Table of Contents

 

 

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 June 29, 2014

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File Number: 001-15181

 

 

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		04-3363001
(State or other jurisdiction of incorporation or organization)		(I.R.S.Employer Identification No.)

3030 Orchard Parkway

San Jose, California 95134

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (408)822-2000

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large Accelerated filer		x		Accelerated filer		¨
Non-accelerated filer		¨		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on June 29, 2014:

 

Title of Each Class		Number of Shares
Common Stock		120,126,663

 

 

 

---

Table of Contents

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

 

				Page
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Consolidated Balance Sheets as of June 29, 2014 and December 29, 2013			3
		Consolidated Statements of Operations for the Three and Six Months Ended June 29, 2014 and June  30, 2013			4
		Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June  29, 2014 and June 30, 2013			5
		Consolidated Statements of Cash Flows for the Six Months Ended June 29, 2014 and June 30, 2013			6
		Notes to Consolidated Financial Statements (Unaudited)			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			32
Item 4.		Controls and Procedures			32
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			33
Item 1A.		Risk Factors			33
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 6.		Exhibits			45
Signature					47

 

2

---

Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

		June 29, 2014				December 29, 2013
ASSETS
Current assets:
Cash and cash equivalents		$	317.4			$	417.8
Short-term marketable securities			0.2				0.1
Accounts receivable, net of allowances of $29.7 and $25.3 at June 29, 2014 and December 29, 2013, respectively			148.6				127.4
Inventories, net			234.4				228.1
Deferred income taxes, net of allowances			19.1				18.6
Other current assets			31.1				32.6
Total current assets			750.8				824.6
Property, plant and equipment, net			674.7				707.9
Deferred income taxes, net of allowances			36.3				30.9
Intangible assets, net			42.9				31.7
Goodwill			213.7				169.3
Long-term securities			2.2				2.2
Other assets			26.8				29.4
Total assets		$	1,747.4			$	1,796.0
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			125.6				95.8
Accrued expenses and other current liabilities			84.7				88.0
Total current liabilities			210.3				183.8
Long-term debt, less current portion			200.1				200.1
Deferred income taxes			32.0				27.7
Other liabilities			25.3				20.3
Total liabilities			467.7				431.9
Commitments and contingencies
Temporary equity – deferred stock units			3.0				3.6
Stockholders’ equity:
Common stock			1.5				1.4
Additional paid-in capital			1,528.8				1,517.8
Accumulated deficit			(3.9	)			(12.4	)
Accumulated other comprehensive income (loss)			(0.7	)			3.1
Less treasury stock (at cost)			(249.0	)			(149.4	)
Total stockholders’ equity			1,276.7				1,360.5
Total liabilities, temporary equity and stockholders’ equity		$	1,747.4			$	1,796.0

See accompanying notes to unaudited consolidated financial statements.

 

3

---

Table of Contents

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share and percent data)

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Total revenue		$	371.6			$	356.5			$	715.7			$	699.7
Cost of sales			247.4				252.8				487.3				503.6
Gross margin			124.2				103.7				228.4				196.1
Gross margin %			33.4	%			29.1	%			31.9	%			28.0	%
Operating expenses:
Research and development			43.0				46.0				84.1				88.6
Selling, general and administrative			55.0				52.2				110.5				103.8
Amortization of acquisition-related intangibles			2.2				3.9				6.4				7.7
Restructuring, impairments, and other costs			4.7				3.4				10.8				4.6
Charge for (release of) litigation			—				—				4.4				(12.6	)
Total operating expenses			104.9				105.5				216.2				192.1
Operating income (loss)			19.3				(1.8	)			12.2				4.0
Other expense, net			2.6				1.6				3.7				6.2
Income (loss) before income taxes			16.7				(3.4	)			8.5				(2.2	)
(Benefit from) provision for income taxes			(1.1	)			4.1				—				5.8
Net income (loss)		$	17.8			$	(7.5	)		$	8.5			$	(8.0	)
Net income (loss) per common share:
Basic		$	0.14			$	(0.06	)		$	0.07			$	(0.06	)
Diluted		$	0.14			$	(0.06	)		$	0.07			$	(0.06	)
Weighted average common shares:
Basic			122.7				127.6				124.0				127.4
Diluted			123.9				127.6				125.6				127.4

See accompanying notes to unaudited consolidated financial statements.

 

4

---

Table of Contents

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)

 

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Net income (loss)		$	17.8			$	(7.5	)		$	8.5			$	(8.0	)
Other comprehensive income (loss), net of tax:
Net change associated with hedging transactions			1.8				(2.0	)			1.3				(5.3	)
Net amount reclassified to earnings for hedging (1)			(3.3	)			(0.5	)			(5.0	)			(2.0	)
Net change associated with fair value of securities			—				(0.1	)			0.1				(0.1	)
Net change associated with pension transactions			0.1				0.1				0.1				0.1
Foreign currency translation adjustment			(0.3	)			—				(0.3	)			—
Comprehensive income (loss)		$	16.1			$	(10.0	)		$	4.7			$	(15.3	)

 

				Three Months Ended								Six Months Ended
				June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
(1)		Net amount reclassified for cash flow hedges included in total revenue			0.3			$	(0.2	)			0.8			$	(0.3	)
		Net amount reclassified for cash flow hedges included in cost of sales			(2.7	)			(0.3	)			(4.3	)			(1.4	)
		Net amount reclassified for cash flow hedges included in SG&A			(0.9	)			—				(1.5	)			(0.3	)
		Total net amount reclassified to earnings for hedging		$	(3.3	)		$	(0.5	)		$	(5.0	)		$	(2.0	)

See accompanying notes to unaudited consolidated financial statements.

 

5

---

Table of Contents

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

		Six Months Ended
		June 29,				June 30,
		2014				2013
Cash flows from operating activities:
Net income (loss)		$	8.5			$	(8.0	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			68.0				72.5
Non-cash stock-based compensation expense			16.6				14.2
Non-cash restructuring and impairment expense			0.6				—
Gain on sale of equity investment			(1.4	)			—
Non-cash financing expense			0.6				0.5
Non-cash impairment of equity investment			—				3.0
Loss on disposal of property, plant and equipment			—				0.8
Writedown of property, plant, and equipment			1.8				—
Deferred income taxes, net			(4.7	)			1.4
Charge for (release of) litigation			4.4				(12.6	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net			(20.0	)			(17.2	)
Inventories			(5.3	)			(1.2	)
Other current assets			(0.6	)			4.3
Current liabilities			19.0				(3.7	)
Other assets and liabilities, net			5.9				(7.8	)
Net cash provided by operating activities			93.4				46.2
Cash flows from investing activities:
Maturity of marketable securities			—				0.1
Capital expenditures			(28.9	)			(40.1	)
Purchase of molds and tooling			(1.4	)			(1.1	)
Sale of equity investment			2.1				—
Acquisitions, net of cash acquired			(60.0	)			—
Net cash used in investing activities			(88.2	)			(41.1	)
Cash flows from financing activities:
Proceeds from issuance of common stock and from exercise of stock options, net			0.7				0.5
Purchase of treasury stock			(99.5	)			(8.7	)
Shares withheld for employees taxes			(6.8	)			(8.0	)
Net cash used in financing activities			(105.6	)			(16.2	)
Net change in cash and cash equivalents			(100.4	)			(11.1	)
Cash and cash equivalents at beginning of period			417.8				405.9
Cash and cash equivalents at end of period		$	317.4			$	394.8

See accompanying notes to unaudited consolidated financial statements.

