- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
</Table>
COMMISSION FILE NUMBER: 001-15181
---------------------
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 04-3363001
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</Table>
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 September 30, 2001:
<Table>
<Caption>
TITLE OF EACH CLASS NUMBER OF SHARES
------------------- ----------------
Class A Common Stock, par value $.01 per share 99,741,117
Class B Common Stock, par value $.01 per share 0
</Table>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2001 (Unaudited) and December 31, 2000...................... 2
Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Nine Months Ended September 30, 2001 and
October 1, 2000............................................. 3
Condensed Consolidated Statements of Comprehensive Income
(Unaudited) for the Three and Nine Months Ended September
30, 2001 and October 1, 2000................................ 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 2001 and October 1,
2000........................................................ 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition 20
and Results of Operations...................................
Item 3. Quantitative and Qualitative Disclosures about Market 35
Risk........................................................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 36
Item 6. Exhibits and Reports on Form 8-K............................ 36
SIGNATURE............................................................ 37
</Table>
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
(IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 285.4 $ 401.8
Accounts receivable, net.................................. 140.7 225.0
Inventories............................................... 213.0 192.8
Deferred income taxes..................................... 47.5 47.3
Other current assets...................................... 11.9 9.5
-------- --------
Total current assets.............................. 698.5 876.4
Property, plant and equipment, net.......................... 673.1 596.6
Intangible assets, net...................................... 494.3 298.1
Other assets................................................ 100.9 66.4
-------- --------
Total assets...................................... $1,966.8 $1,837.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 0.4 $ --
Accounts payable.......................................... 99.7 155.3
Accrued expenses and other current liabilities............ 105.1 136.9
-------- --------
Total current liabilities......................... 205.2 292.2
Long-term debt, less current portion........................ 938.2 705.2
Other liabilities........................................... 4.3 2.4
-------- --------
Total liabilities................................. 1,147.7 999.8
Commitments and contingencies
Stockholders' equity:
Class A common stock...................................... 1.0 0.8
Class B common stock...................................... -- 0.2
Additional paid-in capital................................ 807.7 801.1
Retained earnings......................................... 16.3 41.8
Accumulated other comprehensive loss...................... (0.4) --
Less treasury stock at cost............................... (5.5) (6.2)
-------- --------
Total stockholders' equity........................ 819.1 837.7
-------- --------
Total liabilities and stockholders' equity........ $1,966.8 $1,837.5
======== ========
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
2
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Revenue:
Net sales -- trade........................... $303.4 $450.7 $1,025.7 $1,229.6
Contract manufacturing....................... 22.0 25.3 57.4 84.8
------ ------ -------- --------
Total revenue........................ 325.4 476.0 1,083.1 1,314.4
Operating expenses:
Cost of sales -- trade....................... 246.0 286.2 769.7 790.1
Cost of contract manufacturing............... 14.3 16.1 37.7 52.8
Research and development..................... 19.1 20.8 64.4 57.4
Selling, general and administrative.......... 35.8 47.7 120.1 138.3
Amortization of acquisition-related
intangibles............................... 14.1 10.1 38.7 27.5
Purchased in-process research and
development............................... 1.0 5.8 13.8 9.0
Restructuring and impairments................ 0.8 -- 14.2 (5.6)
------ ------ -------- --------
Total operating expenses............. 331.1 386.7 1,058.6 1,069.5
------ ------ -------- --------
Operating income (loss)........................ (5.7) 89.3 24.5 244.9
Interest expense............................... 25.8 18.7 76.4 62.4
Interest income................................ (2.2) (6.8) (12.7) (16.8)
------ ------ -------- --------
Income (loss) before income taxes.............. (29.3) 77.4 (39.2) 199.3
Provision (benefit) for income taxes........... (10.2) 7.7 (13.7) 19.9
------ ------ -------- --------
Net income (loss).............................. $(19.1) $ 69.7 $ (25.5) $ 179.4
====== ====== ======== ========
Net income (loss) per common share:
Basic........................................ $(0.19) $ 0.70 $ (0.26) $ 1.85
====== ====== ======== ========
Diluted...................................... $(0.19) $ 0.68 $ (0.26) $ 1.77
====== ====== ======== ========
Weighted average common shares:
Basic........................................ 99.7 99.1 99.5 96.9
====== ====== ======== ========
Diluted...................................... 99.7 102.9 99.5 101.1
====== ====== ======== ========
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
3
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
(IN MILLIONS)
(UNAUDITED)
Net income (loss).............................. $(19.1) $69.7 $(25.5) $179.4
Other comprehensive income (loss), net of tax:
Net change associated with hedging
transactions.............................. (1.5) -- 0.4 --
Net amount reclassed to earnings............. -- -- (0.8) --
------ ----- ------ ------
Comprehensive income (loss).................... $(20.6) $69.7 $(25.9) $179.4
====== ===== ====== ======
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
4
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED
--------------------------
SEPTEMBER 30, OCTOBER 1,
2001 2000
------------- ----------
(IN MILLIONS)
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)........................................... $ (25.5) $ 179.4
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization............................. 130.4 110.8
Amortization of deferred compensation..................... 2.9 2.8
Restructuring and impairments............................. 8.6 (5.6)
Non-cash interest expense................................. 3.4 6.5
Purchased in-process research and development............. 13.8 9.0
Loss on disposal of property, plant and equipment......... 7.1 1.3
Deferred income taxes..................................... (18.8) (0.5)
Non-cash settlement of receivable......................... (2.1) --
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable....................................... 81.1 (59.5)
Inventories............................................... 9.9 (1.5)
Other current assets...................................... 4.1 (5.2)
Current liabilities....................................... (92.4) 50.8
Other assets and liabilities, net......................... (5.6) (15.6)
------- -------
Cash provided by operating activities............. 116.9 272.7
------- -------
Cash flows from investing activities:
Capital expenditures...................................... (101.2) (211.3)
Proceeds from sale of property, plant and equipment....... -- 3.5
Purchase of molds and tooling............................. (3.5) (3.6)
Purchase of long-term investments......................... (3.5) (7.2)
Acquisitions, net of cash acquired........................ (343.1) (32.5)
------- -------
Cash used in investing activities................. (451.3) (251.1)
------- -------
Cash flows from financing activities:
Proceeds from revolving credit facility, net.............. -- 2.1
Repayment of long-term debt............................... (120.4) (1.5)
Issuance of long-term debt................................ 350.0 --
Proceeds from issuance of common stock and from exercise
of stock options, net.................................. 5.1 244.9
Purchase of treasury stock................................ (5.8) --
Debt issuance costs....................................... (10.9) (2.1)
------- -------
Cash provided by financing activities............. 218.0 243.4
------- -------
Net change in cash and cash equivalents..................... (116.4) 265.0
Cash and cash equivalents at beginning of period............ 401.8 138.7
------- -------
Cash and cash equivalents at end of period.................. $ 285.4 $ 403.7
======= =======
</Table>
See accompanying notes to unaudited condensed consolidated financial statements.
5
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying interim consolidated condensed financial statements of
Fairchild Semiconductor International, Inc. (the Company) have been prepared in
conformity with accounting principles generally accepted in the United States,
consistent in all material respects with those applied in the company's Annual
Report on Form 10-K for the year ended December 31, 2000, except as noted below.
The interim financial information is unaudited, but reflects all normal
adjustments, which are, in the opinion of management, necessary to provide a
fair statement of results for the interim periods presented. The interim
financial statements should be read in connection with the financial statements
in the company's Annual Report on Form 10-K for the year ended December 31,
2000. Certain amounts for prior periods have been reclassified to conform to the
current presentation.
NOTE 2 -- INVENTORIES
The components of inventories are as follows:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(IN MILLIONS)
Raw materials............................................... $ 27.6 $ 24.8
Work in process............................................. 142.1 123.9
Finished goods.............................................. 43.3 44.1
------ ------
Total inventories................................. $213.0 $192.8
====== ======
</Table>
NOTE 3 -- COMPUTATION OF NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income 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. As a result of the net loss
for the three and nine months ended September 30, 2001, approximately 4.0
million and 2.9 million, respectively, potential common equivalent shares have
been excluded from the calculation of diluted net loss per common share because
their effect would be anti-dilutive.
The following table reconciles basic to diluted weighted average shares
outstanding:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
(IN MILLIONS)
Basic weighted average common shares
outstanding.......................... 99.7 99.1 99.5 96.9
Net effect of dilutive stock options
based on the treasury stock method
using the average market price....... -- 3.8 -- 4.2
---- ----- ---- -----
Diluted weighted average common shares
outstanding.......................... 99.7 102.9 99.5 101.1
==== ===== ==== =====
</Table>
6
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION
<Table>
<Caption>
NINE MONTHS ENDED
--------------------------
SEPTEMBER 30, OCTOBER 1,
2001 2000
------------- ----------
(IN MILLIONS)
Cash paid for:
Income taxes.............................................. $10.8 $ 3.5
===== =====
Interest.................................................. $66.7 $54.2
===== =====
</Table>
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 $342.8 million in cash, including related acquisition expenses.
