<PAGE> 1
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 AUGUST 29, 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
FAIRCHILD SEMICONDUCTOR CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 77-0449095
(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 [ ] No [X].
The number of shares outstanding of the issuer's classes of common stock as of
the close of business on September 30, 1999:
Title of Each Class Number of Shares
-------------------------------------- ----------------
Common Stock, par value $.01 per share 100
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FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended August 29, 1999 and
August 30, 1998 3
Condensed Consolidated Balance Sheets as of August 29, 1999
(Unaudited) and May 30, 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended August 29, 1999 and
August 30, 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
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS) (UNAUDITED)
Three Months Ended
------------------------
August 29, August 30,
1999 1998
------ ------
Revenue:
Net sales--trade $291.4 $135.1
Contract manufacturing 33.1 16.2
------ ------
Total revenue 324.5 151.3
Operating expenses:
Cost of sales 205.0 106.3
Cost of contract manufacturing 24.0 14.6
Research and development 14.0 9.2
Selling, general and administrative 56.4 22.6
Restructuring and impairments -- 4.5
------ ------
Total operating expenses 299.4 157.2
------ ------
Operating income (loss) 25.1 (5.9)
Interest expense, net 28.1 11.9
------ ------
Loss before income taxes (3.0) (17.8)
Provision (benefit) for income taxes 0.6 (3.5)
------ ------
Net loss $ (3.6) $(14.3)
====== ======
See accompanying notes to condensed consolidated financial statements.
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FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
(Unaudited)
August 29, May 30,
1999 1999
----------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 119.2 $ 62.4
Receivables, net 130.3 129.7
Inventories 157.3 148.6
Other current assets 19.4 65.7
-------- --------
Total current assets 426.2 406.4
Property, plant and equipment, net 363.1 360.2
Intangible assets, net 270.0 278.5
Other assets 40.0 50.6
-------- --------
Total assets $1,099.3 $1,095.7
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 2.6 $ 14.1
Accounts payable 98.4 105.7
Accrued expenses and other current liabilities 98.6 85.0
-------- --------
Total current liabilities 199.6 204.8
Long-term debt, less current portion 716.5 895.9
Other liabilities 2.6 1.4
-------- --------
Total liabilities 918.7 1,102.1
-------- --------
Commitments and contingencies
Stockholder's equity (deficit):
Common stock -- --
Additional paid-in capital 252.6 62.0
Accumulated deficit (72.0) (68.4)
-------- --------
Total stockholder's equity (deficit) 180.6 (6.4)
-------- --------
Total liabilities and stockholder's equity (deficit) $1,099.3 $1,095.7
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS) (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
August 29, August 30,
1999 1998
------- ------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3.6) $(14.3)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 35.1 23.3
Amortization of deferred compensation 0.4 --
Restructuring charges, net of cash expended -- 2.4
Non-cash interest expense 8.2 1.0
Loss (gain) on disposal of property, plant and equipment 0.3 (0.2)
Deferred income taxes (1.4) (3.5)
Changes in operating assets and liabilities, net:
Receivables (0.6) (0.5)
Inventories (8.7) 1.9
Other current assets 5.4 9.1
Current liabilities 5.9 (20.8)
Other assets and liabilities 3.6 (3.7)
------- ------
Cash provided by (used in) operating activities 44.6 (5.3)
------- ------
Cash flows from investing activities:
Capital expenditures (28.1) (13.0)
Proceeds from sale of property, plant and equipment -- 1.0
Purchase of molds and tooling (0.3) (0.8)
Refund of value added tax paid in connection with
acquisition 40.9 --
------- ------
Cash provided by (used in) investing activities 12.5 (12.8)
------- ------
Cash flows from financing activities:
Proceeds from revolving credit facility, net -- 16.6
Repayment of long-term debt (190.9) --
Capital contribution from Fairchild International 190.6 --
------- ------
Cash provided by (used in) financing activities (0.3) 16.6
------- ------
Net change in cash and cash equivalents 56.8 (1.5)
Cash and cash equivalents at beginning of period 62.4 6.5
------- ------
Cash and cash equivalents at end of period $ 119.2 $ 5.0
======= ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheets of Fairchild Semiconductor
Corporation (the "Company") as of August 29, 1999 and May 30, 1999 and the
Condensed Consolidated Statements of Operations and Cash Flows for the
three-month periods ended August 29, 1999 and August 30, 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 30, 1999.
