1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2001
[ ] 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (207) 775-8100
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of the issuer's classes of common stock as
of the close of business on May 7, 2001:
TITLE OF EACH CLASS NUMBER OF SHARES
------------------- ----------------
Class A Common Stock, par value $.01 per share............ 99,455,734
Class B Common Stock, par value $.01 per share............ 0
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of April 1, 2001
(Unaudited) and December 31, 2000........................... 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended April 1, 2001 and April 2,
2000........................................................ 4
Condensed Consolidated Statements of Comprehensive Income
(Unaudited) for the Three Months Ended April 1, 2001 and
April 2, 2000............................................... 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended April 1, 2001 and April 2,
2000........................................................ 6
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 30
Item 6. Exhibits and Reports on Form 8-K............................ 30
SIGNATURE............................................................ 31
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
APRIL 1, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 377.6 $ 401.8
Accounts receivable, net.................................. 195.1 225.0
Inventories............................................... 244.1 192.8
Deferred income taxes..................................... 47.3 47.3
Other current assets...................................... 8.6 9.5
-------- --------
Total current assets.............................. 872.7 876.4
Property, plant and equipment, net.......................... 684.9 596.6
Intangible assets, net...................................... 514.8 298.1
Other assets................................................ 83.9 66.4
-------- --------
Total assets...................................... $2,156.3 $1,837.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 137.6 $ 155.3
Accrued expenses and other current liabilities............ 115.8 136.9
-------- --------
Total current liabilities......................... 253.4 292.2
Long-term debt.............................................. 1,059.1 705.2
Other liabilities........................................... 3.1 2.4
-------- --------
Total liabilities................................. 1,315.6 999.8
Commitments and contingencies Stockholders' equity:
Class A common stock...................................... 1.0 0.8
Class B common stock...................................... -- 0.2
Additional paid-in capital................................ 801.4 801.1
Retained earnings......................................... 43.4 41.8
Accumulated other comprehensive income.................... 2.3 --
Less treasury stock at cost............................... (7.4) (6.2)
-------- --------
Total stockholders' equity........................ 840.7 837.7
-------- --------
Total liabilities and stockholders' equity........ $2,156.3 $1,837.5
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
3
4
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED
----------------------
APRIL 1, APRIL 2,
2001 2000
-------- --------
Revenue:
Net sales -- trade........................................ $367.8 $368.9
Contract manufacturing.................................... 17.5 32.8
------ ------
Total revenue..................................... 385.3 401.7
Operating expenses:
Cost of sales -- trade.................................... 255.0 244.5
Cost of contract manufacturing............................ 12.2 20.0
Research and development.................................. 23.5 17.8
Selling, general and administrative....................... 53.7 53.4
Purchased in-process research and development............. 12.8 --
Restructuring and impairments............................. 9.5 (5.6)
------ ------
Total operating expenses.......................... 366.7 330.1
------ ------
Operating income............................................ 18.6 71.6
Interest expense............................................ 23.9 20.8
Interest income............................................. (7.4) (4.0)
------ ------
Income before income taxes.................................. 2.1 54.8
Provision for income taxes.................................. 0.5 4.8
------ ------
Net income.................................................. $ 1.6 $ 50.0
====== ======
Net income per common share:
Basic..................................................... $ 0.02 $ 0.53
====== ======
Diluted................................................... $ 0.02 $ 0.51
====== ======
Weighted average common shares:
Basic..................................................... 99.3 94.2
====== ======
Diluted................................................... 101.2 98.7
====== ======
See accompanying notes to unaudited condensed consolidated financial statements.
4
5
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED
------------------------
APRIL 1, APRIL 2,
2001 2000
-------- --------
Net Income.................................................. $1.6 $50.0
Other comprehensive income, net of tax:
Unrealized gain on derivative instrument.................. 2.3 --
---- -----
Comprehensive income........................................ $3.9 $50.0
==== =====
See accompanying notes to unaudited condensed consolidated financial statements.
5
6
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED
--------------------
APRIL 1, APRIL 2,
2001 2000
-------- --------
Cash flows from operating activities:
Net income................................................ $ 1.6 $ 50.0
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of deferred compensation................ 0.7 0.9
Depreciation and amortization........................ 39.8 37.5
Restructuring, net of cash expended.................. 8.7 (2.1)
Loss on disposal of fixed assets..................... 0.6 0.8
Non-cash interest expense............................ 1.0 1.0
Purchased in-process research and development........ 12.8 --
Deferred income taxes................................ (2.4) (0.1)
Changes in operating assets, liabilities, net of effects
of acquisitions:
Accounts receivable.................................. 26.1 (15.2)
Inventories.......................................... (19.4) (4.7)
Other current assets................................. 10.1 (2.8)
Accounts payable..................................... (17.7) (12.4)
Accrued expenses and other current liabilities....... (24.1) (7.0)
Other assets and liabilities, net.................... (4.6) (1.6)
------- ------
Cash provided by operating activities............. 33.2 44.3
------- ------
Investing activities:
Capital expenditures...................................... (47.4) (37.6)
Purchase of molds and tooling............................. (1.1) (0.6)
Purchase of long-term investments......................... (3.5) --
Acquisitions, net of cash acquired........................ (343.1) --
------- ------
Cash used in investing activities................. (395.1) (38.2)
------- ------
Financing activities:
Repayment of long-term debt............................... -- (0.8)
Issuance of long-term debt................................ 350.0 --
Proceeds from issuance of common stock and from issuance
of stock options, net.................................. 1.8 241.0
Purchase of treasury stock................................ (3.4) --
Debt issuance costs....................................... (10.7) --
------- ------
Cash provided by financing activities............. 337.7 240.2
------- ------
Net change in cash and cash equivalents..................... (24.2) 246.3
Cash and cash equivalents at beginning of period............ 401.8 138.7
------- ------
Cash and cash equivalents at end of period.................. $ 377.6 $385.0
======= ======
See accompanying notes to unaudited condensed consolidated financial statements.
6
7
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 1, 2001 and December 31, 2000,
and the Condensed Consolidated Statements of Operations, Comprehensive Income
and Cash Flows for the three months ended April 1, 2001 and April 2, 2000, 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 31, 2000.
Certain prior period amounts have been reclassified to conform to their
current presentation.
NOTE 2 -- INVENTORIES
The components of inventories are as follows:
APRIL 1, DECEMBER 31,
2001 2000
-------- ------------
(IN MILLIONS)
Raw materials............................................... $ 31.1 $ 24.8
Work in process............................................. 163.3 123.9
Finished goods.............................................. 49.7 44.1
------ ------
Total inventories................................. $244.1 $192.8
====== ======
NOTE 3 -- COMPUTATION OF NET INCOME PER SHARE
Basic net income per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income 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. There were 9,423,257 anti-dilutive
common stock options outstanding at April 1, 2001 and none at April 2, 2000.
The following table reconciles basic to diluted weighted average shares
outstanding:
THREE MONTHS
ENDED
--------------------
APRIL 1, APRIL 2,
2001 2000
-------- --------
(IN MILLIONS)
Basic weighted average common shares outstanding............ 99.3 94.2
Net effect of dilutive stock options based on the treasury
stock method using the average market price............... 1.9 4.5
----- ----
Diluted weighted average common shares outstanding.......... 101.2 98.7
===== ====
7
8
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS
ENDED
--------------------
APRIL 1, APRIL 2,
2001 2000
-------- --------
(IN MILLIONS)
Cash paid for:
Income taxes.............................................. $ 3.2 $ 1.5
===== =====
Interest.................................................. $18.0 $19.2
===== =====
NOTE 5 -- ACQUISITIONS
On March 16, 2001, the Company completed its acquisition of the discrete
power products business of Intersil Corporation (DPP) for a purchase price of
approximately $343.1 million in cash, including related acquisition expenses.
DPP is a leading provider of silicon-based discrete power devices for the
computer, communications, industrial, automotive, and space and defense end-user
markets. The transaction was accounted for as a purchase and DPP's results of
operations since the date of acquisition have been included in the accompanying
statement of operations. In connection with the DPP acquisition, the Company
recorded a non-recurring charge of $12.8 million for in-process research and
development. The remaining purchase price in excess of the fair value of
tangible and identifiable intangible assets was allocated to goodwill.
Intangible assets have been assigned lives ranging from three to fifteen years.
NOTE 6 -- SEGMENT INFORMATION
The Company is currently organized into three reportable segments: Analog
and Mixed Signal Products Group (Analog), Discrete Products Group (Discrete) and
Interface and Logic Products Group (Interface and Logic). The operating results
for DPP are included within the Discrete reporting segment.
The Company has determined that its Configurable Products business unit
(formerly known as the Non-Volatile Memory Division which was reported as a
separate segment) and its Optoelectronics Group do not meet the threshold for a
separate reportable segment under SFAS No. 131, and accordingly these segments'
results are included as part of the "Other" category for all periods presented.
