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 March 1, 1998
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________.
Commission File Number: 333-26897
FAIRCHILD SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0449095
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
333 Western Avenue, 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 March 31, 1998:
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 Nine Months Ended March 1, 1998 and
February 23, 1997 3
Condensed Consolidated Balance Sheets as of March 1, 1998
(Unaudited) and May 25, 1997 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three and Nine Months Ended March 1, 1998 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II. Other Information
Item 1 Legal Proceedings 16
Item 6 Exhibits and Reports on Form 8-K 16
Signature 17
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 Nine Months Ended
March 1, February 23, March 1, February 23,
1998 1997 1998 1997
-------- ------------ -------- -------------
Revenue:
Net sales - trade $165.1 $147.5 $479.1 $434.4
Contract manufacturing - National
Semiconductor 41.5 25.7 122.8 75.8
----- ----- ----- ----
Total revenue 206.6 173.2 601.9 510.2
Direct costs and allocated expenses:
Cost of sales - trade 116.0 111.6 329.4 332.0
Cost of contract manufacturing -
National Semiconductor 30.9 25.7 92.3 75.8
Research and development 9.8 5.1 24.7 13.6
Selling, general and administrative 24.6 30.6 66.6 72.5
Purchased in-process research and
development 15.5 -- 15.5 --
Restructuring of operations -- -- -- 5.3
----- ----- ----- -----
Total operating costs and expenses 196.8 173.0 528.5 499.2
----- ----- ----- -----
Operating income 9.8 73.4
Interest, net 12.1 -- 33.8 --
Other expense -- 0.5 -- 1.4
----- ----- ----- -----
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (2.3) 39.6
Revenues less direct and allocated
expenses before income taxes $(0.3) $9.6
===== =====
Income tax expense (benefit) (1.7) 13.0
----- -----
Income (loss) before cumulative effect of
change in accounting principle (0.6) 26.6
Cumulative effect of change in
accounting principle, net of tax
effect of $0.8 million (1.5) (1.5)
----- -----
Net income (loss) $(2.1) $25.1
===== =====
See accompanying Notes to Condensed Consolidated Financial Statements.
3
FAIRCHILD SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
March 1, May 25,
1998 1997
--------- -------
ASSETS
Current assets:
Cash $ 12.4 $ 40.7
Receivables, net 86.6 79.6
Inventories 99.6 73.1
Prepaid expenses and other current assets 14.4 16.6
Deferred income taxes 2.1 2.1
----- -----
Total current assets 215.1 212.1
Property, plant and equipment, net 334.2 295.0
Deferred income taxes 16.8 17.8
Intangibles, net 32.3 --
Other assets 30.7 29.4
----- -----
Total assets $629.1 $554.3
===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 12.4 11.0
Accounts payable 65.0 77.1
Accrued expenses and other current liabilities 65.1 40.1
----- -----
Total current liabilities 142.5 128.2
Long-term debt, less current portion 442.0 409.0
Other liabilities 0.4 0.4
----- -----
Total liabilities 584.9 537.6
Commitments and contingencies
Stockholders' Equity:
Common stock -- --
Additional paid-in capital 12.0 9.6
Retained earnings 32.2 7.1
----- -----
Total stockholders' equity 44.2 16.7
----- -----
Total liabilities and stockholders' equity $629.1 $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 Nine Months
Ended Ended
March 1, March 1,
1998 1998
------ -----
Operating activities:
Net income (loss) $(2.1) $25.1
Addback non-cash adjustments to net income (loss):
Cumulative effect of change in accounting principle 1.5 1.5
Depreciation and amortization 22.2 62.5
Loss on disposal of fixed assets 0.2 0.7
In-process research and development 15.5 15.5
Deferred income taxes (2.8) 1.8
Changes in certain assets and liabilities, net:
Accounts receivable 5.7 6.9
Inventories (7.8) (12.9)
Prepaid expenses and other current assets (2.4) 2.5
Other assets -- 0.1
Current liabilities 4.4 5.0
----- -----
Cash provided by operating activities 34.4 108.7
Investing activities:
Capital expenditures (21.8) (49.3)
Purchase of molds and tooling (1.3) (4.2)
Purchase of Raytheon Semiconductor, Inc.,
net of cash acquired (116.8) (116.8)
----- -----
Cash used by investing activities (139.9) (170.3)
Financing activities:
Repayment of long-term debt (50.1) (55.6)
Issuance of long-term debt 90.0 90.0
Debt issuance costs (1.1) (1.1)
----- -----
Cash provided by financing activities 38.8 33.3
----- -----
Net change in cash and cash equivalents (66.7) (28.3)
Cash and cash equivalents at beginning of period 79.1 40.7
----- -----
Cash and cash equivalents at end of period $12.4 $12.4
===== =====
Cash paid for interest and taxes was $1.9 million and $5.0 million,
respectively, for the three-month period ended March 1, 1998, and $24.5
million and $8.3 million, respectively, for the nine-month period ended March
1, 1998.
