<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 NOVEMBER 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
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)
(207) 775-8100
(Registrant's telephone number, including area code)
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, 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 and Six Months Ended November 28, 1999 and
November 29, 1998 3
Condensed Consolidated Balance Sheets as of November 28, 1999
(Unaudited) and May 30, 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended November 28, 1999 and
November 29, 1998 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS) (UNAUDITED)
Three Months Ended Six Months Ended
-------------------------- --------------------------
November 28, November 29, November 28, November 29,
1999 1998 1999 1998
------ ------ ------ ------
Revenue:
Net sales--trade $328.1 $152.0 $619.5 $287.1
Contract manufacturing 28.7 15.9 61.8 32.1
------ ------ ------ ------
Total revenue 356.8 167.9 681.3 319.2
Operating expenses:
Cost of sales 223.1 118.4 428.1 224.7
Cost of contract
manufacturing 20.4 13.9 44.4 28.5
Research and development 15.7 9.1 29.7 18.3
Selling, general and
administrative 53.3 23.6 109.7 46.2
Restructuring and
impairments -- -- -- 4.5
------ ------ ------ ------
Total operating
expenses 312.5 165.0 611.9 322.2
------ ------ ------ ------
Operating income (loss) 44.3 2.9 69.4 (3.0)
Interest expense, net 18.3 12.7 46.4 24.6
------ ------ ------ ------
Income (loss) before
income taxes 26.0 (9.8) 23.0 (27.6)
Provision (benefit) for
income taxes 3.5 (2.0) 4.1 (5.5)
------ ------ ------ ------
Net income (loss) $ 22.5 $ (7.8) $ 18.9 $(22.1)
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
3
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FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
November 28, May 30,
1999 1999
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 123.6 $ 62.4
Receivables, net 145.9 129.7
Inventories 162.4 148.6
Other current assets 14.9 65.7
-------- --------
Total current assets 446.8 406.4
Property, plant and equipment, net 362.8 360.2
Intangible assets, net 264.0 278.5
Other assets 41.6 50.6
-------- --------
Total assets $1,115.2 $1,095.7
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 1.4 $ 14.1
Accounts payable 99.4 105.7
Accrued expenses and other current liabilities 89.8 85.0
-------- --------
Total current liabilities 190.6 204.8
Long-term debt, less current portion 717.2 895.9
Other liabilities 4.3 1.4
-------- --------
Total liabilities 912.1 1,102.1
-------- --------
Commitments and contingencies
Stockholder's equity (deficit):
Common stock -- --
Additional paid-in capital 252.6 62.0
Accumulated deficit (49.5) (68.4)
-------- --------
Total stockholder's equity (deficit) 203.1 (6.4)
-------- --------
Total liabilities and stockholder's equity
(deficit) $1,115.2 $1,095.7
======== ========
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
-----------------------------
November 28, November 29,
1999 1998
------ ------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 18.9 $(22.1)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 69.9 47.4
Amortization of deferred compensation 1.1 --
Restructuring charges, net of cash expended -- 1.9
Non-cash interest expense 8.9 1.8
Loss (gain) on disposal of property, plant and equipment 0.2 (0.1)
Deferred income taxes (1.6) (5.2)
Changes in operating assets and liabilities, net:
Receivables (16.2) (18.0)
Inventories (16.0) 6.6
Other current assets 4.7 7.0
Current liabilities 2.7 (19.9)
Other assets and liabilities 2.3 (3.3)
------ ------
Cash provided by (used in) operating activities 74.9 (3.9)
------ ------
Cash flows from investing activities:
Capital expenditures (53.8) (19.4)
Proceeds from sale of property, plant and equipment 0.9 1.0
Purchase of molds and tooling (0.9) (1.4)
Refund of value added tax paid in connection with
acquisition 40.9 --
------ ------
Cash used in investing activities (12.9) (19.8)
------ ------
Cash flows from financing activities:
Proceeds from revolving credit facility, net -- 31.5
Repayment of long-term debt (191.4) (3.1)
Capital contribution from Fairchild International 190.6 --
------ ------
Cash provided by (used in) financing activities (0.8) 28.4
------ ------