The Company's contract manufacturing business is not a separate reportable
segment and its results are recorded together with the Configurable Products
business unit and the Optoelectronics Group 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 contractual agreements for limited time periods, entered into with the
Company's former parent National Semiconductor and Samsung Electronics.
Selected operating segment financial information for the three months ended
April 1, 2001 and April 2, 2000 is as follows:
THREE MONTHS ENDED
--------------------
APRIL 1, APRIL 2,
2001 2000
-------- --------
(IN MILLIONS)
REVENUE:
Analog...................................................... $ 83.7 $ 86.4
Discrete.................................................... 155.2 174.3
Interface and Logic......................................... 92.1 93.5
Other (1)................................................... 54.3 47.5
------ ------
Total.................................................. $385.3 $401.7
====== ======
8
9
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED
--------------------
APRIL 1, APRIL 2,
2001 2000
-------- --------
(IN MILLIONS)
OPERATING INCOME:
Analog...................................................... $ 4.1 $10.1
Discrete.................................................... 12.3 25.8
Interface and Logic......................................... 21.2 16.8
Other (1)................................................... 3.3 13.3
------ -----
Subtotal.................................................... 40.9 66.0
Purchased in-process research and development............... (12.8) --
Restructuring and impairments............................... (9.5) 5.6
------ -----
Total.................................................. $ 18.6 $71.6
====== =====
- ---------------
(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 7 -- RESTRUCTURING AND IMPAIRMENTS
During the first quarter of 2001, the Company recorded a pre-tax
restructuring charge of $9.5 million. The restructuring charge consisted of $8.3
million related to non-cash asset impairments and $1.2 million of employee
separation costs. The asset impairments relate to the consolidation of the
five-inch wafer fabrication line in South Portland, Maine. The employee
separation costs relate primarily to severance and other benefits associated
with approximately 300 salaried, hourly and temporary employees severed in Cebu,
the Philippines.
During the first quarter of 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.
NOTE 8 -- EQUITY
Effective March 7, 2001, one of the Company's principal stockholders
converted its 17,281,000 shares of Class B into an equal number of to Class A
Common Stock. As a result, no Class B shares were outstanding at April 1, 2001.
Total common shares outstanding were not affected by this transaction. Shares of
the Company's Class A Common Stock and Class B Common Stock are identical in all
respects, except that Class B shares have no voting rights, other than as
provided by law, and there is no public market for Class B shares.
NOTE 9 -- LONG-TERM DEBT
In connection with the financing of the DPP acquisition (See Note 5), on
January 31, 2001, the Company's principal operating subsidiary, Fairchild
Semiconductor Corporation, completed a private offering of $350.0 million of
10 1/2% senior subordinated notes (the "10 1/2% Notes"). Interest on the notes
will be paid semi-annually on February 1 and August 1 of each year commencing on
August 1, 2001. The 10 1/2% Notes are unsecured and are subordinated to all
existing and future senior indebtedness of the Company. The Company may redeem
the notes on or after February 1, 2005. Prior to February 1, 2004, the Company
may redeem up to 35% of the 10 1/2% Notes from the proceeds of certain equity
offerings. Net proceeds from this debt issuance, after deducting the
underwriting discount and offering expenses of approximately $10.7 million, were
$339.3 million.
Beginning on April 30, 2001, the Company initiated an exchange offer for
all of the outstanding 10 1/2% Senior Subordinated Notes. The new notes will be
substantially identical to the terms of the outstanding notes,
9
10
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
except that certain transfer restrictions, registration rights and liquidated
damages provisions relating to the outstanding notes will not apply.
The Company's senior credit facility and the indentures governing the
10 1/8% Senior Subordinated Notes, 10 3/8% Senior Subordinated Notes and 10 1/2%
Senior Subordinated Notes impose various restrictions and covenants. 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 and
limitations on incurring indebtedness, 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 facility also limits the
Company's ability to modify the certificate of incorporation, bylaws,
shareholder agreements, voting trusts or similar arrangements. In addition, the
senior credit facility, the indenture governing the 10 1/8% Senior Subordinated
Notes, the 10 3/8% Senior Subordinated Notes and the 10 1/2% Senior Subordinated
Notes contain additional restrictions limiting the ability of the Company's
subsidiaries to pay dividends or make advances to the Company.
NOTE 10 -- DERIVATIVES
Effective January 1, 2001, the Company adopted SFAS 133, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities,
and SFAS 138, which modified certain provisions of SFAS 133. All derivatives,
whether designated as hedging relationships or not, are required to be recorded
on the balance sheet at fair value. If the derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and of the hedged
item attributable to the hedged risk are recognized in earnings. If the
derivative is designated as a cash flow hedge, the effective portions of changes
in the fair value of the derivative are recorded in other comprehensive income
(OCI) and are recognized in the income statement when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges
are recognized in earnings.
The Company uses derivative instruments to manage exposures to foreign
currencies. Certain forecasted transactions are exposed to foreign currency
risks. The Company monitors its foreign currency exposures to maximize the
overall effectiveness of its foreign currency hedge positions. Principal
currencies hedged include the Euro and the Japanese yen. The Company's
objectives for holding derivatives are to minimize the risks using the most
effective methods to eliminate or reduce the impacts of these exposures.
Changes in the fair value of derivative instruments related to time value
are included in the assessment of hedge effectiveness. Hedge ineffectiveness,
determined in accordance with SFAS 133 and SFAS 138, had no impact on earnings
for the three months ended April 1, 2001. No cash flow hedges were derecognized
or discontinued for the three months ended April 1, 2001.
Derivative gains and losses included in OCI are reclassified into earnings
at the time the forecasted revenue is recognized. The Company estimates that the
entire $2.3 million of net derivative gains included in OCI will be reclassified
into earnings within the next twelve months.
The adoption of SFAS 133 and SFAS 138 on January 1, 2001, resulted in no
cumulative adjustment to income or OCI as no cash flow derivative instruments
were outstanding at December 31, 2000.
NOTE 11 -- CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED)
The Company operates through its wholly-owned subsidiary Fairchild
Semiconductor Corporation and other indirect wholly-owned subsidiaries.
Fairchild Semiconductor International, Inc. and certain of Fairchild
Semiconductor Corporation's subsidiaries are guarantors under the 10 1/8%,
10 3/8% and 10 1/2% Senior Subordinated Notes. These guaranties are full and
unconditional. In addition, all guaranties are joint and several. Accordingly,
presented below are condensed consolidating balance sheets of Fairchild
International as of April 1, 2001 and December 31, 2000 and related condensed
consolidating statements of operations and cash flows for the three months ended
April 1, 2001 and April 2, 2000.