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 March 1, 1998 and May 25, 1997 and the
Condensed Consolidated Statements of Operations and Cash Flows for the
three-and nine-month periods ended March 1, 1998 were prepared by the
Company. The Combined Condensed Statements of Operations of the Fairchild
Semiconductor Business (the "Business") for the three- and nine-month periods
ending February 23, 1997 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 nine-month
periods ended February 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
nine-month periods ended February 23, 1997 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:
March 1, May 25,
1998 1997
------- -------
(In millions)
Raw materials $12.7 $8.8
Work in process 62.6 43.4
Finished goods 24.3 20.9
----- -----
Total inventories $99.6 $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 Nine Months
Ended Ended
February 23, February 23,
1997 1997
------------ ------------
(In millions)
Operating activities:
Revenues less expenses $(0.3) $9.6
Depreciation and amortization 19.1 56.7
Loss on disposal of fixed assets, molds and tooling 0.3 0.5
Decrease in inventories 5.9 25.8
Decrease (increase) in prepaid expenses and
other current assets 0.7 (0.1)
Decrease in other assets 0.4 1.1
Decrease in accounts payable (7.0) (23.3)
Increase in accrued expenses and other liabilities 6.9 16.0
----- -----
Cash provided by operating activities 26.0 86.3
Investing activities:
Capital expenditures (2.8) (33.4)
Purchase of molds and tooling (2.0) (4.8)
Transfers of capital equipment from
National Semiconductor (3.3) (3.3)
----- ------
Cash used by investing activities (8.1) (41.5)
----- ------
Net financing provided to National Semiconductor * $ 17.9 $ 44.8
===== ======
* 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 December 31, 1997, the Company entered into an amended and restated
Credit 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 March 1, 1998, no amounts were outstanding under the
Revolving Credit Facility.
7
Note 5 - Acquisitions
On December 31, 1997, the Company acquired all of the outstanding common
stock of Raytheon Semiconductor, Inc. ("Raytheon") for approximately $117
million in cash plus transaction expenses. Raytheon, based in Mountain View,
California, designs, manufactures and markets high-performance analog and
mixed signal integrated circuits for the personal computer, communications,
broadcast video and industrial markets. The purchase price was financed
through a combination of existing cash and borrowings under a new $90 million
Tranche C term loan within the Company's Senior Term Facility. In
conjunction with the acquisition, the Company also refinanced its Tranche B
term loan with the remaining proceeds from the new Tranche C term loan. The
Tranche C term loan matures on March 11, 2003, and bears interest based on
either the bank's base rate or the Eurodollar rate at the option of the
Company.
The acquisition was accounted for as a purchase as of December 31, 1997,
and the results of operations of Raytheon have been included since that date.
The purchase price was allocated to all identifiable tangible and intangible
assets and assumed liabilities based on their fair values, including $32.9
million allocated to various intangible assets and $15.5 million to
in-process research and development. The in-process research and development
was expensed to operations during the third quarter. The intangible assets
are being amortized over periods ranging from 3 to 15 years.