Net change in cash and cash equivalents 61.2 4.7
Cash and cash equivalents at beginning of period 62.4 6.5
------ ------
Cash and cash equivalents at end of period $123.6 $ 11.2
====== ======
</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 28, 1999 and May 30, 1999 and the
Condensed Consolidated Statements of Operations for the three and six month
periods ended November 28, 1999 and November 29, 1998 and the Condensed
Consolidated Statements of Cash Flows for the six month periods ended November
28, 1999 and November 29, 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:
November 28, May 30,
1999 1999
------------ -------
(In millions)
Raw materials $ 13.7 $ 13.6
Work in process 97.4 93.1
Finished goods 51.3 41.9
------ ------
Total inventories $162.4 $148.6
====== ======
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended
----------------------------
November 28, November 29,
1999 1998
------------ ------------
(In millions)
Cash paid for:
Income taxes $ 1.5 $ 1.0
===== =====
Interest $42.1 $22.7
===== =====
NOTE 4 - SEGMENT INFORMATION
During the second quarter of stub year 1999, the Company integrated the
power device business acquired from Samsung Electronics in April of 1999, into
its existing Analog and Mixed Signal Products Division and its Discrete Power
and Signal Technologies Group product line operating segments. In addition, the
Company's Logic Products Group was renamed the Interface and Logic Products
Group, reflecting this segment's emphasis on its Interface products. These
changes were approved by the Company's Chief Executive Officer, who has been
identified as the Chief Operating Decision Maker as defined by SFAS No. 131.
Selected operating segment financial information for the three and six months
ended November 28, 1999 and November 29, 1998 is as follows:
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Three Months Ended
---------------------------------------------------------
November 28, 1999 November 29, 1998
-------------------------- --------------------------
Contract Contract
Manu- Manu-
REVENUE: Trade facturing Total Trade facturing Total
------ --------- ------ ------ --------- ------
(In millions)
Analog $ 79.7 $ -- $ 79.7 $ 17.7 $ -- $ 17.7
Discrete 147.1 9.7 156.8 45.7 1.5 47.2
Interface and Logic 84.0 19.0 103.0 67.9 14.4 82.3
Memory 17.3 -- 17.3 20.7 -- 20.7
------ ----- ------ ------ ----- ------
Total $328.1 $28.7 $356.8 $152.0 $15.9 $167.9
====== ===== ====== ====== ===== ======
Six Months Ended
---------------------------------------------------------
November 28, 1999 November 29, 1998
-------------------------- --------------------------
Contract Contract
Manu- Manu-
REVENUE: Trade facturing Total Trade facturing Total
------ --------- ------ ------ --------- ------
(In millions)
Analog $151.3 $ -- $151.3 $ 34.6 $ -- $ 34.6
Discrete 277.6 22.7 300.3 84.5 4.3 88.8
Interface and Logic 156.7 39.1 195.8 128.7 27.8 156.5
Memory 33.9 -- 33.9 39.3 -- 39.3
------ ----- ------ ------ ----- ------
Total $619.5 $61.8 $681.3 $287.1 $32.1 $319.2
====== ===== ====== ====== ===== ======
Three Months Ended Six Months Ended
---------------------------------------------------------
November 28, November 29, November 28, November 29,
OPERATING INCOME 1999 1998 1999 1998
(LOSS): ---- ---- ---- ----
(In millions)
Analog $ 7.7 $0.8 $20.9 $ 0.7
Discrete 20.5 2.5 32.0 4.4
Interface and Logic 15.5 6.8 24.6 9.8
Memory 0.6 (7.2) 0.2 (13.4)
Other unusual charges (1) -- -- (8.3) (4.5)
----- ---- ----- -----
Total $44.3 $2.9 $69.4 $(3.0)
===== ==== ===== =====
(1) For the six months ended November 28, 1999, the amount represents a one-time
charge for the write-off of receivables from the management investors to pay
their federal and state individual income tax liabilities resulting from the
lapse of risks of forfeiture with respect to their ownership of the Class A
Common Stock of the Company's parent, Fairchild Semiconductor International,
Inc. ("Fairchild International"). Such receivables were cancelled as a result of
initial public offering. This write-off includes amounts to discharge the
individual tax liabilities associated with the cancellation. For the six months
ended November 29, 1998, the amount represents a restructuring charge for
severance related to a workforce reduction and certain asset write-offs.
