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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 NOVEMBER 29, 1998
[ ] 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
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0449095
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(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
333 WESTERN AVENUE
SOUTH PORTLAND, MAINE 04106
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(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 December 31, 1998:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NUMBER OF SHARES
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<S> <C>
Common Stock; $0.01 par value 100
</TABLE>
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FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Six Months Ended November 29, 1998 and
November 23, 1997 3
Condensed Consolidated Balance Sheets as of November 29, 1998
(Unaudited) and May 31, 1998 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended November 29, 1998 and
November 23, 1997 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 13
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURE 14
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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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- ----------------------------
NOVEMBER 29, NOVEMBER 23, NOVEMBER 29, NOVEMBER 23,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenue:
Net sales--trade $152.0 $155.3 $287.1 $314.0
Contract manufacturing--National Semiconductor 15.9 40.5 32.1 81.3
------ ------ ------ ------
Total revenue 167.9 195.8 319.2 395.3
Operating expenses:
Cost of sales 118.4 105.4 224.7 213.4
Cost of contract manufacturing--National Semiconductor 13.9 31.3 28.5 61.4
Research and development 9.1 7.8 18.3 14.9
Selling, general and administrative 23.6 21.0 46.2 42.0
Restructuring -- -- 4.5 --
------ ------ ------ ------
Total operating expenses 165.0 165.5 322.2 331.7
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Operating income (loss) 2.9 30.3 (3.0) 63.6
Interest, net 12.7 10.7 24.6 21.7
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Income (loss) before income taxes (9.8) 19.6 (27.6) 41.9
Provision (benefit) for income taxes (2.0) 6.9 (5.5) 14.7
------ ------ ------ ------
Net income (loss) $ (7.8) $ 12.7 $(22.1) $ 27.2
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------ ------ ------ ------
</TABLE>
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)
NOVEMBER 29, MAY 31,
1998 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11.2 $ 6.5
Receivables, net 93.0 75.0
Inventories 101.4 108.0
Other current assets 13.1 20.0
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Total current assets 218.7 209.5
Property, plant and equipment, net 318.1 342.9
Deferred income taxes 22.6 17.5
Intangible assets, net 29.8 31.5
Other assets 31.1 30.4
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Total assets $620.3 $631.8
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LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 45.4 $ 13.2
Accounts payable 66.7 77.7
Accrued expenses and other current liabilities 48.1 55.9
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Total current liabilities 160.2 146.8
Long-term debt, less current portion 434.3 438.1
Other liabilities 1.6 0.6
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Total liabilities 596.1 585.5
Commitments and contingencies
Stockholder's equity:
Common stock -- --
Additional paid-in capital 12.0 12.0
Accumulated earnings 12.2 34.3
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Total stockholder's equity 24.2 46.3
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Total liabilities and stockholder's equity $620.3 $631.8
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS) (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
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NOVEMBER 29, NOVEMBER 23,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (22.1) $ 27.2
Adjustments to reconcile net income (loss) to cash provided by (used in) operating
activities:
Depreciation and amortization 47.4 40.3
Restructing charge, net of cash expended 1.9 --
(Gain) loss on disposal of property, plant and equipment (0.1) 0.5
Deferred income taxes (5.2) 4.6
Changes in operating assets and liabilities, net:
Accounts receivable (18.0) 1.2
Inventories 6.6 (5.1)
Prepaid expenses and other current assets 7.0 4.9
Current liabilities (19.9) 0.6
Other assets and liabilities (1.5) 0.1
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Cash provided by (used in) operating activities (3.9) 74.3
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Cash flows from investing activities:
Capital expenditures (19.4) (27.5)
Proceeds from sale of property, plant and equipment 1.0 --
Purchase of molds and tooling (1.4) (2.9)
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Cash used in investing activities (19.8) (30.4)
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Cash flows from financing activities:
Proceeds from revolving credit facility, not 31.5 --
Repayment of long-term debt (3.1) (5.5)
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Cash provided by (used in) financing activities 28.4 (5.3)
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Net change in cash and cash equivalents 4.7 38.4
Cash and cash equivalents at beginning of period 6.5 40.7
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Cash and cash equivalents at end of period $ 11.2 $ 79.1
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Supplemental cash flow information:
Cash paid for:
Income taxes $ 1.0 $ 3.3
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Interest $ 22.7 $ 22.6
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</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 November 29, 1998 and May 31, 1998, the
Condensed Consolidated Statements of Operations for the three and six month
periods ended November 29, 1998 and November 23, 1997 and the Condensed
Consolidated Statements of Cash Flows for the six month periods ended November
29, 1998 and November 23, 1997 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>
November 29, May 31,
1998 1998
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(In millions)
<S> <C> <C>
Raw materials $ 8.1 $ 13.0
Work in process 71.0 69.5
Finished goods 22.3 25.5
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Total inventories $ 101.4 $ 108.0
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</TABLE>
NOTE 3 - RESTRUCTURING CHARGE
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 accrues 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. Through the first half of fiscal 1999, approximately $2.6 million of
these costs have been paid with the remaining $1.1 million of accruals to be
expended by the end of fiscal 1999.