Note 6 - Change in Accounting Principle
Effective in the third quarter of fiscal 1998, Fairchild adopted the
provisions of EITF Issue 97-13 "Accounting for Business Process Reengineering
Costs." This Issue requires companies to write-off business process
reengineering costs that had been previously capitalized. The Company had
been capitalizing such costs in conjunction with its enterprise software
implementation project. The Issue requires companies to write-off these
costs in the quarter that contains November 20, 1997. As the guideline for
adoption was issued late in the Company's quarter ended November 23, 1997,
the Company is applying the change for the first time in this quarter. The
majority of the amount to be written off was capitalized prior to the second
quarter of fiscal 1998. The amount incurred in the second quarter of fiscal
1998 which would have been charged to expense as a result of this Issue is
immaterial to net income. The cumulative effect of adoption of this Issue
resulted in a charge of $1.5 million, net of taxes of $0.8 million. Of the
pre-tax write-off, $1.6 million applies to costs incurred in fiscal 1998,
while $0.7 million applies to costs incurred in fiscal 1997.
Note 7 - Reclassifications
Certain amounts in the unaudited financial statements for the three and
nine-month periods ended February 23, 1997 have been reclassified to conform
to the presentation in the unaudited financial statements for the three and
nine-month periods ended March 1, 1998.
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, discrete power and signal technology and analog and mixed signal
semiconductors, serving the telecommunications, consumer, industrial,
personal systems and automotive markets. The results of operations for the
third quarter and first nine months of fiscal 1997 (three- and nine-month
periods ended February 23, 1997) 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.
The Company's results for the three and nine months ended March 1, 1998
consist of 14 and 40 weeks of activity, respectively, compared to 13 and 39
weeks, respectively, for the three and nine months ended February 23, 1997.
Results of Operations
Net income (loss) was $(2.1) million and $25.1 million for the third
quarter and first nine months of fiscal 1998, respectively. As a stand-alone
operation in fiscal 1998, the Company incurred interest expense and income
tax expense (benefit) of $12.1 million and $(1.7) million, respectively, in
the third quarter of fiscal 1998 and $33.8 million and $13.0 million,
respectively, in the first nine months of fiscal 1998, that the Business did
not incur in the comparable periods of fiscal 1997. Net income for the three
and nine months ended March 1, 1998 includes one-time non-recurring charges
for the write-off of purchased in-process research and development associated
with the acquisition of Raytheon Semiconductor, Inc. ("Raytheon") ($15.5
million) and an after-tax charge for the cumulative effect of a change in
accounting principle pertaining to certain business process reengineering
costs associated with the Company's enterprise software system implementation
($1.5 million) which had been previously capitalized. Excluding these
one-time non-recurring charges, net income was $14.9 million and $42.1
million, respectively, for the three and nine months ended March 1, 1998.
Operating income was $9.8 million and $73.4 million in the third quarter
and first nine months of fiscal 1998, respectively, compared to revenues less
direct and allocated expenses before income taxes of $(0.3) million and $9.6
million in the comparable periods of fiscal 1997. Excluding one-time charges
for in-process research and development for the three and nine months ended
March 1, 1998 and for restructuring of operations for the nine months ended
February 23, 1997 ($5.3 million), operating income was $25.3 million and
$88.9 million, respectively, for the three and nine months ended March 1,
1998, compared to revenues less direct and allocated expenses before income
taxes of $(0.3) million and $14.9 million, respectively, for the three and
nine months ended February 23, 1997. This increase is primarily attributable
to gross profit on contract manufacturing services of $10.6 million and $30.5
million, respectively, in the third quarter and first nine months of fiscal
1998. In the comparable periods of fiscal 1997, these revenues were recorded
at cost. In addition, the Company experienced higher trade revenues as a
result of
9
the acquisition of Raytheon and improved market conditions, higher trade
gross profit due to improved factory utilization, improved pricing and the
favorable effect of currency devaluations in Southeast Asia on manufacturing
costs. Excluding one-time non-recurring charges, depreciation and
amortization of $22.2 million and $62.5 million in the third quarter and
first nine months of fiscal 1998, respectively, and $19.1 million and $56.7
million in the comparable periods of fiscal 1997, and other expense of $0.5
million and $1.4 million in the third quarter and first nine months of fiscal
1997, respectively, earnings before interest, taxes and depreciation and
amortization ("EBITDA") were $47.5 million and $151.4 million in the third
quarter and first nine months of fiscal 1998, respectively, compared to $19.3
million and $73.0 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.