7
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NOTE 5 - RESTRUCTURING AND IMPAIRMENTS
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
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
Cash payments (3.2)
-----
Accrual balance as of November 28, 1999 $ 2.8
=====
8
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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 analog and mixed signal
semiconductors, serving the telecommunications, consumer, industrial, personal
systems and automotive markets.
The Company has changed its fiscal year end from the last Sunday in May
to the last Sunday in December. This discussion covers the first six months of
the transition period from May 31, 1999 to December 26, 1999. Throughout this
discussion, we refer to the second quarter and first six months of the
transition period as the second quarter and first six months of "stub year
1999." The comparable quarter and six month period a year ago is referred to as
the second quarter and first six months 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.
RESULTS OF OPERATIONS
The Company generated net income of $22.5 million in the second quarter
of stub year 1999, compared to a net loss of $7.8 in the second quarter of
fiscal 1999. The Company generated net income of $18.9 million in the first six
months of stub year 1999, compared to a net loss of $22.1 million in the first
six months of fiscal 1999. Excluding amortization of acquisition-related
intangibles of $8.4 million and $0.8 million, respectively, in the second
quarter of stub year 1999 and fiscal 1999, net of tax effect, the Company had
adjusted net income of $30.9 million for the second quarter of stub year 1999,
compared to an adjusted net loss of $7.1 million for the second quarter of
fiscal 1999. On a year to date basis, excluding unusual charges and amortization
of acquisition-related intangibles of $15.5 million and $16.9 million,
respectively, in the first six months of stub year 1999, and $4.5 million and
$1.6 million, respectively, in the first six months of fiscal 1999, net of tax
effect, the Company had adjusted net income of $51.3 million for the first six
months of stub year 1999, compared to an adjusted net loss of $17 million in
the first six months of fiscal 1999. Unusual charges in the first six months of
stub year 1999 included initial public offering-related charges of $8.3 million,
recorded in selling, general and administrative expense ("SG&A"), for 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, and $7.2 million, recorded in interest expense, for
the write-off of deferred financing fees associated with the debt repaid with
the proceeds from the initial public offering. Unusual charges in the first six
months of fiscal 1999 were due to restructuring charges as a result of a
workforce reduction. Operating income was $44.3 million for the second quarter
of stub year 1999, as compared to operating income of $2.9 million in the same
period last year. Excluding unusual charges, the Company had operating income
for the first six months of stub year 1999 of $77.7 million as compared to
operating income of $1.5 million for the same period last year. The increase in
operating income for both the second quarter and first six months of stub year
1999 over the comparable periods last year is due to the acquisition of the
Power Device Business (the "power device business") of Samsung Electronics Co.,
Ltd. ("Samsung Electronics") and higher revenues and gross profits due to new
product introductions and improved business conditions, resulting in higher
factory utilization in the second quarter and first six months of stub year 1999
compared to the second quarter and first six months of fiscal 1999.
All operating segments reported improved operating results in the
second quarter and first six months of stub year 1999 as compared to the
corresponding periods during fiscal 1999. Analog had operating income of $7.7
million and $20.9 million, respectively, in the second quarter and first six
months of stub year 1999 as compared to operating income of $0.8 million and
$0.7 million,
9
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respectively, in the second quarter and first six months of fiscal 1999.
Excluding analog power device products, Analog had operating losses of $3.3
million and $5.9 million, respectively, for the three and six months ended
November 28, 1999. The increases in Analog's operating losses (excluding analog
power device products) were due to unfavorable sales mix and increased inventory
valuation reserves in anticipation of the closure of the Mountain View,
California wafer fab, which occurred in the second quarter of stub year 1999.