DPP was 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 estimated fair value
of tangible and identifiable intangible assets was allocated to goodwill.
Intangible assets have been assigned lives ranging from three to fifteen years.
On September 5, 2001, the Company completed its acquisition of Impala
Linear Corporation (Impala) for approximately $4.6 million, subject to
post-closing adjustments, paid in the Company's common stock. The business
acquired in the Impala acquisition designs analog power management
semiconductors for a wide range of portable devices including laptops, MP3
players, cell phones, portable test equipment and PDA's. The transaction was
accounted for as a purchase and the acquired business's results of operations
since the date of acquisition have been included in the accompanying statement
of operations. In connection with the Impala acquisition, the Company recorded a
non-recurring charge of $1.0 million for in-process research and development.
The remaining purchase price in excess of the estimated fair value of tangible
and identifiable intangible assets was allocated to goodwill. In accordance with
FAS 141, goodwill has been estimated to have an indefinite life.
NOTE 6 -- SEGMENT INFORMATION
The Company is currently organized into three reportable segments: the
Analog and Mixed Signal Products Group (Analog), the Discrete Products Group
(Discrete) and the Interface and Logic Products Group (Interface and Logic). The
operating results for DPP are included within the Discrete reporting segment.
The operating results for the acquired Impala business are included within the
Analog 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 Corporation, and with Samsung
Electronics Co., Ltd.
7
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selected operating segment financial information for the three and nine
months ended September 30, 2001 and October 1, 2000 is as follows:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
(IN MILLIONS)
REVENUE:
Analog................................. $ 70.4 $ 96.1 $ 226.5 $ 277.6
Discrete............................... 159.4 196.4 493.7 553.7
Interface and Logic.................... 52.3 114.3 218.0 312.6
Other(1)............................... 43.3 69.2 144.9 170.5
------ ------ -------- --------
Total........................ $325.4 $476.0 $1,083.1 $1,314.4
====== ====== ======== ========
</Table>
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
(IN MILLIONS)
OPERATING INCOME:
Analog................................. $(0.1) $ 9.9 $ (0.5) $ 32.7
Discrete............................... (5.4) 38.8 14.2 96.9
Interface and Logic.................... (2.8) 32.0 27.6 72.9
Other(1)............................... 4.4 14.4 11.2 45.8
----- ----- ------ ------
Subtotal............................... (3.9) 95.1 52.5 248.3
Purchased in-process research and
development.......................... (1.0) (5.8) (13.8) (9.0)
Restructuring and impairments.......... (0.8) -- (14.2) 5.6
----- ----- ------ ------
Total........................ $(5.7) $89.3 $ 24.5 $244.9
===== ===== ====== ======
</Table>
- ---------------
(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 three and nine months ended September 30, 2001, the Company
recorded pre-tax restructuring and impairment charges of $0.8 million and $14.2
million, respectively. In the third quarter of 2001, the charge was due to
employee separation costs related to severance and other benefits associated
with work force reduction actions in the United States and France. For the nine
months ended September 30, 2001 these charges also included an $8.3 million
charge for asset impairments relating to the consolidation of the five-inch
wafer fabrication line in South Portland, Maine, $1.2 million for employee
separation costs recorded in the first quarter and $3.9 million for employee
separation costs recorded in the second quarter. These aforementioned workforce
reduction actions affected approximately 750 employees primarily in the United
States, the Philippines and Malaysia.
During the nine months ended October 1, 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
8
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
one-time gain of $2.1 million. The Company also recorded a one-time gain of $3.5
million for additional funds received in connection with the sale of its former
Mountain View, California facility.
The following table summarizes the previously mentioned restructuring and
impairment charges for the nine months ended September 30, 2001 (in millions):
<Table>
Accrual balance as of December 31, 2000..................... $ --
Accrual................................................... 9.5
Non-cash items............................................ (8.3)
-----
Accrual balance as of April 1, 2001......................... 1.2
Accrual................................................... 3.9
Cash payments............................................. (3.9)
-----
Accrual balance as of July 1, 2001.......................... 1.2
Accrual................................................... 0.8
Cash payments............................................. (1.7)
-----
Accrual balance as of September 30, 2001.................... $ 0.3
=====
</Table>
The Company expects that all amounts will be substantially paid before the
end of the year.
NOTE 8 -- EQUITY
Effective March 7, 2001, affiliates of Citigroup Inc., one of the Company's
principal stockholders, converted 17,281,000 shares of Class B Common Stock into
an equal number of shares of Class A Common Stock. As a result, no Class B
Common Stock shares were outstanding at September 30, 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 due February 1, 2009 (the "10 1/2% Notes").
Interest on the notes is paid semi-annually on February 1 and August 1 of each
year, and the first interest payment was made on August 1, 2001. The 10 1/2%
Notes are unsecured and are subordinated to all existing and future senior
indebtedness of Fairchild Semiconductor Corporation. Fairchild Semiconductor
Corporation may redeem the notes on or after February 1, 2005 and, prior to
February 1, 2004, it 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 $10.9
million, were $339.1 million.
On June 8, 2001, the Company completed an offer to exchange the privately
placed 10 1/2% Notes for publicly registered notes with terms substantially
identical to the privately placed notes, except that certain transfer
restrictions, registration rights and liquidated damages provisions relating to
the previously outstanding notes do not apply.
The Company's senior credit facility and the indentures governing Fairchild
Semiconductor Corporation's 10 1/8% Senior Subordinated Notes Due March 15,
2007, 10 3/8% Senior Subordinated Notes Due October 1, 2007 and 10 1/2% Notes
include 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, restrictions on capital
9
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expenditures and limitations on incurring indebtedness, among other
restrictions. In addition, the senior credit facility contains covenants
relating to financial ratios including a minimum interest coverage ratio and a
maximum senior leverage ratio. Provided there are no outstanding balances under
the senior credit facility, compliance with these ratios is not required until
March 31, 2003. The senior credit facility also limits the Company's ability to
modify its certificate of incorporation, bylaws, shareholder agreements, voting
trusts or similar arrangements. In addition, the senior credit facility and the
indentures governing all 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 nine months ended September 30, 2001. No cash flow hedges were
derecognized or discontinued for the nine months ended September 30, 2001.
Derivative gains and losses included in OCI are reclassified into earnings
at the time the forecasted transaction revenue is recognized. The Company
estimates that the entire $1.5 million of net derivative losses 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,
the interim condensed consolidating financial statements are presented below.
10
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<Table>
<Caption>
SEPTEMBER 30, 2001
---------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD NON-
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS
------------------- -------------- ------------ ------------ ------------
(IN MILLIONS)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........ $ -- $ 265.2 $ 0.3 $ 19.9 $ --
Accounts receivable, net......... -- 40.8 2.6 97.3 --
Inventories...................... -- 104.4 32.4 76.2 --
Deferred income taxes............ -- 46.7 0.8 -- --
Other current assets............. -- 3.5 0.1 8.3 --
------ -------- ------ ------ ---------
Total current assets..... -- 460.6 36.2 201.7 --
Property, plant and equipment,
net.............................. -- 257.2 71.5 344.4 --
Intangible assets, net............. -- 14.9 307.3 172.1 --
Investment in subsidiary........... 813.2 915.6 147.8 -- (1,876.6)
Other assets....................... 5.9 78.2 17.2 (0.4) --
------ -------- ------ ------ ---------
Total assets............. $819.1 $1,726.5 $580.0 $717.8 $(1,876.6)
====== ======== ====== ====== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt.......................... $ -- $ 0.4 $ -- $ -- $ --
Accounts payable................. -- 50.6 6.5 42.6 --
Accrued expenses and other
current liabilities........... -- 59.9 8.7 36.5 --
------ -------- ------ ------ ---------
Total current
liabilities............ -- 110.9 15.2 79.1 --
Long-term debt, less current
portion.......................... -- 938.2 -- -- --
Net intercompany (receivable)
payable.......................... -- (148.6) (14.9) 163.5 --
Other liabilities.................. -- 6.9 3.2 (5.8) --
------ -------- ------ ------ ---------
Total liabilities........ -- 907.4 3.5 236.8 --
------ -------- ------ ------ ---------
Commitments and contingencies
Stockholders' equity:
Class A common stock............. 1.0 -- (6.2) 6.2 --
Class B common stock............. -- -- -- -- --
Additional paid-in capital....... 807.9 -- -- -- --
Retained earnings (deficit)...... 16.1 819.1 582.7 474.8 (1,876.6)
<Caption>
SEPTEMBER 30, 2001
-------------------
CONSOLIDATED
FAIRCHILD
SEMICONDUCTOR
INTERNATIONAL, INC.