10
11
CONDENSED CONSOLIDATING BALANCE SHEETS
(UNAUDITED)
APRIL 1, 2001
-------------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ ------------ -------------------
ASSETS
Current assets:
Cash and cash
equivalents........... $ -- $ 362.2 $ 1.2 $ 14.2 $ -- $ 377.6
Accounts receivable,
net................... -- 40.9 7.0 147.2 -- 195.1
Inventories............. -- 113.0 50.2 80.9 -- 244.1
Deferred income taxes... -- 46.5 0.8 -- -- 47.3
Other current assets.... -- 4.0 0.1 6.9 -- 11.0
------ -------- ------ ------ --------- --------
Total current
assets......... -- 566.6 59.3 249.2 -- 875.1
Property, plant and
equipment, net.......... -- 258.3 80.0 346.6 -- 684.9
Intangible assets, net.... -- 9.9 319.0 185.9 -- 514.8
Investment in
subsidiary.............. 832.4 932.9 148.7 -- (1,914.0) --
Other assets.............. 5.9 52.6 7.7 15.3 -- 81.5
------ -------- ------ ------ --------- --------
Total assets..... $838.3 $1,820.3 $614.7 $797.0 $(1,914.0) $2,156.3
====== ======== ====== ====== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........ $ -- $ 77.5 $ 2.2 $ 57.9 $ -- $ 137.6
Accrued expenses and
other current
liabilities........... -- 66.0 5.3 44.5 -- 115.8
------ -------- ------ ------ --------- --------
Total current
liabilities.... -- 143.5 7.5 102.4 -- 253.4
Long-term debt............ -- 1,059.1 -- -- -- 1,059.1
Net intercompany
(receivable) payable.... -- (213.9) 9.2 204.7 -- --
Other liabilities......... -- (1.0) (0.5) 4.6 -- 3.1
------ -------- ------ ------ --------- --------
Total
liabilities.... -- 987.7 16.2 311.7 -- 1,315.6
------ -------- ------ ------ --------- --------
Commitments and
contingencies
Stockholders' equity:
Class A common stock.... 1.0 -- -- -- -- 1.0
Class B common stock.... -- -- -- -- -- --
Additional paid-in
capital............... 801.4 -- -- -- -- 801.4
Retained earnings....... 43.3 830.3 598.5 485.3 (1,914.0) 43.4
Accumulated other
comprehensive
income................ -- 2.3 -- -- -- 2.3
Less treasury stock (at
cost)................. (7.4) -- -- -- -- (7.4)
------ -------- ------ ------ --------- --------
Total
stockholders'
equity......... 838.3 832.6 598.5 485.3 (1,914.0) 840.7
------ -------- ------ ------ --------- --------
Total liabilities
and
stockholders'
equity......... $838.3 $1,820.3 $614.7 $797.0 $(1,914.0) $2,156.3
====== ======== ====== ====== ========= ========
11
12
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED APRIL 1, 2001
-------------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ ------------ -------------------
Revenue:
Net sales -- trade....... $ -- $ 76.6 $ 7.5 $283.7 $ -- $367.8
Net sales --
intercompany........... -- 230.7 20.1 91.8 (342.6) --
Contract manufacturing... -- 16.0 -- 1.5 -- 17.5
----- ------ ------ ------ ------- ------
Total revenue..... -- 323.3 27.6 377.0 (342.6) 385.3
Operating expenses:
Cost of sales............ -- 35.9 9.3 209.8 -- 255.0
Cost of sales --
intercompany........... -- 228.7 19.0 94.9 (342.6) --
Cost of contract
manufacturing.......... -- 11.2 -- 1.0 -- 12.2
Research and
development............ -- 12.3 5.2 6.0 -- 23.5
Selling, general and
administrative......... -- 26.5 6.6 20.6 -- 53.7
Purchased in-process
research and
development............ -- -- 12.8 -- -- 12.8
Restructuring and
impairments............ -- 8.3 0.4 0.8 -- 9.5
----- ------ ------ ------ ------- ------
Total operating
expenses........ -- 322.9 53.3 333.1 (342.6) 366.7
----- ------ ------ ------ ------- ------
Operating income (loss).... -- 0.4 (25.7) 43.9 -- 18.6
Interest expense........... -- 23.9 -- -- -- 23.9
Interest income............ -- (7.3) -- (0.1) -- (7.4)
Equity in subsidiary
income................... (1.6) (15.5) (19.3) -- 36.4 --
----- ------ ------ ------ ------- ------
Income before income
taxes.................... 1.6 (0.7) (6.4) 44.0 (36.4) 2.1
Provision (benefit) for
income taxes............. -- (2.3) -- 2.8 -- 0.5
----- ------ ------ ------ ------- ------
Net income (loss)........ $ 1.6 $ 1.6 $ (6.4) $ 41.2 $ (36.4) $ 1.6
===== ====== ====== ====== ======= ======
12
13
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED APRIL 1, 2001
----------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ -------------------
Cash flows from operating
activities: $ -- $ 19.3 $1.2 $ 12.7 $ 33.2
----- ------- ---- ------ -------
Investing activities:
Capital expenditures............ -- (22.7) -- (24.7) (47.4)
Purchase of molds and tooling... -- -- -- (1.1) (1.1)
Purchase of long-term
investments.................. -- (3.5) -- -- (3.5)
Acquisitions, net of cash
acquired..................... -- (343.1) -- -- (343.1)
Investment (in) from
affiliate.................... 1.6 (1.6) -- -- --
----- ------- ---- ------ -------
Cash provided by (used in)
investing activities....... 1.6 (370.9) -- (25.8) (395.1)
----- ------- ---- ------ -------
Financing activities:
Issuance of long-term debt...... -- 350.0 -- -- 350.0
Proceeds from issuance of common
stock and from issuance of
stock options, net........... 1.8 -- -- -- 1.8
Purchase of treasury stock...... (3.4) -- -- -- (3.4)
Debt issuance costs............. -- (10.7) -- -- (10.7)
----- ------- ---- ------ -------
Cash provided by (used in)
financing activities....... (1.6) 339.3 -- -- 337.7
----- ------- ---- ------ -------
Net change in cash and cash
equivalents..................... -- (12.3) 1.2 (13.1) (24.2)
Cash and cash equivalents at
beginning of period............. -- 374.5 -- 27.3 401.8
----- ------- ---- ------ -------
Cash and cash equivalents at end
of period....................... $ -- $ 362.2 $1.2 $ 14.2 $ 377.6
===== ======= ==== ====== =======
Supplemental Cash Flow
Information:
Cash paid during the year for:
Income taxes................. $ -- $ -- $ -- $ 3.2 $ 3.2
===== ======= ==== ====== =======
Interest..................... $ -- $ 18.0 $ -- $ -- $ 18.0
===== ======= ==== ====== =======
13
14
CONDENSED CONSOLIDATING BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, 2000
-------------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ ------------ -------------------
ASSETS
Current assets:
Cash and cash
equivalents............ $ -- $ 374.5 $ -- $ 27.3 $ -- $ 401.8
Accounts receivable,
net.................... -- 53.7 5.1 166.2 -- 225.0
Inventories.............. -- 102.4 9.7 80.7 -- 192.8
Deferred income taxes.... -- 46.5 0.8 -- 47.3
Other current assets..... -- 1.6 3.9 4.0 -- 9.5
------ -------- ------ ------ --------- --------
Total current
assets.......... -- 578.7 19.5 278.2 -- 876.4
Property, plant and
equipment, net........... -- 252.4 2.8 341.4 -- 596.6
Intangible assets, net..... -- 11.6 102.4 184.1 -- 298.1
Investment in subsidiary... 831.8 601.6 146.5 -- (1,579.9)
Other assets............... 5.9 36.1 16.7 7.7 -- 66.4
------ -------- ------ ------ --------- --------
Total assets...... $837.7 $1,480.4 $287.9 $811.4 $(1,579.9) $1,837.5
====== ======== ====== ====== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......... $ -- $ 86.2 $ 0.7 $ 68.4 $ -- $ 155.3
Accrued expenses and
other current
liabilities............ -- 77.1 5.9 53.9 -- 136.9
------ -------- ------ ------ --------- --------
Total current
liabilities..... -- 163.3 6.6 122.3 -- 292.2
Long-term debt............. -- 705.2 -- -- -- 705.2
Net intercompany
(receivable) payable..... -- (213.0) (31.1) 244.1
Other liabilities.......... -- (6.9) 0.3 9.0 -- 2.4
------ -------- ------ ------ --------- --------
Total
liabilities..... -- 648.6 (24.2) 375.5 -- 999.8
------ -------- ------ ------ --------- --------
Commitments and
contingencies
Stockholders' equity:
Class A common stock..... 0.8 -- -- -- -- 0.8
Class B common stock..... 0.2 -- -- -- -- 0.2
Additional paid-in
capital................ 801.1 -- -- -- -- 801.1
Retained earnings........ 41.8 831.8 312.1 436.0 (1,579.9) 41.8
Less treasury stock (at
cost).................. (6.2) -- -- -- -- (6.2)
------ -------- ------ ------ --------- --------
Total
stockholders'
equity.......... 837.7 831.8 312.1 436.0 (1,579.9) 837.7
------ -------- ------ ------ --------- --------
Total liabilities
and
stockholders'
equity.......... $837.7 $1,480.4 $287.9 $811.4 $(1,579.9) $1,837.5
====== ======== ====== ====== ========= ========
14
15
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED APRIL 2, 2000
-------------------------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ ------------ -------------------
Revenue:
Net sales -- trade....... $ -- $ 89.0 $ -- $279.9 $ -- $368.9
Net sales --
intercompany........... -- 221.2 4.5 12.5 (238.2) --
Contract manufacturing... -- 24.4 -- 8.4 -- 32.8
------ ------ ------ ------ ------- ------
Total revenue..... -- 334.6 4.5 300.8 (238.2) 401.7
Operating expenses:
Cost of sales............ -- 32.8 (6.2) 217.9 -- 244.5
Cost of sales --
intercompany........... -- 218.5 4.5 15.2 (238.2) --
Cost of contract
manufacturing.......... -- 16.5 -- 3.5 -- 20.0
Research and
development............ -- 10.5 3.4 3.9 -- 17.8
Selling, general and
administrative......... -- 29.2 2.5 21.7 -- 53.4
Purchased in-process
research and
development............ -- -- -- -- -- --
Restructuring and
impairments............ -- (2.3) (3.3) -- -- (5.6)
------ ------ ------ ------ ------- ------
Total operating
expenses........ -- 305.2 0.9 262.2 (238.2) 330.1
------ ------ ------ ------ ------- ------
Operating income........... -- 29.4 3.6 38.6 -- 71.6
Interest expense........... -- 20.8 -- -- -- 20.8
Interest income............ -- (3.8) -- (0.2) -- (4.0)
Other income, net.......... -- -- -- -- -- --
Equity in subsidiary
income................... (50.0) (39.9) (28.8) -- 118.7 --
------ ------ ------ ------ ------- ------
Income before income
taxes.................... 50.0 52.3 32.4 38.8 (118.7) 54.8
Provision for income
taxes.................... -- 2.3 -- 2.5 -- 4.8
------ ------ ------ ------ ------- ------
Net income................. $ 50.0 $ 50.0 $ 32.4 $ 36.3 $(118.7) $ 50.0
====== ====== ====== ====== ======= ======
15
16
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED APRIL 2, 2000
----------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ -------------------
Cash flows provided by operating
activities: $ -- $ 8.4 $ 0.1 $ 35.8 $ 44.3
------- ------ ----- ------ ------
Investing activities:
Capital expenditures............. -- (22.9) (0.1) (14.6) (37.6)
Purchase of molds and tooling.... -- -- -- (0.6) (0.6)
Investment (in) from affiliate... (241.0) 241.0 -- -- --
------- ------ ----- ------ ------
Cash provided by (used in)
investing activities........ (241.0) 218.1 (0.1) (15.2) (38.2)
------- ------ ----- ------ ------
Financing activities:
Repayment of long-term debt...... -- (0.8) -- -- (0.8)
Proceeds from issuance of common
stock and from issuance of
stock options, net............ 241.0 -- -- -- 241.0
------- ------ ----- ------ ------
Cash provided by (used in)
financing activities........ 241.0 (0.8) -- -- 240.2
------- ------ ----- ------ ------
Net change in cash and cash
equivalents...................... -- 225.7 -- 20.6 246.3
Cash and cash equivalents at
beginning of period.............. -- 117.3 -- 21.4 138.7
------- ------ ----- ------ ------
Cash and cash equivalents at end of
period........................... $ -- $343.0 $ -- $ 42.0 $385.0
======= ====== ===== ====== ======
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes.................. $ -- $ -- $ -- $ 1.5 $ 1.5
======= ====== ===== ====== ======
Interest...................... $ -- $ 19.2 $ -- $ -- $ 19.2
======= ====== ===== ====== ======
16
17
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
We are a leading designer, manufacturer and supplier of building block
semiconductors and optoelectronics for multi market uses. Semiconductor product
offerings include analog and mixed signal, discrete power and signal technology,
interface and logic, and non-volatile memory semiconductors. Optoelectronic
product offerings include optocouplers, LED displays and infrared components.