Discrete operating income was $20.5 million and $32.0 million, respectively, in
the second quarter and first six months of stub year 1999, as compared to $2.5
million and $4.4 million, respectively, in the second quarter and first six
months of fiscal 1999. Excluding discrete power device products, Discrete had
operating income of $8.7 million and $10.2 million, respectively, for the three
and six months ended November 28, 1999. Interface and Logic operating income was
$15.5 million and $24.6 million, respectively, in the second quarter and first
six months of stub year 1999 as compared to $6.8 million and $9.8 million,
respectively, in the corresponding periods last year. The increases in Discrete
and Interface and Logic operating income were due to higher revenues and
improved gross profits due to improved factory utilization and, in the case of
Discrete, higher average selling prices. Memory had operating income of $0.6
million and $0.2 million, respectively, in the second quarter and first six
months of stub year 1999 as compared to operating losses of $7.2 million and
$13.4 million, respectively, in the second quarter and first six months of
fiscal 1999. The decreases in Memory operating losses are 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 $71.0
million in the second quarter and first six months of stub year 1999,
respectively, and $24.1 million and $47.4 million in the comparable periods of
fiscal 1999, and unusual charges, earnings before interest, taxes and
depreciation and amortization ("EBITDA") were $79.8 million and $148.7 million
in the second quarter and first six months of stub year 1999, respectively,
compared to $27.0 million and $48.9 million in the comparable periods 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
(92.0% and 90.9% of total revenues in the second quarter and first six months of
stub year 1999, respectively, and 90.5% and 89.9% in the comparable periods of
fiscal 1999) and revenues from contract manufacturing services provided to
National Semiconductor and Samsung Electronics (8.0% and 9.1% of total revenues
in the second quarter and first six months of stub year 1999, respectively, and
9.5% and 10.1% in the comparable periods of fiscal 1999).
Trade sales increased 115.9% to $328.1 million in the second quarter of
stub year 1999 compared to $152.0 million in the second quarter of fiscal 1999.
On a year to date basis, trade sales increased 115.8% to $619.5 million as
compared to $287.1 million for the same period a year ago. Excluding sales from
the power device business, trade sales increased 26.6% and 23.6%, respectively,
for the three and six months ended November 28, 1999 over the comparable periods
in fiscal 1999, as higher sales volume offset lower average selling prices.
Average selling prices for the second quarter and first six months of stub year
1999 were lower than the second quarter and first six months of fiscal 1999,
despite higher average selling prices in the second quarter of stub year 1999
over the first quarter of stub year 1999, particularly for Discrete and
Interface and Logic products. The increase in trade sales is attributable to
improved demand due to strength in end-markets such as personal computers and
telecommunications and an economic recovery in the Asia/Pacific region. Sales
growth was observed across all segments except Memory, whose sales declined as a
result of exiting certain unprofitable product lines. Excluding power device
products, Analog, Discrete and Interface and Logic trade sales were up 12.5%,
56.2% and 23.8%, respectively, in the second quarter of stub year 1999 over the
second quarter of fiscal 1999. On a year-to-date basis, Analog, Discrete and
Interface and Logic trade sales were up 9.2%, 49.7% and 21.8%, respectively,
over the comparable period a year ago.
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Approximately 69.1 % and 69.2% of the Company's trade revenues were
generated from Analog, Discrete and Power Device products in the second quarter
and first six months of stub year 1999, respectively.
Geographically, 21.1%, 12.0%, 46.2% and 20.7% of trade sales were
derived from North America, Europe, Asia/Pacific and Korea, respectively, in the
second quarter of stub year 1999. Excluding sales from the power device
business, 29.7%, 16.5% and 53.8% of trade sales were derived from North America,
Europe and Asia/Pacific (including Korea), respectively, compared to 38.9%,
18.3% and 42.8% in the second quarter of fiscal 1999. On a year to date basis,
22.2%, 12.2%, 44.6% and 21.0% of trade sales were derived from North America,
Europe, Asia/Pacific and Korea, respectively. Excluding sales from the power
device business, 32.1%, 17.1% and 50.8% of trade sales were derived from North
America, Europe and Asia/Pacific (including Korea), respectively, as compared to
40.4%, 18.5% and 41.1% in the first six months of fiscal 1999. Excluding sales
from the power device business, the Asia/Pacific and European regions saw
increases in trade sales in the second quarter of stub year 1999 over the second
quarter of fiscal 1999 of 59.0% and 14.4%, respectively, while North American
revenues decreased 3.0%. For the first six months of stub year 1999, excluding
sales from the power device business, Asia/Pacific and Europe saw increases in
trade sales over the first six months of fiscal 1999 of 53.0% and 14.2%,
respectively, while North American revenues decreased by 2.0%. The increases in
the Asia/Pacific region are due to strength in the consumer and personal
computer markets, as well as improved market conditions. The increases in Europe
are due to improved telecommunications, consumer and distribution markets. The
decreases in North America are due mainly to the continued move of contract
manufacturers to locations outside North America.