 

6

---

Table of Contents

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Presentation

The accompanying interim consolidated financial statements of Fairchild Semiconductor International, Inc. (the company) have been prepared in conformity with accounting principles generally accepted in the United States of America, consistent in all material respects with those applied in the company’s Annual Report on Form 10-K for the year ended December 29, 2013. 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 financial statements should be read in conjunction with the financial statements in the company’s Annual Report on Form 10-K for the year ended December 29, 2013. The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the full year. The company’s fiscal calendar, in which each quarter ends on a Sunday, contains 53 weeks every seven years compared to the usual 52 weeks. This additional week is included in the first quarter of the year. The company’s results for the six months ended June 29, 2014 and June 30, 2013 both consisted of 26 weeks.

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, inventories, goodwill, investments, intangible assets, and other long-lived assets, legal contingencies, and assumptions used in the calculation of income taxes and customer incentives, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity and foreign currency markets, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the financial statements in future periods.

Note 2 – Financial Statement Details

 

		June 29, 2014				December 29, 2013
		(In millions)
Inventories, net
Raw materials		$	38.0			$	39.0
Work in process			127.4				122.6
Finished goods			69.0				66.5
Total inventories, net		$	234.4			$	228.1

 

7

---

Table of Contents

		June 29, 2014				December 29, 2013
		(In millions)
Property, plant and equipment
Land and improvements		$	23.0			$	24.8
Buildings and improvements			399.9				399.1
Machinery and equipment			1,901.0				1,881.4
Construction in progress			53.9				63.8
Total property, plant and equipment			2,377.8				2,369.1
Less accumulated depreciation			1,703.1				1,661.2
Total property, plant, and equipment, net		$	674.7			$	707.9

Included in the property, plant and equipment balance as of June 29, 2014 is assets held for sale in the amount of $3.2 million.

 

		June 29, 2014				December 29, 2013
		(In millions)
Accrued expenses and other current liabilities
Payroll and employee related accruals		$	53.5			$	55.4
Accrued interest			0.3				0.3
Taxes payable			7.2				9.9
Restructuring			2.0				4.2
Other			21.7				18.2
Total accrued expenses and other current liabilities		$	84.7			$	88.0

Other expense, net

 

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
		(In millions)								(In millions)
Interest expense		$	2.1			$	1.6			$	3.4			$	3.3
Interest income			(0.2	)			(0.1	)			(0.4	)			(0.3	)
Other (income) expense, net			0.7				0.1				0.7				3.2
Other expense, net		$	2.6			$	1.6			$	3.7			$	6.2

Note 3 – Computation of Net Income (Loss) per Share

Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to potentially dilutive securities. There is no dilution when a net loss exists. Potentially dilutive common equivalent securities consist of stock options, performance units (PUs), deferred stock units (DSUs) and restricted stock units (RSUs). In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the respective period using the treasury share method. Certain potential shares of the company’s outstanding stock options were excluded because they were anti-dilutive, but could be dilutive in the future. The following table sets forth the computation of basic and diluted income per share.

 

8

---

Table of Contents

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
		(In millions, except per share data)
Basic:
Net income (loss)		$	17.8			$	(7.5	)		$	8.5			$	(8.0	)
Weighted average shares outstanding			122.7				127.6				124.0				127.4
Net income (loss) per share		$	0.14			$	(0.06	)		$	0.07			$	(0.06	)
Diluted:
Net income (loss)		$	17.8			$	(7.5	)		$	8.5			$	(8.0	)
Basic weighted average shares outstanding			122.7				127.6				124.0				127.4
Assumed exercise of common stock equivalents			1.2				—				1.6				—
Diluted weighted average common and common equivalent shares			123.9				127.6				125.6				127.4
Net income (loss) per share		$	0.14			$	(0.06	)		$	0.07			$	(0.06	)
Anti-dilutive common stock equivalents, non-vested stock, PSUs, DSUs, and RSUs			0.7				2.4				0.9				2.2

Note 4 – Supplemental Cash Flow Information

 

		Six Months Ended
		June 29, 2014				June 30, 2013
		(In millions)
Cash paid for:
Income taxes, net		$	5.7			$	6.5
Interest		$	1.9			$	2.9

Note 5 – Fair Value

Fair Value of Financial Instruments. The company groups its financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

•

Level 1 – Valuation is based upon quoted market price for identical instruments traded in active markets.

 

•

Level 2 – Valuation is based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

•

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. Valuation techniques include use of discounted cash flow models and similar techniques.

It is the company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, the company uses quoted market prices to measure fair value. If market prices are not available, the fair value measurement is based on models that use primarily market based parameters including interest rate yield curves, option volatilities and currency rates. In certain cases where market rate assumptions are not available, the company is required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows could significantly affect the results of current or future values. The results may not be realized in an actual sale or immediate settlement of an asset or liability.

 

9

---

Table of Contents

The assets and liabilities measured at fair value on a recurring basis include securities and derivatives. Financial instruments classified as Level 1 are securities traded on an active exchange as well as U.S. Treasury, and other U.S. government and agency-backed securities that are traded by dealers or brokers in active over-the-counter markets. Derivatives are classified as Level 2 financial instruments. There are no Level 3 instruments in 2014.

The fair value of securities is based on quoted market prices at the date of measurement. All of the company’s derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the company measures fair value using prices obtained from the counterparties with whom the company has traded. The counterparties price the derivatives based on models that use primarily market observable inputs, such as yield curves and option volatilities. Accordingly, the company classifies these derivatives as Level 2.

The company is exposed to credit-related losses in the event of non-performance by counterparties to hedging instruments. The counterparties to all derivative transactions are major financial institutions. However, this does not eliminate the company’s exposure to credit risk with these institutions. This credit risk is generally limited to the unrealized gains in such contracts should any of these counterparties fail to perform as contracted. The company considers the risk of counterparty default to be minimal.

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of June 29, 2014.