Revenues
The Company's revenues consist of trade sales to unaffiliated customers
(79.9% and 79.6% of total revenues in the third quarter and first nine months
of fiscal 1998, respectively, and 85.2% and 85.1% in the comparable periods
of fiscal 1997) and revenues from contract manufacturing services provided to
National (20.1% and 20.4% of total revenues in the third quarter and first
nine months of fiscal 1998, respectively, and 14.8% and 14.9% in the
comparable periods of fiscal 1997).
Trade sales increased 11.9% to $165.1 million in the third quarter of
fiscal 1998 compared to $147.5 million in the third quarter of fiscal 1997.
On a year-to-date basis, trade sales increased 10.3% to $479.1 million
compared to $434.4 million for the comparable period of fiscal 1997. Trade
sales for the three and nine months ended March 1, 1998 include those of
Raytheon since the acquisition. Excluding Raytheon, trade sales increased
3.9% and 7.6% for the three and nine months ended March 1, 1998,
respectively, over the comparable periods of fiscal 1997.
Logic trade sales increased 9.3% and 11.3% in the third quarter and
first nine months 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 decrease in average
selling prices. In the third quarter of fiscal 1998, CMOS trade sales
increased 19.3% over the third quarter of fiscal 1997, offsetting a decrease
of 2.5% in Bipolar trade sales, reflective of the general market trend
favoring CMOS. On a year-to-date basis, CMOS and Bipolar trade sales
increased 16.7% and 5.2%, respectively, over the comparable periods of fiscal
1997.
Discrete trade sales increased 16.3% and 22.4% in the third quarter and
first nine months 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
31.5% in the third quarter of fiscal 1998 over the third quarter of fiscal
1997 due to sales of new DMOS products targeted at battery management
applications. Power sales were flat quarter over quarter, as new DMOS
product revenues offset declining revenues in certain mature products. On a
year-to-date basis, Small Signal and Power trade sales increased 36.6% and
5.5%, respectively, over the comparable period of fiscal 1997.
10
Memory trade sales decreased 21.4% and 16.5% in the third quarter and
first nine months of fiscal 1998, respectively, from 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 2.0% in the
third quarter of fiscal 1998 from the third quarter of fiscal 1997, but have
increased 10.4% in the first nine months of fiscal 1998 over the first nine
months of fiscal 1997. In a declining market, EPROM trade sales decreased
45.5% and 47.2% in the third quarter and first nine months of fiscal 1998,
respectively, from the comparable periods of fiscal 1997.
Geographically, 35%, 23% and 42% of trade sales were derived in North
America, Europe and Asia/Pacific, respectively, in the third quarter of
fiscal 1998, compared to 38%, 20% and 42% in the third quarter of fiscal
1997. Trade sales in Europe increased 29.5% over a year ago, Asia/Pacific
increased 11.5%, despite deteriorating economic conditions in the region, and
North America increased 3.2%. Excluding Raytheon, North America trade sales
were down 8.5% due primarily to softer sales into the distribution channel
and lower prices. On a year-to-date basis, 36%, 21% and 43% of trade sales
were derived in North America, Europe and Asia/Pacific, respectively,
compared to 39%, 20% and 41% in the first nine months of fiscal 1997. Trade
sales in all regions were higher in the first nine months of fiscal 1998
compared to a year ago. Trade sales increased 3.8% and 19.6% in North
America and Europe, respectively, the result of improved market conditions
and the acquisition of Raytheon. Despite soft economic conditions over the
last several months in Asia/Pacific, trade sales in the region have increased
11.9% in the first nine months of 1998 over a year ago.
