UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 23, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File Number: 333-26897
FAIRCHILD SEMICONDUCTOR CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0449095
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
333 Western Avenue, Mail Stop 01-00
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 December 18, 1997:
Title of Each Class Number of Shares
-------------------- ----------------
Common Stock; $0.01 par value 100
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1 Financial Statements
Condensed Consolidated Statements of Operations
(Unaudited) for the Three and Six Months Ended
November 23, 1997 and November 24, 1996........................... 3
Condensed Consolidated Balance Sheets as of November 23,
1997 (Unaudited) and May 25, 1997................................. 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Three and Six Months Ended
November 23, 1997................................................. 5
Notes to Condensed Consolidated Financial
Statements (Unaudited)............................................ 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 9
Part II Other Information
Item 1 Legal Proceedings................................................... 15
Item 6 Exhibits and Reports on Form 8-K.................................... 15
Signature................................................................... 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 23, NOVEMBER 24, NOVEMBER 23, NOVEMBER 24,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Revenue:
Net sales--trade..................................... $ 155.3 $ 154.0 $ 314.0 $ 286.9
Contract manufacturing -- National Semiconductor..... 40.5 24.0 81.3 50.1
------ ------ ------ ------
Total revenue...................................... 195.8 178.0 395.3 337.0
Direct costs and allocated expenses:
Cost of sales--trade................................. 105.4 117.5 213.4 220.4
Cost of contract manufacturing -- National
Semiconductor...................................... 31.3 24.0 61.4 50.1
Research and development............................. 7.8 4.3 14.9 8.5
Selling, general and administrative.................. 21.0 23.2 42.0 41.9
Restructuring of operations.......................... -- -- -- 5.3
------ ------ ------ ------
Total operating costs and expenses................. 165.5 169.0 331.7 326.2
------ ------
Operating income....................................... 30.3 63.6
Interest, net.......................................... 10.7 -- 21.7 --
Other expense.......................................... -- 0.5 -- 0.9
------ ------ ------ ------
Income before income taxes............................. 19.6 41.9
Revenues less direct and allocated expenses before
income taxes......................................... $ 8.5 $ 9.9
====== ======
Income taxes........................................... 6.9 14.7
------ ------
Net income............................................. $ 12.7 $ 27.2
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
3
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
NOVEMBER 23, MAY 25,
1997 1997
------------- -----------
ASSETS
Current assets:
Cash............................................ $ 79.1 $ 40.7
Receivables, net................................ 80.9 79.6
Inventories..................................... 78.2 73.1
Prepaid expenses and other current assets....... 11.7 16.6
Deferred income taxes........................... 2.1 2.1
------ ------
Total current assets.......................... 252.0 212.1
Property, plant and equipment, net.............. 285.0 295.0
Deferred income taxes........................... 13.2 17.8
Other assets.................................... 28.9 29.4
------ ------
Total assets.................................. $ 579.1 $ 554.3
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............... $ 11.0 $ 11.0
Accounts payable................................ 60.0 77.1
Accrued expenses and other current liabilities.. 57.9 40.1
------ ------
Total current liabilities..................... 128.9 128.2
Long-term debt, less current portion.............. 403.5 409.0
Other liabilities................................. 0.4 0.4
------ ------
Total liabilities............................. 532.8 537.6
Commitments and contingencies
Stockholders' Equity:
Common stock.................................... -- --
Additional paid-in capital...................... 12.0 9.6
Retained earnings............................... 34.3 7.1
------ ------
Total stockholders' equity.................... 46.3 16.7
------ ------
Total liabilities and stockholders' equity.... $ 579.1 $ 554.3
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
4
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
THREE MONTHS SIX MONTHS
ENDED ENDED
NOVEMBER 23, NOVEMBER 23,
1997 1997
-------------- -------------
Operating activities:
Net income....................................... $ 12.7 $ 27.2
Addback non-cash adjustments to net income:
Depreciation and amortization.................. 20.3 40.3
Loss on disposal of fixed assets............... 0.3 0.5
Deferred income taxes.......................... (0.6) 4.6
Changes in certain assets and liabilities, net:
Accounts receivable............................ 16.9 1.2
Inventories.................................... (6.6) (5.1)
Prepaid expenses and other current assets...... 2.6 4.9
Other assets................................... 0.2 0.1
Current liabilities............................ (5.2) 0.6
----- -----
Cash provided by operating activities........ 40.6 74.3
Investing activities:
Capital expenditures............................. (15.7) (27.5)
Purchase of molds and tooling.................... (1.7) (2.9)
----- -----
Cash used by investing activities............ (17.4) (30.4)
Financing activities:
Repayment of long-term debt...................... (2.8) (5.5)
----- -----
Cash used by financing activities............ (2.8) (5.5)
Net change in cash and cash equivalents............ 20.4 38.4
Cash and cash equivalents at beginning of period... 58.7 40.7
----- -----
Cash and cash equivalents at end of period......... $ 79.1 $ 79.1
===== =====
Cash paid for interest and taxes was $18.7 million and $3.0 million
respectively for the three-month period ended November 23, 1997, and $22.6
million and $3.3 million respectively for the six-month period ended November
23, 1997.