 

		Fair Value Measurements
						Quoted Prices in Active Markets				Significant Other Observable Inputs				Significant Unobservable Inputs
		Total				(Level 1)				(Level 2)				(Level 3)
		(In millions)
Foreign Currency Derivatives
Assets		$	0.9			$	—			$	0.9			$	—
Liabilities			(0.3	)			—				(0.3	)			—
		$	0.6			$	—			$	0.6			$	—
Securities
Marketable securities		$	2.4			$	2.4			$	—			$	—
		$	2.4			$	2.4			$	—			$	—

Long-term debt is carried at amortized cost. However, the company is required to estimate the fair value of long-term debt. In order to calculate the fair market value of the loan, we have discounted the future payment stream at the current market rate. See Note 12 for more information on the credit facility.

 

		June 29, 2014								December 29, 2013
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
						(In millions)
Long-Term Debt:
Revolving Credit Facility		$	200.0			$	200.0			$	200.0			$	200.0

 

10

---

Table of Contents

Note 6 - Derivatives

Derivatives. The company uses derivative instruments to manage exposures to changes in foreign currency exchange rates and interest rates. The fair value of these hedges is recorded on the balance sheet. For the fair value of derivatives, see Note 5.

Foreign Currency Derivatives. The company uses currency forward and combination option contracts to hedge a portion of its forecasted foreign exchange denominated revenues and expenses. The company monitors its foreign currency exposures to maximize the overall effectiveness of its foreign currency hedge positions. Currencies hedged include the euro, Japanese yen, Philippine peso, Malaysian ringgit, South Korean won and Chinese yuan. 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. The maturities of the cash flow hedges are 12 months or less.

Changes in the fair value of derivative instruments related to time value are included in the assessment of hedge effectiveness. Hedge ineffectiveness did not have a material impact on earnings for the six months ended June 29, 2014. No cash flow hedges were derecognized or discontinued during the six months ended June 29, 2014.

Derivative gains and losses included in accumulated other comprehensive income (AOCI) are reclassified into earnings at the time the forecasted transaction is recognized. The company estimates that $0.6 million of net unrealized derivative gain included in AOCI will be reclassified into earnings within the next twelve months.

The company also uses currency forward and combination option contracts to offset the foreign currency impact of balance sheet translation. These derivatives have one month terms and the initial fair value, if any, and the subsequent gains or losses on the change in fair value are reported in earnings within the same income statement line as the impact of the foreign currency translation. From time to time, the company will also hedge the liability for an expected cash payment in foreign currency. These derivatives have terms that match the expected payment timing. The initial fair value, if any, and the subsequent gains or losses on the change in fair value are reported in earnings within the same income statement line as the change in value of the liability due to changes in currency value.

The tables below show the notional principal and the location and amounts of the derivative fair values in the consolidated balance sheets as of June 29, 2014 and December 29, 2013 as well as the location of derivative gains and losses in the statements of operations for the six months ended June 29, 2014 and June 30, 2013. The notional principal amounts for these instruments provide one measure of the transaction volume outstanding as of the end of the period and do not represent the amount of the company’s exposure to credit or market loss. The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information as of June 29, 2014 and December 29, 2013. Although the following table reflects the notional principal and fair value of amounts of derivative financial instruments, it does not reflect the gains or losses associated with the exposures and transactions that these financial instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures will depend on actual market conditions during the remaining life of the instruments.

The following tables present derivatives designated as hedging instruments.

 

		As of June 29, 2014														As of December 29, 2013
		Balance Sheet Classification		Notional Amount				Fair Value				Amount of Gain (Loss) Recognized In AOCI				Balance Sheet Classification		Notional Amount				Fair Value				Amount of Gain (Loss) Recognized In AOCI
		(In millions)														(In millions)
Derivatives in Cash Flow Hedges
Foreign exchange contracts
Derivatives for forecasted revenues		Current assets		$	31.1			$	—			$	—			Current assets		$	6.3			$	0.3			$	0.3
Derivatives for forecasted revenues		Current liabilities			12.5				(0.1	)			(0.1	)		Current liabilities			44.5				(1.1	)			(1.1	)
Derivatives for forecasted expenses		Current assets			112.2				0.9				0.9			Current assets			136.1				5.9				5.9
Derivatives for forecasted expenses		Current liabilities			36.7				(0.2	)			(0.2	)		Current liabilities			44.2				(0.8	)			(0.8	)
Total foreign exchange contract derivatives				$	192.5			$	0.6			$	0.6					$	231.1			$	4.3			$	4.3

 

11

---

Table of Contents

		For the Six Months Ended June 29, 2014												For the Six Months Ended June 30, 2013
		Income Statement Classification of Gain (Loss)				Amount of Gain (Loss) Recognized In Income				Amount of Gain (Loss) Reclassified from AOCI				Income Statement Classification of Gain (Loss)				Amount of Gain (Loss) Recognized In Income				Amount of Gain (Loss) Reclassified from AOCI
		(In millions)												(In millions)
Foreign Currency contracts			Revenue				(0.9	)			(0.9	)			Revenue			$	0.3			$	0.3
Foreign Currency contracts			Expenses				5.9				5.9				Expenses				1.7				1.7
						$	5.0			$	5.0							$	2.0			$	2.0

The company nets the fair value of all derivative financial instruments with counterparties for which a master netting arrangement is utilized. The gross amounts of the above assets and liabilities are as follows:

 

As of June 29, 2014						As of December 29, 2013
(In millions)						(In millions)
Gross Assets		$	(1.3	)		Gross Assets		$	6.3
Gross Liabilities			2.2			Gross Liabilities			(0.1	)
Current Assets		$	0.9			Current Assets		$	6.2
Gross Assets		$	(0.3	)		Gross Assets		$	—
Gross Liabilities			—			Gross Liabilities			(1.9	)
Current Liabilities		$	(0.3	)		Current Liabilities		$	(1.9	)

 

		Gain (Loss) Recognized in OCI for Derivative Instruments (1)
		Six Months Ended June 29, 2014
		(In millions)
Foreign exchange contracts		$	3.7

 

(1)	This amount is inclusive of both realized and unrealized gains and losses recognized in OCI.

The following tables present derivatives not designated as hedging instruments.

 

		As of June 29, 2014										As of December 29, 2013
		Balance Sheet Classification		Notional Amount				Fair Value				Balance Sheet Classification		Notional Amount				Fair Value
		(In millions)										(In millions)
Derivatives Not Designated as Hedging Instruments
Foreign Exchange Contracts		Current assets		$	7.9			$	—			Current assets		$	2.3			$	—
Foreign Exchange Contracts		Current liabilities			12.1				—			Current liabilities			11.0				—
Total derivatives, net				$	20.0			$	—					$	13.3			$	—

 

12

---

Table of Contents

		For the Six Months Ended June 29, 2014						For the Six Months Ended June 30, 2013
		Income Statement Classification of Gain (Loss)		Amount of Gain (Loss) Recognized In Income				Income Statement Classification of Gain (Loss)		Amount of Gain (Loss) Recognized In Income
		(In millions)						(In millions)
Derivatives Not Designated as Hedging Instruments
Foreign Exchange Contracts		Revenue		$	—			Revenue		$	0.1
Foreign Exchange Contracts		Expenses			—			Expenses			(0.4	)
Net gain (loss) recognized in income				$	—					$	(0.3	)

Note 7 – Securities

The company invests excess cash in marketable securities consisting primarily of money markets, commercial paper, corporate notes and bonds, and U.S. government securities.