These multi-market products serve the telecommunications, consumer, industrial,
personal systems and automotive markets.
On March 16, 2001, we completed an acquisition of the discrete power
business of Intersil Corporation (DPP) for approximately $343.1 million in cash,
including related acquisition costs. DPP is a leading provider of silicon-based
discrete power devices for the computer, communications, industrial, automotive,
and space and defense markets. Included in the acquisition is the industry's
only eight inch wafer fabrication facility dedicated to discrete power products,
located in Mountaintop, Pennsylvania.
RESULTS OF OPERATIONS
We generated net income of $1.6 million and $50.0 million in the first
quarter of 2001 and 2000, respectively. Excluding restructuring and impairments,
purchased in-process research and development and amortization of
acquisition-related intangibles, adjusted net income was as follows for the
three months ended April 1, 2001 and April 2, 2000, respectively:
THREE MONTHS ENDED
---------------------
APRIL 1, APRIL 2,
2001 2000
-------- --------
(IN MILLIONS)
Net income.................................................. $ 1.6 $50.0
Restructuring and impairments............................. 9.5 (5.6)
Purchased in-process research and development............. 12.8 --
Amortization of acquisition-related intangibles........... 10.4 8.4
Less associated tax effects............................... (8.2) (0.2)
----- -----
Adjusted net income......................................... $26.1 $52.6
===== =====
Restructuring and impairments in the first quarter of 2001 include asset
impairment charges related to the consolidation of the five-inch wafer
fabrication line in South Portland, Maine ($8.3 million) as well as employee
severance and benefit costs associated with approximately 300 salaried, hourly
and temporary employees severed primarily in Cebu, the Philippines.
Restructuring and impairments in the first quarter of 2000 include gains
resulting from our re-evaluation and subsequent adjustment to our non-cash
restructuring accruals based upon the final execution of several of our plans
($2.1 million) as well as a one-time gain for additional funds received in
connection with the sale of our former Mountain View, California facility ($3.5
million). Purchased in-process research and development of $12.8 million was
recorded in the first quarter of 2001 in connection with the DPP acquisition.
Operating income was $18.6 million and $71.6 million in the first quarter
of 2001 and 2000, respectively. Excluding restructuring and impairments and
purchased in-process research and development, operating income was $40.9
million and $66.0 million in the first quarter of 2001 and 2000, respectively.
The decrease in operating income is primarily due to soft market conditions in
the semiconductor industry in the first quarter of 2001, resulting in
underutilization of our factories as well as from lower contract manufacturing
revenues. Despite the current industry conditions, we have continued to invest
in our research and development effort to drive new product introductions.
Excluding depreciation and amortization of $40.5 million and $38.4 million
in the first quarter of 2001 and 2000, respectively, restructuring and
impairments and purchased in-process research and development,
17
18
earnings before interest, taxes depreciation and amortization (EBITDA) were
$81.4 million for the first quarter of 2001 compared to $104.4 million in the
first quarter of 2000. EBITDA is presented because we believe that it is a
widely accepted financial indicator of an entity's ability to incur and service
debt. EBITDA, adjusted net income, and adjusted operating income 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 our operating performance, or
as an alternative to cash flow as a measure of liquidity.
On a segment basis, Analog had operating income of $4.1 million in the
first quarter of 2001 compared to $10.1 million in the first quarter of 2000.
Discrete had operating income of $12.3 million in the first quarter of 2001
compared to $25.8 million in the first quarter of 2000. The decreases in Analog
and Discrete operating income were mainly a result of decreased gross margins
due to decreases in revenue coupled with lower factory utilization. Interface
and Logic had operating income of $21.2 million in the first quarter of 2001
compared to $16.8 million in the first quarter of 2000. The increase in
operating results for Interface and Logic was due to a combination of slightly
higher gross margins despite lower sales, coupled with reduced operating
expenses. The higher gross margins are a result of a higher average selling
price, due to improved product mix, offset by lower factory utilization.
REVENUES
Our revenues consist of trade sales to unaffiliated customers (95.5% and
91.8% of total revenues in the first quarter of 2001 and 2000, respectively) and
revenues from contract manufacturing services provided to National Semiconductor
and Samsung Electronics (4.5% and 8.2% of total revenues in the first quarter of
2001 and 2000, respectively).
Trade sales were $367.8 million in the first quarter of 2001 compared to
$368.9 million for the first quarter of 2000. Increased revenues from our
acquisitions that have taken place since the first quarter of 2000 were offset
by lower revenues in our continuing businesses due to the industry-wide market
slowdown.
On a segment basis, revenues from our optoelectronics group, which is
included in our other segment in the first quarter of 2001, offset decreases in
our other operating segments. Analog revenues decreased 3.1% to $83.7 million in
the first quarter of 2001 compared to $86.4 million in the first quarter of
2000. Discrete revenues decreased 11.0% to $155.2 million in the first quarter
of 2001 compared to $174.3 million in the first quarter of 2000. Interface and
Logic revenues decreased 1.5% to $92.1 million in the first quarter of 2001
compared to $93.5 million in the first quarter of 2000. The aforementioned
revenue decreases were due lower unit volume which was partially offset by
increased average selling prices, due primarily to improved product mix.
Geographically, 21%, 14%, 47% and 18% of trade sales were derived from
North America, Europe, Asia/ Pacific and Korea, respectively, in the first
quarter of 2001 as compared to 24%, 15%, 41% and 20%, respectively, in the first
quarter of 2000. North American revenues decreased 13% in the first quarter of
2001 compared to the first quarter of 2000. The North American sales region has
been hardest hit by the inventory correction occurring in all end market
segments. European revenues have decreased 7% in the first quarter of 2001
compared to the first quarter of 2000. They have been impacted by the same
factors affecting North America, but to a lesser extent. Revenues in our
Asia/Pacific sales region have increased 14% in the first quarter of 2001
compared to the first quarter of 2000. The increase is due to stronger sales in
China as well as the migration of contract manufacturing to this region. Sales
in our Korean region decreased 10% in the first quarter of 2001 compared to the
first quarter of 2000. This decrease is due to the impact of a weaker Korean
economy as the financial restructuring of this country continues.
Contract manufacturing revenues decreased 46.7% to $17.5 million in the
first quarter of 2001 compared to $32.8 million in the first quarter of 2000.
The decrease in contract manufacturing revenue results from diminishing demand
from both National Semiconductor and Samsung Electronics.
18
19
GROSS PROFIT
Gross profit decreased 13.9% to $118.1 million in the first quarter of 2001
compared to $137.2 million in the first quarter of 2000. As a percentage of
sales, gross profits were 30.7% in the first quarter of 2001 compared to 34.2%
in the first quarter of 2000. Gross trade profit decreased 9.3% to $112.8
million in the first quarter of 2001 compared to $124.4 million in the first
quarter of 2000. As a percentage of sales, gross trade profits were 30.7% in the
first quarter of 2001 compared to 33.7% in the first quarter of 2000. The
decrease in our gross margins is due primarily to lower capacity utilization.