-------------------
(IN MILLIONS)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........ $ 285.4
Accounts receivable, net......... 140.7
Inventories...................... 213.0
Deferred income taxes............ 47.5
Other current assets............. 11.9
--------
Total current assets..... 698.5
Property, plant and equipment,
net.............................. 673.1
Intangible assets, net............. 494.3
Investment in subsidiary........... --
Other assets....................... 100.9
--------
Total assets............. $1,966.8
========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term
debt.......................... $ 0.4
Accounts payable................. 99.7
Accrued expenses and other
current liabilities........... 105.1
--------
Total current
liabilities............ 205.2
Long-term debt, less current
portion.......................... 938.2
Net intercompany (receivable)
payable.......................... --
Other liabilities.................. 4.3
--------
Total liabilities........ 1,147.7
--------
Commitments and contingencies
Stockholders' equity:
Class A common stock............. 1.0
Class B common stock............. --
Additional paid-in capital....... 807.9
Retained earnings (deficit)...... 16.1
</Table>
11
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
SEPTEMBER 30, 2001
---------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD NON-
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS
------------------- -------------- ------------ ------------ ------------
(IN MILLIONS)
(UNAUDITED)
Accumulated other comprehensive
income........................ (0.4) -- -- -- --
Less treasury stock (at cost).... (5.5) -- -- -- --
------ -------- ------ ------ ---------
Total stockholders'
equity................. 819.1 819.1 576.5 481.0 (1,876.6)
------ -------- ------ ------ ---------
Total liabilities and
stockholders' equity... $819.1 $1,726.5 $580.0 $717.8 $(1,876.6)
====== ======== ====== ====== =========
<Caption>
SEPTEMBER 30, 2001
-------------------
CONSOLIDATED
FAIRCHILD
SEMICONDUCTOR
INTERNATIONAL, INC.
-------------------
(IN MILLIONS)
(UNAUDITED)
Accumulated other comprehensive
income........................ (0.4)
Less treasury stock (at cost).... (5.5)
--------
Total stockholders'
equity................. 819.1
--------
Total liabilities and
stockholders' equity... $1,966.8
========
</Table>
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, 2001
---------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES
------------------- -------------- ------------
(IN MILLIONS)
(UNAUDITED)
Revenue:
Net sales -- trade............... $ -- $ 50.9 $ 6.0
Net sales -- intercompany........ -- 227.5 16.2
Contract manufacturing........... -- 18.2 --
------ ------ ------
Total revenue............ -- 296.6 22.2
Operating expenses:
Cost of sales.................... -- 35.3 0.8
Cost of sales -- intercompany.... -- 225.8 15.3
Cost of contract manufacturing... -- 12.2 --
Research and development......... -- 8.0 5.6
Selling, general and
administrative................ -- 19.7 4.6
Amortization of
acquisition-related
intangibles................... -- -- 6.7
Purchased in-process research and
development................... -- 1.0 --
Restructuring and impairments.... -- 0.5 0.1
------ ------ ------
Total operating
expenses............... -- 302.5 33.1
------ ------ ------
Operating income (loss)............ -- (5.9) (10.9)
Interest expense................... -- 25.8 0.1
Interest income.................... -- (1.9) (0.3)
Equity in subsidiary (income)
loss............................. 19.1 1.6 (7.6)
------ ------ ------
Income (loss) before income
taxes............................ (19.1) (31.4) (3.1)
Provision (benefit) for income
taxes............................ -- (12.3) --
------ ------ ------
Net income (loss).................. $(19.1) $(19.1) $ (3.1)
====== ====== ======
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, 2001
-------------------------------------------------
CONSOLIDATED
NON- FAIRCHILD
GUARANTOR SEMICONDUCTOR
SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------ ------------ -------------------
(IN MILLIONS)
(UNAUDITED)
Revenue:
Net sales -- trade............... $246.5 $ -- $303.4
Net sales -- intercompany........ 73.8 (317.5) --
Contract manufacturing........... 3.8 -- 22.0
------ ------- ------
Total revenue............ 324.1 (317.5) 325.4
Operating expenses:
Cost of sales.................... 209.9 -- 246.0
Cost of sales -- intercompany.... 76.4 (317.5) --
Cost of contract manufacturing... 2.1 -- 14.3
Research and development......... 5.5 -- 19.1
Selling, general and
administrative................ 11.5 -- 35.8
Amortization of
acquisition-related
intangibles................... 7.4 -- 14.1
Purchased in-process research and
development................... -- -- 1.0
Restructuring and impairments.... 0.2 -- 0.8
------ ------- ------
Total operating
expenses............... 313.0 (317.5) 331.1
------ ------- ------
Operating income (loss)............ 11.1 -- (5.7)
Interest expense................... (0.1) -- 25.8
Interest income.................... -- -- (2.2)
Equity in subsidiary (income)
loss............................. -- (13.1) --
------ ------- ------
Income (loss) before income
taxes............................ 11.2 13.1 (29.3)
Provision (benefit) for income
taxes............................ 2.1 -- (10.2)
------ ------- ------
Net income (loss).................. $ 9.1 $ 13.1 $(19.1)
====== ======= ======
</Table>
12
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2001
---------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES
------------------- -------------- ------------
(IN MILLIONS)
(UNAUDITED)
Revenue:
Net sales -- trade............... $ -- $190.3 $ 56.1
Net sales -- intercompany........ -- 686.4 57.4
Contract manufacturing........... -- 49.0 --
------ ------ ------
Total revenue............ -- 925.7 113.5
Operating expenses:
Cost of sales.................... -- 104.6 48.1
Cost of sales -- intercompany.... -- 679.9 54.2
Cost of contract manufacturing... -- 32.9 --
Research and development......... -- 32.0 16.3
Selling, general and
administrative................ -- 69.2 14.6
Amortization of
acquisition-related
intangibles................... -- 0.2 16.3
Purchased in-process research and
development................... -- 1.0 12.8
Restructuring and impairments.... -- 11.3 1.3
------ ------ ------
Total operating
expenses............... -- 931.1 163.6
------ ------ ------
Operating income (loss)............ -- (5.4) (50.1)
Interest expense................... -- 76.2 0.1
Interest income.................... -- (12.2) (0.2)
Equity in subsidiary (income)
loss............................. 25.5 (25.5) (39.3)
------ ------ ------
Income (loss) before income
taxes............................ (25.5) (43.9) (10.7)
Provision (benefit) for income
taxes............................ -- (18.4) --
------ ------ ------
Net income (loss).................. $(25.5) $(25.5) $(10.7)
====== ====== ======
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2001
-------------------------------------------------
CONSOLIDATED
NON- FAIRCHILD
GUARANTOR SEMICONDUCTOR
SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------ ------------ -------------------
(IN MILLIONS)
(UNAUDITED)
Revenue:
Net sales -- trade............... $ 779.3 $ -- $1,025.7
Net sales -- intercompany........ 252.3 (996.1) --
Contract manufacturing........... 8.4 -- 57.4
-------- ------- --------
Total revenue............ 1,040.0 (996.1) 1,083.1
Operating expenses:
Cost of sales.................... 617.0 -- 769.7
Cost of sales -- intercompany.... 262.0 (996.1) --
Cost of contract manufacturing... 4.8 -- 37.7
Research and development......... 16.1 -- 64.4
Selling, general and
administrative................ 36.3 -- 120.1
Amortization of
acquisition-related
intangibles................... 22.2 -- 38.7
Purchased in-process research and
development................... -- -- 13.8
Restructuring and impairments.... 1.6 -- 14.2
-------- ------- --------
Total operating
expenses............... 960.0 (996.1) 1,058.6
-------- ------- --------
Operating income (loss)............ 80.0 -- 24.5
Interest expense................... 0.1 -- 76.4
Interest income.................... (0.3) -- (12.7)
Equity in subsidiary (income)
loss............................. -- 39.3 --
-------- ------- --------
Income (loss) before income
taxes............................ 80.2 (39.3) (39.2)
Provision (benefit) for income
taxes............................ 4.7 -- (13.7)
-------- ------- --------
Net income (loss).................. $ 75.5 $ (39.3) $ (25.5)
======== ======= ========
</Table>
13
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2001