All of the company’s securities are classified as available-for-sale. Available-for-sale securities are carried at fair value with unrealized gains and losses included as a component of AOCI within stockholders’ equity, net of any related tax effect, if such gains and losses are considered temporary. Realized gains and losses on these investments are included in interest income and expense. Declines in value judged by management to be other-than-temporary and credit-related are included in impairment of investments in the statement of operations. The non-credit component of impairment is included in AOCI. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis. There were no sales of securities in the first six months of 2014.

Securities are summarized as of June 29, 2014:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Market Value
		(In millions)
Short-term available for sale securities:
U.S. Treasury securities and obligations of U.S. government agencies		$	0.1			$	—			$	—			$	0.1
Corporate debt securities		$	0.1			$	—			$	—			$	0.1
Total short-term marketable securities		$	0.2			$	—			$	—			$	0.2
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Market Value
		(In millions)
Long-term available for sale securities:
U.S. Treasury securities and obligations of U.S. government agencies		$	1.9			$	0.2			$	—			$	2.1
Corporate debt securities		$	0.1			$	—			$	—			$	0.1
Total long-term securities		$	2.0			$	0.2			$	—			$	2.2

Securities are summarized as of December 29, 2013:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Market Value
		(In millions)
Short-term available for sale securities:
U.S. Treasury securities and obligations of U.S. government agencies		$	0.1			$	—			$	—			$	0.1
Corporate debt securities		$	—			$	—			$	—			$	—
Total short-term marketable securities		$	0.1			$	—			$	—			$	0.1
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Market Value
		(In millions)
Long-term available for sale securities:
U.S. Treasury securities and obligations of U.S. government agencies		$	2.0			$	0.1			$	—			$	2.1
Corporate debt securities		$	0.1			$	—			$	—			$	0.1
Total long-term securities		$	2.1			$	0.1			$	—			$	2.2

 

13

---

Table of Contents

The following table presents the amortized cost and estimated fair market value of available-for-sale securities by contractual maturity as of June 29, 2014.

 

		Amortized Cost				Market Value
		(In millions)
Due in one year or less		$	0.2			$	0.2
Due after one year through three years			0.4				0.4
Due after three years through ten years			1.1				1.3
Due after ten years			0.5				0.5
Total available-for-sale securities		$	2.2			$	2.4

Note 8 – Segment Information

Fairchild is currently organized into three reportable segments. The majority of the company’s activities are aligned into two focus areas; mobile, computing, consumer, and communication (MCCC), which focuses on mobile, computing and multimedia applications with typically lower power requirements, and the Power Conversion, Industrial, and Automotive (PCIA) business, which focuses on the higher power requirements for motor control solutions, power supplies, power conversion and automotive drive train applications. Each of these segments has a relatively small set of leading customers, common technology requirements and similar design cycles. The Standard Discrete and Standard Linear (SDT) business is managed separately as a third reportable segment.

The following table presents selected operating segment financial information for the three and six months ended June 29, 2014 and June 30, 2013.

 

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
		(In millions)								(In millions)
Revenue and Operating Income (Loss):
MCCC
Revenue		$	142.8			$	131.4			$	272.9			$	266.6
Operating income			34.8				17.3				57.9				35.3
PCIA
Revenue			193.1				188.7				375.1				363.3
Operating income			37.2				29.7				65.4				50.7
SDT
Revenue			35.7				36.4				67.7				69.8
Operating income			6.5				4.0				10.8				7.2
Corporate
Restructuring, impairments, and other costs			(4.7	)			(3.4	)			(10.8	)			(4.6	)
Stock-based compensation expense			(8.8	)			(7.9	)			(16.6	)			(14.2	)
Selling, general and administrative expense			(45.8	)			(38.8	)			(90.2	)			(77.6	)
Charge for (release of) litigation			—				—				(4.4	)			12.6
Other (1)			0.1				(2.7	)			0.1				(5.4	)
Total Consolidated
Total revenue		$	371.6			$	356.5			$	715.7			$	699.7
Operating income (loss)			19.3				(1.8	)			12.2				4.0
Other expense, net			2.6				1.6				3.7				6.2
Income (loss) before income taxes		$	16.7			$	(3.4	)		$	8.5			$	(2.2	)

 

14

---

Table of Contents

(1)

Other consists primarily of accelerated depreciation on certain assets in our Salt Lake manufacturing facility. The company completed the closure of the 8-inch line at this facility as of the fourth quarter of 2013. The equipment is in the process of being transferred to other Fairchild locations. The depreciation that relates to the initial installation cost of this equipment has been accelerated as these costs are specific to its installation in Salt Lake. The depreciation was accelerated over an 11 month time period.

MCCC revenue for the three and six months ended June 29, 2014 includes $2.9 million and $5.6 million, respectively, of Xsens revenue.

Note 9 – Goodwill and Intangible Assets

The following table presents a summary of acquired intangible assets.

 

						As of June 29, 2014								As of December 29, 2013
		Period of Amortization				Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
						(In millions)
Identifiable intangible assets:
Developed technology			2 - 15 years			$	262.4			$	(243.8	)		$	250.8			$	(240.0	)
Customer base			8 - 10 years				86.6				(75.6	)			81.6				(73.6	)
Core technology			10 years				15.7				(5.7	)			15.7				(5.1	)
In-Process research & development			10 years				3.4				(0.6	)			2.8				(0.5	)
Trademarks and trade names			5 years				0.6				(0.1	)			—				—
Subtotal							368.7				(325.8	)			350.9				(319.2	)
Goodwill							213.7				—				169.3				—
Total identifiable intangible assets						$	582.4			$	(325.8	)		$	520.2			$	(319.2	)

The following table presents the carrying value of goodwill by reporting unit.

 

		MCCC				PCIA				SDT				Total
		(In millions)
Balance as of December 29, 2013
Goodwill		$	162.0			$	156.1			$	54.5			$	372.6
Accumulated impairment losses			—				(148.8	)			(54.5	)			(203.3	)
		$	162.0			$	7.3			$	—			$	169.3
Xsens acquisition		$	44.4			$	—			$	—				44.4
Balance as of June 29, 2014
Goodwill		$	206.4			$	156.1			$	54.5			$	417.0
Accumulated impairment losses			—				(148.8	)			(54.5	)			(203.3	)
		$	206.4			$	7.3			$	—			$	213.7

 

15

---

Table of Contents

The following table presents the estimated amortization expense for intangible assets for the remainder of 2014 and for each of the four succeeding fiscal years.