Contract manufacturing revenues increased 80.5% to $28.7 million in
the second quarter of stub year 1999 compared to $15.9 million in the second
quarter of fiscal 1999. Excluding contract manufacturing services provided to
Samsung Electronics, contract manufacturing revenues increased 35.8% in the
second quarter of stub year 1999 over the second quarter of fiscal 1999. For the
first six months of stub year 1999, contract manufacturing revenues increased
92.5% to $61.8 million as compared to $32.1 million for the same period a year
ago. Excluding contract manufacturing services provided to Samsung Electronics,
contract manufacturing revenue increased 45.5% in the first six months of stub
year 1999 over the same period a year ago. The increases reflect increased
demand from National Semiconductor.
GROSS PROFIT
Gross profit increased 218.3% to $113.3 million in the second quarter
of stub year 1999 compared to $35.6 million in the second quarter of fiscal
1999. Excluding the gross profit derived from power device products, gross
profit increased 77.0% in the second quarter of stub year 1999 over the second
quarter of fiscal 1999. As a percentage of trade sales, gross trade profits were
32.0% in the second quarter of stub year 1999. Excluding the power device
business, gross trade profits as a percentage of trade sales were 30.6% in the
second quarter of stub year 1999 compared to 22.1% in the second quarter of
fiscal 1999. Gross profit increased 216.4% to $208.8 million in the first six
months of stub year 1999 compared to $66.0 million in the first six months of
fiscal 1999. Excluding the gross profit derived from power device products,
gross profit increased 62.4% in the first six months of stub year 1999 over the
comparable period of fiscal 1999. As a percentage of trade sales, gross trade
profits were 30.9% in the first six months of stub year 1999. Excluding the
power device business, gross trade profits as a percentage of trade sales were
27.7% in the first six months of stub year 1999 compared to 21.7% in the first
six months 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 full benefit of cost reduction actions undertaken in fiscal 1999, offset by
lower average selling prices. Average selling prices for the second quarter and
first six months of stub year 1999 were lower than the second quarter and first
six months of fiscal 1999, despite higher average selling prices in the second
quarter of stub year 1999 over the first quarter of stub year 1999, particularly
for Discrete and Interface and Logic products.
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Contract manufacturing gross profit increased 315.0% to $8.3 million in
the second quarter of stub year 1999 compared to $2.0 million in the second
quarter of fiscal 1999. For the six months ended November 28, 1999, contract
manufacturing gross profit increased 383.3% to $17.4 million as compared to $3.6
million for the first six months 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 the power device business and
greater demand from National Semiconductor reflective of improved market
conditions. Contract manufacturing gross profit for the second quarter and first
six months of fiscal 1999 included $5.4 million and $11.6 million, respectively,
of fixed cost reimbursement under the Company's manufacturing agreements with
National Semiconductor.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $15.7 million, or 4.8%
of trade sales, in the second quarter of stub year 1999, compared to $9.1
million, or 6.0% of trade sales, in the second quarter of fiscal 1999. On a
year-to-date basis, R&D was $29.7 million, or 4.8% of trade sales, compared to
$18.3 million, or 6.4% of trade sales, for the comparable period of fiscal 1999.
The increase in R&D expenses is driven by the dedicated R&D costs incurred by
the power device business in the second quarter and first six months 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 and CMOS logic). In
the second quarter and first six months of stub year 1999, R&D expenditures were
5.5% and 5.5% of trade sales, respectively, for these growth products as
compared to 8.8% and 9.2%, respectively, for the second quarter and first six
months of fiscal 1999. R&D expenditures for the Company's mature products
(Bipolar Logic, Bipolar Discretes and EPROM) were less than 1% of trade sales
for the second quarter and first six months of both 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 trade sales.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $53.3
million, or 16.2% of trade sales, in the second quarter of stub year 1999,
compared to $23.6 million, or 15.5% of trade sales, in the second quarter of
fiscal 1999. On a year-to-date basis, SG&A expenses were $109.7 million, or
17.7% of trade sales, compared to $46.2 million, or 16.1% of trade sales, for
the comparable period of fiscal 1999. SG&A expenses in the first six months of
stub year 1999 include an unusual charge of $8.3 million taken in the first
quarter of stub year 1999 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 $101.4 million, or 16.4% of trade sales, in the first
six months of stub year 1999. The increase in SG&A expenses (excluding the
unusual charge) is primarily the result of the incremental SG&A expenses and
intangible asset amortization of the power device business, which the Company
did not incur in the second quarter and first six months 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 six months 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 $3.2 million
and $3.8 million was expended in the second quarter and first six months of stub
year 1999, respectively,
12
<PAGE> 13
for this transfer with an estimated $2.8 million of accrued liabilities expected
to be expended by the end of the first quarter of 2000.
