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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 APRIL 2, 2000
[ ] 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: 001-15181
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3363001
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
82 RUNNING HILL ROAD
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 April 30, 2000:
TITLE OF EACH CLASS NUMBER OF SHARES
------------------- ----------------
Class A Common Stock, par value $.01 per share 79,369,716
Class B Common Stock, par value $.01 per share 17,281,000
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item
1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended April 2, 2000 and March 28,
1999...................................................... 2
Condensed Consolidated Balance Sheets as of April 2, 2000
(Unaudited) and December 26, 1999......................... 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended April 2, 2000 and March 28,
1999...................................................... 4
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... 5
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
Item
3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 14
PART II. OTHER INFORMATION
Item
1. Legal Proceedings........................................... 15
Item
6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURE........................................................... 16
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED
---------------------
APRIL 2, MARCH 28,
2000 1999
-------- ---------
Revenue:
Net sales -- trade........................................ $368.9 $152.4
Contract manufacturing.................................... 32.8 24.9
------ ------
Total revenue.......................................... 401.7 177.3
Operating expenses:
Cost of sales -- trade.................................... 244.5 115.6
Cost of contract manufacturing............................ 20.0 18.1
Research and development.................................. 17.8 9.5
Selling, general and administrative....................... 53.4 23.3
Restructuring and impairments............................. (5.6) 2.7
------ ------
Total operating expenses............................... 330.1 169.2
------ ------
Operating income............................................ 71.6 8.1
Interest expense............................................ 20.8 15.4
Interest income............................................. 4.0 --
------ ------
Income (loss) before income taxes........................... 54.8 (7.3)
Provision (benefit) for income taxes........................ 4.8 (0.6)
------ ------
Net income (loss)........................................... $ 50.0 $ (6.7)
====== ======
Net income (loss) applicable to common stockholders......... $ 50.0 $ (9.3)
====== ======
Net income (loss) per common share:
Basic..................................................... $ 0.53 $(0.15)
====== ======
Diluted................................................... $ 0.51 $(0.15)
====== ======
Weighted average common shares:
Basic..................................................... 94.2 63.0
====== ======
Diluted................................................... 98.7 63.0
====== ======
See accompanying notes to condensed consolidated financial statements.
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
APRIL 2, DECEMBER 26,
2000 1999
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 385.0 $ 138.7
Receivables, net.......................................... 155.5 140.3
Inventories............................................... 171.0 166.3
Other current assets...................................... 16.5 13.7
-------- --------
Total current assets................................... 728.0 459.0
Property, plant and equipment, net.......................... 387.3 375.8
Intangible assets, net...................................... 253.0 261.4
Other assets................................................ 41.4 41.4
-------- --------
Total assets........................................... $1,409.7 $1,137.6
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1.4 $ 1.4
Accounts payable.......................................... 96.9 109.3
Accrued expenses and other current liabilities............ 87.8 94.5
-------- --------
Total current liabilities.............................. 186.1 205.2
Long-term debt, less current portion........................ 716.4 717.2
Other liabilities........................................... 2.1 2.0
-------- --------
Total liabilities...................................... 904.6 924.4
Commitments and contingencies
Stockholders' equity:
Class A common stock...................................... 0.7 0.6
Class B common stock...................................... 0.3 0.3
Additional paid-in capital................................ 691.4 449.5
Accumulated deficit....................................... (181.4) (231.3)
Less treasury stock at cost............................... (5.9) (5.9)
-------- --------
Total stockholders' equity............................. 505.1 213.2
-------- --------
Total liabilities and stockholders' equity............. $1,409.7 $1,137.6
======== ========
See accompanying notes to condensed consolidated financial statements.