 

Estimated Amortization Expense:		(In millions)
Remaining fiscal 2014		$	4.3
Fiscal 2015			8.9
Fiscal 2016			8.0
Fiscal 2017			5.2
Fiscal 2018			4.1

Note 10 – Restructuring, Impairments and Other Costs

During the three and six months ended June 29, 2014, the company recorded restructuring, impairment and other costs, net of releases, of $4.7 million and $10.8 million, respectively. The detail of these charges is presented in the summary tables below.

During the three and six months ended June 30, 2013, the company recorded restructuring and impairment charges, net of releases, of $3.4 million and $4.6 million, respectively.

The 2014 Infrastructure Realignment Program consists of product line and sales organizational changes, costs associated with streamlining operations creating greater manufacturing flexibility and having a more balanced internal versus external production mix, and other related costs mainly associated with qualification costs.

The 2013 Infrastructure Realignment Program includes costs to close the 8-inch line at our Salt Lake wafer fab facility and the transfer of manufacturing to our 8-inch lines in Korea and Mountaintop, as well as various other organizational changes. The 2012 Infrastructure Realignment Program includes costs for organizational changes in the company’s sales organization, manufacturing sites and manufacturing support organizations, the human resources function, executive management, and the MCCC and PCIA product lines as well as the termination of an IT systems lease and the final closure of a warehouse in Korea. The 2011 Infrastructure Realignment Program includes costs for organizational changes in the company’s supply chain management group, the website technology group, the quality organization, and other administrative groups. The 2011 program also includes costs to further improve the company’s manufacturing strategy and changes in the PCIA and MCCC groups as well as a primarily voluntary retirement program at our Mountaintop, Pennsylvania location.

 

16

---

Table of Contents

The following table presents a summary of the activity in the company’s accrual for restructuring, impairment and other costs for the quarterly periods ended March 30, 2014, and June 29, 2014.

 

		Accrual Balance at 12/29/2013				Restructuring Charges				Other Charges				Reserve Release				Cash Paid				Non-Cash Items				Accrual Balance at 3/30/2014
		(In millions)
2011 Infrastructure Realignment Program:
Employee separation costs		$	0.3				—				—				(0.2	)			(0.1	)			—				—
2012 Infrastructure Realignment Program:
Employee separation costs			0.2				—				—				—				(0.2	)			—				—
Lease termination costs			0.1				—				—				—				—				—				0.1
2013 Infrastructure Realignment Program:
Employee separation costs			3.2				0.4				—				(0.1	)			(2.4	)			—				1.1
Asset impairment costs			—				0.5				—				—				—				(0.5	)			—
Line closure costs, other			—				0.9				—				—				(0.9	)			—				—
Lease termination costs			0.4				—				—				(0.2	)			(0.1	)			—				0.1
2014 Infrastructure Realignment Program:
Employee separation costs			—				2.8				—				—				(0.8	)			—				2.0
Asset impairment costs			—				0.1				—				—				—				(0.1	)			—
Qualification costs			—				—				1.9				—				(1.9	)			—				—
		$	4.2			$	4.7			$	1.9			$	(0.5	)		$	(6.4	)		$	(0.6	)		$	3.3

 

		Accrual Balance at 3/30/2014				Restructuring Charges				Other Charges				Reserve Release				Cash Paid				Non-Cash Items				Accrual Balance at 6/29/2014
		(In millions)
2011 Infrastructure Realignment Program:
Employee separation costs		$	—				—				—				—				—				—			$	—
2012 Infrastructure Realignment Program:
Employee separation costs			—				—				—				—				—				—				—
Lease termination costs			0.1				—				—				—				—				—				0.1
2013 Infrastructure Realignment Program:
Employee separation costs			1.1				0.5				—				(0.1	)			(1.2	)			—				0.3
Asset impairment costs			—				—				—				—				—				—				—
Line closure costs, other			—				0.8				—				—				(0.8	)			—				—
Lease termination costs			0.1				0.1				—				—				(0.1	)			—				0.1
2014 Infrastructure Realignment Program:
Employee separation costs			2.0				1.5				—				—				(2.0	)			—				1.5
Asset impairment costs			—				—				—				—				—				—				—
Qualification costs			—				—				1.9				—				(1.9	)			—				—
		$	3.3			$	2.9			$	1.9			$	(0.1	)		$	(6.0	)		$	—			$	2.0

Note 11 – Contingencies

Litigation. From time to time, the company is involved in legal proceedings in the ordinary course of business. The company analyzes potential outcomes from current and potential litigation as loss contingencies in accordance with the Contingency Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). Since most potential claims against the company may involve the enforcement of complex intellectual property rights or complicated damages calculations, the company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, related to each pending matter may be.

In accordance with applicable accounting guidance, the company establishes an accrued liability for litigation when the matter presents a loss contingency that is both probable and estimable. As the litigation matter develops, the company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Even when the company establishes an accrued liability, there may be exposures to loss in excess of any amounts accrued. The amount reserved is based upon assessments of the potential liabilities using analysis of claims and historical experience in defending and resolving such claims.

 

17

---

Table of Contents

When a loss contingency is not both probable and estimable, the company does not establish an accrued liability. If, at the time of the evaluation, the loss contingency related to a litigation matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. For a limited number of matters disclosed in this note for which a loss, whether in excess of a related accrued liability or where there is no accrued liability, is reasonably possible in future periods, the company is able to estimate a range of possible loss. In determining whether it is possible to estimate a range of possible loss, the company reviews and evaluates its material litigation on an ongoing basis in light of potentially relevant factual and legal developments. These may include information learned through the discovery process, rulings on dispositive motions, settlement discussions, and other rulings by courts, arbitrators or others. If the company possesses sufficient information to develop an estimate of loss or range of possible loss, that estimate is disclosed either individually or in the aggregate. Finally, for loss contingencies for which the company believes the possibility of loss is remote, the company does not record a reserve or assess the range of possible losses.

Based on current knowledge, management does not believe that loss contingencies arising from pending matters will have a material adverse effect on our business, financial condition, results of operations or cash flows. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the company’s control, an adverse outcome in one or more of these matters could be material to the company’s results of operations or cash flows for any particular reporting period.

Patent Litigation with Power Integrations, Inc. There are five outstanding proceedings with Power Integrations.