NOTE 4 - SUBSEQUENT EVENT
On December 21, 1998, the Company signed an agreement to acquire the
Power Device Division of Samsung Electronics Co., Ltd., for approximately $455.0
million. The purchase includes all of the worldwide business and assets of the
Power Device Division, comprising high volume wafer fabs in Bucheon, South
Korea, design and development personnel in Bucheon, and secured services for
high volume assembly and test operations for the Power Device Division, and
worldwide sales and marketing personnel. The transaction, which will be
accounted for as a purchase, is expected to be completed during the fourth
quarter of fiscal 1999.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 analog and mixed signal
semiconductors, serving the telecommunications, consumer, industrial, personal
systems and automotive markets.
RESULTS OF OPERATIONS
The Company incurred net losses of $7.8 million and $22.1 million for
the second quarter and first half of fiscal 1999, respectively, compared to net
income of $12.7 million and $27.2 million in the corresponding periods last
year. Operating income was $2.9 million for the second quarter of fiscal 1999 as
compared to operating income of $30.3 million in the same period last year.
Excluding a one-time restructuring charge of $4.5 million, the Company had
operating income for the first six months of fiscal 1999 of $1.5 million as
compared to operating income of $63.6 million for the same period last year.
Fiscal 1999 second quarter and first half operating income includes $0.9 million
and $0.8 million, respectively, for the Company's analog and mixed signal
operations ("Raytheon" or "Analog") acquired from Raytheon Company in December
1997. The decrease in profitability for both the second quarter and the first
six months of fiscal 1999 over the comparable periods 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
Semiconductor ("National"). These factors, prevalent in the first quarter of
fiscal 1999, and to a lesser degree in the second quarter of fiscal 1999, have
combined to cause excess capacity in the semiconductor industry resulting in
price and margin erosion. Excluding depreciation and amortization of $24.1
million and $47.4 million in the second quarter and first half of fiscal 1999,
respectively, and $20.3 million and $40.3 million in the comparable periods of
fiscal 1998, and one-time charges, earnings before interest, taxes and
depreciation and amortization ("EBITDA") were $27.0 million and $48.9 million in
the second quarter and first half of fiscal 1999, respectively, compared to
$50.6 million and $103.9 million in the comparable periods of fiscal 1998.
Excluding Analog, EBITDA was $23.9 million and $43.7 million for the second
quarter and first six months of fiscal 1999, respectively. 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
(90.5% and 89.9% of total revenues in the second quarter and first half of
fiscal 1999, respectively, and 79.3% and 79.4% in the comparable periods of
fiscal 1998) and revenues from contract manufacturing services provided to
National (9.5% and 10.1% of total revenues in the second quarter and first half
of fiscal 1999, respectively, and 20.7% and 20.6% in the comparable periods of
fiscal 1998). Trade sales decreased 2.1% to $152.0 million in the second quarter
of fiscal 1999 compared to $155.3 million in the second quarter of fiscal 1998.