See accompanying Notes to Condensed Consolidated Financial Statements.
5
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1--BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheets of Fairchild Semiconductor
Corporation (the "Company") as of November 23, 1997 and May 25, 1997 and the
Condensed Consolidated Statements of Operations and Cash Flows for the three-
and six-month periods ended November 23, 1997 were prepared by the Company.
The Combined Condensed Statements of Operations of the Fairchild
Semiconductor Business (the "Business") for the three- and six-month periods
ending November 24, 1996 include all revenues and costs attributable to the
Business as it was operated within National Semiconductor Corporation
("National"), including allocations for shared facilities and overhead. In
addition, National performed cash management on a centralized basis. As a
result, receivables, liabilities and cash receipts and payments were not
identifiable on a business specific basis. Given these constraints, certain
supplemental cash flow information is presented in lieu of statements of cash
flows (Note 3). In the opinion of management, the accompanying condensed
consolidated financial statements as of and for the three- and six-month
periods ended November 23, 1997 contain all adjustments (consisting of only
normal recurring items) necessary to present fairly the financial position
and results of operations of the Company. The allocations and estimates in
the Combined Condensed Statements of Operations as of and for the three-and
six-month periods ended November 24, 1996 were based on assumptions that
management believes were reasonable under the circumstances. Interim results
of operations are not necessarily indicative of the results to be expected
for the full year. This report should be read in conjunction with the
financial statements and notes thereto included in the special financial
report on Form 10-K for the fiscal year ended May 25, 1997 and the Company's
Registration Statement filed on Form S-4 dated July 9, 1997.
NOTE 2--INVENTORIES
The components of inventories are as follows:
NOVEMBER 23, MAY 25,
1997 1997
--------------- -----------
(In millions)
Raw materials....................................... $ 9.9 $ 8.8
Work in process..................................... 49.3 43.4
Finished goods...................................... 19.0 20.9
----- -----
Total inventories................................. $ 78.2 $ 73.1
===== =====
6
NOTE 3--SUPPLEMENTAL CASH FLOW INFORMATION
As described in Note 1, National's cash management system was not
designed to trace centralized cash and related financing transactions to the
specific cash requirements of the Business. In addition, National's corporate
transaction systems were not designed to track receivables and certain
liabilities and cash receipts and payments on a business specific basis.