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED
---------------------
APRIL 2, MARCH 28,
2000 1999
-------- ---------
Cash flows from operating activities:
Net income (loss)........................................... $ 50.0 $ (6.7)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization............................. 37.5 24.6
Amortization of deferred compensation..................... 0.9 0.1
Restructuring (gains) charges, net of cash expended....... (2.1) 1.3
Non-cash interest expense................................. 1.0 3.3
Loss on disposal of property, plant and equipment......... 0.8 0.3
Deferred income taxes..................................... (0.1) 2.4
Changes in operating assets and liabilities, net:
Receivables............................................... (15.2) (13.6)
Inventories............................................... (4.7) (2.5)
Other current assets...................................... (2.8) (1.9)
Current liabilities....................................... (19.4) (9.8)
Other assets and liabilities.............................. (1.6) (0.5)
------ ------
Cash provided by (used in) operating activities........ 44.3 (3.0)
------ ------
Cash flows from investing activities:
Capital expenditures...................................... (37.6) (11.5)
Purchase of molds and tooling............................. (0.6) (1.3)
------ ------
Cash used in investing activities...................... (38.2) (12.8)
------ ------
Cash flows from financing activities:
Proceeds from revolving credit facility, net.............. -- 20.2
Repayment of long-term debt............................... (0.8) (3.1)
Proceeds from issuance of common stock, net............... 240.0 --
Proceeds from exercise of stock options................... 1.0 --
------ ------
Cash provided by financing activities.................. 240.2 17.1
------ ------
Net change in cash and cash equivalents..................... 246.3 1.3
Cash and cash equivalents at beginning of period............ 138.7 3.2
------ ------
Cash and cash equivalents at end of period.................. $385.0 $ 4.5
====== ======
See accompanying notes to condensed consolidated financial statements.
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheets of Fairchild Semiconductor
International, Inc. (the "Company") as of April 2, 2000 and December 26, 1999
and the Condensed Consolidated Statements of Operations and Cash Flows for the
three months ended April 2, 2000 and March 28, 1999, 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 December 26, 1999.
Certain prior period amounts have been reclassified to conform to their
current presentation.
NOTE 2 -- INVENTORIES
The components of inventories are as follows:
APRIL 2, DECEMBER 26,
2000 1999
-------- ------------
(IN MILLIONS)
Raw materials............................................... $ 19.2 $ 17.1
Work in process............................................. 102.3 99.3
Finished goods.............................................. 49.5 49.9
------ ------
Total inventories......................................... $171.0 $166.3
====== ======
NOTE 3 -- COMPUTATION OF NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per common share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of stock options, however, due to the
Company's net loss for the three months ended March 28, 1999, the addition of
the 4.3 million common stock options outstanding at that date would have been
anti-dilutive and accordingly they have been excluded from the calculation for
this period. There were no anti-dilutive common stock options outstanding at
April 2, 2000. The net loss used in computing net loss per common share for the
three months ended March 28, 1999 has been increased by dividends accrued during
the period for the then outstanding redeemable preferred stock, resulting in an
increase to the net loss applicable to common stockholders. All of the Company's
redeemable preferred stock converted to common stock on August 9, 1999, in
connection with the Company's initial public offering. The
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
following table reconciles basic to diluted weighted average shares outstanding
and net income (loss) to net income (loss) applicable to common stockholders:
THREE MONTHS ENDED
---------------------
APRIL 2, MARCH 28,
2000 1999
-------- ---------
(IN MILLIONS)
Basic weighted average common shares outstanding............ 94.2 63.0
Net effect of dilutive stock options based on the treasury
stock method using the average market price............... 4.5 --
----- -----
Diluted weighted average common shares outstanding.......... 98.7 63.0
===== =====
Net income (loss)........................................... $50.0 $(6.7)
Dividends on redeemable preferred stock..................... -- 2.6
----- -----
Net income (loss) applicable to common stockholders......... $50.0 $(9.3)
===== =====
NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED
---------------------
APRIL 2, MARCH 28,
2000 1999
-------- ---------
(IN MILLIONS)
Cash paid for:
Income taxes........................................... $ 1.5 $ 0.4
===== =========
Interest............................................... $19.2 $ 15.6
===== =========
For the three months ended March 28, 1999, the Company accumulated
dividends on its then outstanding redeemable preferred stock of approximately
$2.6 million. The accumulated dividends were recorded as an increase to the
carrying value of the redeemable preferred stock and accumulated deficit.
NOTE 5 -- SEGMENT INFORMATION
The Company has determined that its Non-Volatile Memory Division no longer
meets the requirements of a reportable segment under SFAS No. 131 and
accordingly will report this segment's results as part of the "Other" category
for this and future periods. Management has also determined that its contract
manufacturing business need not be reported as a separate reportable operating
segment and will record its results together with the Non-Volatile Memory
Division in the "Other" category. Management evaluates the contract
manufacturing business differently than its other operating segments, due in
large part to the fact that it is predominantly driven by legal agreements for
limited time periods, entered into with the Company's former parent National
Semiconductor and Samsung Electronics.