Certain prior period amounts have been reclassified to conform to their
current presentation.
NOTE 2 - INVENTORIES
The components of inventories are as follows:
August 29, May 30,
1999 1999
---------- -------
(In millions)
Raw materials $ 14.5 $ 13.6
Work in process 96.3 93.1
Finished goods 46.5 41.9
------ ------
Total inventories $157.3 $148.6
====== ======
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended
----------------------------
August 29, August 30,
1999 1998
---------- ----------
(In millions)
Cash paid for:
Income taxes $0.6 $0.2
==== ====
Interest $8.0 $3.4
==== ====
NOTE 4 - SEGMENT INFORMATION
Selected operating segment financial information for the three months
ended August 29, 1999 and August 30, 1998 is as follows:
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<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------
August 29, 1999 August 30, 1998
-------------------------------- ----------------------------------
Contract Contract
Manu- Manu-
Revenue: Trade facturing Total Trade facturing Total
------ --------- ------ ------ --------- ------
(In millions)
<S> <C> <C> <C> <C> <C> <C>
Analog $ 17.9 $ -- $ 17.9 $ 16.9 $ -- $ 16.9
Discrete 55.3 4.9 60.2 38.9 2.8 41.7
Power Devices 128.9 8.1 137.0 -- -- --
Logic 72.7 20.1 92.8 60.8 13.4 74.2
Memory 16.6 -- 16.6 18.5 -- 18.5
------ ----- ------ ------ ----- ------
Total $291.4 $33.1 $324.5 $135.1 $16.2 $151.3
====== ===== ====== ====== ===== ======
</TABLE>
Three Months Ended
----------------------------
August 29, August 30,
Operating income (loss): 1999 1998
---------- ----------
(In millions)
Analog $(2.6) $(0.1)
Discrete 2.6 1.9
Power Devices 24.7 --
Logic 9.1 3.0
Memory (0.4) (6.2)
Other unusual charges (8.3) (4.5)
----- -----
Total $25.1 $(5.9)
===== =====
NOTE 5 - RESTRUCTURING CHARGES
Substantially all amounts have been expended with respect to the
Company's fiscal 1999 restructuring actions with the exception of the analog
wafer production transfer to South Portland, Maine. The following table
summarizes the activity of the remaining active restructuring plan:
Fourth Quarter Fiscal 1999 Mountain View Restructuring (In millions):
Total charge $10.0
Cash payments --
Non-cash items (3.4)
-----
Accrual balance as of May 30, 1999 6.6
Cash payments (0.6)
-----
Accrual balance as of August 29, 1999 $ 6.0
=====
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS
IN THIS REPORT. SEE "OUTLOOK AND BUSINESS RISKS" BELOW.
OVERVIEW
Fairchild Semiconductor Corporation (the "Company"), is a leading
designer, manufacturer and supplier of high-performance logic, non-volatile
memory, discrete power and signal technology and
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analog and mixed signal semiconductors, serving the telecommunications,
consumer, industrial, personal systems and automotive markets.
The Company is changing its fiscal year end to the last Sunday in
December from the last Sunday in May. This discussion covers the first quarter
of the transition period from May 31, 1999 to December 26, 1999. Throughout this
discussion, we refer to the first quarter of the transition period as the first
quarter of "stub year 1999." The comparable quarter a year ago is referred to as
the first quarter of "fiscal 1999." The Company will file an annual report on
Form 10-K for the transition period from May 31, 1999 to December 26, 1999. On
August 9, 1999, the Company's parent, Fairchild Semiconductor International,
Inc. ("Fairchild International") consummated an initial public offering ("IPO")
of its Class A Common Stock. Using a portion of the proceeds received from the
IPO, Fairchild International made a capital contribution to the Company, the
proceeds of which were used to retire a portion of the Company's debt.