Contract manufacturing revenues increased 61.5% to $41.5 million in the
third quarter of fiscal 1998 compared to $25.7 million in the third quarter
of fiscal 1997. On a year-to-date basis, contract manufacturing revenues
increased 62.0% to $122.8 million, compared to $75.8 million for the
comparable period in fiscal 1997. This increase, when normalized for higher
prices which include a markup in fiscal 1998, reflects greater demand from
National during these periods as compared to the comparable periods of fiscal
1997.
Gross Profit
Gross profit increased 66.3% to $59.7 million in the third quarter of
fiscal 1998, compared to $35.9 million in the third quarter of fiscal 1997.
On a year-to-date basis, gross profit increased 76.0% to $180.2 million from
$102.4 million for the comparable period of fiscal 1997. Included in gross
profit in the third quarter and first nine months of fiscal 1998 is $10.6
million and $30.5 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 36.8% and 46.2% in the third
quarter and first nine months of fiscal 1998, respectively, over the
comparable periods of fiscal 1997. As a percentage of trade sales, gross
trade profits were 29.7% and 31.2% in the third quarter and first nine months
of fiscal 1998, respectively, compared to 24.3% and 23.6% 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.
11
Research and Development
Research and development expenses ("R&D") were $9.8 million, or 5.9% of
trade sales in the third quarter of fiscal 1998, compared to $5.1 million, or
3.5% of trade sales in the third quarter of fiscal 1997. On a year-to-date
basis, R&D was $24.7 million, or 5.2% of trade sales, compared to $13.6
million, or 3.1% 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, E2PROM and Analog. In the third quarter and first nine months
of fiscal 1998, R&D expenditures were 9.5% and 8.8% of trade sales,
respectively, for these growth products, and 1.0% and 0.8% 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 $24.6
million, or 14.9% of trade sales, in the third quarter of fiscal 1998,
compared to $30.6 million, or 20.7% of trade sales, in the third quarter of
fiscal 1997. On a year-to-date basis, SG&A was $66.6 million, or 13.9% of
trade sales, compared to $72.5 million, or 16.7% of trade sales for the
comparable period of fiscal 1997. Excluding one-time retention bonuses of
$10.8 million and $14.1 million charged in the three and nine months ended
February 23, 1997, respectively, SG&A was $19.8 million, or 13.4% of trade
sales in the third quarter of fiscal 1997 and $58.4 million, or 13.4% of
trade sales, for the nine months ended February 23, 1997. The increase in
SG&A as a percentage of trade sales for the quarter and year-to-date after
elimination of retention bonuses is primarily related to inefficiencies
experienced while operating under transition service agreements with National.
Restructuring
The first nine months 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 $12.1 million and $33.8 million in the third quarter
and first nine months of fiscal 1998, respectively, as a result of
indebtedness incurred concurrent with the establishment of the Company as an
independent entity, which occurred in the fourth quarter of fiscal 1997, and
the purchase of Raytheon in the third quarter of fiscal 1998. In the
comparable periods of fiscal 1997, the Business was allocated net interest
expense from National. This amount is included in other expense.
Other Expenses
Other expense was $0.5 million and $1.4 million in the third quarter and
first nine months of fiscal 1997, respectively, consisting primarily of net
interest expense allocated to the Business by National. There were no
comparable amounts incurred in the comparable periods of fiscal 1998.
12
In the third quarter of fiscal 1998, the Company took a pre-tax charge
of $15.5 million for purchased in-process research and development in
conjunction with the acquisition of Raytheon and an after-tax charge of $1.5
million for the cumulative effect of an accounting change pertaining to
treatment of certain costs associated with the Company's enterprise software
system implementation. The costs, relating to activities to assess the new
system's capabilities in light of the Company's current business processes,
were previously capitalized with the cost of the software. EITF Issue 97-13,
dated November 20, 1997, requires companies to expense such costs as incurred.