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selected operating segment financial information for the three months ended
April 2, 2000 and March 28, 1999 is as follows:
THREE MONTHS ENDED
---------------------
APRIL 2, MARCH 28,
2000 1999
-------- ---------
(IN MILLIONS)
REVENUE:
Analog................................................... $ 86.5 $ 15.9
Discrete................................................. 174.4 47.5
Interface and Logic...................................... 93.5 71.1
Other(1)................................................. 47.3 42.8
------ ------
Total.................................................. $401.7 $177.3
====== ======
OPERATING INCOME:
Analog................................................... $ 8.9 $ (2.7)
Discrete................................................. 25.8 3.1
Interface and Logic...................................... 16.8 7.7
Other(1)................................................. 14.5 2.7
Restructuring and impairments............................ 5.6 (2.7)
------ ------
Total.................................................. $ 71.6 $ 8.1
====== ======
- ---------------
(1) Other includes revenues and operating income from contract manufacturing
activities disclosed in the Company's statements of operations. The Company
allocates no other costs to its contract manufacturing business other than
those separately shown in the statements of operations.
NOTE 6 -- RESTRUCTURING AND IMPAIRMENTS
During the three months ended April 2, 2000, the Company recorded a pre-tax
restructuring gain of approximately $5.6 million. During the first quarter of
2000, the Company re-evaluated and subsequently adjusted its non-cash
restructuring accruals based upon final execution of several of its plans. This
resulted in a one-time gain of $2.1 million. The Company also recorded a
one-time gain of $3.5 million for additional funds received in connection with
the sale of its former Mountain View, California facility.
The following table summarizes the first quarter 2000 activity of the
remaining active restructuring plan, which related to the transfer of analog
wafer production to South Portland, Maine:
Accrual balance as of December 26, 1999..................... $ 2.6
Cash payments............................................. (1.7)
-----
Accrual balance as of April 2, 2000......................... $ 0.9
=====
The Company expects that all amounts will be substantially paid by the end
of the third quarter of 2000.
NOTE 7 -- FOLLOW-ON OFFERING
On January 25, 2000, the Company completed a follow-on public offering of
23,500,000 shares of its Class A Common Stock at a price of $33.4375 per share.
The underwriting discount was $1.50 per share. The 23,500,000 shares included
6,140,880 newly issued shares sold by the Company and 17,359,120 shares sold by
existing stockholders, including all remaining shares owned by National
Semiconductor, the Company's former parent. The Company did not receive any
proceeds from shares sold by existing stockholders. In addition, the Company
sold 1,410,000 shares pursuant to the underwriter's overallotment option. The
net
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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
proceeds to the Company after the underwriting discount and other related
expenses were approximately $240.0 million.
NOTE 8 -- SUBSEQUENT EVENT
On April 10, 2000, the Company announced an agreement to acquire QT
Optoelectronics ("QTO") for approximately $100.0 million, net of debt retained
by the seller. The purchase price will be mainly comprised of Fairchild
International stock. QTO designs, manufactures and markets LED lamps and
displays, infrared components, custom optoelectronics and optocouplers and is
the world's largest independent company solely focused on optoelectronics. The
transaction, which will be accounted for as a purchase, is expected to be
completed by May 28, 2000.