RESULTS OF OPERATIONS
The Company incurred a net loss of $3.6 million in the first quarter of
stub year 1999, compared to a net loss of $14.3 million in the first quarter of
fiscal 1999. Operating income was $25.1 million in the first quarter of stub
year 1999, compared to an operating loss of $5.9 million in the first quarter of
fiscal 1999. Excluding unusual charges of $8.3 million in the first quarter of
stub year 1999 and $4.5 million in the first quarter of fiscal 1999, the Company
had operating income of $33.4 million for the first quarter of stub year 1999,
compared to an operating loss of $1.4 million in the first quarter of fiscal
1999. These unusual charges, which were recorded in selling, general and
administrative expense ("SG&A") in the first quarter of stub year 1999,
represented charges resulting from the forgiveness of certain loans made to the
Company's management for payment of individual income tax liabilities resulting
from their ownership of Fairchild International common stock. Unusual charges in
the first quarter of fiscal 1999 were due to restructuring charges as a result
of a workforce reduction. The increase in operating income is due to the
acquisition of the Power Device Products Group ("Power Devices") from Samsung
Electronics Co., Ltd. ("Samsung Electronics") and higher revenues and gross
profits due to improved business conditions, resulting in higher factory
utilization in the first quarter of stub year 1999 as compared to the first
quarter of fiscal 1999.
All operating segments except Analog reported improved operating
results in the first quarter of stub year 1999 as compared to the first quarter
of fiscal 1999. Analog had an operating loss of $2.6 million in the first
quarter of stub year 1999 as compared to a loss of $0.1 million in the first
quarter of fiscal 1999. The increase in Analog's operating loss was due to an
unfavorable sales mix and increased inventory valuation reserves in anticipation
of the closure of the Mountain View, California wafer fab in the second quarter
of stub year 1999. Discrete and Logic operating income was $2.6 million and $9.1
million, respectively, in the first quarter of stub year 1999 as compared to
$1.9 million and $3.0 million, respectively, in the first quarter of fiscal
1999. The increases in Discrete and Logic operating income were due to higher
revenues and improved gross profits due to improved factory utilization. Memory
had an operating loss of $0.4 million in the first quarter of stub year 1999 as
compared to a unproved loss of $6.2 million in the first quarter of fiscal 1999.
The decrease in the Memory operating loss was due to the benefit from the
implementation of the Memory restructuring plan in the fourth quarter of fiscal
1999.
Excluding depreciation and amortization of $35.5 million and $23.3
million in the first quarter of stub year 1999 and fiscal 1999, respectively,
and unusual charges, earnings before interest, taxes, depreciation and
amortization ("EBITDA") were $68.9 million in the first quarter of stub year
1999 compared to $21.9 million in the first quarter of fiscal 1999. 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
(89.8% and 89.3% of total revenues in the first quarters of stub year 1999 and
fiscal 1999, respectively) and revenues from
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contract manufacturing services, provided to National Semiconductor and Samsung
Electronics (10.2% and 10.7% of total revenues in the first quarters of stub
year 1999 and fiscal 1999, respectively).
Trade revenues increased 115.7% to $291.4 million in the first quarter
of stub year 1999 compared with $135.1 million in the first quarter of fiscal
1999. Trade sales for the first quarter of stub year 1999 include those of the
Power Device Products Group. Excluding Power Devices, trade sales increased
20.3% in the first quarter of stub year 1999 over the first quarter of fiscal
1999, as higher sales volume offset lower average selling prices. The increase
in trade sales is attributable to improved demand due to strength in end-markets
such as personal computers and an economic recovery in the Asia/Pacific region,
and was observed across all segments except Memory, whose sales declined as a
result of exiting certain unprofitable product lines. Analog, Discrete and Logic
sales were up 5.9%, 42.2% and 19.6%, respectively in the first quarter of stub
year 1999 over the first quarter of fiscal 1999.
Approximately 69.3% of the Company's trade revenues were generated from
Analog, Discrete and Power Device products in the first quarter of stub year
1999.
Geographically, 23.4%, 12.3%, 42.9% and 21.4% of trade sales were
derived from North America, Europe, Asia/Pacific and Korea, respectively, in the
first quarter of stub year 1999. Excluding Power Devices, 34.9%, 17.7% and 47.4%
of trade sales were derived from North America, Europe and Asia/Pacific
(including Korea), respectively, in the first quarter of stub year 1999,
compared to 42.2%, 18.7% and 39.1% in the first quarter of fiscal 1999.