Given these constraints, the following unaudited data are presented to
facilitate analysis of key components of cash flow activity:
THREE MONTHS SIX MONTHS
ENDED ENDED
NOVEMBER 24, NOVEMBER 24,
1996 1996
------------- ------------
(In millions)
Operating activities:
Revenues less expenses........................ $ 8.5 $ 9.9
Depreciation and amortization................. 19.5 37.6
Loss (gain) on disposal of fixed assets....... (0.2) 0.2
Decrease in inventories....................... 14.8 19.9
Increase in prepaid expenses and other
current assets............................... (4.8) (0.8)
Decrease in other assets...................... 1.5 0.7
Increase (decrease) in accounts payable....... 1.4 (16.3)
Increase (decrease) in accrued expenses and
other liabilities............................ (1.7) 9.1
----- -----
Cash provided by operating activities....... 39.0 60.3
Investing activities:
Capital expenditures.......................... (9.9) (30.6)
Purchase of molds and tooling................. (1.6) (2.8)
----- -----
Cash used by investing activities........... (11.5) (33.4)
----- -----
Net financing provided to
National Semiconductor *...................... $ 27.5 $ 26.9
===== =====
- ------------------------
* Net financing provided to National Semiconductor does not necessarily
represent the cash flows of the Business, or the timing of such cash flows,
had it operated on a stand-alone basis.
Note 4 -- Long-term Debt
On November 18, 1997, the Company amended certain provisions of its Senior
Credit Facilities Agreement with a syndicate of financial institutions.
Specifically, the amount available under the Revolving Credit Facility was
increased from $75 million to $130 million. In addition, certain restrictive
covenants were amended in order to permit the acquisition of Raytheon
Semiconductor, Inc. (Note 5). As of November 23, 1997, no amounts were
outstanding under the Revolving Credit Facility.
7
Note 5 -- Subsequent Event
On November 25, 1997, the Company signed an agreement to acquire all of the
outstanding common stock of Raytheon Semiconductor, Inc., a California-based
supplier of analog and mixed signal integrated circuits, for approximately $120
million in cash. The Company intends to finance the acquisition through a
combination of borrowings under its existing Revolving Credit Facility (Note 4),
borrowings under a new Tranche C term loan within its existing Senior Term
Facility, and existing cash. In conjunction with the acquisition, the Company
intends to refinance its existing Tranche B term loan with proceeds from the new
Tranche C term loan. The new Tranche C term loan will mature on March 11, 2003
and will bear interest based on either the bank's base rate or the Eurodollar
rate at the option of the Company. The transaction, which is presently expected
to be completed by December 31, 1997, will be accounted for as a purchase.
NOTE 6--RECLASSIFICATIONS
Certain amounts in the unaudited financial statements for the three and
six-month periods ended November 24, 1996 have been reclassified to conform to
the presentation in the unaudited financial statements for the three and
six-month periods ended November 23, 1997.
In addition, certain non-cash adjustments were recorded in the second
quarter to increase accounts receivable ($2.5 million) and current liabilities
($0.1 million), offset against additional paid in capital. The purpose of these
adjustments was to properly state business equity assumed as part of the
Recapitalization.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Fairchild Semiconductor Corporation (the "Company") is a leading designer,
manufacturer and supplier of high-performance logic, non-volatile memory and
discrete power and signal technology semiconductors, serving the
telecommunications, consumer, industrial, personal systems and automotive
markets. The results of operations for the second quarter and first half of
fiscal 1997 (three- and six-month periods ended November 24, 1996) reflect the
operating results of the Fairchild Semiconductor Business (the "Business") of
National Semiconductor Corporation ("National"), and are not necessarily
indicative of the results that would have been obtained as a stand-alone
company. This is due in part to the fact that National allocated to the Business
certain corporate and other overhead costs at levels higher than those
experienced as a stand-alone company. In addition, the Business, prior to the
establishment of the Company, provided manufacturing services to National at
cost and now provides such services at higher prices.