POWI 1: On October 20, 2004, the company and its wholly owned subsidiary, Fairchild Semiconductor Corporation, were sued by Power Integrations, Inc. in the U.S. District Court for the District of Delaware. Power Integrations alleged that certain of the company’s pulse width modulation (PWM) integrated circuit products infringed four Power Integrations U.S. patents, and sought a permanent injunction preventing the company from manufacturing, selling or offering the products for sale in the U.S., or from importing the products into the U.S., as well as money damages for past infringement.

The trial in the case was divided into three phases. In the first phase of the trial that occurred in October of 2006, a jury returned a verdict finding that thirty-three of the company’s PWM products willfully infringed one or more of seven claims asserted in the four patents and assessed damages against the company. The company voluntarily stopped U.S. sales and importation of those products in 2007 and have been offering replacement products since 2006. Subsequent phases of the trial conducted during 2007 and 2008 focused on the validity and enforceability of the patents. In December of 2008, the judge overseeing the case reduced the jury’s 2006 damages award from $34 million to approximately $6.1 million and ordered a new trial on the issue of willfulness. Following the new trial held in June of 2009, the court found the company’s infringement to have been willful, and in January 2011 the court awarded Power Integrations final damages in the amount of $12.2 million. The company appealed the final damages award, willfulness finding, and other issues to the U.S. Court of Appeals for the Federal Circuit. On March 26, 2013, the court of appeals vacated almost the entire damages award, ruling that there was no basis upon which a reasonable jury could find the company liable for induced infringement. The court also vacated the earlier ruling of willful patent infringement by the company. The full court of appeals and the Supreme Court of the United States have since denied Power Integrations’ request to review the appeals court ruling. Although the appeals court instructed the lower court to conduct further proceedings to determine damages based upon approximately $500,000 to $750,000 worth of sales and imports of affected products, the company believes that damages on the basis of that level of infringing activity would not be material. Accordingly, the company released $12.6 million from its reserves relating to this case during the first quarter of 2013.

POWI 2: On May 23, 2008, Power Integrations filed another lawsuit against the company, Fairchild Semiconductor Corporation and its wholly owned subsidiary System General Corporation in the U.S. District Court for the District of Delaware, alleging infringement of three patents. Of the three patents asserted in that lawsuit, two were asserted against the company and Fairchild Semiconductor Corporation in the October 2004 lawsuit described above. In 2011, Power Integrations added a fourth patent to this case.

On October 14, 2008, Fairchild Semiconductor Corporation and System General Corporation filed a patent infringement lawsuit against Power Integrations in the U.S. District Court for the District of Delaware, alleging that certain PWM integrated circuit products infringe one or more claims of two U.S. patents owned by System General. The lawsuit seeks monetary damages and an injunction preventing the manufacture, use, sale, offer for sale or importation of Power Integrations products found to infringe the asserted patents.

 

18

---

Table of Contents

Both lawsuits were consolidated and heard together in a jury trial in April of 2012. On April 27, 2012, the jury found that Power Integrations infringed one of the two U.S. patents owned by System General and upheld the validity of both System General patents. In the same verdict, the jury found that the company infringed two of four U.S. patents asserted by Power Integrations and that the company had induced its customers to infringe the asserted patents. The jury also upheld the validity of the asserted Power Integrations patents. The verdict concluded the first phase of trial in the litigation. On June 30, 2014, the court issued an order enjoining Fairchild from making, using, selling, offering to sell or importing into the United States the products found to infringe the Power Integrations patents in the case as well as certain products that were similar to the products found to infringe. Willfulness and damages in the case will be determined in a second phase, which has yet to be scheduled and may occur after appeals of the first phase.

POWI 3: On November 4, 2009, Power Integrations filed a complaint for patent infringement against the company and two of its subsidiaries in the U.S. District Court for the Northern District of California alleging that several of its products infringe three of Power Integrations’ patents. Fairchild filed counterclaims asserting that Power Integrations infringed two Fairchild patents. A trial was held from February 10-27, 2014 on two Power Integrations’ patents and one Fairchild patent. On March 4, 2014, the jury returned a verdict finding that Fairchild willfully infringed both Power Integrations patents, awarding Power Integrations $105 million in damages, and finding that Power Integrations did not infringe the Fairchild patent. As a result of the willfulness finding, it is possible the court may increase the jury’s damages award by up to three times the amount of the jury award.

The company will challenge several aspects of the verdict during post-trial review and if necessary on appeal. The company believes the infringement findings were in error and failed to account for differences in the accused products. The company will also challenge the damages award, including with respect to the sufficiency of the damages evidence and Power Integrations’ unique damages theory. The company believes the damages award includes legal and evidentiary defects, some of which are similar to those that were the basis for a 2013 ruling by the U.S. Court of Appeals for the Federal Circuit, described above, in which the court of appeals vacated almost the entire amount of the damages award in the POWI 1 litigation. Although the company intends to vigorously contest the recent verdict, the facts and the evidence in this case are different from past cases and, as in all litigation, results are inherently uncertain. No assurance can be given that the company will achieve the same or a similar result following post-trial review and any appeal of this verdict as the company did following post-trial review and appeal of the POWI 1 verdict. The company currently believes the range of probable losses is approximately $4.4 million to $21.8 million. The company believes no estimate within this range is a better estimate than any other and has accrued a loss of $4.4 million which represents the low end of the range as of June 29, 2014.

POWI 4: On February 10, 2010, Fairchild and System General filed a lawsuit in Suzhou, China against four Power Integrations entities and seven vendors. The lawsuit claims that Power Integrations violates certain Fairchild/System General patents. Fairchild is seeking an injunction against the Power Integrations products and over $17.0 million in damages. Hearings comparable to a trial in U.S. litigation were held in January, May and July 2012. In December of 2012, the Suzhou court ruled in favor of Power Integrations and denied the company’s claims. The company is appealing the trial court’s judgment to the appeals court in Nanjing, China.

POWI 5: On May 1, 2012, the company sued Power Integrations in U.S. District Court for the District of Delaware. The lawsuit accuses Power Integration’s LinkSwitch-PH LED power conversion products of violating three of the company’s patents. Power Integrations has filed counterclaims of patent infringement against the company asserting five Power Integrations patents. Trial is currently expected to be in May of 2015.

Other Legal Claims. From time to time the company is involved in legal proceedings in the ordinary course of business. For example, in December 2013, a customer of one of the company’s distributors filed suit against the company claiming damages of $30 million arising out of the purchase of $20,000 of the company’s products. The company is contesting that claim vigorously. The company believes that there is no such ordinary-course pending litigation that could have, individually or in the aggregate, a material adverse effect on our business, financial condition, results of operations, or cash flows.

For matters where an estimate of the range of possible loss is possible, excluding POWI 3 as discussed separately above, management currently estimates the aggregate range of possible loss, in excess of amounts accrued for outstanding matters is $1.4 to $14.1 million. The estimated range of possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. Those matters for which an estimate is not possible are not included within this estimated range. Therefore, this estimated range of possible loss represents what the company believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the company’s maximum loss exposure.