Contract manufacturing gross profit decreased 58.6% to $5.3 million in the first
quarter of 2001 compared to $12.8 million in the first quarter of 2000. The
decrease in contract manufacturing margins is due to lower factory utilization
due to reduced demand for these services.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $23.5 million, or 6.4% of
trade sales, in the first quarter of 2001, compared to $17.8 million, or 4.8% of
trade sales, in the first quarter of 2000. The increases in R&D spending were
primarily due to R&D from our acquired businesses in 2000 and continued spending
on new product development, focused primarily on our growth products (Analog,
Power MOSFETS, Interface, CMOS Logic, and Optoelectronics), despite softer
market conditions.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were flat at $53.7
million, or 14.6% of trade sales, in the first quarter of 2001, compared to
$53.4 million, or 14.5% of trade sales, in the first quarter of 2000, as we
offset SG&A from our acquired businesses in 2000 with spending reductions in
response to softer market conditions.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development was $12.8 million in the
first quarter of 2001, recorded in conjunction with the acquisition of DPP.
RESTRUCTURING AND IMPAIRMENTS
We recorded a pre-tax charge of approximately $9.5 million in the first
quarter of 2001. This one-time charge was for a non-cash asset impairment in
connection with the consolidation of the five-inch wafer fabrication line in
South Portland, Maine ($8.3 million) and employee separation costs related
primarily to severance and other benefits associated with approximately 300
salaried, hourly and temporary employees severed in Cebu, the Philippines.
We recorded a pre-tax gain of approximately $5.6 million during the first
quarter of 2000. This includes a gain from our re-evaluation and subsequent
adjustment to our non-cash restructuring accruals based upon the final execution
of several of our plans ($2.1 million) as well as a one-time gain for additional
funds received in connection with the sale of our former Mountain View,
California facility ($3.5 million).
INTEREST EXPENSE
Interest expense was $23.9 million in the first quarter of 2001 compared to
$20.8 million in the first quarter of 2000. The increase in interest expense is
principally the result of additional interest associated with the $350.0 million
10 1/2% Senior Subordinated Notes which were issued during the first quarter of
2001.
INTEREST INCOME
Interest income was $7.4 million in the first quarter of 2001 and $4.0
million in the first quarter of 2000. The increase in interest income in 2001 is
due to higher average cash balances in 2001.
19
20
INCOME TAXES
Income tax expense was $0.5 million for the first quarter of 2001 compared
to $4.8 million in the first quarter of 2000. The effective tax rate was 25% for
the first quarter of 2001, compared to 9% in the first quarter of 2000. The
increase in our effective tax rate is due to the favorable effect of the
utilization of deferred tax valuation allowances to offset current year income
tax expense in the first quarter of 2000. We did not realize a similar benefit
in the first quarter of 2001. In the fourth quarter of 2000, the valuation
allowance on our deferred tax asset was reduced because management now believes
that it is more likely than not that these assets will be realizable. As a
result of this action, our effective tax rate has increased in 2001.
LIQUIDITY AND CAPITAL RESOURCES
We have a borrowing capacity of $300.0 million on a revolving basis for
working capital and general corporate purposes, including acquisitions, under
our senior credit facility. At April 1, 2001, we had drawn approximately $120.2
million under our revolving credit facility.
In connection with the financing of the DPP acquisition, on January 31,
2001, we finalized a private placement offering of $350.0 million of 10 1/2%
Senior Subordinated Notes. Interest on these notes will be paid semi-annually on
February 1 and August 1 of each year, beginning August 1, 2001. We may redeem
the notes on or after February 1, 2005. Prior to February 1, 2004, we may redeem
up to 35% of the notes from the proceeds of equity offerings.
Beginning on April 30, 2001, we initiated an exchange offer for all of the
outstanding 10 1/2% Senior Subordinated Notes. The new notes will be
substantially identical to the terms of the outstanding notes, except that
certain transfer restrictions, registration rights and liquidated damages
provisions relating to the outstanding notes will not apply. We expect this
exchange offer to be completed by May 30, 2001.
Our senior credit facility, the indentures governing the 10 1/8% Senior
Subordinated Notes, 10 3/8% Senior Subordinated Notes and 10 1/2% Senior
Subordinated Notes do, and other debt instruments we may enter into in the
future may, impose various restrictions and covenants on us which could
potentially limit our 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 and limitations on incurring indebtedness, 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 facility also
limits our ability to modify the certificate of incorporation, bylaws,
shareholder agreements, voting trusts or similar arrangements. The subsidiaries
of Fairchild Semiconductor Corporation are permitted without material
restrictions under our debt instruments to pay dividends or make 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
debt obligations. We expect that existing cash and available funds from our
senior credit facility and funds generated from operations, will be sufficient
to meet our anticipated operating requirements and to fund our research and
development and capital expenditures for the next twelve months. We intend to
invest approximately $155 to $160 million in 2001 to expand capacity primarily
in support of in-sourcing and our e-business initiatives. Additional borrowing
or equity investment may be required to fund future acquisitions.
As of April 1, 2001, the Company's cash and cash equivalents balance was
$377.6 million, a decrease of $24.2 million from December 31, 2000.
During the first three months of 2001, our operations provided $33.2
million in cash compared to $44.3 million of cash in the first three months of
2000. The decrease in cash provided by operating activities reflects a decrease
in the first three months of 2001 in net income adjusted for non-cash items of
$25.3 million offset by a increase in cash flows from changes in operating
assets and liabilities of $14.1 million as compared with the first three months
of 2000. Cash used in investing activities during the first three months of 2001
totaled $395.1 million, compared to $38.2 million in the first three months of
2000. The increase primarily results from the acquisition of the discrete power
business of Intersil Corporation and increased capital
20
21
expenditures for the first three months of 2001. Capital expenditures in the
first three months of 2001 were made principally in the Company's wafer fabs,
assembly and test facilities and our e-business initiatives, and were part of
the Company's 2001 plan. Capital expenditures for the balance of 2001 will
continue to be primarily to increase manufacturing capacity in support of our
in-sourcing as well as for our e-business initiative. Cash provided by financing
activities of $337.7 million for the first three months of 2001 was primarily
from the issuance of $350 million of 10 1/2% Senior Subordinated Notes, net of
associated fees and expenses of approximately $10.7 million. Cash provided by
financing activities of $240.2 million in the first three months of 2000 was due
primarily to proceeds from our secondary stock offering.
LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL, EXCLUDING
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 three months of 2001, nor in the first three months of 2000. Fairchild
International on a stand-alone basis has no cash requirements for the next
twelve months.
OUTLOOK
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, this Outlook section contains 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 our future operating results are described in the
Business Risks section below and in our 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 from those in the
forward-looking statements. Readers are cautioned not to place undue reliance on
the forward-looking statements in this quarterly report. We assume no obligation
to update such information.
During the first quarter of 2001, the slow down that we began to experience
at the end of 2000 continued. We have experienced soft end market demand in all
market segments, though computers and telecommunications have been hit
especially hard. Order cancellations began to slow in the latter part of the
first quarter, indicating that, for at least some of our customer base,
inventories are beginning to be reduced. We anticipate that our unit demand
should bottom within the next one to two quarters. However, we have begun to see
more aggressive pricing from our competitors, particularly in the mature areas
of our product mix, and expect this to continue until the unit demand begins to
turn up and increase steadily for one to two quarters.
In response to soft market conditions, we continue to implement our cost
reduction plan, and will continue with those efforts throughout 2001. This plan
includes re-negotiation of various contracts, in-sourcing production, and
aggressive cost containment plans for operating expenses.
We expect total second quarter revenues, which will include a full quarter
of sales from DPP, to be roughly flat to down 5% sequentially. In line with
current expectations for the overall semiconductor market, we expect revenues to
be flat to down sequentially in the third quarter of 2001 and improve
sequentially in the fourth quarter of 2001. As a result, we anticipate that full
year revenues will be down approximately 15% to 20% from 2000.
We expect overall gross margins to drop roughly 400 basis points
sequentially in the second quarter 2001 due to anticipated price erosion and
lower factory utilization. Margins should improve sequentially in the
21
22
second half of 2001 as we expect progress from our cost reduction efforts and
improvements in capacity utilization will begin to offset lower pricing.
As a result of the above factors, we expect second quarter net income to be
at breakeven to a slight loss. In addition, we expect full year 2001 net income
to be down significantly from 2000.
BUSINESS RISKS
Our business is subject to a number of risks and uncertainties, which could
cause actual results to differ materially from those expressed in
forward-looking statements. The risks described below are not the only ones
facing our company. Additional risks not currently known to us or that we
currently deem immaterial also may impair our business operations:
DOWNTURNS IN THE HIGHLY CYCLICAL SEMICONDUCTOR INDUSTRY OR CHANGES IN END
USER MARKET DEMANDS COULD REDUCE THE VALUE OF OUR BUSINESS.