RESULTS OF OPERATIONS
Net income was $12.7 million and $27.2 million for the second quarter and
first half of fiscal 1998, respectively. As a stand-alone operation in fiscal
1998, the Company incurred interest expense and income tax expense of $10.7
million and $6.9 million, respectively, in the second quarter of fiscal 1998
and $21.7 million and $14.7 million, respectively, in the first half of
fiscal 1998, that the Business did not incur in the comparable periods of
fiscal 1997. Operating income was $30.3 million and $63.6 million in the
second quarter and first half of fiscal 1998, respectively, compared to
revenues less direct and allocated expenses before income taxes of $8.5
million and $9.9 million in the comparable periods of fiscal 1997. This
increase is primarily attributable to higher trade revenues, particularly in
the first quarter of fiscal 1998, as a result of improved market conditions,
higher trade gross profit due to improved factory utilization and improved
pricing, along with a one-time restructuring charge of $5.3 million for
workforce reductions in first half of fiscal 1997 which did not recur in the
first half of fiscal 1998. In addition, the Company generated $9.2 million
and $19.9 million of gross profit on contract manufacturing services in the
second quarter and first half of fiscal 1998, respectively, under
manufacturing agreements with National. In the comparable periods of fiscal
1997, these revenues were recorded at cost. Excluding depreciation and
amortization of $20.3 million and $40.3 million in the second quarter and
first half of fiscal 1998, respectively, and $19.5 million and $37.6 million
in the comparable periods of fiscal 1997, and other expense of $0.5 million
and $0.9 million in the second quarter and first half of fiscal 1997,
respectively, earnings before interest, taxes and depreciation and
amortization ("EBITDA") were $50.6 million and $103.9 million in the second
quarter and first half of fiscal 1998, respectively, compared to $28.5
million and $48.4 million in the comparable periods of fiscal 1997. EBITDA is
presented because the Company believes that it is a widely accepted financial
indicator of an entity's ability to incur and service debt. EBITDA should not
be considered as an alternative to net income, operating income, or other
consolidated operations and cash flow data prepared in accordance with
generally accepted accounting principles, as an indicator of the operating
performance of the Company, or as an alternative to cash flows as a measure
of liquidity.
9
REVENUES
The Company's revenues consist of trade sales to unaffiliated customers
(79.3% and 79.4% of total revenues in the second quarter and first half of
fiscal 1998, respectively, and 86.5% and 85.1% in the comparable periods of
fiscal 1997) and revenues from contract manufacturing services provided to
National (20.7% and 20.6% of total revenues in the second quarter and first half
of fiscal 1998, respectively, and 13.5% and 14.9% in the comparable periods of
fiscal 1997).
Trade sales increased 1.0% to $155.3 million in the second quarter of
fiscal 1998 compared to $154.0 million in the second quarter of fiscal 1997.
On a year-to-date basis, trade sales increased 9.4% to $314.0 million
compared to $286.9 million for the comparable period of fiscal 1997.
Logic trade sales increased 7.0% and 12.3% in the second quarter and
first half of fiscal 1998, respectively, over the comparable periods of
fiscal 1997. The increase was driven by a significant increase in unit
volume, reflecting strong market demand, which offset a slight decrease in
average selling prices. In the second quarter of fiscal 1998, CMOS trade
sales increased 14.6% over the second quarter of fiscal 1997, offsetting a
decrease of 1.0% in Bipolar trade sales, reflective of the general market
trend favoring CMOS. On a year-to-date basis, CMOS and Bipolar trade sales
increased 15.5% and 8.9%, respectively, over the comparable periods of fiscal
1997.
Discrete trade sales increased 18.6% and 26.1% in the second quarter and
first half of fiscal 1998, respectively, over the comparable periods of
fiscal 1997. The increase was due almost entirely to higher average selling
prices, driven by new product introductions and a favorable sales mix, as
unit volume was down slightly. Small Signal trade sales increased 39.4%,
offsetting a decrease of 5.2% in Power DMOS trade sales in the second quarter
of fiscal 1998 over the second quarter of fiscal 1997. Power DMOS trade sales
in the second quarter of fiscal 1998 were impacted by manufacturing problems
at the Company's facility in Cebu, Philippines, which have been rectified. On
a year-to-date basis, Small Signal and Power DMOS trade sales increased 39.4%
and 9.1%, respectively, over the comparable period of fiscal 1997.