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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 International, Inc. ("Fairchild International"),
through its wholly-owned subsidiary Fairchild Semiconductor Corporation
(collectively, the "Company"), is a leading designer, manufacturer and supplier
of high-performance analog and mixed signal, discrete power and signal
technology, interface and logic, and non-volatile memory 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. The three months ended April 2, 2000 represents the
first reported quarter under the new fiscal year, which will end on December 31,
2000. Below, the Company's discussion compares the current quarter's results to
the results of the comparable period in 1999. The current quarter's results
include the results of the power device business acquired from Samsung
Electronics in April 1999. The comparable period of 1999 excludes the power
device business results, as they were only included after the date of
acquisition. The table below presents selected financial results for the quarter
ended April 2, 2000, reported both with and without the power device business
acquired from Samsung Electronics:
THREE MONTHS ENDED
---------------------------------
EXCLUDING
POWER DEVICES
APRIL 2, APRIL 2, MARCH 28,
2000 2000 1999
-------- -------- ---------
(IN MILLIONS)
Net sales -- trade.............................. $368.9 $223.8 $152.4
Contract manufacturing.......................... 32.8 24.4 24.9
------ ------ ------
Total revenue................................. 401.7 248.2 177.3
Gross profit -- trade........................... 124.4 82.2 36.8
Gross profit -- contract manufacturing.......... 12.8 7.9 6.8
Operating income................................ 71.6 48.4 8.1
RESULTS OF OPERATIONS
Fairchild International generated net income of $50.0 million in the first
quarter of 2000, compared to a net loss of $6.7 million in the first quarter of
1999. Excluding unusual (gains) charges and amortization of acquisition-related
intangibles of $(5.6) million and $8.4 million, respectively, in the first
quarter of 2000, and $2.7 million and $0.8 million, respectively, in the first
quarter of 1999, net of tax effects, Fairchild International had adjusted net
income of $52.6 million for the first quarter of 2000 compared to an adjusted
net loss of $3.4 million in the first quarter of 1999. The unusual gains in the
first quarter of 2000 represent funds received in connection with the sale of
the Company's former Mountain View, California facility ($3.5 million) and the
adjustment of restructuring reserves upon final execution of several prior year
actions ($2.1 million). Unusual charges in the first quarter of 1999 represent
restructuring charges resulting from the transfer of assembly and test
activities from the Company's former Mountain View, California facility to its
Penang, Malaysia facility. Operating income was $71.6 million in the first
quarter of 2000, compared to $8.1 million in the first quarter of 1999.
Excluding unusual (gains) charges, operating income was $66.0 million in the
first quarter of 2000, compared to $10.8 million in the first quarter of 1999.
The increase in operating income is due to the acquisition of the power device
business from Samsung Electronics in April 1999 and higher revenues and gross
profits for the historical business due to new product introductions and
improved business conditions, resulting in higher factory utilization in the
first quarter of 2000 as compared to the first quarter 1999.
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All operating segments reported improved operating results in the first
quarter of 2000 as compared to the first quarter of 1999. Analog had operating
income of $8.9 million in the first quarter of 2000 as compared to a loss of
$2.7 million in the first quarter of 1999. This increase in Analog's operating
income was due to the addition of the analog power device business acquired from
Samsung Electronics and higher revenues and improved gross profits from the
Company's historical analog business, driven by the beneficial effect of the
first full quarter of wafer production in South Portland, Maine. In the first
quarter of 1999, wafer production occurred in the now closed Mountain View,
California facility. Discrete had operating income of $25.8 million in the first
quarter of 2000 as compared to $3.1 million in the first quarter of 1999. The
increase in Discrete operating income resulted from the addition of the discrete
power device business acquired from Samsung Electronics and higher revenues and
gross profits in the Company's historical discrete business due to higher
average selling prices resulting in part from new product revenues and improved
factory utilization. Interface and Logic had operating income of $16.8 million
in the first quarter of 2000 as compared to operating income of $7.7 million in
the first quarter of 1999. The increase in Interface and Logic operating income
was due to higher revenues and improved gross profits due to a better sales mix
resulting from new product introductions and improved factory utilization.
Excluding depreciation and amortization of $38.4 million and $24.7 million
in the first quarter of 2000 and the first quarter 1999, respectively, and
unusual (gains) charges, earnings before interest, taxes, depreciation and
amortization ("EBITDA") were $104.4 million in the first quarter of 2000
compared to $35.5 million in the first quarter of 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 Fairchild
International, or as an alternative to cash flows as a measure of liquidity.
REVENUES
Fairchild International's revenues consist of trade sales to unaffiliated
customers (91.8% and 86.0% of total revenues in the first quarter of 2000 and
the first quarter of 1999, respectively) and revenues from contract
manufacturing services provided to National Semiconductor and Samsung
Electronics (8.2% and 14.0% of total revenues in the first quarter of 2000 and
the first quarter of 1999, respectively).
Trade sales increased 142.1% to $368.9 million in the first quarter of 2000
compared with $152.4 million in the first quarter of 1999. Trade sales for the
first quarter of 2000 include $145.1 million of sales from the power device
business. Increases in the Company's historical trade business resulted from
higher sales volume reflecting strength in end-markets, particularly
communications, and higher average selling prices reflecting an improved sales
mix due to new product introductions.