The semiconductor industry is highly cyclical, and the value of our
business may decline during the "down" portion of these cycles. During the
latter half of Fiscal 1998 and most of Fiscal 1999, we, as well as many others
in our industry, experienced significant declines in the pricing of our products
as customers reduced demand forecasts and manufacturers reduced prices to keep
capacity utilization high. We believe these trends were due primarily to the
Asian financial crisis during that period and excess personal computer
inventories. Beginning in the fourth quarter of Calendar 2000 and continuing
into 2001, we and the rest of the semiconductor industry experienced backlog
cancellations, resulting in slower revenue growth, due to excess inventories at
computer and telecommunications equipment manufacturers. We may experience
renewed, possibly more severe and prolonged, downturns in the future as a result
of such cyclical changes. In addition, we may experience significant changes in
our profitability as a result of variations in sales, changes in product mix,
price competition for orders, changes in end user markets and the costs
associated with the introduction of new products. The markets for our products
depend on continued demand for personal computers, cellular telephones and
consumer electronics and automotive goods, and these end user markets may
experience changes in demand that will adversely affect our prospects.
WE MAY NOT BE ABLE TO DEVELOP NEW PRODUCTS TO SATISFY CHANGES IN CONSUMER
DEMANDS.
Our failure to develop new technologies, or react to changes in existing
technologies, could materially delay development of new products, which could
result in decreased revenues and a loss of market share to our competitors.
Rapidly changing technologies and industry standards, along with frequent new
product introductions, characterize the semiconductor industry. Our financial
performance depends on our ability to design, develop, manufacture, assemble,
test, market and support new products and enhancements on a timely and
cost-effective basis. We may not successfully identify new product opportunities
and develop and bring new products to market in a timely and cost-effective
manner. Products or technologies developed by other companies may render our
products or technologies obsolete or noncompetitive. A fundamental shift in
technologies in our product markets could have a material adverse effect on our
competitive position within our industry.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD ADVERSELY
AFFECT OUR FUTURE PERFORMANCE AND GROWTH.
Failure to protect our existing intellectual property rights may result in
the loss of valuable technologies or having to pay other companies for
infringing on their intellectual property rights. We rely on patent, trade
secret, trademark and copyright law to protect such technologies. Some of our
technologies are not covered by any patent or patent application, and we cannot
assure that:
- any of the more than 330 U.S. patents owned by us or numerous other
patents which third parties license to us will not be invalidated,
circumvented, challenged or licensed to other companies;
- any of the more than 500 patents that we acquired or licensed in the
acquisition of DPP will not be invalidated, circumvented or challenged;
or
22
23
- any of our pending or future patent applications will be issued within
the scope of the claims sought by us, if at all.
In addition, effective patent, trademark, copyright and trade secret
protection may be unavailable, limited or not applied for in some foreign
countries.
We also seek to protect our proprietary technologies, including
technologies that may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventors' rights agreements with our
collaborators, advisors, employees and consultants. We cannot assure you that
these agreements will not be breached, that we will have adequate remedies for
any breach or that such persons or institutions will not assert rights to
intellectual property arising out of such research. Some of our technologies
have been licensed on a non-exclusive basis from National Semiconductor
Corporation, Samsung Electronics Co., Ltd. and other companies which may license
such technologies to others, including, in the case of National Semiconductor
commencing on March 11, 2002, our competitors. In addition, under a technology
licensing and transfer agreement, National Semiconductor has limited
royalty-free, worldwide license rights (without right to sublicense) to some of
our technologies. If necessary or desirable, we may seek licenses under patents
or intellectual property rights claimed by others. However, we cannot assure you
that we will obtain such licenses or that the terms of any offered licenses will
be acceptable to us. The failure to obtain a license from a third party for
technologies we use could cause us to incur substantial liabilities and to
suspend the manufacture or shipment of products or our use of processes
requiring the technologies.
OUR FAILURE TO OBTAIN OR MAINTAIN THE RIGHT TO USE CERTAIN TECHNOLOGIES MAY
NEGATIVELY AFFECT OUR FINANCIAL RESULTS.
Our future success and competitive position depend in part upon our ability
to obtain or maintain proprietary technologies used in our principal products,
which is achieved in part by defending claims by competitors of intellectual
property infringement. The semiconductor industry is characterized by litigation
regarding patent and other intellectual property rights. We are involved in
lawsuits, and could become subject to other lawsuits, in which it is alleged
that we have infringed upon the intellectual property rights of other companies.
Our involvement in existing and future intellectual property litigation could
result in significant expense to our company, adversely affecting sales of the
challenged product or technologies and diverting the efforts of our technical
and management personnel, whether or not such litigation is resolved in our
favor. In the event of an adverse outcome as a defendant in any such litigation,
we may be required to:
- pay substantial damages;
- indemnify customers for damages they might suffer if the products they
purchase from us violate the intellectual property rights of others;
- stop our manufacture, use, sale or importation of infringing products;
- expend significant resources to develop or acquire non-infringing
technologies;
- discontinue processes; or
- obtain licenses to the intellectual property we are found to have
infringed.
We cannot assure you that we would be successful in such development or
acquisition or that such licenses would be available under reasonable terms. Any
such development, acquisition or license could require the expenditure of
substantial time and other resources.
WE MAY NOT BE ABLE TO CONSUMMATE FUTURE ACQUISITIONS OR SUCCESSFULLY
INTEGRATE ACQUISITIONS INTO OUR BUSINESS.
We plan to pursue additional acquisitions of related businesses. We believe
the semiconductor industry is going through a period of consolidation, and we
expect to participate in this development. The expense incurred in consummating
the future acquisition of related businesses, or our failure to integrate such
businesses successfully into our existing businesses, could result in our
company incurring unanticipated
23
24
expenses and losses. In addition, we may not be able to identify or finance
additional acquisitions or realize any anticipated benefits from acquisitions we
do complete.
We are constantly pursuing acquisition opportunities and consolidation
possibilities and are in various stages of due diligence or preliminary
discussions with respect to a number of potential transactions, some of which
would be significant. None of these potential transactions is subject to a
letter of intent or otherwise so far advanced as to make the transaction
reasonably certain.
Should we successfully acquire another business, the process of integrating
acquired operations into our existing operations may result in unforeseen
operating difficulties and may require significant financial resources that
would otherwise be available for the ongoing development or expansion of
existing operations. Some of the risks associated with acquisitions include:
- unexpected losses of key employees or customers of the acquired company;
- conforming the acquired company's standards, processes, procedures and
controls with our operations;
- coordinating new product and process development;
- hiring additional management and other critical personnel;
- negotiating with labor unions; and
- increasing the scope, geographic diversity and complexity of our
operations.
In addition, although Intersil has signed a transitional services agreement
to assist us in integrating the DPP operations that we are acquiring from
Intersil into our operations, we may encounter unforeseen obstacles or costs in
such integration and in the integration of other businesses we acquire.
Possible future acquisitions could result in the incurrence of additional
debt, contingent liabilities and amortization expenses related to goodwill and
other intangible assets, all of which could have a material adverse effect on
our financial condition and operating results.
AS A RESULT OF THE ACQUISITION OF INTERSIL'S DISCRETE POWER BUSINESS,
APPROXIMATELY 330 OF OUR EMPLOYEES ARE COVERED BY A COLLECTIVE BARGAINING
AGREEMENT. OUR FAILURE TO INTEGRATE THESE EMPLOYEES SUCCESSFULLY COULD ADVERSELY
AFFECT US.
As a result of the DPP acquisition, at April 1, 2001 approximately 330 of
our employees were covered by a collective bargaining agreement. We cannot
assure you that we will successfully integrate these new employees into our
business or what effect, if any, their collective bargaining agreement will have
on our employee relations generally.
PRODUCTION TIME AND THE OVERALL COST OF PRODUCTS COULD INCREASE IF WE WERE
TO LOSE ONE OF OUR PRIMARY SUPPLIERS OR IF A PRIMARY SUPPLIER INCREASED THE
PRICES OF RAW MATERIALS.
Our manufacturing operations depend upon obtaining adequate supplies of raw
materials on a timely basis. Our results of operations could be adversely
affected if we were unable to obtain adequate supplies of raw materials in a
timely manner or if the costs of raw materials increased significantly. We
purchase raw materials such as silicon wafers, lead frames, mold compound,
ceramic packages and chemicals and gases from a limited number of suppliers on a
just-in-time basis. From time to time, suppliers may extend lead times, limit
supplies or increase prices due to capacity constraints or other factors. In
addition, we subcontract a portion of our wafer fabrication and assembly and
test operations to other manufacturers, including Carsem, Amkor NS Electronics
(Bangkok) Ltd., Samsung Electronics and Korea Micro Industry and, as a result of
the acquisition of Intersil's discrete power business, ChipPAC, Inc. Our
operations and ability to satisfy customer obligations could be adversely
affected if our relationships with these subcontractors were disrupted or
terminated.
DELAYS IN BEGINNING PRODUCTION AT NEW FACILITIES, EXPANDING CAPACITY AT
EXISTING FACILITIES, IMPLEMENTING NEW PRODUCTION TECHNIQUES, OR IN CURING
PROBLEMS ASSOCIATED WITH TECHNICAL EQUIPMENT MALFUNCTIONS, ALL COULD ADVERSELY
AFFECT OUR MANUFACTURING EFFICIENCIES.
