland, Maine in fiscal 1999. Although demand from National has
recently increased, the Company does not believe National will meet its revenue
commitment in fiscal 1999. In this event, the Agreement requires National to
reimburse Fairchild for unabsorbed fixed costs and lost profit on the revenue
shortfall. The Company recorded revenues of $4.2 million in the third quarter to
recognize a portion of the projected shortfall. National paid $1.2 million to
the Company during the third quarter as a partial payment on the shortfall.
On March 31, 1999, the Company agreed to sell its Mountain View,
California facility for approximately $35.0 million. In conjunction with the
sale, the Company announced the transfer of all wafer production at the
facility, wholly supporting Analog and Mixed Signal products, to its facility in
South Portland, Maine. The transfer is expected to be complete by the end of the
1999 calendar year. Net of a gain on sale of approximately $4.2 million, the
Company will record a one-time charge for severance, equipment write-offs and
other related costs of approximately $8.3 million in the fourth quarter of
fiscal 1999.
The combination of soft market conditions, particularly in the first
half of fiscal 1999, and reduced demand from National, has negatively affected
the Company's profitability and EBITDA. While the Company is hopeful that market
conditions will continue to improve, resulting in improved revenue, factory
utilization and EBITDA (excluding one-time charges) in the fourth quarter of
fiscal 1999 over the third quarter, no assurance can be given that such
conditions will improve. Should prices, order rates and demand from National not
continue to improve during the fourth quarter of fiscal 1999 or National not
comply with its obligations under the Agreement, the Company may experience no
improvement in EBITDA (excluding one-time charges) in the fourth quarter over
the third quarter of fiscal 1999. Despite
12
<PAGE>
improving market conditions, the Company expects substantially lower EBITDA in
fiscal 1999 as compared to fiscal 1998.
On December 20, 1998, the Company announced it had reached an agreement
to acquire the Power Device Business (the "Business") of Samsung Electronics for
approximately $455.0 million in cash. The Business includes a broad portfolio of
standard linear products, power switch devices, IGBT, high-voltage DMOS and
bipolar products, small signal transistors, motor control IC's and power
MOSFETs. The transaction, which is expected to be completed by the end of April,
will be accounted for as a purchase. The final allocation of the aggregate
purchase price is contingent upon studies and valuations which have not yet been
completed. However, the results of these studies and valuations will result in
fair value allocations to assets, including an amount allocated to in-process
research and development, which amount will be immediately expensed upon
consummation of the Acquisition. The Company believes that its products,
technologies and capabilities and those of the Business are largely
complementary, and that the operations of the Business are compatible with the
Company's existing operations. However, increased indebtedness resulting from
the acquisition may have an unfavorable impact on future operating results if
the Company encounters unforeseen obstacles, or is unable to successfully
execute its integration plan.
The Company's assembly and test facilities, as well as certain
subcontractors for wafer fabrication and assembly and test services, are located
in Southeast Asia and Japan. Reliance on these facilities, as well as
subcontractors located in this region of the world, entails certain risks, both
political and economic, including political instability, asset seizures or
nationalizations, currency controls and exchange rate fluctuations. While the
Company has not experienced any significant disruptions in its operations in
that part of the world, no assurance can be given that such continued economic
and political instability would not result in an adverse effect on the Company's
operations or financial condition.
In the fourth quarter of fiscal 1997, the Company commenced its
enterprise software system implementation project for the purpose of separating
from National's business systems. The system, which became operational for
several of the Company's critical business processes in the first quarter of
fiscal 1999, is year 2000 compliant. Additional modules of the system are
scheduled to be implemented throughout fiscal 1999. The Company's business is
dependent upon its information systems as an integral part of all major business
processes. Additionally, internal resources have been redeployed to identify,
test and correct year 2000 problems in other systems throughout the Company,
including those systems embedded in the Company's machinery and equipment.
Identification of systems and equipment that are not year 2000 compliant has
been completed. The Company is also reviewing the year 2000 readiness and
compliance of its principal suppliers of products and services, in order to
identify and assess any negative impacts that such non-compliances could have on
the Company. In addition, the Company is working with its customers to identify
potential year 2000 issues with its products. To date, no issues have been
identified. Management expects that its assessments will be completed by April
30, 1999. During the first nine months of fiscal 1999 and the comparable periods
of fiscal 1998, incremental amounts incurred and charged to expense to identify,
test and correct such other year 2000 problems were immaterial to the financial
statements. Future incremental expenditures are currently estimated to be
approximately $1.0 million, the majority of which should be incurred within the
next six months. Although management believes the Company's systems will be year
2000 compliant, the failure of the Company's suppliers and customers to address
the year 2000 issue could result in disruption to the Company's operations and
have a significant adverse impact on its results of operations, the extent of
which the Company has not yet estimated. The Company is not actively engaged in
preparing contingency plans in the event that key suppliers or customers fail to
become year 2000 compliant. However, the Company, in the ordinary course of
business, seeks to expand its customer base to lessen dependence on any one
customer for a significant portion of its revenues, and seeks second sources of
supply for its key products and services where appropriate.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising in the
ordinary course of its business. Management believes there is no litigation
pending that could have a material adverse effect on its results of operations
or its financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
27 Financial Data Schedule
B) REPORTS ON FORM 8-K
1. On December 23, 1998, FSC Semiconductor Corporation filed a
Form 8-K to disclose Fairchild Semiconductor Corporation's
agreement to purchase the Power Device Business of Samsung
Electronics Co., Ltd.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FSC Semiconductor Corporation
Date: April 13, 1999 By: /s/ Joseph R. Martin
----------------------------------
Joseph R. Martin
Executive Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF FEBRUARY 28, 1999 AND THE INCOME STATEMENT FOR THE
NINE MONTHS ENDED FEBRUARY 28, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 5,400
<SECURITIES> 0
<RECEIVABLES> 101,500
<ALLOWANCES> 0
<INVENTORY> 105,600
<CURRENT-ASSETS> 232,200
<PP&E> 305,900
<DEPRECIATION> 0
<TOTAL-ASSETS> 623,500
<CURRENT-LIABILITIES> 170,600
<BONDS> 524,500
87,700
0
<COMMON> 600
<OTHER-SE> (161,600)
<TOTAL-LIABILITY-AND-EQUITY> 623,500
<SALES> 488,600
<TOTAL-REVENUES> 488,600
<CGS> 381,600
<TOTAL-COSTS> 485,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,700
<INCOME-PRETAX> (41,300)
<INCOME-TAX> (4,100)
<INCOME-CONTINUING> (37,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,200)
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