Excluding Power Devices, the Asia/Pacific and European regions saw increases in
trade sales in the first quarter of stub year 1999 compared to the first quarter
of fiscal 1999 of 45.6% and 13.9%, respectively, while the Americas saw no
change. The increases resulted from increased customer demand due to general
market improvement, and in the case of Asia/Pacific, improving economic
conditions.
Contract manufacturing revenues increased 104.3% to $33.1 million in
the first quarter of stub year 1999 compared to $16.2 million in the first
quarter of fiscal 1999. Excluding contract manufacturing services provided by
the Power Devices Products Group to Samsung Electronics, contract manufacturing
revenues increased 54.3% in the first quarter of stub year 1999 as compared to
fiscal 1999, reflecting increased demand from National Semiconductor.
GROSS PROFIT
Gross profit increased 214.1% to $95.5 million in the first quarter of
stub year 1999 compared to $30.4 million in the first quarter of fiscal 1999.
Excluding the effect of Power Devices, gross profit increased 45.1% in the first
quarter of stub year 1999 over the first quarter of fiscal 1999. As a percentage
of trade sales, gross trade profits were 29.6% in the first quarter of stub year
1999. Excluding Power Devices, gross trade profits as a percentage of trade
sales were 24.3% in the first quarter of stub year 1999 compared to 21.3% in the
first quarter of fiscal 1999. The increase in gross trade profit as a percentage
of trade sales was due to the favorable effect of increased factory utilization
and the benefit of cost reduction actions undertaken in fiscal 1999, offset by
lower average selling prices. Contract manufacturing gross profit increased
468.8% to $9.1 million in the first quarter of stub year 1999 compared to $1.6
million in the first quarter of fiscal 1999. The increase in contract
manufacturing gross profit is due to incremental business with Samsung
Electronics as a result of the acquisition of Power Devices and greater demand
from National Semiconductor reflective of improved market conditions. Contract
manufacturing gross profit for the first quarter of fiscal 1999 included $6.2
million of fixed cost reimbursement under the Company's manufacturing agreements
with National Semiconductor.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $14.0 million, or 4.8%
of trade sales, in the first quarter of stub year 1999, compared to $9.2
million, or 6.8% of trade sales, in the first quarter of fiscal 1999. The
increase in R&D expenses is driven by the dedicated R&D costs incurred by Power
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Devices in the first quarter of stub year 1999 which the Company did not incur
in fiscal 1999. R&D efforts are focused on the Company's growth products
(Analog, DMOS, Power Devices and CMOS logic). R&D expenditures for these growth
products were 5.6% and 9.3% of trade sales in the first quarter of stub year
1999 and fiscal 1999, respectively. 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 first quarter of stub year 1999 and fiscal 1999. The decrease
in R&D expenditures for growth products as a percentage of trade sales is due to
the relatively small R&D requirements of the power device business as a
percentage of sales.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $56.4
million, or 19.4% of trade sales, in the first quarter of stub year 1999,
compared to $22.6 million, or 16.7% of trade sales, in the first quarter of
fiscal 1999. SG&A expenses in the first quarter of stub year 1999 include an
unusual charge of $8.3 million for the forgiveness of certain loans made to the
Company's management investors for payment of individual income tax liabilities
resulting from their ownership of the Company's common stock. Excluding this
unusual charge, SG&A was $48.1 million, or 16.5% of trade sales, in the first
quarter of stub year 1999. The increase in SG&A expenses is primarily the result
of the incremental SG&A expenses of Power Devices, which the Company did not
incur in the first quarter of fiscal 1999 and increased selling expenses for the
pre-existing business due to higher sales volume.
RESTRUCTURING
The Company incurred a pre-tax restructuring charge of approximately
$4.5 million in the first quarter of fiscal 1999. The charge consisted of $0.8
million related to non-cash asset impairments and $3.7 million of employee
separation costs related to the reduction of approximately 600 salaried, hourly
and temporary positions, then representing approximately 10% of the Company's
payroll. Substantially all amounts have been expended with respect to the
Company's fiscal 1999 restructuring actions with the exception of the Analog
wafer production transfer to South Portland, Maine. Approximately $0.6 million
was expended in the first quarter of stub year 1999 for this transfer with an
estimated $6.0 million of accrued liabilities expected to be expended by the end
of the first quarter of 2000.