---------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES
------------------- -------------- ------------
(IN MILLIONS)
(UNAUDITED)
Cash flows from operating
activities....................... $ -- $ 78.0 $ 0.6
----- ------- -----
Investing activities:
Capital expenditures............. -- (58.7) (0.2)
Purchase of molds and tooling.... -- -- (0.1)
Purchase of long-term
investments................... -- (3.5) --
Acquisitions, net of cash
acquired...................... -- (343.1) --
Investment (in) from affiliate... 0.7 (0.7) --
----- ------- -----
Cash provided by (used
in) investing
activities............. 0.7 (406.0) (0.3)
----- ------- -----
Financing activities:
Repayment of long-term debt...... -- (120.4) --
Issuance of long-term debt....... -- 350.0 --
Proceeds from issuance of common
stock and from issuance of
stock options, net............ 5.1 -- --
Purchase of treasury stock....... (5.8) -- --
Debt issuance costs.............. -- (10.9) --
----- ------- -----
Cash provided by (used
in) financing
activities............. (0.7) 218.7 --
----- ------- -----
Net change in cash and cash
equivalents...................... -- (109.3) 0.3
Cash and cash equivalents at
beginning of period.............. -- 374.5 --
----- ------- -----
Cash and cash equivalents at end of
period........................... $ -- $ 265.2 $ 0.3
===== ======= =====
Supplemental Cash Flow Information:
Cash paid during the period for:
Income taxes............. $ -- $ 0.5 $ --
===== ======= =====
Interest................. $ -- $ 66.7 $ --
===== ======= =====
<Caption>
NINE MONTHS ENDED SEPTEMBER 30, 2001
-------------------------------------------------
CONSOLIDATED
NON- FAIRCHILD
GUARANTOR SEMICONDUCTOR
SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------ ------------ -------------------
(IN MILLIONS)
(UNAUDITED)
Cash flows from operating
activities....................... $ 38.3 $-- $ 116.9
------ -- -------
Investing activities:
Capital expenditures............. (42.3) -- (101.2)
Purchase of molds and tooling.... (3.4) -- (3.5)
Purchase of long-term
investments................... -- -- (3.5)
Acquisitions, net of cash
acquired...................... -- -- (343.1)
Investment (in) from affiliate... -- -- --
------ -- -------
Cash provided by (used
in) investing
activities............. (45.7) -- (451.3)
------ -- -------
Financing activities:
Repayment of long-term debt...... -- -- (120.4)
Issuance of long-term debt....... -- -- 350.0
Proceeds from issuance of common
stock and from issuance of
stock options, net............ -- -- 5.1
Purchase of treasury stock....... -- -- (5.8)
Debt issuance costs.............. -- -- (10.9)
------ -- -------
Cash provided by (used
in) financing
activities............. -- -- 218.0
------ -- -------
Net change in cash and cash
equivalents...................... (7.4) -- (116.4)
Cash and cash equivalents at
beginning of period.............. 27.3 -- 401.8
------ -- -------
Cash and cash equivalents at end of
period........................... $ 19.9 $-- $ 285.4
====== == =======
Supplemental Cash Flow Information:
Cash paid during the period for:
Income taxes............. $ 10.3 $-- $ 10.8
====== == =======
Interest................. $ -- $-- $ 66.7
====== == =======
</Table>
14
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
<Table>
<Caption>
DECEMBER 31, 2000
---------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD NON-
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES ELIMINATIONS
------------------- -------------- ------------ ------------ ------------
(IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents........ $ -- $ 374.5 $ -- $ 27.3 $ --
Accounts receivable, net......... -- 53.7 5.1 166.2 --
Inventories...................... -- 102.4 9.7 80.7 --
Deferred income taxes............ -- 46.5 0.8 -- --
Other current assets............. -- 1.6 3.9 4.0 --
------ -------- ------ ------ ---------
Total current assets..... -- 578.7 19.5 278.2 --
Property, plant and equipment,
net.............................. -- 252.4 2.8 341.4 --
Intangible assets, net............. -- 11.6 102.4 184.1 --
Investment in subsidiary........... 831.8 601.6 146.5 -- (1,579.9)
Other assets....................... 5.9 36.1 16.7 7.7 --
------ -------- ------ ------ ---------
Total assets............. $837.7 $1,480.4 $287.9 $811.4 $(1,579.9)
====== ======== ====== ====== =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable................. $ -- $ 86.2 $ 0.7 $ 68.4 $ --
Accrued expenses and other
current liabilities........... -- 77.1 5.9 53.9 --
------ -------- ------ ------ ---------
Total current
liabilities............ -- 163.3 6.6 122.3 --
Long-term debt..................... -- 705.2 -- -- --
Net intercompany (receivable)
payable.......................... -- (213.0) (31.1) 244.1 --
Other liabilities.................. -- (6.9) 0.3 9.0 --
------ -------- ------ ------ ---------
Total liabilities.................. -- 648.6 (24.2) 375.4 --
------ -------- ------ ------ ---------
Commitments and contingencies
Stockholders' equity:
Class A common stock............. 0.8 -- -- -- --
Class B common stock............. 0.2 -- -- -- --
Additional paid-in capital....... 801.1 -- -- -- --
Retained earnings................ 41.8 831.8 312.1 436.0 (1,579.9)
Less treasury stock (at cost).... (6.2) -- -- -- --
------ -------- ------ ------ ---------
Total stockholders'
equity................. 837.7 831.8 312.1 436.0 (1,579.9)
------ -------- ------ ------ ---------
Total liabilities and
stockholders' equity... $837.7 $1,480.4 $287.9 $811.4 $(1,579.9)
====== ======== ====== ====== =========
<Caption>
DECEMBER 31, 2000
-------------------
CONSOLIDATED
FAIRCHILD
SEMICONDUCTOR
INTERNATIONAL, INC.
-------------------
(IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents........ $ 401.8
Accounts receivable, net......... 225.0
Inventories...................... 192.8
Deferred income taxes............ 47.3
Other current assets............. 9.5
--------
Total current assets..... 876.4
Property, plant and equipment,
net.............................. 596.6
Intangible assets, net............. 298.1
Investment in subsidiary........... --
Other assets....................... 66.4
--------
Total assets............. $1,837.5
========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable................. $ 155.3
Accrued expenses and other
current liabilities........... 136.9
--------
Total current
liabilities............ 292.2
Long-term debt..................... 705.2
Net intercompany (receivable)
payable.......................... --
Other liabilities.................. 2.4
--------
Total liabilities.................. 999.8
--------
Commitments and contingencies
Stockholders' equity:
Class A common stock............. 0.8
Class B common stock............. 0.2
Additional paid-in capital....... 801.1
Retained earnings................ 41.8
Less treasury stock (at cost).... (6.2)
--------
Total stockholders'
equity................. 837.7
--------
Total liabilities and
stockholders' equity... $1,837.5
========
</Table>
15
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, 2000
---------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES
------------------- -------------- ------------
(IN MILLIONS)
(UNAUDITED)
Revenue:
Net sales -- trade............... $ -- $ 93.5 $ 16.7
Net sales -- intercompany........ -- 291.7 5.6
Contract manufacturing........... -- 19.4 --
------ ------ ------
Total revenue............ -- 404.6 22.3
Operating expenses:
Cost of sales.................... -- 21.9 12.7
Cost of sales -- intercompany.... -- 290.6 5.6
Cost of contract manufacturing... -- 13.6 --
Research and development......... -- 12.2 3.3
Selling, general and
administrative................ -- 28.1 4.9
Amortization of
acquisition-related
intangibles................... -- -- 2.5
Purchased in-process research and
development................... -- 5.8 --
Restructuring and impairments.... -- -- --
------ ------ ------
Total operating
expenses............... -- 372.2 29.0
------ ------ ------
Operating income (loss)............ -- 32.4 (6.7)
Interest expense................... -- 18.8 (0.1)
Interest income.................... -- (6.7) --
Equity in subsidiary (income)
loss............................. (69.7) (53.6) (27.1)
------ ------ ------
Income before income taxes......... 69.7 73.9 20.5
Provision for income taxes......... -- 4.2 0.4
------ ------ ------
Net income......................... $ 69.7 $ 69.7 $ 20.1
====== ====== ======
<Caption>
THREE MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------------------------
CONSOLIDATED
NON- FAIRCHILD
GUARANTOR SEMICONDUCTOR
SUBSIDIARIES ELIMINATIONS INTERNATIONAL, INC.