Analog revenues increased 444.0% to $86.5 million in the first quarter of
2000 from $15.9 million in the first quarter of 1999. The first quarter of 2000
includes $62.5 million of analog revenues from the power device business. The
increase in the Company's historical analog business reflects improved business
conditions resulting in higher sales volumes. Discrete revenues increased 267.2%
to $174.4 million in the first quarter of 2000 compared to $47.5 million in the
first quarter of 1999. The first quarter of 2000 includes $82.6 million of
discrete revenues from the power device business. The increase in historical
Discrete business revenues was across all product lines as both volumes and
prices increased over last year. Interface and Logic revenues increased 31.5% to
$93.5 million in the first quarter of 2000 from $71.1 million in the first
quarter of 1999. Increases in Interface and Logic revenues were volume driven,
resulting from strengthening demand and new product introductions.
Approximately 70.7% of the Company's trade revenues were generated from
Analog and Discrete products in the first quarter of 2000.
Geographically, 24.0%, 14.7%, 41.6% and 19.7% of trade sales were derived
from North America, Europe, Asia/Pacific and Korea, respectively, in the first
quarter of 2000 as compared to 34.3%, 20.0%, 43.9% and 1.8%, respectively, in
the first quarter of 1999. Asia/Pacific region revenues increased 129.3% in the
first quarter of 2000 over the first quarter of 1999. The increase in the
Asia/Pacific region is due to incremental
10
12
revenues from the power device business and improved regional economic
conditions. Revenues in the Europe region increased 77.5% in the first quarter
of 2000 over the first quarter of 1999. The increase in Europe was also due to
incremental power device business revenues and improvements in communications,
consumer and distribution markets. North America revenues increased 69.2% in the
first quarter of 2000 over the first quarter of 1999. The increase in North
America resulted from incremental power device business revenues and increased
distribution sales and overall improved market conditions.
Contract manufacturing revenues increased 31.7% to $32.8 million in the
first quarter of 2000 compared to $24.9 million in the first quarter of 1999.
The increase results from additional contract manufacturing business with
Samsung Electronics. Contract manufacturing demand from National Semiconductor
was flat for the first quarter of 2000 as compared to the first quarter of 1999.
GROSS PROFIT
Gross profit increased 214.7% to $137.2 million in the first quarter of
2000 compared to $43.6 million in the first quarter of 1999. As a percentage of
trade sales, gross trade profits were 33.7% in the first quarter of 2000 as
compared to 24.1% in the first quarter of 1999. The increase in gross trade
profit as a percentage of trade sales was due in part to a better sales mix
resulting from new product introductions and slightly higher average selling
prices, as mentioned above, as well as the favorable effect of increased factory
utilization and the full benefit of cost reduction actions undertaken during
1999. Contract manufacturing gross profit increased 88.2% to $12.8 million in
the first quarter of 2000 compared to $6.8 million in the first quarter of 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.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $17.8 million, or 4.8% of
trade sales, in the first quarter of 2000, compared to $9.5 million, or 6.2% of
trade sales, in the first quarter of 1999. The increase in R&D expenses was
driven by the dedicated R&D costs incurred by the power device business in the
first quarter of 2000, which Fairchild International did not incur in the first
quarter of 1999. R&D efforts are focused on Fairchild International's growth
products (Analog, DMOS power and CMOS logic). R&D expenditures for these growth
products were 8.1% and 8.6% of their trade sales in the first quarter of 2000
and the first quarter of 1999, respectively. R&D expenditures for Fairchild
International's mature products (Bipolar Logic, Bipolar Discretes and EPROM)
were less than 1% of their trade sales for both the first quarter of 2000 and
the first quarter of 1999. The decrease in R&D expenditures for growth products
as a percentage of trade sales is due to the relatively smaller R&D requirements
of the power device business as a percentage of sales.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses were $53.4 million,
or 14.5% of trade sales, in the first quarter of 2000, compared to $23.3
million, or 15.3% of trade sales, in the first quarter of 1999. The increase in
SG&A expenses was primarily the result of the incremental SG&A expenses of the
power device business which Fairchild International did not incur in the first
quarter of 1999, including amortization of acquisition-related intangibles, and
increased selling expenses for the historical business due to higher sales
volume.
RESTRUCTURING AND IMPAIRMENTS
The Company recorded a pre-tax gain of approximately $5.6 million in the
first quarter of 2000. The one-time gain was for additional funds received in
connection with the sale of the Company's former Mountain View, California
facility ($3.5 million) and the adjustment of restructuring reserves ($2.1
million) based upon final execution of several prior year plans. For the first
quarter of 1999, the Company incurred a pre-tax charge of approximately $2.7
million for a restructuring charge taken in connection with the transfer of
assembly and test activities from the Company's former Mountain View, California
facility to its Penang, Malaysia facility.