INTEREST EXPENSE, NET
Interest expense, net was $28.1 million in the first quarter of stub
year 1999, compared to $11.9 million in the first quarter of fiscal 1999.
Interest expense, net in the first quarter of stub year 1999 includes an unusual
charge of $7.2 million for the write-off of deferred financing fees associated
with debt retired with the proceeds from the capital contribution from Fairchild
International. Excluding this charge, interest expense, net was $20.9 million in
the first quarter of stub year 1999. The increase is principally the result of
indebtedness incurred to finance the Power Device acquisition, which occurred in
the fourth quarter of fiscal 1999.
INCOME TAXES
Income tax expense was $0.6 million for the first quarter of stub year
1999, compared to a tax benefit of $3.5 million in the first quarter of fiscal
1999. The effective tax rates for the first quarter of stub year 1999 and fiscal
1999 on book pre-tax income were 20.0% and 19.7%, respectively. In the first
quarter of stub year 1999, the tax provision is based on income generated from
the Company's foreign operations, excluding Korea where the Company benefits
from a tax holiday. The decrease in the tax benefit is due to the Company's
limited ability to recognize the future benefit of U.S. net operating loss
carryforwards.
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PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with its acquisitions of the Power Device Products Group
and Raytheon Semiconductor completed in fiscal 1999 and fiscal 1998,
respectively, the Company allocated a portion of each purchase price to
in-process research and development projects. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to the incomplete
products. At the date of the acquisition, the development of these projects had
no alternative future uses. Accordingly, these costs were expensed as of each
respective acquisition date.
The Power Device Product Group's results to date have been consistent,
in all material respects, with the assumptions of the Company at the time of the
acquisition as they relate to the value of the purchased in-process research and
development. Actual results to date on Raytheon products have fallen short of
expectations due to unfavorable market conditions during the recent industry
downturn and higher than expected costs on certain projects. The Company has
addressed the cost issues in the restructuring of its Mountain View facility and
expects improvement in demand for these products as market conditions continue
to improve. The weaker cash flows from these projects have not had, nor are
expected to have, any material adverse impact on the results of the Company or
its financial position, including the recoverability of intangible assets.
LIQUIDITY AND CAPITAL RESOURCES
As of August 29, 1999, the Company's cash and cash equivalents balance
was $119.2 million, an increase of $56.8 million from May 30, 1999. In addition,
the Company has $100.0 million available under its Revolving Credit Facility,
which was not utilized as of August 29, 1999.
On August 9, 1999, the Company's parent, Fairchild International,
completed an initial public offering of 20,000,000 shares of its Class A Common
Stock. With a portion of the proceeds from the offering, Fairchild International
made a capital contribution to the Company in the amount of $190.6 million. The
Company used these proceeds to repay the Tranche A term loan and partially repay
the Tranche B term loan, in each case under the Company's senior credit
facilities.
During the first quarter of stub year 1999, the Company's operations
provided $44.6 million in cash compared to a use of $5.3 million of cash in the
first quarter of fiscal 1999. The increase in cash provided by operating
activities reflects an increase in net income adjusted for non-cash items of
$30.3 million as well as an increase in cash flows from changes in operating
assets and liabilities of $19.6 million. Cash provided by investing activities
during the first quarter of stub year 1999 totaled $12.5 million, compared to a
use of $12.8 million in the first quarter of fiscal 1999. The difference
primarily relates to the refund of Korean value added taxes paid as a result of
the acquisition of the Power Device Products Group. Capital expenditures in the
first quarter of stub year 1999 were made principally to add capacity in the
Company's assembly and test manufacturing facilities, whereas in the first
quarter of fiscal 1999, capital purchases were made primarily to install the
Company's enterprise software system. Capital expenditures for the balance of
stub year 1999 will be made primarily to increase capacity in the Company's
manufacturing facilities.