------------ ------------ -------------------
(IN MILLIONS)
(UNAUDITED)
Revenue:
Net sales -- trade............... $340.5 $ -- $450.7
Net sales -- intercompany........ 12.3 (309.6) --
Contract manufacturing........... 5.9 -- 25.3
------ ------- ------
Total revenue............ 358.7 (309.6) 476.0
Operating expenses:
Cost of sales.................... 251.6 -- 286.2
Cost of sales -- intercompany.... 13.4 (309.6) --
Cost of contract manufacturing... 2.5 -- 16.1
Research and development......... 5.3 -- 20.8
Selling, general and
administrative................ 14.7 -- 47.7
Amortization of
acquisition-related
intangibles................... 7.6 -- 10.1
Purchased in-process research and
development................... -- -- 5.8
Restructuring and impairments.... -- -- --
------ ------- ------
Total operating
expenses............... 295.1 (309.6) 386.7
------ ------- ------
Operating income (loss)............ 63.6 -- 89.3
Interest expense................... -- -- 18.7
Interest income.................... (0.1) -- (6.8)
Equity in subsidiary (income)
loss............................. -- 150.4 --
------ ------- ------
Income before income taxes......... 63.7 (150.4) 77.4
Provision for income taxes......... 3.1 -- 7.7
------ ------- ------
Net income......................... $ 60.6 $(150.4) $ 69.7
====== ======= ======
</Table>
16
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
NINE MONTHS ENDED OCTOBER 1, 2000
------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED
FAIRCHILD FAIRCHILD NON-
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES
------------------- -------------- ------------ ------------
(IN MILLIONS)
(UNAUDITED)
Revenue:
Net sales -- trade............... $ -- $ 276.1 $25.6 $927.9
Net sales -- intercompany........ -- 761.2 14.3 41.0
Contract manufacturing........... -- 63.2 -- 21.6
------- -------- ----- ------
Total revenue............ -- 1,100.5 39.9 990.5
Operating expenses:
Cost of sales.................... -- 80.7 12.2 697.2
Cost of sales -- intercompany.... -- 755.6 14.3 46.6
Cost of contract manufacturing... -- 43.7 -- 9.1
Research and development......... -- 33.7 9.6 14.1
Selling, general and
administrative................ -- 87.0 9.6 41.7
Amortization of
acquisition-related
intangibles................... -- -- 4.7 22.8
Purchased in-process research and
development................... -- 5.8 3.2 --
Restructuring and impairments.... -- (2.3) (3.3) --
------- -------- ----- ------
Total operating
expenses............... -- 1,004.2 50.3 831.5
------- -------- ----- ------
Operating income (loss)............ -- 96.3 (10.4) 159.0
Interest expense................... -- 62.5 (0.1) --
Interest income.................... -- (16.1) -- (0.7)
Equity in subsidiary (income)
loss............................. (179.4) (141.0) (90.7) --
------- -------- ----- ------
Income before income taxes......... 179.4 190.9 80.4 159.7
Provision for income taxes......... -- 11.5 1.1 7.3
------- -------- ----- ------
Net income......................... $ 179.4 $ 179.4 $79.3 $152.4
======= ======== ===== ======
<Caption>
NINE MONTHS ENDED OCTOBER 1, 2000
----------------------------------
CONSOLIDATED
FAIRCHILD
SEMICONDUCTOR
ELIMINATIONS INTERNATIONAL, INC.
------------ -------------------
(IN MILLIONS)
(UNAUDITED)
Revenue:
Net sales -- trade............... $ -- $1,229.6
Net sales -- intercompany........ (816.5) --
Contract manufacturing........... -- 84.8
------- --------
Total revenue............ (816.5) 1,314.4
Operating expenses:
Cost of sales.................... -- 790.1
Cost of sales -- intercompany.... (816.5) --
Cost of contract manufacturing... -- 52.8
Research and development......... -- 57.4
Selling, general and
administrative................ -- 138.3
Amortization of
acquisition-related
intangibles................... -- 27.5
Purchased in-process research and
development................... -- 9.0
Restructuring and impairments.... -- (5.6)
------- --------
Total operating
expenses............... (816.5) 1,069.5
------- --------
Operating income (loss)............ -- 244.9
Interest expense................... -- 62.4
Interest income.................... -- (16.8)
Equity in subsidiary (income)
loss............................. 411.1 --
------- --------
Income before income taxes......... (411.1) 199.3
Provision for income taxes......... -- 19.9
------- --------
Net income......................... $(411.1) $ 179.4
======= ========
</Table>
17
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
<Table>
<Caption>
NINE MONTHS ENDED OCTOBER 1, 2000
----------------------------------------------------------------------------------------
UNCONSOLIDATED UNCONSOLIDATED CONSOLIDATED
FAIRCHILD FAIRCHILD NON- FAIRCHILD
SEMICONDUCTOR SEMICONDUCTOR GUARANTOR GUARANTOR SEMICONDUCTOR
INTERNATIONAL, INC. CORPORATION SUBSIDIARIES SUBSIDIARIES INTERNATIONAL, INC.
------------------- -------------- ------------ ------------ -------------------
(IN MILLIONS)
(UNAUDITED)
Cash flows provided by operating
activities....................... $ -- $150.7 $ 1.6 $ 120.4 $ 272.7
------- ------ ----- ------- -------
Investing activities:
Capital expenditures............. -- (96.3) (0.2) (114.8) (211.3)
Proceeds from sale of property,
plant and equipment........... -- 3.5 -- -- 3.5
Purchase of molds and tooling.... -- -- -- (3.6) (3.6)
Purchase of long term
investments................... -- (7.2) -- -- (7.2)
Acquisitions, net of cash
acquired...................... -- (32.5) -- -- (32.5)
Investment (in) from affiliate... (244.9) 244.9 -- -- --
------- ------ ----- ------- -------
Cash provided by (used
in) investing
activities............. (244.9) 112.4 (0.2) (118.4) (251.1)
------- ------ ----- ------- -------
Financing activities:
Proceeds from revolving credit
facility, net................. -- 2.1 -- -- 2.1
Repayment of long-term debt...... -- (1.5) -- -- (1.5)
Proceeds from issuance of common
stock and from issuance of
stock options, net............ 244.9 -- -- -- 244.9
Debt issuance costs.............. -- (2.1) -- -- (2.1)
------- ------ ----- ------- -------
Cash provided by (used
in) financing
activities............. 244.9 (1.5) -- -- 243.4
------- ------ ----- ------- -------
Net change in cash and cash
equivalents...................... -- 261.6 1.4 2.0 265.0
Cash and cash equivalents at
beginning of period.............. -- 117.3 -- 21.4 138.7
------- ------ ----- ------- -------
Cash and cash equivalents at end of
period........................... $ -- $378.9 $ 1.4 $ 23.4 $ 403.7
======= ====== ===== ======= =======
Supplemental Cash Flow Information:
Cash paid during the period for:
Income taxes.................. $ -- $ 0.1 $ -- $ 3.4 $ 3.5
======= ====== ===== ======= =======
Interest...................... $ -- $ 54.2 $ -- $ -- $ 54.2
======= ====== ===== ======= =======
</Table>
18
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- SUBSEQUENT EVENT
On October 31, 2001, Fairchild Semiconductor Corporation, a wholly owned
subsidiary of the Company, sold $200 million aggregate principal amount of 5.0%
Convertible Senior Subordinated Notes Due November 1, 2008 in a private
offering. The notes are guaranteed by the Company and its domestic subsidiaries.
The notes are unsecured obligations and convertible into common stock of the
Company at a conversion price of $30.00 per share, subject to certain
adjustments. The notes and the guarantees will rank pari passu in right of
payment with Fairchild Semiconductor Corporation's existing senior subordinated
notes and the guarantees thereof, and with any future senior subordinated
indebtedness.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
UNLESS OTHERWISE INDICATED, REFERENCES IN THIS MD&A TO "WE", "OUR" AND THE
"COMPANY" REFER TO FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND ITS
SUBSIDIARIES TAKEN AS A WHOLE. 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 high performance
building block semiconductors and optoelectronics for multiple end markets. Our
focus is on leading edge power and high-speed interface products, which
currently account for over half of our trade sales. Our total product portfolio
includes 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 products serve a wide variety of applications in the computing,
communications, consumer, display, industrial and automotive markets.
On March 16, 2001, we acquired the discrete power business of Intersil
Corporation (DPP) for approximately $342.8 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.
On September 5, 2001, we acquired Impala Linear Corporation (Impala) for
approximately $4.6 million, subject to post closing adjustments, paid in our
common stock. The Impala business designs analog power management semiconductors
for a wide range of portable devices including laptops, MP3 players, cell
phones, portable test equipment and PDA's.