24
25
Our manufacturing efficiency is an important factor in our profitability,
and we cannot assure you that we will be able to maintain our manufacturing
efficiency or increase manufacturing efficiency to the same extent as our
competitors. Our manufacturing processes are highly complex, require advanced
and costly equipment and are continuously being modified in an effort to improve
yields and product performance. Impurities or other difficulties in the
manufacturing process can lower yields.
In addition, we are currently engaged in an effort to expand capacity at
our manufacturing facilities. As is common in the semiconductor industry, we
have from time to time experienced difficulty in beginning production at new
facilities or in effecting transitions to new manufacturing processes. As a
consequence, we have suffered delays in product deliveries or reduced yields. We
may experience delays or problems in bringing planned new manufacturing capacity
to full production. We may also experience problems in achieving acceptable
yields, or experience product delivery delays in the future with respect to
existing or planned new capacity as a result of, among other things, capacity
constraints, construction delays, upgrading or expanding existing facilities or
changing our process technologies, any of which could result in a loss of future
revenues. Our operating results could also be adversely affected by the increase
in fixed costs and operating expenses related to increases in production
capacity if revenues do not increase proportionately.
A SIGNIFICANT PORTION OF OUR SALES ARE MADE BY DISTRIBUTORS WHO CAN
TERMINATE THEIR RELATIONSHIPS WITH US WITH LITTLE OR NO NOTICE. THE TERMINATION
OF A DISTRIBUTOR COULD REDUCE SALES AND RESULT IN INVENTORY RETURNS.
Distributors accounted for 53.9% of our net sales for the three months
ended April 1, 2001. Our five domestic distributors accounted for 8.4% of our
total net sales for the three months ended April 1, 2001. As a general rule, we
do not have long-term agreements with our distributors and they may terminate
their relationships with us with little or no advance notice. Distributors
generally offer competing products. The loss of one or more of our distributors,
or the decision by one or more of them to reduce the number of our products they
offer or to carry the product lines of our competitors, could have a material
adverse effect on our business, financial condition and results of operations.
The termination of a significant distributor, whether at our or the
distributor's initiative, or a disruption in the operations of one or more of
our distributors, could reduce our net sales in a given quarter and could result
in an increase in inventory returns.
THE SEMICONDUCTOR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION
COULD REDUCE THE VALUE OF AN INVESTMENT IN OUR COMPANY.
The semiconductor industry is, and the multi-market semiconductor product
markets in particular are, highly competitive. Competition is based on price,
product performance, quality, reliability and customer service. In addition,
even in strong markets, price pressures may emerge as competitors attempt to
gain a greater market share by lowering prices. Competition in the various
markets in which we participate comes from companies of various sizes, many of
which are larger and have greater financial and other resources than we have and
thus are better able to pursue acquisition candidates and can better withstand
adverse economic or market conditions. In addition, companies not currently in
direct competition with us may introduce competing products in the future.
THE COSTS TO OPERATE THE DISCRETE POWER PRODUCTS BUSINESS ACQUIRED FROM
INTERSIL MAY INCREASE.
Prior to our acquisition of the discrete power products business, Intersil
operated that business as a division. Since the consummation of the DPP
acquisition, DPP incurred $1.1 million in costs for research and development,
sales and marketing and general and administrative activities. These costs
represent expenses incurred directly by DPP and charges incurred under the
transition services agreement with Intersil. Although Intersil has agreed to
provide certain of these services for a transition period under a transitional
services agreement, DPP will need to obtain many of these services on an arm's
length basis. We cannot assure you that we will be able to obtain similar
services on comparable terms. In addition, although Intersil will aid us in
integrating the DPP operations into our operations pursuant to the transitional
services agreement, we may encounter unforeseen obstacles or costs in such
integration.
WE ENTERED INTO A NUMBER OF LONG-TERM SUPPLY AND SUPPORT CONTRACTS WITH
SAMSUNG ELECTRONICS IN CONNECTION WITH OUR ACQUISITION OF ITS POWER DEVICE
BUSINESS IN 1999. ANY DECREASE IN THE PURCHASE
25
26
REQUIREMENTS OF SAMSUNG ELECTRONICS OR THE INABILITY OF SAMSUNG ELECTRONICS TO
MEET ITS CONTRACTUAL OBLIGATIONS COULD SUBSTANTIALLY REDUCE OUR FINANCIAL
PERFORMANCE.
As a result of the acquisition of the power device business in 1999, we
have numerous arrangements with Samsung Electronics, including arrangements
relating to product sales, designation as a vendor to affiliated Samsung
companies and other services. Any material adverse change in the purchase
requirements of Samsung Electronics, in its ability to supply the agreed-upon
services or in its ability to fulfill its other obligations could have a
material adverse effect on our results of operations. Although historically the
power device business generated significant revenues from the sale of products
to affiliated Samsung companies, we cannot assure you that we will be able to
sell products to affiliated Samsung companies or that the designation of the
power device business as a vendor to those affiliated Samsung companies will
generate any revenues for our company. Furthermore, under the Korean Fair Trade
Law, the Fair Trade Commission may issue an order requiring a change in the
terms and conditions of the agreements between us and Samsung Electronics if it
concludes that Samsung Electronics has provided us with undue support or
discriminated against our competitors.
THE POWER DEVICE BUSINESS SUBJECTS OUR COMPANY TO RISKS INHERENT IN DOING
BUSINESS IN KOREA, INCLUDING LABOR RISK, POLITICAL RISK AND CURRENCY RISK.
As a result of the acquisition of the power device business in 1999, we
have significant operations in South Korea and are subject to risks associated
with doing business in that country.
In addition to other risks disclosed relating to international operations,
some businesses in South Korea are subject to labor unrest. Also, relations
between South Korea and North Korea have been tense over most of South Korea's
history. We cannot assure you as to whether or when this situation will be
resolved or change abruptly as a result of current or future events. An adverse
change in economic or political conditions in South Korea or in its relations
with North Korea could have a material adverse effect on our Korean subsidiary.
The power device business' sales are denominated primarily in U.S. dollars
while a significant portion of its costs of goods sold and its operating
expenses are denominated in South Korean won. Although we have taken steps to
fix the costs subject to currency fluctuations and to balance won revenues and
won costs, a significant change in this balance, coupled with a significant
change in the value of the won relative to the dollar, could have a material
adverse effect on our financial performance and results of operations. In
addition, an unfavorable change in the value of the won could require us to
write down our won-denominated assets.
A CHANGE IN FOREIGN TAX LAWS OR A DIFFERENCE IN THE CONSTRUCTION OF CURRENT
FOREIGN TAX LAWS BY RELEVANT FOREIGN AUTHORITIES COULD RESULT IN US NOT
RECOGNIZING THE BENEFITS WE ANTICIPATED IN CONNECTION WITH THE TRANSACTION
STRUCTURE USED TO CONSUMMATE THE ACQUISITION OF THE POWER DEVICE BUSINESS.
The transaction structure we used for the acquisition of the power device
business is based on assumptions about the various tax laws, including
withholding tax, and other relevant laws of foreign jurisdictions. In addition,
our Korean subsidiary was granted a ten-year tax holiday under Korean law in
1999. The first seven years are tax-free, followed by three years of income
taxes at 50% of the statutory rate. In Calendar 2000, the tax holiday was
extended such that the exemption amounts were increased to 75% in the eighth
year and a 25% exemption was added to the eleventh year. If our assumptions
about tax and other relevant laws are incorrect, or if foreign taxing
jurisdictions were to change or modify the relevant laws, or if our Korean
subsidiary were to lose its tax holiday, we could suffer adverse tax and other
financial consequences or lose the benefits anticipated from the transaction
structure we used to acquire that business.
OUR INTERNATIONAL OPERATIONS SUBJECT OUR COMPANY TO RISKS NOT FACED BY
DOMESTIC COMPETITORS.
Through our subsidiaries we maintain significant operations in the
Philippines, Malaysia and South Korea and also operate facilities in China and
Singapore. We also have sales offices and customers around the world. The
following are risks inherent in doing business on an international level:
- changes in import duties;
- trade restrictions;
26
27
- transportation delays;
- work stoppages;
- economic and political instability;
- foreign currency fluctuations; and
- the laws, including tax laws, and policies of the United States and of
the countries in which we manufacture our products.
WE ARE SUBJECT TO MANY ENVIRONMENTAL LAWS AND REGULATIONS THAT COULD AFFECT
OUR OPERATIONS OR RESULT IN SIGNIFICANT EXPENSES.