Memory trade sales decreased 28.4% and 13.9% in the second quarter and
first half of fiscal 1998, respectively, over the comparable periods of
fiscal 1997. The decrease was driven by lower prices impacting all product
lines due to competitive pressures, partially offset by higher volume,
particularly in E2PROM. E2PROM trade sales decreased 0.7% in the second
quarter of fiscal 1998 over the second quarter of fiscal 1997, but have
increased 16.4% in the first half of fiscal 1998 over the first half of
fiscal 1997. EPROM trade sales decreased 56.5% and 44.0% in the second
quarter and first half of fiscal 1998, respectively, over the comparable
periods of fiscal 1997.
Geographically, 38%, 22% and 40% of trade sales were derived in North
America, Europe and Asia/Pacific, respectively, in the second quarter of
fiscal 1998, compared to 38%, 19% and 43% in the second quarter of fiscal
1997. Trade sales in Europe increased 15.7% over a year ago due to strength
in the telecommunications market, which offset a decrease of 5.2% in
Asia/Pacific, due in part to the delayed transition to a dedicated sales
force in Japan and price pressures, particularly in Memory, in Southeast
Asia. North America trade sales were flat year over year. On a year-to-date
basis, 37%, 20% and 43% of trade sales were derived in North America, Europe
and Asia/Pacific, respectively, compared to 39%, 19% and 42% in the first
half of fiscal 1997. Trade sales in all regions were higher in the first half
of fiscal 1998 compared to a year ago. Trade sales increased 4.0%, 14.9% and
12.2% in North America, Europe and Asia/Pacific, respectively, the result of
improved market conditions.
10
Contract manufacturing revenues increased 68.8% to $40.5 million in the
second quarter of fiscal 1998 compared to $24.0 million in the second quarter
of fiscal 1997. On a year-to-date basis, contract manufacturing revenues
increased 62.3% to $81.3 million, compared to $50.1 million for the
comparable period in fiscal 1997. This increase reflects greater demand from
National.
GROSS PROFIT
Gross profit increased 61.9% to $59.1 million in the second quarter of
fiscal 1998, compared to $36.5 million in the second quarter of fiscal 1997. On
a year-to-date basis, gross profit increased 81.2% to $120.5 million from $66.5
million for the comparable period of fiscal 1997. Included in gross profit in
the second quarter and first half of fiscal 1998 is $9.2 million and $19.9
million, respectively, attributable to contract manufacturing services provided
to National. In the comparable periods of fiscal 1997, these revenues were
recorded at cost. Gross trade profit (excluding contract manufacturing)
increased 36.7% and 51.3% in the second quarter and first half of fiscal 1998,
respectively, over the comparable periods of fiscal 1997. As a percentage of
trade sales, gross trade profits were 32.1% and 32.0% in the second quarter and
first half of fiscal 1998, respectively, compared to 23.7% and 23.2% in the
comparable periods of fiscal 1997. The increase in gross trade profit as a
percentage of trade sales was due to higher average selling prices, increased
factory utilization due to improved market conditions and the favorable effects
of currency devaluations in Southeast Asia on the Company's manufacturing costs.
RESEARCH AND DEVELOPMENT
Research and development expenses ("R&D") were $7.8 million, or 5.0% of
trade sales in the second quarter of fiscal 1998, compared to $4.3 million, or
2.8% of trade sales in the second quarter of fiscal 1997. On a year-to-date
basis, R&D was $14.9 million, or 4.7% of trade sales, compared to $8.5 million,
or 3.0% of trade sales, for the comparable period of fiscal 1997. The increase
in R&D is driven by higher spending to support new product development,
reflecting renewed emphasis on R&D efforts as a stand-alone company. R&D efforts
are focused on the Company's growth products: CMOS Logic, Power DMOS, and
E2PROM. In the second quarter and first half of fiscal 1998, R&D expenditures
were 8.8% and 8.3% of trade sales, respectively, for these growth products, and
0.9% and 1.0% of trade sales, respectively, for the Company's mature products
(Bipolar Logic, Small Signal Discretes and EPROM). In the comparable periods of
fiscal 1997, R&D expenditures of the Business primarily consisted of allocations
from National.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $21.0 million, or
13.5% of trade sales, in the second quarter of fiscal 1998, compared to $23.2
million, or 15.1% of trade sales, in the second quarter of fiscal 1997. On a
year-to-date basis, SG&A was $42.0 million, or 13.4% of trade sales, compared to
$41.9 million, or 14.6% of trade sales for the comparable period of fiscal 1997.