Income Taxes
Income tax expense (benefit) was $(1.7) million and $13.0 million in the
third quarter and first nine months of fiscal 1998, respectively. Including
the tax benefit from the cumulative effect of change in accounting principle,
income taxes are recorded at an effective tax rate of 32% for the nine months
ended March 1, 1998. During the third quarter, the Company reduced its
effective tax rate from 35% to 32%, the impact of which was recorded in the
third quarter. 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 March 1, 1998, the Company's cash balance was $12.4 million, a
decrease of $28.3 million from May 25, 1997. In addition, the Company had
available a Revolving Credit Facility of $130 million on March 1, 1998, under
which no amounts were outstanding. The Business had no cash as of February
23, 1997, as cash management was centralized by National and amounts were not
identifiable on a business specific basis.
In the third quarter and first nine months of fiscal 1998, the Company
generated sufficient cash from operations to fund its research and
development, capital expenditure and debt service requirements. Additionally,
the Company used $75 million of its existing cash to fund in part the
acquisition of Raytheon. Research and development expenditures are made
primarily to fund new product development. Capital expenditures in the third
quarter and first nine months 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
presently expect it to have, a direct material adverse effect on the
Company's results of operations or financial condition. However, the
economic conditions that have led to or are reflected by such devaluations
are expected to negatively impact the Company's operating results. See
"Outlook and Business Risks." The Company currently benefits from lower
dollar-denominated expenses incurred by its manufacturing operations in
Southeast Asia. Deferred gains from hedging transactions were immaterial to
the financial statements in the third quarter and first nine months of fiscal
1998. The Company does not speculate in these financial instruments.
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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.
Soft market conditions in the semiconductor industry, which have emerged
over the last several months, resulting in decreased demand and increased
price pressures, will negatively impact the Company's trade revenues and
gross profit in the fourth quarter. The Company expects its trade revenues
in the fourth quarter to be below its third quarter results. In addition,
National has informed the Company that their demand will be significantly
lower in the Company's fourth quarter. This will result in lower contract
manufacturing revenues in the fourth quarter as compared to the third
quarter, and will negatively impact factory utilization, particularly in the
6-inch fab in South Portland, Maine. The Company does not expect contract
manufacturing revenues to return to levels generated to date in fiscal 1998
for the foreseeable future. The Company's plan in the coming year is to
utilize this capacity to manufacture its own products. National, under terms
of the Asset Purchase Agreement, is obligated to purchase an aggregate of
$330 million of contract manufacturing services during the 39 month period
which began March 11, 1997. Despite the reduction in demand for the fourth
quarter, National remains fully compliant with the revenue targets mandated
by the Agreement.
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,
14
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.
In the fourth quarter of fiscal 1997, the Company commenced its
enterprise software system implementation project for the purpose of
separating from National's business systems. The software, which will be
fully operational by the end of the first quarter of fiscal 1999, is year
2000 compliant. In addition, internal resources have been redeployed to
identify, test and correct year 2000 problems in other systems throughout the
Company. For the three and nine months ended March 1, 1998, incremental
amounts incurred and charged to expense to identify, test and correct such
other year 2000 problems are immaterial to the financial statements.
Management has not yet assessed the future impact of year 2000 compliance
expenses on its financial position or results of operations.
15
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 Credit Agreement - Amended and Restated as of December 31,
1997
10.2 Employee Stock Purchase Savings Plan Effective February 26,
1998
27 Financial Data Schedule
b) Reports on Form 8-K
1. On November 26, 1997, Fairchild Semiconductor Corporation
filed a Form 8-K to disclose the Registrant's agreement to
purchase all of the outstanding common stock of Raytheon
Semiconductor, Inc.
2. On January 13, 1998, Fairchild Semiconductor Corporation
filed a Form 8-K to disclose that it had completed the
acquisition of all of the outstanding common stock of
Raytheon Semiconductor, Inc. No financial statements were
filed under this Form 8-K. An amendment was filed on
March 16, 1998.
Items 2, 3, 4 and 5 are not applicable and have been omitted.
16
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: April 13, 1998 By:/s/ Joseph R. Martin
------------------------------
Executive Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
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