 

19

---

Table of Contents

Note 12 – Long-Term Debt

Long-term debt consists of the following:

 

		June 29, 2014				December 29, 2013
		(In millions)
Revolving Credit Facility borrowings		$	200.0			$	200.0
Other debt			0.1				0.1
Total debt		$	200.1			$	200.1
Current portion of long-term debt			—				—
Long-term debt, less current portion		$	200.1			$	200.1

Our revolving credit facility became effective on May 20, 2011 and matures on the fifth anniversary of its effective date. It consists of a $400.0 million revolving loan agreement of which $200.0 million was drawn as of June 29, 2014. After adjusting for outstanding letters of credit, $199.4 million remained available under the credit facility. This revolving borrowing capacity is available for working capital and general corporate purposes, including acquisitions.

Note 13 – Strategic Investments

The company has certain strategic investments that are typically accounted for on a cost basis as they are less than 20% owned, and the company does not exercise significant influence over the operating and financial policies of the investee. Under the cost method, investments are held at historical cost, less impairments. The company periodically assesses the need to record impairment losses on investments and records such losses when the impairment of an investment is determined to be other-than-temporary in nature. A variety of factors are considered when determining if a decline in fair value below book value is other-than-temporary, including, among others, the financial condition and prospects of the investee.

During the second quarter of 2014, the company’s strategic investment of $0.7 million was sold for $2.1 million resulting in a gain of $1.4 million.

During the first quarter of 2013, as a result of the failure of certain funding plans for one of the strategic investments, the company evaluated the investment for impairment. Based on the current financial position of the investee and the lack of future cash flow funding, the company determined that the investment was impaired and wrote off the full value of $3.0 million.

Note 14 – Acquisition

On January 21, 2014, the company completed the acquisition of Xsens Holding B.V. (Xsens), a privately held, high-performance sensor company in a share purchase transaction for approximately $61.2 million in cash. Xsens is a leading innovator in 3D motion tracking technology and products. Its sensor fusion technologies enable a seamless interaction between the physical and the digital world in consumer devices and professional applications such as 3D character animation, motion analysis, and industrial control & stabilization. The purpose of the acquisition was to grow revenue as their technology is complimentary to the company’s own sensor solutions.

 

20

---

Table of Contents

The total estimated consideration as shown in the table below is allocated to Xsens assets and liabilities based on their preliminary fair value as of the date of the completion of the transaction, January 21, 2014. The fair values are subject to adjustment upon finalization of the valuation, and therefore the current measurements of intangible assets, acquired goodwill, and assumed assets and liabilities are subject to change.

 

		Estimated Fair Value June 29, 2014
		(In millions)
Fair value of consideration transferred:
Cash consideration to Xsens shareholders		$	61.2
Preliminary allocation of consideration:
Cash and cash equivalents			1.2
Inventories			0.8
Other current assets			4.5
Property, plant and equipment, net			0.3
Other assets			0.2
Intangible assets, net			17.6
Goodwill			44.4
Current liabilities			(4.4	)
Deferred income taxes and other liabilities			(3.4	)
Total consideration transferred		$	61.2

The total cash flow impact of $60.0 million results from the $61.2 million cash payment offset by $1.2 million cash balance of Xsens at closing.

Identifiable intangible assets acquired and their estimated useful lives are as follows:

 

		June 29, 2014
		Asset amount				Weighted Average useful
		(In millions)				life (in years)
Developed technology		$	11.4				3
Customer base			5.0				4
Trademarks and trade names			0.6				5
Intangible assets subject to amortization		$	17.0
In process research and development			0.6
Total intangible assets		$	17.6

The developed technology intangible assets are being amortized on a technology-by-technology basis with the amortization recorded for each technology commensurate with the expected cash flows used in the initial determination of fair value. In-process research and development is capitalized until such time the related projects are completed or abandoned at which time the capitalized amounts will begin to be amortized or written off. Customer base assets consist of Xsens customer relations and customer loyalty related to its end-customer relationships. Customer base is being amortized in a manner consistent with the cash flows used in determining fair value. Trade names include Xsens corporate name. Trade names are considered to be finite-lived assets and are being amortized using the straight-line method, which management believes is materially consistent with the pattern of benefit to be realized by the asset.

Amortization expense associated with acquired intangible assets was approximately $0.9 million and $1.5 million, respectively, for the three and six months ended June 29, 2014.

 

21

---

Table of Contents

The remaining consideration, after adjusting for identifiable intangible assets and the net assets and liabilities recorded at fair value, was $44.4 million and was recorded as goodwill. This goodwill is attributed to Xsens’s product portfolio and workforce expertise. None of the goodwill related to the Xsens acquisition is deductible for tax purposes.

Note 15 – Subsequent Events

The company has evaluated subsequent events and did not identify any events that required disclosure.

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except as otherwise indicated in this Quarterly Report on Form 10-Q, the terms “we,” “our,” the “company,” “Fairchild” and “Fairchild International” refer to Fairchild Semiconductor International, Inc. and its consolidated subsidiaries, including Fairchild Semiconductor Corporation, our principal operating subsidiary. We refer to individual subsidiaries where appropriate.

Overview

Fairchild continues to deliver steady sales growth due to improved execution and broad-based demand strength. Our distribution sell-through or POS has grown for six consecutive quarters while our weeks of inventory in the channel decreased to about 9 weeks. We are managing the supply chain to maintain short lead times and lean, yet responsive inventory levels to better support our customers. Our current backlog is modestly higher than a quarter ago and we expect that sales will continue to grow in the third quarter. We generated strong cash flow in the second quarter due to improved earnings coupled with low capital spending and favorable changes in working capital. We repurchased 4 percent of our outstanding shares of stock during the second quarter and we plan to continue repurchasing our stock throughout the remainder of 2014.

The Mobile, Computing, Consumer and Communication (MCCC) group’s main focus is to supply the mobile, computing, consumer and communication end market segments with innovative power and signal path solutions including our low voltage metal oxide semiconductor field effect transistors (MOSFETs), Power Management integrated circuits (IC’s), Mixed Signal Analog and Logic products. We seek to deliver exceptional product performance by optimizing silicon processes and application specific design to satisfy specific requirements for our customers. This enables us to deliver solutions with greater energy efficiency in a smaller footprint than is commonly available. We expect a steady acceleration of new product sales especially for solutions addressing the smart phone and ultraportable market.

The Power Conversion, Industrial, and Automotive (PCIA) group’s focus is to capitalize on the growing demand for greater energy efficiency and higher power density for space savings in power supplies, consumer electronics, battery chargers, electric motors, industrial electronics and automobiles. We are a leader in power semiconductor devices, low standby power consumption designs, and power module technology that enable greater efficiency, higher power density, and better performance. Improving the efficiency of our customers’ products is vital to meeting new energy efficiency regulations. Effectively managing power conversion and distribution in power supplies is one of the greatest opportunities we have to improve overall system efficiency. We believe the growing global focus on energy efficiency will continue to drive growth in this product segment.