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INTEREST EXPENSE
Interest expense was $20.8 million in the first quarter of 2000, compared
to $15.4 million in the first quarter of 1999. The increase was principally the
result of indebtedness incurred to finance the power device acquisition.
INTEREST INCOME
Interest income was $4.0 million in the first quarter of 2000. There was no
interest income in the first quarter of 1999 due to the Company's relatively low
cash balances during that period.
INCOME TAXES
Income tax expense was $4.8 million for the first quarter of 2000, compared
to a tax benefit of $0.6 million in the first quarter of 1999. The effective tax
rates for the first quarter of 2000 and the first quarter of 1999 were 8.8% and
8.2%, respectively. In the first quarter of 2000, the tax provision was based on
income generated from Fairchild International's foreign operations, excluding
Korea where Fairchild International currently benefits from a tax holiday. There
was no provision for income taxes in the United States recorded in the first
quarter due to the anticipated usage of previously reserved net operating loss
carryforwards. The change in the Company's tax provision was due to profits
earned in the first quarter of 2000 as compared to a loss in the first quarter
of 1999 and Fairchild International's limited ability in 1999 to recognize the
future benefit of U.S. net operating loss carryforwards.
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 April 2, 2000.
The Company's senior credit facilities, 10 1/8% Senior Subordinated Notes
and 10 3/8% Senior Subordinated Notes do, and other debt instruments Fairchild
International may enter into in the future may, impose various restrictions and
covenants on Fairchild International which could potentially limit Fairchild
International'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 our ability to modify our certificate of
incorporation, bylaws, shareholder agreements, voting trusts 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 our subsidiaries to make dividends or
advances to Fairchild International. However, our subsidiaries are permitted
without material restrictions under our debt instruments to make dividends or
advances to Fairchild Semiconductor Corporation. We believe that those funds
permitted to be transferred to us, together with existing cash, will be
sufficient to meet our cash obligations. Fairchild International expects that
its existing cash and 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. We intend to invest approximately
$255.0 million in 2000 to expand capacity at all of the Company's major
manufacturing fabs and assembly/test centers. In the long-term, additional
borrowing or equity investment may be required to fund future acquisitions.
On January 25, 2000, the Company completed a follow-on public offering of
23,500,000 shares of its Class A Common Stock at a price of $33.4375 per share.
The underwriting discount was $1.50 per share. The 23,500,000 shares included
6,140,880 newly issued shares sold by the Company and 17,359,120 shares sold by
existing stockholders, including all remaining shares owned by National
Semiconductor, the Company's former parent. The Company did not receive any
proceeds from shares sold by existing stockholders. In
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addition, the Company sold 1,410,000 shares pursuant to the underwriter's
overallotment option. The net proceeds to the Company after the underwriting
discount and other related expenses were approximately $240.0 million.
As of April 2, 2000, the Company's cash and cash equivalents balance was
$385.0 million, an increase of $246.3 million from December 26, 1999.
During the first quarter of 2000, the Company's operations provided $44.3
million in cash compared to a use of $3.0 million of cash in the first quarter
of 1999. The increase in cash provided by operating activities reflects an
increase in the first quarter of 2000 in net income (loss) adjusted for non-cash
items of $62.7 million offset by a decrease in cash flows from changes in
operating assets and liabilities of $15.4 million as compared with the first
quarter of 1999. Cash used in investing activities during the first quarter of
2000 totaled $38.2 million, compared to $12.8 million in the first quarter of
1999. The difference primarily relates to increased capital expenditures in the
first quarter of 2000. Capital expenditures in the first quarter of 2000 were
made principally in the Company's wafer fabs and assembly and test facilities,
and were part of the Company's 2000 plan to add capacity at all manufacturing
locations. Capital expenditures for the balance of 2000 will be made primarily
to execute this plan. Cash provided by financing activities of $240.2 million
for the first quarter of 2000 was primarily from the issuance of common stock.
Cash provided by financing activities of $17.1 million in the first quarter of
1999 was due primarily to proceeds received from the Company's revolving credit
line.
LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL, EXCLUDING OUR
SUBSIDIARIES
Fairchild International is a holding company, the principal asset of which
is the stock of its subsidiary, Fairchild Semiconductor Corporation. Fairchild
International on a stand-alone basis had no cash flow from operations in the
first quarter of 2000, nor in the first quarter of 1999. Fairchild International
on a stand-alone basis has no cash requirements for the next twelve months.