However, in the second quarter of fiscal 1999, trade sales increased 12.5% over
the first quarter, reflective of an easing of 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 8.6% to $287.1
million compared
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to $314.0 million for the comparable period of fiscal 1998. Trade sales for the
three and six-month periods ending November 29, 1998 include those of Analog.
Excluding Analog, trade sales decreased 13.5% and 19.6%, respectively, for the
three and six month periods ending November 29, 1998 over the comparable periods
of fiscal 1998. These declines impacted all product groups and are the result of
aforementioned industry-wide market softness during the first half of fiscal
1999. Logic, Discrete and Memory trade sales decreased by 15.1%, 3.2% and 26.2%,
respectively, in the second quarter of fiscal 1999 over the second quarter of
fiscal 1998. For the first six months of fiscal 1999, Logic, Discrete and Memory
trade sales decreased by 19.2%, 11.1% and 34.2%, respectively, over the
comparable period a year ago.
Geographically, excluding Analog, 37%, 17% and 46% of trade sales were
derived from North America, Europe and Asia/Pacific, respectively, in the second
quarter of fiscal 1999, compared to 38%, 22% and 40% in the second quarter of
fiscal 1998. Trade sales were down in all regions in the current quarter over
the corresponding quarter of the previous year. Trade sales decreased by 11.3%,
34.7% and 3.8% in North America, Europe and Asia/Pacific, respectively. The
decline in Europe revenue is driven by soft demand and resulting price
competition. The Asia/Pacific region, although down slightly year over year for
the second quarter, saw the effects of soft market conditions offset somewhat by
the introduction of new products such as DMOS power and CMOS logic and a recent
strengthening of the personal computer market. The strengthening of the personal
computer market in the second quarter of fiscal 1999 helped to drive North
America and Asia/Pacific revenues up 13.5% and 26.8%, respectively, over the
first quarter. Europe revenues were down slightly over the first quarter. On a
year-to-date basis, 37%, 20% and 43% of trade sales were derived in North
America, Europe and Asia/Pacific, respectively, compared to 37%, 20% and 43% in
the first half of fiscal 1998. Trade sales in all regions were lower in the
first half of fiscal 1999 compared to a year ago. Trade sales decreased 17.4%,
25.1% and 18.7% in North America, Europe and Asia Pacific, respectively, as a
result of soft market conditions.
Contract manufacturing revenues have decreased sharply to $15.9
million in the second quarter of fiscal 1999, compared to $40.5 million in the
second quarter of fiscal 1998. On a year-to-date basis, contract manufacturing
revenues decreased to $32.1 million, compared to $81.3 million for the
comparable period in fiscal 1998. Contract manufacturing revenue includes $5.4
million and $11.6 million of billings, respectively, in the second quarter and
first half of fiscal 1999 for committed fixed cost absorption under the
Company's manufacturing agreements with National. The aforementioned decreases
are reflective of greatly reduced demand from National.
GROSS PROFIT
Gross profit decreased 39.8% to $35.6 million in the second quarter of
fiscal 1999, compared to $59.1 million in the second quarter of fiscal 1998.
Excluding Analog, gross trade profit decreased 47.5% in the second quarter of
fiscal 1999 over the second quarter of fiscal 1998. As a percentage of trade
sales, gross trade profit was 22.1% in the second quarter of fiscal 1999,
compared to 32.1% in the second quarter of fiscal 1998. On a year-to-date basis,
gross profit decreased 45.2% to $66.0 million for the first half of fiscal 1999,
compared to $120.5 million in the first half of fiscal 1998. Excluding Analog,
gross trade profit decreased 51.2% in the first half of fiscal 1999 over the
first half of fiscal 1998. As a percentage of trade sales, gross trade profit
was 21.7% in the first half of fiscal 1999, compared to 32.0% in the first half
of fiscal 1998. The decrease in gross trade profit as a percentage of trade
sales is due to lower average selling prices, decreased factory utilization
resulting from soft market conditions and inefficiencies, particularly in the
second quarter of fiscal 1999, due to the start-up of the Company's own shipping
and logistics systems (independent of National's), part of its ongoing
enterprise system implementation.