RESULTS OF OPERATIONS
We generated net losses of $19.1 million and $25.5 million in the third
quarter and first nine months of 2001, respectively, compared to net income of
$69.7 million and $179.4 million in the comparable periods of 2000. Excluding
unusual (gains) charges and amortization of acquisition-related intangibles,
adjusted net income (loss) was as follows for the three and nine months ended
September 30, 2001 and October 1, 2000, respectively:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
(IN MILLIONS)
Net income (loss)...................... $(19.1) $69.7 $(25.5) $179.4
Restructuring and impairments........ 0.8 -- 14.2 (5.6)
Purchased in-process research and
development....................... 1.0 5.8 13.8 9.0
Unusual (gains) charges.............. -- -- 2.5 (1.8)
Amortization of acquisition-related
intangibles....................... 14.1 10.1 38.7 27.5
Less associated tax effects.......... (5.6) (1.6) (20.6) (2.9)
------ ----- ------ ------
Adjusted net income (loss)............. $ (8.8) $84.0 $ 23.1 $205.6
====== ===== ====== ======
</Table>
Restructuring and impairments in the third quarter and first nine months of
2001 include $0.8 million recorded in the third quarter for employee severance
and benefit costs associated with workforce reduction actions, $3.9 million in
the second quarter for employee severance and benefit costs associated with
workforce reduction actions, $8.3 million recorded in the first quarter for
asset impairment charges related to the consolidation of the five-inch wafer
fabrication line in South Portland, Maine and $1.2 million recorded in the first
quarter for employee severance and benefit costs associated with workforce
reduction actions. Restructuring and impairments in the first nine months of
2000 include gains in the first quarter resulting from our re-
20
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 in the first quarter 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 was recorded in connection
with our acquisitions of Impala in the third quarter of 2001 ($1.0 million), DPP
in the first quarter of 2001 ($12.8 million), KOTA Microcircuits, Inc. ($2.5
million) and Micro Linear Corporation ($3.3 million) in the third quarter of
2000, and QT Optoelectronics, Inc. in the second quarter of 2000 ($3.2 million).
Unusual (gains) charges for the first nine months of 2001 included a $2.5
million inventory charge associated with the discontinuance of the digitizer
product line in our Analog group. Unusual (gains) charges for the first nine
months of 2000 included charges for the write-off of debt issuance costs
associated with refinanced debt ($3.6 million) recorded in interest expense,
offset by gains resulting from revisions of estimated charges recorded in sales
and cost of sales as part of the 1999 Memory restructuring action ($5.4
million).
Operating income (loss) was $(5.7) million and $24.5 million in the third
quarter and first nine months of 2001, respectively, compared to $89.3 million
and $244.9 million in the third quarter and first nine months of 2000. Excluding
restructuring and impairments, purchased in-process research and development and
other unusual (gains) charges detailed above applicable to operations, adjusted
operating income (loss) was $(3.9) million and $55.0 million in the third
quarter and first nine months of 2001, respectively, compared to $95.1 million
and $242.9 million in the comparable periods of 2000. The decrease in operating
income is primarily due to soft market conditions in the semiconductor industry
in the first nine months of 2001, resulting in lower prices, unit volumes and
underutilization of our factories, as well as from lower contract manufacturing
revenue. Despite the current industry conditions, we have continued to invest in
our research and development effort to drive new product introductions.
On a segment basis, Analog had an operating loss of $0.1 million and $0.5
in the third quarter and first nine months of 2001, respectively, compared to
operating income of $9.9 million and $32.7 million in the comparable periods of
2000. The decreases in Analog's operating income were primarily due to decreases
in gross margins due to decreased revenues coupled with lower factory
utilization. Discrete had an operating loss of $5.4 million and operating income
of $14.2 million in the third quarter and first nine months of 2001,
respectively, compared to operating income of $38.8 million and $96.9 million in
the comparable periods of 2000. The decreases in Discrete's operating income
were primarily due to decreases in gross margins, coupled with increases in
operating expenses, including amortization of acquisition related intangibles,
due primarily to the acquisition of DPP. Interface and Logic had an operating
loss of $2.8 million and operating income of $27.6 million in the third quarter
and first nine months of 2001, respectively, compared to operating income of
$32.0 million and $72.9 million in the comparable periods of 2000. The decrease
in Interface and Logic's operating income were decreases in gross margins offset
by spending reductions in operating expenses.
Excluding depreciation and amortization of $45.3 million and $133.3 million
in the third quarter and first nine months of 2001, respectively, and $38.7
million and $113.6 million in the comparable periods of 2000, restructuring and
impairments, purchased in-process research and development and other unusual
(gains) charges, earnings before interest, taxes depreciation and amortization
(EBITDA) were $41.4 million and $188.3 million in the third quarter and first
nine months of 2001, respectively, compared to $133.8 million and $356.5 million
in the comparable periods 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. Adjusted net income (loss) and adjusted operating income are
presented because we use them as alternative measures of the operating
performance of the business. 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 accounting principles generally accepted in the United States of
America, as an indicator of our operating performance, or as an alternative to
cash flow as a measure of liquidity.
21
REVENUES
Our revenues consist of trade sales to unaffiliated customers (93.2% and
94.7% of total revenues in the third quarter and first nine months of 2001,
respectively, and 94.7% and 93.6% of total revenues in the comparable periods of
2000) and revenues from contract manufacturing services provided to National
Semiconductor and Samsung Electronics (6.8% and 5.3% of total revenues in the
third quarter and first nine months of 2001, respectively, and 5.3% and 6.4% of
total revenues in the comparable periods of 2000).
Trade sales were $303.4 million in the third quarter of 2001 compared to
$450.7 million for the third quarter of 2000. On a year-to-date basis, trade
sales were $1,025.7 million in 2001 compared to $1,229.6 million for the
comparable period of 2000. Additional revenues from DPP and other acquisitions
that have taken place since the third quarter of 2000 partially offset lower
revenues in our continuing businesses due to the industry-wide market slowdown.
Analog revenues decreased 26.7% and 18.4% to $70.4 million and $226.5
million in the third quarter and first nine months of 2001, respectively, from
$96.1 million and $277.6 million in the comparable periods of 2000. Discrete
revenues decreased 18.8% and 10.8% to $159.4 million and $493.7 million in the
third quarter and first nine months of 2001, respectively, compared to $196.4
million and $553.7 million in the comparable periods of 2000. Interface and
Logic revenues decreased 54.2% and 30.3% to $52.3 million and $218.0 million in
the third quarter and first nine months of 2001, respectively, from $114.3
million and $312.6 million in the comparable periods of 2000. These revenue
decreases were due to lower prices and unit volumes.
As a percentage of trade sales, geographic trade sales for North America,
Europe, Asia/Pacific (which for our geographic reporting purposes excludes
Korea) and Korea were as follows for the three and nine months ended September
30, 2001 and October 1, 2000:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
North America.......................... 18% 23% 21% 23%
Europe................................. 14 13 14 14
Asia/Pacific........................... 47 48 47 45
Korea.................................. 21 16 18 18
--- --- --- ---
Total........................ 100% 100% 100% 100%
=== === === ===
</Table>
North American revenues decreased 49% and 26% in the third quarter and
first nine months of 2001 compared to the same periods of 2000. The North
American sales region has been hardest hit by the inventory correction occurring
in all end market segments, as well as weakening economic conditions in the
United States. European revenues decreased 27% and 16% in the third quarter and
first nine months of 2001 compared to same periods of 2000. They have been
impacted by the same factors affecting North America. Revenues in our
Asia/Pacific sales region decreased 34% and 13% in the third quarter and first
nine months of 2001 compared to the same periods of 2000. The decrease in
Asia/Pacific sales was driven by the slow down in the computing segment,
including peripherals, as many of the manufacturers for this market segment are
located in this region. Sales in our Korean region decreased 10% and 13% in the
third quarter and first nine months of 2001 compared to the same period of 2000.
This decrease was due to the impact of a weaker Korean economy as financial
restructuring in this country continues.
Contract manufacturing revenues decreased 13.0% and 32.3% to $22.0 million
and $57.4 in the third quarter and first nine months of 2001, respectively,
compared to $25.3 million and $84.8 million in the same periods of 2000. The
decrease in contract manufacturing revenue resulted from diminishing demand from
both National Semiconductor and Samsung Electronics.
22
GROSS PROFIT
Gross profit was as follows for the three and nine months ended September
30, 2001 and October 1, 2000:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ -----------------------------
SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30, OCTOBER 1,
2001 2000 2001 2000
-------------- ------------- ------------- -------------
(IN MILLIONS)
Trade gross profit........ $57.4 18.9% $164.5 36.5% $256.0 25.0% $439.5 35.7%
Contract manufacturing
gross profit............ 7.7 35.0% 9.2 36.4% 19.7 34.3% 32.0 37.7%
----- ------ ------ ------
Total gross
profit........ $65.1 20.0% $173.7 36.5% $275.7 25.5% $471.5 35.9%
===== ====== ====== ======
</Table>
Excluding unusual charges in the first nine months of 2001 associated with
an inventory charge as a result of the discontinuance of the digitizer product
line in our Analog group ($2.5 million), total gross profit for that period was
$278.2 million (25.7%). Excluding an unusual gain in first nine months of 2000
associated with revisions to estimated charges for the 1999 Memory restructuring
action ($5.4 million), total gross profit for that period was $466.1 million
(35.5%). The decrease in gross profit was primarily due to lower prices, unit
volumes, a shift in product mix to lower margin products and lower capacity
utilization. In the third quarter of 2001, fixed overhead absorption was
negatively impacted by our decision to focus on reducing inventories.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $19.1 million, or 6.3% of
trade sales, in the third quarter of 2001, compared to $20.8 million, or 4.6% of
trade sales, in the third quarter of 2000. The decrease was due to spending
reductions in response to softer market conditions, offset by the acquisition of
DPP. On a year-to-date basis, R&D was $64.4 million, or 6.3% of trade sales,
compared to $57.4 million, or 4.7% of trade sales, for the comparable period of
2000. The increase was due to the acquisition of DPP.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $35.8 million,
or 11.8% of trade sales, in the third quarter of 2001, compared to $47.7
million, or 10.6% of trade sales, in the third quarter of 2000. On a
year-to-date basis, SG&A expenses were $120.1 million, or 11.7% of trade sales,
compared to $138.3 million, or 11.2% of trade sales, for the comparable period
of 2000. We have offset SG&A from our acquired businesses in 2000 and 2001 with
spending reductions in response to softer market conditions.