The senior credit facilities, the 10 1/8% Senior Subordinated Notes and
the 10 3/8% Senior Subordinated Notes do, and other debt instruments the Company
may enter into in the future may, impose various restrictions and covenants on
the Company which could potentially limit the Company's ability to respond to
market conditions, to provide for unanticipated capital investments or to take
advantage of business opportunities. The restrictive covenants include
limitations on consolidations, mergers and acquisitions, restrictions on
creating liens, restrictions on paying dividends or making other similar
restricted payments, restrictions on asset sales, limitations on borrowing
money, and limitations on capital expenditures, among other restrictions. The
covenants relating to financial ratios include minimum fixed charge and interest
coverage ratios and a maximum leverage ratio. The senior credit facilities also
limit the Company's ability to modify its certificate of incorporation, bylaws,
shareholder
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agreements or similar arrangements. In addition, the senior credit facilities,
the 10 1/8 % Senior Subordinated Notes and the 10 3/8 % Senior Subordinated
Notes contain additional restrictions limiting the ability of the Company's
subsidiaries to make dividends or advances to the Company. However, the
Company's subsidiaries are permitted without material restrictions under its
debt instruments to make payments of dividends or other advances. The Company
believes that those funds permitted to be transferred, together with existing
cash, will be sufficient to meet cash obligations. The Company expects that its
existing cash, together with available funds 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. In the long-term, additional
borrowing or equity investment may be required to fund future acquisitions.
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 within the meaning of Section 21E of the Securities Exchange Act of
1934. Forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," "seeks,"
"approximately," "intends," "plans," "estimates," "anticipates," or "hopeful,"
or the negative of those terms or other comparable terminology, or by
discussions of strategy, plans or intentions. Forward-looking statements are
made based on current expectations and management's estimates, which involve
risks and uncertainties, including those described in the following paragraph.
Other factors that may affect the Company's future operating results are
described in Fairchild Semiconductor Corporation's annual report on Form 10-K
for the fiscal year ended May 30, 1999, which was filed with the Securities and
Exchange Commission on August 27, 1999, under the caption "Business-Risk
Factors." Such risks and uncertainties could cause actual results to be
materially different than those in the forward-looking statements. Readers are
cautioned not to place undue reliance on the forward-looking statements in this
quarterly report on Form 10-Q, which speak only as of the date hereof. The
Company assumes no obligation to update such information.
The following factors may affect the Company's future operating
results: (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 its products; (v) the
need to design, develop, manufacture, market and support new products in order
to remain competitive in our markets; (vi) the ability to efficiently integrate
the operations of the Power Device Products Group into the Company and the risk
of losing customers or employees of the acquired operation; (vii) 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; (viii) the Company's reliance on complex manufacturing processes
and its sensitivity to maintaining yields, efficiencies and continuous
operations; (ix) 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; (x)
uncertainties and legal risks associated with the dependence on, and potential
disputes concerning patents and other intellectual property rights; and (xi)
foreign currency and other risks associated with operating a global business.
Market conditions have generally been improving since the third quarter
of fiscal 1999. Strong bookings and demand throughout the historically slower
summer season evidenced an industry upturn. A portion of the bookings increase
occurred as industry-wide lead times extended and customers committed their
backlog for a longer period of time.
12
<PAGE> 13
Going forward, sequential bookings increases are expected to return to more
normal seasonal patterns as no further lengthening of lead times is anticipated.
The Company expects revenues to increase moderately in the second quarter of
stub year 1999 over the first quarter of stub year 1999. Despite improving
market conditions, pricing has remained soft. However, due to the tightening
market, management expects that prices will rise slowly as market conditions
continue to improve and that margins will also improve slowly with these
increases, better product mix, manufacturing cost reductions and better overhead
spreading. As a result of the acquisition of the Power Device Products Group,
the Company expects trade sales and EBITDA in stub year 1999 will be higher than
the comparable periods of fiscal 1999.
Contract manufacturing revenues with National Semiconductor increased
substantially in the first quarter of stub year 1999 compared to the first
quarter of fiscal 1999. For the period from May 31, 1999 to May 26, 2000,
National Semiconductor is obligated to purchase $80.0 million of contract
manufacturing services. Although demand from National Semiconductor increased in
the first quarter of stub year 1999, there can be no assurance that demand will
remain at these levels. Should National Semiconductor not meet its purchase
commitment, it could result in lower fixed cost absorption, and hence could
negatively impact gross profit in stub year 1999.