INTEREST EXPENSE, NET
Interest expense, net was $18.3 million and $46.4 million in the second
quarter and first six months of stub year 1999, respectively, compared to $12.7
million and $24.6 million in the comparable periods of fiscal 1999. Interest
expense, net in the first six months 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 IPO. Excluding this charge,
interest expense, net was $39.2 million in the first six months of stub year
1999. The increases, excluding the unusual charges, is principally the result of
indebtedness incurred to finance the power device business acquisition, which
occurred in the fourth quarter of fiscal 1999.
INCOME TAXES
Income tax expense was $3.5 million and $4.1 million for the second
quarter and first six months of stub year 1999, respectively, compared to a tax
benefit of $2.0 million and $5.5 million in the second quarter and first six
months of fiscal 1999. The effective tax rates for the second quarter and first
six months of stub year 1999 were 13.5% and 17.8%, respectively, compared to
20.4% and 19.9% in the second quarter and first six months of fiscal 1999. The
stub year 1999 second quarter and first six months tax provisions are based on
income generated from the Company's foreign operations, excluding Korea where
the Company benefits from a tax holiday. The increase in the tax provision is
due to profits earned in stub year 1999 and the Company's limited ability to
currently recognize the full benefit of U.S. net operating loss carryforwards.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with its acquisitions of the power device business and
the Raytheon Semiconductor business 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 dates of the acquisitions, the development of these projects
had no alternative future uses. Accordingly, these costs were expensed as of
each respective acquisition date.
The financial results of the power device business 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
The Company has a borrowing capacity of $100.0 million for working
capital and general corporate purposes under the revolving credit facility. No
amount was drawn under the revolving credit facility at November 28, 1999.
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
13
<PAGE> 14
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 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 dividends or advances to Fairchild Semiconductor
Corporation. The Company believes that those funds permitted to be transferred,
together with existing cash, will be sufficient to meet our 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.
As of November 28, 1999, the Company's cash and cash equivalents
balance was $123.6 million, an increase of $61.2 million from May 30, 1999.
During the first six months of stub year 1999, the Company's
operations provided $74.9 million in cash compared to a use of $3.9 million of
cash in the first six months of fiscal 1999. The increase in cash provided by
operating activities reflects an increase in net income adjusted for non-cash
items of $73.7 million as well as an increase in cash flows from changes in
operating assets and liabilities of $5.1 million. Cash used in investing
activities during the first six months of stub year 1999 totaled $12.9 million,
compared to a use of $19.8 million in the first six months 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 business offset by higher capital
expenditures. Capital expenditures in the first six months of stub year 1999
were made principally to add capacity in the Company's assembly and test
manufacturing facilities, whereas in the first six months of fiscal 1999,
capital expenditures 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.
Cash used in financing activities for the first six months of stub year 1999
includes the repayment of the Tranche A term loan and partial repayment of the
Tranche B term loan, in each case under the Company's senior credit facilities,
in the aggregate amount of $190.6 million with the proceeds received from a
capital contribution from Fairchild International. Cash provided by financing
activities of $28.4 million in the first six months of fiscal 1999 was due to
proceeds received from the Company's revolving credit line.
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. The statements about the Company's
expectations about market conditions, revenues and earnings in the second
paragraph below are examples of forward-looking statements in this report.
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 The Company'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-
14
<PAGE> 15
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 business 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) uncertainties and legal risks associated with the dependence
on, and potential disputes concerning patents and other intellectual property
rights; and (x) foreign currency and other risks associated with operating a
global business.