Contract manufacturing gross profit decreased 78.3% and 81.9% in the
second quarter and first half of fiscal 1999, respectively, over the
corresponding periods in the prior year. As a percentage of contract
manufacturing revenue, gross contract manufacturing profits were 12.6% and 11.2%
in the second quarter and first half of fiscal 1999, respectively, compared to
22.7% and 24.5% 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.
8
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RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $9.1 million, or 6.0% of
trade sales, in the second quarter of fiscal 1999, compared to $7.8 million, or
5.0% of trade sales, in the second quarter of fiscal 1998. On a year-to-date
basis, R&D was $18.3 million, or 6.4% of trade sales, compared to $14.9 million,
or 4.7% of trade sales, for the comparable period of fiscal 1998. The increase
in R&D is driven by R&D costs incurred by Analog in fiscal 1999 which the
Company did not incur in fiscal 1998. R&D efforts are focused on the Company's
growth products: CMOS Logic, DMOS, EEPROM and Analog. In the second quarter and
first half of fiscal 1999, R&D expenditures were 8.8% and 9.2% of trade 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 second quarter and first half of fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $23.6
million, or 15.5% of trade sales, in the second quarter of fiscal 1999, compared
to $21.0 million, or 13.5% of trade sales, in the second quarter of fiscal 1998.
On a year-to-date basis, SG&A expenses were $46.2 million, or 16.1% of trade
sales, compared to $42.0 million, or 13.4% of trade sales for the comparable
period of fiscal 1998. The increase in SG&A expense is primarily the result of
the incremental SG&A expenses of Analog, which the Company did not incur in the
second quarter and first half of fiscal 1998.
RESTRUCTURING
The Company incurred a pre-tax restructuring charge of approximately
$4.5 million in the first half of fiscal 1999. The charge consisted of $0.8
million related to non-cash asset impairments and $3.7 million of employee
separation costs which are expected to be substantially expended by the end of
fiscal 1999.
INTEREST, NET
Interest, net was $12.7 million and $24.6 million in the second quarter
and first half of fiscal 1999, respectively, compared to $10.7 million and $21.7
million in the comparable periods of fiscal 1998. The increase is principally
the result of indebtedness incurred to fund the Raytheon acquisition, which
occurred in the third quarter of fiscal 1998.
INCOME TAXES
Income tax (benefit) expense was $(2.0) million and $(5.5) million
for the second quarter and first half of fiscal 1999, respectively, compared
to $6.9 million and $14.7 million in the second quarter and first half of
fiscal 1998. The effective tax rates for the second quarter and first half of
fiscal 1999 were 20.0% and 20.0%, respectively, compared to 35.2% and 35.1%
in the second quarter and first half of fiscal 1999. The decrease in the
effective tax rate is due to the Company's 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 November 29, 1998, the Company's cash and cash equivalents
balance was $11.2 million, an increase of $4.7 million from May 31, 1998. In
addition, the Company had $98.5 million available under its Revolving Credit
Facility at November 29, 1998.
During the six months ended November 29, 1998, the Company's operations
used $3.9 million in cash compared to $74.3 million generated from operating
activities in the first six months of fiscal 1998. The decrease in cash provided
by operating activities reflects a decrease in net income adjusted for noncash
9
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items of $50.7 million as well as a decrease in cash flows from changes in
operating assets and liabilities of $27.5 million. Cash used in investing
activities during the first six months of fiscal 1999 totaled $19.8 million
compared to $30.4 million in the first six months of fiscal 1998. Capital
expenditures in the first half of fiscal 1999 were being made principally to
purchase and install the Company's enterprise-wide information system whereas in
the first half of fiscal 1998, capital purchases were being made primarily to
increase capacity in the Company's manufacturing facilities. Cash provided by
financing activities of $28.4 million for the first six months of fiscal 1999
was the result of net proceeds from the Company's Revolving Credit Facility of
$31.5 million and repayments of long-term debt of $3.1 million. Cash used in
financing activities of $5.5 million for the first six months of fiscal 1998 was
due to repayments of long-term debt.