The decrease in SG&A as a percent of trade sales is primarily attributable to
the effect of one-time retention and incentive bonuses charged to SG&A in the
second quarter of fiscal 1997 which did not recur in the second quarter of
fiscal 1998, lower G&A expenses due to lower stand-alone costs compared to the
direct and allocated G&A expenses of the Business, offset by higher selling
expenses primarily related to inefficiencies experienced while operating under
transition service agreements with National.
11
RESTRUCTURING
The first half of fiscal 1997 included a one-time restructuring charge of
$5.3 million for severance and other costs directly attributable to a workforce
reduction.
INTEREST, NET
Interest, net was $10.7 million and $21.7 million in the second quarter and
first half of fiscal 1998, respectively, as a result of indebtedness incurred
concurrent with the Recapitalization, which occurred in the fourth quarter of
fiscal 1997. In the comparable periods of fiscal 1997, the Business was
allocated net interest expense from National. This amount is included in other
expense.
OTHER EXPENSE
Other expense was $0.5 million and $0.9 million in the second quarter and
first half of fiscal 1997, respectively, consisting of primarily net interest
expense allocated to the Business by National. There were no comparable amounts
incurred in the comparable periods of fiscal 1998.
INCOME TAXES
Income taxes were $6.9 million and $14.7 million in the second quarter and
first half of fiscal 1998, respectively, an effective tax rate of 35%. In the
comparable periods of fiscal 1997, the Business did not record a tax provision
or pay income taxes as it operated as a division of National.
LIQUIDITY AND CAPITAL RESOURCES
As of November 23, 1997, the Company's cash balance was $79.1 million, an
increase of $38.4 million from May 25, 1997. In addition, the Company had
available a Revolving Credit Facility of $130 million on November 23, 1997,
under which no amounts were outstanding. The Business had no cash as of
November 24, 1996, as cash management was centralized by National and amounts
were not identifiable on a business specific basis.
In the second quarter and first half of fiscal 1998, the Company
generated sufficient cash from operations to fund its research and
development, capital expenditure and debt service requirements. Research and
development expenditures are made primarily to fund new product development.
Capital expenditures in the second quarter and first half of fiscal 1998 and
for the remainder of the fiscal year are being made primarily to increase
capacity in the Company's manufacturing facilities and to purchase and
install an enterprise-wide information system. The Company expects that its
existing cash together with available funds from its amended Senior Credit
Facilities, and funds generated from operations, will be sufficient to meet
its investing and financing requirements for the next twelve months.
The Company utilizes financial instruments to hedge its overall exposure
to the effects of foreign currency and interest rate fluctuations. The
Company utilizes short-term forward contracts to hedge currency exposure when
deemed necessary for expenses denominated in Malaysian ringgit and Philippine
pesos, as well as revenues denominated in Japanese yen and the major European
currencies. The recent devaluation of several currencies in Southeast Asia
against the U.S. dollar has not had, nor does the Company
12
presently expect it to have, a material adverse effect on the Company's
results of operations or financial condition. The Company currently benefits
from lower dollar-denominated expenses incurred by its manufacturing
operations in Southeast Asia. The effect of lower manufacturing costs is
presently expected to substantially offset any adverse impact to the
Company's revenues in the region for the remainder of the fiscal year, which
may result from soft market conditions created by the devaluations and other
economic factors. Deferred gains from hedging transactions were immaterial to
the financial statements in the second quarter and first half of fiscal 1998.
The Company does not speculate in these financial instruments.
OUTLOOK AND BUSINESS RISKS
The statements contained under this heading and in the Liquidity and
Capital Resources section of Management's Discussion and Analysis, other than
statements of historical facts, are forward looking statements based on
current expectations and management's estimates, which involve risks and
uncertainties. Actual results may differ materially from those set forth in
such forward looking statements.