AMORTIZATION OF ACQUISITION RELATED INTANGIBLES
Amortization of acquisition-related intangibles was $14.1 million in the
third quarter of 2001, compared to $10.1 million in the third quarter of 2000.
On a year-to-date basis, amortization of acquisition-related intangibles was
$38.7 million, compared to $27.5 million for the comparable period of 2000. The
increases in amortization were due to acquisitions that occurred in the latter
part of 2000 and in 2001.
INTEREST EXPENSE
Interest expense was $25.8 million and $76.4 million in the third quarter
and first nine months of 2001, respectively, compared to $18.7 million and $62.4
million in the comparable periods of 2000. The increase in interest expense was
principally the result of additional interest associated with the $350.0 million
in aggregate principal amount of the 10 1/2% Notes issued during the first
quarter of 2001, offset by lower interest on our revolving credit facility.
INTEREST INCOME
Interest income was $2.2 million and $12.7 million in the third quarter and
first nine months of 2001, respectively, compared to $6.8 million and $16.8
million in the comparable periods of 2000. The decrease in
23
interest income for the third quarter and first nine months of 2001 compared to
the comparable period of 2000 was due to lower average cash balances coupled
with lower rates of return.
INCOME TAXES
Income tax expense (benefit) was $(10.2) million and $(13.7) million for
the third quarter and first nine months of 2001, respectively, compared to $7.7
million and $19.9 million in the third quarter and first nine months of 2000.
The effective tax rates for the third quarter and first nine months of 2001 were
34.8% and 34.9%, respectively, compared to 10.0% in both the third quarter and
first nine months of 2000. The increase in our effective tax rate is due to
recognition in 2000 of additional tax benefit triggered by the reduction of the
valuation allowance against deferred tax assets. Similar benefits were not
realized in 2001. In addition, due to regional economic conditions, our
effective tax rate has increased as a result of decreased profits in low tax
jurisdictions.
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 September 30, 2001, no amounts were outstanding
on our revolving credit facility.
In connection with the financing of the DPP acquisition, on January 31,
2001, we completed a private offering of $350.0 million of the 10 1/2% Notes.
Interest on these notes is paid semi-annually on February 1 and August 1 of each
year, and the first interest payment was made 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 certain equity offerings.
On June 8, 2001, we completed an offer to exchange the privately placed 10
1/2% Notes for publicly registered notes with terms substantially identical to
those of the outstanding notes, except that certain transfer restrictions,
registration rights and liquidated damages provisions relating to the previously
outstanding privately placed notes do not apply.
On October 31, 2001 Fairchild Semiconductor Corporation sold $200 million
aggregate principal amount of 5.0% Convertible Senior Subordinated Notes Due
November 1, 2008. The notes are unsecured obligations, and convertible into our
common stock at a conversion price of $30.00 per share, subject to certain
adjustments. The notes rank on a parity with Fairchild Semiconductor
Corporation's existing senior subordinated debt and are and will be subordinated
to all existing and future senior indebtedness, including any indebtedness
incurred under the senior credit facility.
Our senior credit facility, the indentures governing our 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, restrictions on capital expenditures and limitations on incurring
indebtedness, among other restrictions. The covenants relating to financial
ratios include a minimum interest coverage ratio and a maximum senior leverage
ratio. Provided there are no outstanding balances under the senior credit
facility, compliance with these ratios is not required until March 31, 2003. The
senior credit facility also limits our ability to modify our certificate of
incorporation and bylaws, or enter into shareholder agreements, voting trusts or
similar arrangements. Under our debt instruments, the subsidiaries of Fairchild
Semiconductor Corporation cannot be restricted, except to a limited extent, from
paying dividends or making advances to Fairchild Semiconductor Corporation. We
believe that those funds, 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 $125 to $135 million in 2001 to expand capacity
primarily in support of in-sourcing and
24
our e-business initiatives. Additional borrowing or equity investment may be
required to fund future acquisitions.
As of September 30, 2001, our cash and cash equivalents balance was $285.4
million, a decrease of $116.4 million from December 31, 2000. Excluding the
repayment of $120.2 million on our revolving credit facility in the second
quarter of 2001, cash would have increased by $3.8 million from December 31,
2000. Cash increased $28.5 million from the second quarter ended July 1, 2001.
During the first nine months of 2001, our operations provided $116.9
million in cash compared to $272.7 million of cash in the first nine months of
2000. The decrease in cash provided by operating activities reflects a decrease
in the first nine months of 2001 in net income adjusted for non-cash items of
$183.9 million and a increase in cash flows from changes in operating assets and
liabilities of $28.1 million as compared with the first nine months of 2000.
Cash used in investing activities during the first nine months of 2001 totaled
$451.3 million, compared to $251.1 million in the first nine months of 2000. The
increase primarily results from the acquisition of the discrete power business
of Intersil Corporation offset by lower capital expenditures for the first nine
months of 2001. Capital expenditures in the first nine months of 2001 were made
principally in our 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 production in-sourcing as well as for our e-business
initiative. Cash provided by financing activities of $218.0 million for the
first nine months of 2001 was primarily from the issuance of $350.0 million of
10 1/2% Senior Subordinated Notes, net of associated fees and expenses of
approximately $10.9 million, offset by repayment of $120.2 million on our
revolving senior credit facility. Cash provided by financing activities of
$243.4 million in the first nine months of 2000 was due primarily to proceeds
from our secondary stock offering.
LIQUIDITY AND CAPITAL RESOURCES OF FAIRCHILD INTERNATIONAL, EXCLUDING
SUBSIDIARIES
Fairchild Semiconductor International, Inc. is a holding company, the
principal asset of which is the stock of its wholly owned subsidiary, Fairchild
Semiconductor Corporation. Fairchild Semiconductor International on a
stand-alone basis had no cash flow from operations in the first nine months of
2001, nor in the first nine months of 2000. Fairchild Semiconductor
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
"we believe," "we expect," "we intend," "may," "will," "should," "seeks,"
"approximately," "plans," "estimates," "anticipates," or "hopeful," or the
negative of those terms or other comparable terms, or by discussions of our
strategy, plans or future performance. 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
below and more specifically in the Business Risks section below. Among these
factors are the following: changes in regional or global economic or political
conditions (including as a result of terrorist attacks and responses to them);
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. Factors that may
affect our operating results are described in the Business Risks section in the
quarterly and annual reports we file with the Securities and Exchange
Commission. 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. It is our current policy to update our business outlook at
least twice each quarter. The first update is near the beginning of each
quarter, within the press release that announces the previous quarter's results.
The business outlook below is consistent with the outlook included in our
October 23, 2001 press release announcing third quarter results. The second
update is
25
within a press release issued approximately two months into each quarter. The
current business outlook is accessible at the Investor Relations section of our
website at investor.fairchildsemi.com. Toward the end of each quarter, we
observe a "quiet period," when the outlook is not updated to reflect
management's current expectations. The quiet period for the fourth quarter of
2001 will be from December 17, 2001 to January 22, 2002, when we plan to release
our fourth quarter and full year 2001 results. Except during quiet periods, the
business outlook posted on our website reflects current guidance unless and
until updated through a press release, SEC filing or other public announcement.
During quiet periods, our business outlook, as posted on our website, announced
in press releases and provided in quarterly, annual and special reports or other
filings with the SEC, should be considered to be historical, speaking as of
prior to the quiet period only and not subject to update by the company. During
quiet periods, Fairchild Semiconductor representatives will not comment about
the business outlook or the company's financial results or expectations.
Given the current economic environment, we continue to be cautious about
the extent of seasonal demand in the fourth quarter. Due to widespread
uncertainty about consumer spending plans, we anticipate that our turns business
in the fourth quarter will be lower than the third quarter. We expect overall
revenues for the fourth quarter will be flat to down 5% sequentially.