OUTLOOK AND BUSINESS RISKS
This quarterly report includes "forward-looking statements" as that term is
defined in 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. For example, the following two paragraphs contain numerous
forward-looking statements. All forward-looking statements in this quarterly
report are made based on management's current expectations and estimates, which
involve risks and uncertainties, including those described in the following
paragraph. Among these factors are the following: changes in overall economic
conditions; changes in demand for our products; changes in inventories at our
customers and distributors; technological and product development risks;
availability of manufacturing capacity; availability of raw materials;
competitors' actions; loss of key customers; order cancellations or reduced
bookings; changes in manufacturing yields or output; and significant litigation.
Other factors that may affect the company's future operating results are
described in Fairchild International's annual report on Form 10-K, under the
Risk Factors caption in the Business section. Such risks and uncertainties could
cause actual results to be materially different than those in forward-looking
statements. Readers are cautioned not to place undue reliance on the
forward-looking statements in the following paragraphs or elsewhere in this
quarterly report. Fairchild International assumes no obligation to update such
information.
Market conditions continued to improve in the first quarter of 2000. Strong
bookings, particularly from customers in communications end markets, offset
seasonally weak bookings from personal computer manufacturers in the first two
months of the quarter. Personal computer bookings rebounded sharply in March.
Leadtimes, which lengthened in late 1999 for the industry as a whole, have
stabilized. Further significant lengthening of lead-times is not anticipated.
Pricing was mostly stable in the first quarter of 2000 as compared to the fourth
quarter of 1999. With firming leadtimes, prices are expected to remain stable
through the second quarter of 2000. Fairchild International expects that second
quarter revenues will increase 5%-6%
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over first quarter of 2000 and that total 2000 revenues will be approximately
30% higher than pro forma 1999 revenues, which include a full year of power
device revenues. Fairchild International expects that margins will continue to
improve slowly through 2000 as a result of improved product mix due to continued
new product introductions. 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.
During the second quarter of 2000, the manufacturing agreements entered
into with National Semiconductor at the time of the Company's recapitalization
will expire. For the twelve months ended May 2000, the agreements provide for
guaranteed minimum contract manufacturing revenues of $80.0 million. National
Semiconductor is currently in compliance with its purchase commitment. Fairchild
International has entered into new manufacturing agreements with National
Semiconductor, which take effect June 1, 2000. The terms of these agreements are
not as favorable as the existing agreements. The agreements do not provide for
any minimum annual purchase commitments. Fairchild International expects that
revenues from National Semiconductor, which were approximately $24.5 million in
the first quarter of 2000, will modestly decline for the remaining quarters of
2000. As a result, contract manufacturing revenues from National Semiconductor
are expected to be lower in 2000 than 1999. Fairchild International anticipates
that capacity not utilized for contract manufacturing activities in 2000 will be
fully absorbed by capacity demands for the Company's power and interface
products.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivatives and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
Fairchild International intends to adopt SFAS No. 133 in 2001. Fairchild
International is presently analyzing SFAS No. 133, and has not yet determined
its impact on Fairchild International's consolidated financial statements.
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 Fairchild International's annual report on Form
10-K for the year ended December 26, 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 28 of
Fairchild International's Annual Report to Stockholders for the year ended
December 26, 1999.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 2, 1999, our principal operating subsidiary, 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 our products infringe two Siliconix patents and claims an
unspecified amount of damages. We are contesting these claims vigorously.
On December 22, 1999, we, 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. These claims were subject to indemnification by
Samsung Electronics under the power device business acquisition agreement.
Pursuant to a settlement agreement with Samsung Electronics, IXYS has agreed to
dismiss the suit and to release each of the defendant companies from all future
claims under the IXYS patent claimed to have been infringed.
In addition to the above proceedings, from time to time the Company is
involved in other legal proceedings in the ordinary course of business. We
believe that there is no such ordinary course litigation pending that could
have, individually or in the aggregate, a material adverse effect on our
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 International, Inc. filed no reports on Form 8-K
during the quarter ended April 2, 2000.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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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 International,
Inc.
By: /s/ DAVID A. HENRY
------------------------------------
David A. Henry
Vice President, Corporate Controller
(Principal Accounting Officer)
Date: May 15, 2000
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