As a result of the acquisition of the Power Device Products Group,
Samsung Electronics became one of the Company's largest customers. Under the
terms of a product supply agreement, Samsung Electronics is obligated to
purchase approximately 702 million units per year of power device products
during the three-year period following the acquisition. Samsung Electronics'
purchase commitment is contingent upon our ability to satisfy Samsung
Electronics' quality and other specifications for power device products. Should
the Company not be able to comply with such specifications, or Samsung
Electronics not fulfill its obligation under the product supply agreement, there
could be a material adverse effect on our trade revenues and results from
operations.
The Company's assembly and test facilities, a wafer fabrication
facility, as well as certain subcontractors for wafer fabrication and assembly
and test services, are located in Southeast Asia, Korea and Japan. Reliance on
these facilities, as well as subcontractors located in this region of the world,
entails risks, both political and economic, including political instability,
asset seizures and currency exchange rate fluctuations. No assurance can be
given that such economic and political instability would not result in an
adverse effect on our operations or financial condition.
On September 21, 1999, Taiwan experienced a major earthquake. The
earthquake and resulting aftershocks have caused power outages and significant
damage to Taiwan's infrastructure. The Company has no manufacturing facilities
in Taiwan. However, the Company has a number of customers, primarily personal
computer manufacturers, located there. Based on initial damage assessments from
key customers in Taiwan, the Company expects no significant impact on its
revenue in that region as a result of the earthquake.
YEAR 2000 COMPLIANCE
In the fourth quarter of fiscal 1997, the Company commenced its
enterprise software system implementation project for the purpose of separating
from National Semiconductor's business systems. The system, which is operational
for most of the Company's critical business processes, is year 2000 compliant.
For those legacy systems that will not be converted by December 31, 1999, year
2000 remediation projects are underway, and are expected to be completed by
October 31, 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. As of August 29,
1999, remediation projects to correct identified problems were substantially
completed. Final completion of all projects is expected by October 31, 1999. The
Company is also reviewing the year 2000 readiness and compliance of its
principal suppliers of products and
13
<PAGE> 14
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. The
Company has completed its assessments. The Company does not believe there are
any year 2000 problems with its products. No year 2000 issues were noted with
its key suppliers, which in the Company's opinion would cause a major disruption
to its operations. In the first quarter of stub year 1999 and in fiscal 1999,
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 $0.7 million, the majority of which should be incurred before the
end of the second quarter of stub year 1999. Although we believe 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 actively engaged in preparing contingency plans in the event that key
suppliers fail to become year 2000 compliant. For example, for key materials,
which are imported from outside the U.S., arrangements are being made to insure
at least four weeks of available supply. 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.
The Power Device Products Group is dependent upon the information
systems of Samsung Electronics. Under the terms of an agreement with Samsung SDS
Co., Ltd., entered into in connection with the acquisition of the Power Device
Products Group, Samsung SDS Co., Ltd. has agreed to provide information
technology services to the Power Device Products Group and to support the use of
its information systems for a three-year period following consummation of the
acquisition of the power device business. The terms of the agreement with
Samsung SDS Co., Ltd. require it to insure the systems utilized by the Power
Device Products Group are year 2000 compliant. Samsung Electronics' systems have
been certified by a Korean government agency to be year 2000 compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosure about Market Risk, in the Company's Annual Report on Form 10 K for
the year ended May 30, 1999 and under the subheading "Quantitative and
Qualitative Disclosures about Market Risk" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 31 of the
Company's Annual Report on Form 10 K for the year ended May 30, 1999.
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
14
<PAGE> 15
On June 28, 1999, the registrant amended a current report on Form 8-K
filed April 27, 1999 for the purpose of including therein financial statements
and pro forma financial information with respect to its acquisition of the Power
Device Business of Samsung Electronics Co., Ltd.
On July 9, 1999, the registrant filed a current report on Form 8-K
disclosing a change in the Company's fiscal year end from the last Sunday in May
to the last Sunday in December.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
15
<PAGE> 16
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.
Fairchild Semiconductor Corporation
Date: October 12, 1999 By: /s/ David A. Henry
------------------------------------
David A. Henry
Vice President, Corporate Controller
(Principal Accounting Officer)
16
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AUGUST 29, 1999.
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