On December 21, 1998 the Company signed an agreement to acquire the
Power Device Division of Samsung Electronics Co., Ltd. ("Samsung") for
approximately $455.0 million in cash. The Company currently intends to 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 private equity investment.
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. Capital expenditures for the balance of fiscal 1999 will be
primarily made for the completion of the enterprise software system
implementation and to increase assembly and test capacity.
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. The devaluation of several currencies in Southeast Asia
against the U.S. dollar and the recent currency restrictions imposed by the
Malaysian government have not had, nor does the Company presently expect these
events to have, a material adverse effect on the Company's results of operations
or financial condition. The Company currently benefits from lower
dollar-denominated expenses incurred by its manufacturing operations in
Southeast Asia, and the fact that its sales in that region (excluding Japan) are
denominated in U.S. dollars. As discussed in greater depth in "Outlook and
Business Risks," recent economic developments and the associated currency
devaluations have softened demand in that region, thereby negatively affecting
the Company's revenues and profitability. Deferred gains from hedging
transactions were immaterial to the Company's operating results in the first six
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.
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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 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 Division of
Samsung, to efficiently integrate the Samsung 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) 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.
The industry has been experiencing soft market conditions, which began
in the second half of fiscal 1998, due to the Asian financial crisis and an
inventory correction in the personal computer market, resulting in excess
capacity in the semiconductor industry as a whole. These factors have combined
to cause price pressures and reduced demand. There are indications that
market conditions are improving, and the Company believes that it reached the
bottom of this industry downturn in its first fiscal quarter of 1999. As a
result of these improved conditions, the Company's trade revenues in the
third quarter of fiscal 1999, while lower when compared to the third quarter
of fiscal 1998, are expected to be approximately flat to the second quarter
of fiscal year 1999. The Company does not expect to see the typical seasonal
sequential downturn in the third quarter and, in addition, the Company
expects sequential increases in unit volume and gross profit in its third and
fourth quarters of fiscal 1999. No assurance can be given that market
conditions will continue to improve (or not deteriorate) 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
second quarter and first half of fiscal 1999 as compared to the second quarter
and first half of fiscal 1998 and will result in substantially lower contract
manufacturing revenues throughout fiscal 1999 as compared to fiscal 1998. Such
reduced demand has and will continue to negatively impact 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. For the
three and six-months ended November 29, 1998, the Company has billed National
$5.4 million and $11.6 million, respectively, for committed fixed cost
absorption under the Agreement. Despite recent indications that demand from
National will increase in the second half of fiscal 1999, the Company does not
believe National will meet its revenue commitment in fiscal 1999. In this event,
the Agreement requires National to reimburse the Company for unabsorbed fixed
costs and lost profit on the revenue shortfall. National has reaffirmed its
commitment to remain in compliance with the terms of the Agreement.
11
<PAGE>
The combination of soft market conditions 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 factory utilization and EBITDA in the second half of
fiscal 1999 over the first half, no assurance can be given that such conditions
will improve (or not deteriorate). Should prices, order rates and demand from
National not continue to improve during the second half of fiscal 1999 or
National not comply with its obligations under the Agreement, the Company may
experience no improvement in EBITDA for the second half over the first half of
fiscal 1999. Despite improving market conditions, the Company expects
substantially lower EBITDA in fiscal 1999 as compared to fiscal 1998.
On December 21, 1998, the Company announced it had reached an agreement
to acquire the Power Device Division of Samsung (the "Business") for
approximately $455.0 million in cash. The Power Device Division 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 during the fourth quarter of fiscal 1999, will be accounted for as
a purchase. While the Company expects to recognize special charges related to
certain acquisition and related expenses during its fourth fiscal quarter of
1999, the amount of such charges and their impact on the Company's operating
results have yet to be determined. 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, higher leverage 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 half 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 March 31, 1999.
During the second quarter and first half 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 before
the end of fiscal 1999. 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.
12
<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
Fairchild Semiconductor Corporation filed no reports on Form 8-K
during the quarter ended November 29, 1998.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
13
<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.
Fairchild Semiconductor Corporation
Date: January 11, 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)
14
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