We expect revenues in the first quarter of 2002 to be sequentially lower
than the fourth quarter, following normal seasonal patterns, and currently
expect quarterly sequential growth to follow for 2002.
We expect fourth quarter gross margins will improve by 200 basis points due
to improved product mix and better factory utilization driven by a smaller
planned inventory reduction. We are planning additional cost reductions and
expect fourth quarter research and development and selling, general and
administrative expenses (excluding amortization of intangibles) to be in the
range of $51 to $54 million, or down another 5% from the third quarter. We
expect interest expense to average approximately $23 million per quarter and we
expect our effective tax rate to be 35% for the fourth quarter.
For purposes of computing EBITDA, adjusted net income and net income per
share, we expect that depreciation and amortization will be roughly $32 million
and amortization of acquisition-related intangibles to be approximately $14
million for the fourth quarter. Finally, we expect an outstanding diluted share
count of approximately 102.5 million shares for the fourth quarter of 2001.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Statement (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. SFAS No. 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that an assembled workforce may no longer be accounted for as an identifiable
intangible asset. SFAS No. 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.
We were required to adopt the provisions of SFAS No. 141, effective in the
third quarter, and are required to adopt SFAS No. 142 effective December 31,
2001. Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-SFAS No. 142
accounting literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized prior
to the adoption of SFAS No. 142.
26
Upon adoption of SFAS No. 142, SFAS No. 141 will require us to evaluate our
existing intangible assets and goodwill that were acquired in prior purchase
business combinations, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Accordingly, we will be required to reassess the useful lives and
residual values of all identifiable intangible assets acquired in purchase
business combinations, and make any necessary amortization period adjustments by
the first quarter of 2002. In addition, to the extent an intangible asset is
then determined to have an indefinite useful life, we will be required to test
the intangible asset for impairment in accordance with the provisions of SFAS
No. 142 during the first quarter of 2002. Any impairment loss will be measured
as of the date of adoption and recognized as the cumulative effect of a change
in accounting principle in the first quarter of 2002.
SFAS No. 142 will require us to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this we must identify our reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. We will then have up to six months from the date of adoption
to determine the fair value of each reporting unit and compare it to the
reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and we must perform the second step of the transitional
impairment test. In the second step, we must compare the implied fair value of
the reporting unit's goodwill, determined by allocating the reporting unit's
fair value to all of its assets (recognized and unrecognized) and liabilities in
a manner similar to a purchase price allocation in accordance with SFAS No. 141,
to its carrying amount, both of which would be measured as of the date of
adoption. This second step is required to be completed as soon as possible, but
no later than the end of the year of adoption. Any transitional impairment loss
for goodwill will be recognized as the cumulative effect of a change in
accounting principle in the Company's statement of earnings.
As of December 31, 2001, we expect to have unamortized goodwill of
approximately $227.0 million, unamortized assembled workforce of approximately
$3.5 million and other unamortized identifiable intangible assets of
approximately $250.0 million, all of which will be subject to the transition
provisions of SFAS No. 141 and SFAS No. 142. Amortization expense related to
goodwill and assembled workforce was $4.7 million and $12.1 million for the
three and nine months ended September 30, 2001, respectively. Because of the
extensive effort needed to comply with adopting SFAS No. 141 and SFAS No. 142,
it is not practicable to reasonably estimate the impact of adopting these
statements on the Company's financial statements at the date of this report,
including whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle.
Statement of Financial Accounting Standards (SFAS) No. 143, Accounting For
Asset Retirement Obligations, issued in August 2001, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and for the associated retirement costs. SFAS 143,
which applies to all entities that have a legal obligation associated with the
retirement of a tangible long-lived asset, is effective for fiscal years
beginning after June 15, 2001. We do not expect the implementation of SFAS 143
to have a material impact on our financial condition or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, issued in October 2001,
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144, which applies to all entities, is effective for
fiscal years beginning after December 15, 2001. We do not expect the
implementation of SFAS 144 to have a material impact on our financial condition
or results of operations.
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
27
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 1998 and
into 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
2000 and throughout 2001, we and the rest of the semiconductor industry have
experienced backlog cancellations and reduced demand for our products, resulting
in revenue declines, due to excess inventories at computer and
telecommunications equipment manufacturers and general economic conditions,
especially in the technology sector. We may experience renewed, possibly more
severe and prolonged, downturns in the future as a result of such cyclical
changes. Even as demand increases following such downturns, our profitability
may not increase because of price competition that historically accompanies
recoveries in demand. In addition, we may experience significant changes in our
profitability as a result of variations in sales, changes in product mix,
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
and industrial 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
- 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
28
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, Samsung
Electronics 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 patent or other 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 our 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 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. No material potential transactions is subject to a letter
of intent or otherwise so far advanced as to make the transaction reasonably
certain.
29
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, we may encounter unforeseen obstacles or costs 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.
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, Korea Micro Industry and 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.
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
some of 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.
30
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 56.0% of our net sales for the nine months ended
September 30, 2001. Our five domestic distributors accounted for 7.9% of our
total net sales for the nine months ended September 30, 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,
delivery terms, 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.
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 REQUIREMENTS OF SAMSUNG
ELECTRONICS OR ITS INABILITY TO MEET ITS CONTRACTUAL OBLIGATIONS COULD
SUBSTANTIALLY REDUCE OUR FINANCIAL PERFORMANCE.
As a result of the acquisition of Samsung Electronics' 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. The initial terms of these
agreements terminate beginning in April 2002 and we cannot assure you that we
will be able to obtain extensions of these agreements on as favorable terms, if
at all. 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.
31
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 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:
- economic and political instability;
- foreign currency fluctuations;
- transportation delays;
- trade restrictions;
- work stoppages; and
- the laws, including tax laws of, and the policies of the United States
toward, 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.
32
Although most of our known environmental liabilities are covered by
indemnities from Raytheon Company, National Semiconductor or Samsung
Electronics, 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.
Affiliates of Citigroup Inc., and our directors and executive officers
together own approximately 34.3% of the outstanding shares of our Class A Common
Stock. 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 directors and the amendment of our corporate charter and bylaws.
Such persons may exercise their influence over us in a manner detriment to the
interests of our stockholders or bondholders.
WE ARE A LEVERAGED COMPANY WITH A DEBT TO EQUITY RATIO OF 1.36 TO 1, WHICH
COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR ABILITY TO GROW AND
COMPETE.
At September 30, 2001, after giving effect to the issuance of Fairchild
Semiconductor Corporation's 5% Convertible Senior Subordinated Notes on October
31, 2001, we had total indebtedness of $1,138.6 million and a ratio of debt to
equity of 1.36 to 1.
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 (namely borrowings under our senior credit facility, which is
currently undrawn) 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.
33
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.
The indenture governing Fairchild Semiconductor Corporation's outstanding 5%
Convertible Senior Subordinated Notes Due 2008 does not limit the amount of
additional debt that we may incur. 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 September 30, 2001 we had $300.0 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.
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 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 most of 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 and 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. These 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 credit agreement governing our senior credit facility
contains other and more restrictive covenants and limits 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. Provided there are no outstanding balances under
our senior credit facility, compliance with these covenants in the credit
agreement is not required until March 31, 2003. After that date, or earlier if
we borrow money under the credit facility, 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
34
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 Semiconductor 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 Semiconductor International's Annual Report
to Stockholders for the year ended December 31, 2000.
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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 have recently agreed to settle the patent infringement lawsuit filed
against us and other defendants in 1999 by U.S. Philips Corporation in the
United States District Court for the Southern District of New York. The terms of
the settlement are not material to our financial position and are not expected
to have a material effect on our future results of operations.
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
(a) Exhibits
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10. Form of Stock Option Cancellation and Exchange Memorandum
and Agreement between Fairchild Semiconductor International,
Inc. and certain executive officers.
</Table>
(b) Reports on Form 8-K
On July 26, 2001, we filed a special report on Form 8-K relating to
financial information for the three and six months ended July 1, 2001
and forward-looking statements relating to the third quarter of 2001
and the year ended December 30, 2001 as announced in a press release
issued July 24, 2001. The press release is incorporated in, and filed
as an exhibit to, the special report.
On September 6, 2001, we filed a special report on Form 8-K relating to
(1) our acquisition of Impala Linear Corporation, as announced in a
press release issued September 6, 2001, and (2) updates of
forward-looking statements relating to the third quarter of 2001, as
announced in a press release issued September 6, 2001. The press
releases are incorporated in, and filed as exhibits to, the special
report.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fairchild Semiconductor International,
Inc.
By: /s/ DAVID A. HENRY
------------------------------------
David A. Henry
Vice President, Corporate Controller
(Principal Accounting Officer)
Date: November 14, 2001
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