Market conditions have been generally improving since the third
quarter of fiscal 1999. Strong bookings and demand throughout the historically
slower summer season continued into the second quarter of stub year 1999, which
ended November 28, 1999. A portion of the bookings increase seen in both the
first and second quarters of stub year 1999 has occurred as industry-wide
leadtimes have extended and customers have committed their backlog for a longer
period of time. Going forward, the Company expects sequential bookings increases
to return to more normal seasonal patterns. Further significant lengthening of
leadtimes are not anticipated. The Semiconductor Industry Association forecasts
calendar year 2000 industry sales growth of 14-22% compared to calendar year
1999 for our targeted investment areas in the power transistor, voltage
regulator/reference generator and interface markets. Fairchild Semiconductor
Corporation expects its revenue growth in these focused areas to be at least at
market growth rates. Fairchild Semiconductor Corporation believes that
industry-wide demand is meeting supply in many product areas, leading to some
price firming during the second quarter of stub year 1999. If tightening market
trends continue, the Company's management expects that prices will continue to
stabilize or rise slowly through the first half of calendar year 2000.
Management expects that margins will continue to improve slowly as a result of
these price increases, better new product mix, manufacturing cost reductions and
better overhead spreading. Potential factors that may preclude us from realizing
any or all of these expectations include, but are not limited to, softening of
industry-wide demand, renewed industry-wide price competition, failure to
execute new product development plans and failure to execute capacity expansion
plans.
On September 21, 1999, Taiwan experienced a major earthquake. The
earthquake and resulting aftershocks 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 manufactures, located there. Fairchild Semiconductor Corporation has
not experienced any significant impact on its revenue in that region as a result
of the earthquake.
The power device business currently sells its products in Asia
through a network of exclusive sales agents on a commission basis. The prices
for which products are sold include the commission. The commissions are recorded
as a selling expense. Effective January 1, 2000, as part of the integration of
the power device business into The Company's operations, the power device
business is ending these arrangements, and the products will be sold through the
Company's existing distribution network at market prices. Had the prospective
arrangement been in place during stub year 1999, revenues, gross profits and
15
<PAGE> 16
SG&A would each be reduced by approximately $5.1 million and $10.0 million for
the three and six months ended November 28, 1999, respectively.
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 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 through Fiscal 2000. For those legacy
systems that were not converted by December 31, 1999, year 2000 remediation
projects were completed in October 1999. The Company's business is dependent
upon its information systems as an integral part of all major business
processes. Additionally, internal resources had 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 and
remediation projects to correct identified problems have been completed. The
Company also reviewed 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 worked 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 less
than $0.1 million. 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 has completed the preparation of
contingency plans. These plans cover manufacturing equipment, information
services and facilities. In addition, contingency plans were prepared 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 were 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.
As of the date of this filing, the Company has not experienced any
significant year 2000 problems with its internal systems or equipment, nor has
the Company detected any significant year 2000 problems affecting its customers
or suppliers.
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.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 2, 1999, Fairchild Semiconductor Corporation was named as a
defendant in a patent infringement lawsuit filed by Siliconix Incorporated in
the United States District Court for the Northern District of California. The
complaint filed in the suit alleges that some of the Company's products infringe
two Siliconix patents and claims an unspecified amount of damages. The Company
intends to contest these claims vigorously.
On December 22, 1999, Fairchild International, Fairchild Semiconductor
Corporation and Fairchild Korea Semiconductor Ltd. were named as defendants in a
patent infringement lawsuit filed by IXYS Corporation in the United States
District Court for the Northern District of California. The complaint filed in
the lawsuit alleges that one or more of our products infringe one IXYS patent
and claims an unspecified amount of damages. Although the Company is in the
process of investigating IXYS' claims, the Company believes these claims are
subject to indemnification by Samsung Electronics under the patent
indemnification provisions of the Business Transfer Agreement with Samsung
Electronics. As of the date of this filing, the Company is unable to assess the
validity of IXYS' claims.
In addition to the above proceedings, from time to time the Company is
involved in other legal proceedings in the ordinary course of business. The
Company believes that there is no such ordinary course litigation pending that
could have, individually or in the aggregate, a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
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 28, 1999.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
17
<PAGE> 18
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, 2000 By: /s/ David A. Henry
----------------------------------
David A. Henry
Vice President, Corporate Controller
(Principal Accounting Officer)
18
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