The following factors may affect the Company's operating results for
fiscal 1998: (i) the potential effect of the Company's substantially
leveraged financial condition on its liquidity, its ability to fund capital
expenditures, working capital and research and development and its ability to
withstand adverse general economic, market or competitive conditions and
developments; (ii) restrictive covenants contained in the Company's debt
instruments that could limit its ability to borrow additional funds, dispose
of or acquire assets or fund capital expenditures; (iii) the highly cyclical
and competitive nature of the semiconductor industry; (iv) the Company's
dependence on continued demand for the end-products such as personal
computers, telecommunications, automotive, and consumer and industrial
electronic goods that incorporate the Company's products; (v) the need to
design, develop, manufacture, market and support new products in order to
remain competitive in the Company's markets; (vi) the Company's dependence on
sales to National Semiconductor; (vii) the Company's dependence on the
availability and cost of new materials used in its products and upon key
subcontractors providing it with wafer fabrication, assembly and test
services; (viii) the Company's reliance on complex manufacturing processes
and its sensitivity to maintaining yields, efficiencies and continuous
operations; (ix) uncertainties and legal risks associated with the dependence
on, and potential disputes concerning, patents and other intellectual
property rights; and (x) foreign currency and other risks associated with
operating a business internationally.
On November 25, 1997, the Company announced it had reached an agreement
to acquire all of the outstanding common stock of Raytheon Semiconductor,
Inc. ("Raytheon") for approximately $120 million in cash. Raytheon designs,
manufactures and markets high-performance analog and mixed signal integrated
circuits for the personal computer, communications, broadcast video and
industrial markets. The transaction, which is presently expected to be
completed by December 31, 1997, will be accounted for as a purchase. While
the Company expects to recognize special charges related to certain
acquisition and related expenses during its third quarter, the amount of such
charges and their impact on the Company's operating results have yet to be
determined. The Company believes that its products, technologies and
capabilities and those of Raytheon are complementary, and that the separate
operations are compatible. However, the integration of the companies and the
Company's higher leverage resulting from the acquisition may have an
unfavorable impact on future operating results if the Company encounters
unforeseen obstacles, or is unable to successfully execute its integration
plan.
13
The Company relies on certain subcontractors for wafer fabrication and
assembly and test services. In particular, the Company utilizes NS
Electronics (Bangkok) Ltd. ("NS Electronics") as a subcontractor for a
significant portion of assembly and test services for its non-volatile memory
products. NS Electronics has common ownership and business and management
relationships with Alphatec Electronics Public Company Ltd. ("Alphatec").
Alphatec has recently reported financial difficulties, and its ability to
continue its current operations and the impact of such on the operations of
NS Electronics are uncertain. The Company's contract with NS Electronics
expired on November 23, 1997 and negotiations to renew the contract are in
progress. While negotiations continue, the parties have agreed to operate
under the pricing arrangements of the proposed contract, which are generally
favorable to the Company. The Company continues to explore sourcing
alternatives, including other subcontractors and expansion of internal
capacity. There can be no assurance that the Company would be able to replace
any loss of assembly or test services as a result of adverse developments
affecting Alphatec and NS Electronics, nor any assurance that such services
could be replaced on terms equally favorable to the Company. Accordingly,
should NS Electronics cease or sharply curtail its operations in the near
future, there could be a material adverse effect on the Company's results of
operations in fiscal 1998.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising in
the ordinary course of its business. Management believes there is no litigation
pending that could have a material adverse effect on its results of operations
or its financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 First Amendment to Credit Agreement dated November 18, 1997
27 Financial Data Schedule
b) Reports on Form 8-K
Fairchild Semiconductor Corporation filed no reports on Form 8-K
during the quarter ended November 23, 1997.
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 CORPORATION
Date: December 23, 1997 By: /s/ Joseph R. Martin
---------------------------------
Joseph R. Martin
Executive Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
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