Increasingly stringent environmental regulations restrict the amount and
types of pollutants that can be released from our operations into the
environment. While historically the cost of compliance with environmental laws
has not had a material adverse effect on our results of operations, compliance
with these and any future regulations could require significant capital
investments in pollution control equipment or changes in the way we make our
products. In addition, because we use hazardous and other regulated materials in
our manufacturing processes, we are subject to risks of liabilities and claims,
regardless of fault, resulting from accidental releases, including personal
injury claims and civil and criminal fines, any of which could be material to
our cash flow or earnings. For example:
- we currently are remediating contamination at some of our operating plant
sites;
- we have been identified as a potentially responsible party at a number of
Superfund sites where we (or our predecessors) disposed of wastes in the
past; and
- significant regulatory and public attention on the impact of
semiconductor operations on the environment may result in more stringent
regulations, further increasing our costs.
Although most of our known environmental liabilities are covered by
indemnities from Raytheon Company or National Semiconductor, these indemnities
are limited to conditions that occurred prior to the consummation of those
transactions. Moreover, we cannot assure you that their indemnity obligations to
us for the covered liabilities will be adequate to protect us.
WE MAY NOT BE ABLE TO ATTRACT OR RETAIN THE TECHNICAL OR MANAGEMENT
EMPLOYEES NECESSARY TO REMAIN COMPETITIVE IN OUR INDUSTRY.
Our continued success depends on the retention and recruitment of skilled
personnel, including technical, marketing, management and staff personnel. In
the semiconductor industry, the competition for qualified personnel,
particularly experienced design engineers and other technical employees, is
intense. There can be no assurance that we will be able to retain our current
personnel or recruit the key personnel we require. In addition, we do not have
employment agreements with most members of our senior management team.
A SUBSTANTIAL NUMBER OF SHARES OF OUR COMPANY'S COMMON STOCK ARE OWNED BY A
LIMITED NUMBER OF PERSONS, AND THEIR INTERESTS MAY CONFLICT WITH YOUR INTERESTS.
Court Square Capital Limited, which is one of our principal stockholders,
and our directors and executive officers together own approximately 31.4% of the
outstanding shares of our Class A Common Stock (including shares underlying
vested options). By virtue of such stock ownership, such persons have the power
to significantly influence our affairs and are able to influence the outcome of
matters required to be submitted to stockholders for approval, including the
election of its directors and amendment of our charter and bylaws. Such persons
may exercise their influence over us in a manner detriment to the interests of
our stockholders or bondholders. See "Principal Stockholders."
WE ARE A LEVERAGED COMPANY WITH A DEBT TO EQUITY RATIO OF 1.26 TO 1, WHICH
COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR ABILITY TO GROW AND
COMPETE.
At April 1, 2001 we would have had total indebtedness of $1,059.1 million
and a ratio of debt to equity of 1.26 to 1.
27
28
Our substantial indebtedness could have important consequences. For
example, it could:
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
- increase the amount of our interest expense, because certain of our
borrowings are at variable rates of interest, which, if interest rates
increase, could result in higher interest expense;
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- restrict us from making strategic acquisitions, introducing new
technologies or exploiting business opportunities;
- make it more difficult for us to satisfy our obligations with respect to
the instruments governing our indebtedness;
- place us at a competitive disadvantage compared to our competitors that
have less indebtedness; and
- limit, along with the financial and other restrictive covenants in our
debt instruments, among other things, our ability to borrow additional
funds, dispose of assets or pay cash dividends. Failing to comply with
those covenants could result in an event of default which, if not cured
or waived, could have a material adverse effect on our business,
financial condition and results of operations.
DESPITE CURRENT INDEBTEDNESS LEVELS, WE MAY STILL BE ABLE TO INCUR
SUBSTANTIALLY MORE INDEBTEDNESS. INCURRING MORE INDEBTEDNESS COULD EXACERBATE
THE RISKS DESCRIBED ABOVE.
We may be able to incur substantial additional indebtedness in the future.
Although the terms of the indentures governing Fairchild Semiconductor
Corporation's outstanding 10 1/8% Senior Subordinated Notes, its outstanding 10
3/8% Senior Subordinated Notes, its outstanding 10 1/2% Senior Subordinated
Notes and the credit agreement relating to the senior credit facility contain
restrictions on the incurrence of additional indebtedness, these restrictions
are subject to a number of qualifications and exceptions and, under certain
circumstances, additional indebtedness incurred in compliance with these
restrictions could be substantial. The senior credit facility permits borrowings
of up to $300.0 million. As of April 1, 2001 we had $179.8 million available
under this revolving credit facility. If new debt is added to our subsidiaries'
current debt levels, the substantial risks described above would intensify.
WE MAY NOT BE ABLE TO GENERATE THE NECESSARY AMOUNT OF CASH TO SERVICE OUR
INDEBTEDNESS, WHICH MAY REQUIRE US TO REFINANCE OUR INDEBTEDNESS OR DEFAULT ON
OUR SCHEDULED DEBT PAYMENTS. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY
FACTORS BEYOND OUR CONTROL.
Our historical financial results have been, and our future financial
results are anticipated to be, subject to substantial fluctuations. We cannot
assure you that our business will generate sufficient cash flow from operations,
that currently anticipated cost savings and operating improvements will be
realized on schedule or at all, or that future borrowings will be available to
us under our senior credit facility in an amount sufficient to enable us to pay
our indebtedness or to fund our other liquidity needs. In addition, because our
senior credit facility has variable interest rates, the cost of those borrowings
will increase if market interest rates increase. If we are unable to meet our
expenses and debt obligations, we may need to refinance all or a portion of our
indebtedness on or before maturity, sell assets or raise equity. We cannot
assure you that we would be able to refinance any of our indebtedness, sell
assets or raise equity on commercially reasonable terms or at all, which could
cause us to default on our obligations and impair our liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RESTRICTIONS IMPOSED BY THE CREDIT AGREEMENT RELATING TO OUR SENIOR CREDIT
FACILITY, THE INDENTURES GOVERNING FAIRCHILD SEMICONDUCTOR CORPORATION'S 10 1/8%
SENIOR SUBORDINATED NOTES, ITS 10 3/8% SENIOR SUBORDINATED NOTES, AND ITS
10 1/2% SENIOR SUBORDINATED NOTES RESTRICT OR PROHIBIT OUR ABILITY TO ENGAGE IN
OR
28
29
ENTER INTO SOME BUSINESS OPERATING AND FINANCING ARRANGEMENTS, WHICH COULD
ADVERSELY AFFECT OUR ABILITY TO TAKE ADVANTAGE OF POTENTIALLY PROFITABLE
BUSINESS OPPORTUNITIES.
The operating and financial restrictions and covenants in our debt
instruments, such as the credit agreement relating to our senior credit
facility, the indenture governing Fairchild Semiconductor Corporation's 10 1/2%
Senior Subordinated Notes, the indenture governing its 10 1/8% Senior
Subordinated Notes, the indenture governing its 10 3/8% Senior Subordinated
Notes may limit our ability to finance our future operations or capital needs or
engage in other business activities that may be in our interests. Our debt
instruments impose significant operating and financial restrictions on us that
affect our ability to incur additional indebtedness or create liens on our
assets, pay dividends, sell assets, engage in mergers or acquisitions, make
investments or engage in other business activities. These restrictions could
place us at a disadvantage relative to competitors not subject to such
limitations.
In addition, the senior credit facility contains other and more restrictive
covenants and prohibits us from prepaying our other indebtedness. The senior
credit facility also requires us to maintain specified financial ratios. These
financial ratios become more restrictive over the life of the senior credit
facility. Our ability to meet those financial ratios can be affected by events
beyond our control, and we cannot assure you that we will meet those ratios. A
breach of any of these covenants, ratios or restrictions could result in an
event of default under the senior credit facility. Upon the occurrence of an
event of default under the senior credit facility, the lenders could elect to
declare all amounts outstanding under the senior credit facility, together with
accrued interest, to be immediately due and payable. If we were unable to repay
those amounts, the lenders could proceed against the collateral granted to them
to secure the indebtedness. If the lenders under the senior credit facility
accelerate the payment of the indebtedness, we cannot assure you that our assets
would be sufficient to repay in full that indebtedness and our other
indebtedness.
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 31, 2000 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 27 of
Fairchild International's Annual Report to Stockholders for the year ended
December 31, 2000.
29
30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are 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
intend to continue contesting these claims vigorously.
We are a defendant in a patent infringement lawsuit filed by U.S. Philips
Corporation in the United States District Court for the Southern District of New
York. The complaint filed in the suit alleges that some of our products infringe
one Philips patent and claims an unspecified amount of damages. We intend to
continue investigating these allegations and contesting these claims vigorously.
In addition to the above proceedings, from time to time we are 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
(b) Reports on Form 8-K
On January 31, 2001, we filed a special report on Form 8-K in connection
with our announcement to acquire the discrete power products business of
Intersil Corporation as well as the agreement to sell $350.0 million of
10 1/2% Senior Subordinated Notes due 2009 to finance this acquisition.
On March 21, 2001 we filed a special report on Form 8-K in connection
with our announcement of the completion of our acquisition of the
discrete power products business from Intersil Corporation.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
30
31
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.
Date: May 14, 2001 By: /s/ DAVID A. HENRY
------------------------------------------
David A. Henry
Vice President, Corporate Controller
(Principal Accounting Officer)
31