Standard Discrete and Standard Linear (SDT) products are core building block components for many electronic applications. This segment uses a simplified and focused operating model to make the selling and support of these products easier and more profitable. The current operational structure and part portfolio should enable our standard products group to continue to generate solid cash flow with minimal investment.

We continually invest in our business to upgrade technologies, acquire new capabilities, and to fund research & development (R&D). We expect the transition to 8-inch wafer manufacturing for a greater percentage of our production will enable lower costs and improved margins for years to come. In addition, we will increase our focus on streamlining operations, creating greater manufacturing flexibility and having a more balanced internal versus external production mix. We expect this process to enable significant improvements in manufacturing and financial performance beginning in mid-2015.

We strive to keep inventory as lean as possible while maintaining customer service. We prefer to maintain maximum flexibility by adjusting internal inventory in response to higher demand before adding more inventory to our distribution channels. At the end of the second quarter, our channel inventory was approximately 9 weeks after adjusting for end of life inventory, which is below our target range of 10 to 11 weeks. Internal inventory at the end of the second quarter was $234.4 million, 6 percent higher than the prior quarter but still lean at 87 days of inventory.

 

22

---

Table of Contents

Results of Operations

The following table summarizes certain information relating to our operating results as derived from our unaudited consolidated financial statements.

 

		Three Months Ended																Six Months Ended
		June 29, 2014								June 30, 2013								June 29, 2014								June 30, 2013
		(Dollars in millions)
Total revenue		$	371.6				100.0	%		$	356.5				100.0	%		$	715.7				100.0	%		$	699.7				100.0	%
Gross margin			124.2				33.4	%			103.7				29.1	%			228.4				31.9	%			196.1				28.0	%
Operating expenses:
Research and development			43.0				11.6	%			46.0				12.9	%			84.1				11.8	%			88.6				12.7	%
Selling, general and administrative			55.0				14.8	%			52.2				14.6	%			110.5				15.4	%			103.8				14.8	%
Amortization of acquisition-related intangibles			2.2				0.6	%			3.9				1.1	%			6.4				0.9	%			7.7				1.1	%
Restructuring, impairments, and other costs			4.7				1.3	%			3.4				1.0	%			10.8				1.5	%			4.6				0.7	%
Charge for (release of) litigation			—				0.0	%			—				0.0	%			4.4				0.6	%			(12.6	)			-1.8	%
Total operating expenses			104.9				28.2	%			105.5				29.6	%			216.2				30.2	%			192.1				27.5	%
Operating income (loss)			19.3				5.2	%			(1.8	)			-0.5	%			12.2				1.7	%			4.0				0.6	%
Other expense, net			2.6				0.7	%			1.6				0.4	%			3.7				0.5	%			6.2				0.9	%
Income (loss) before income taxes			16.7				4.5	%			(3.4	)			-1.0	%			8.5				1.2	%			(2.2	)			-0.3	%
(Benefit) provision for income taxes			(1.1	)			-0.3	%			4.1				1.2	%			—				0.0	%			5.8				0.8	%
Net income (loss)		$	17.8				4.8	%		$	(7.5	)			-2.1	%		$	8.5				1.2	%		$	(8.0	)			-1.1	%

Adjusted net income (loss), adjusted gross margin, and free cash flow are also included in the table below. These are non-Generally Accepted Accounting Principles (GAAP) financial measures and should not be considered a replacement for GAAP results. We present adjusted results because we use these measures, together with GAAP measures, for internal managerial purposes and as a means to evaluate period-to-period comparisons. However, we do not, and you should not, rely on non-GAAP financial measures alone as measures of our performance. We believe that non-GAAP financial measures reflect an additional way of viewing aspects of our operations that – when taken together with GAAP results and the reconciliations to corresponding GAAP financial measures that we also provide in our press releases – provide a more complete understanding of factors and trends affecting our business. We strongly encourage you to review all of our financial statements and publicly-filed reports in their entirety and to not rely on any single financial measure. Our criteria for adjusted results may differ from methods used by other companies and may not be comparable and should not be considered as alternatives to net income or loss, gross margin, or other measures of consolidated operations and cash flow data prepared in accordance with U.S. GAAP as indicators of our operating performance or as alternatives to cash flow as a measure of liquidity.

 

23

---

Table of Contents

		Three Months Ended																Six Months Ended
		June 29, 2014								June 30, 2013								June 29, 2014								June 30, 2013
		(Dollars in millions)
Non GAAP Measures
Adjusted net income (loss)		$	25.2							$	1.7							$	30.1							$	(0.3	)
Adjusted gross margin			124.2				33.4	%			106.2				29.8	%			228.4				31.9	%			201.5				28.8	%
Free cash flow			69.6								30.0								64.5								6.1
Reconciliation of Net Income (Loss) to Adjusted Net Income (Loss)
Net income (loss)			17.8								(7.5	)							8.5								(8.0	)
Adjustments to reconcile net income (loss) to adjusted net income (loss):
Restructuring, impairments, and other costs			4.7								3.4								10.8								4.6
Gain on sale of equity investment			(1.4	)							—								(1.4	)							—
Write down of asset held for sale			1.9								—								1.9								—
Accelerated depreciation on assets related to fab closure			—								2.5								—								5.4
Write-off of equity investments			—								—								—								3.0
Charge for (release of) litigation			—								—								4.4								(12.6	)
Amortization of acquisition-related intangibles			2.2								3.9								6.4								7.7
Associated net tax effects of the above and other acquisition-related intangibles			—								(0.6	)							(0.5	)							(0.4	)
Adjusted net income (loss)		$	25.2							$	1.7							$	30.1							$	(0.3	)
Reconciliation of Gross Margin to Adjusted Gross Margin
Gross margin		$	124.2							$	103.7							$	228.4							$	196.1
Adjustments to reconcile gross margin to adjusted gross margin:
Accelerated depreciation on assets related to fab closure			—								2.5								—								5.4
Adjusted gross margin		$	124.2							$	106.2							$	228.4							$	201.5
Reconciliation of Operating Cash Flow to Free Cash Flow
Cash provided by operating activities		$	84.8							$	50.2							$	93.4							$	46.2
Capital expenditures			(15.2	)							(20.2	)							(28.9	)							(40.1	)
Free cash flow		$	69.6							$	30.0							$	64.5							$	6.1

 

Total Revenue
		Three Months Ended																Six Months Ended
		June 29,				June 30,				$ Change				% Change				June 29,				June 30,				$ Change				% Change
		2014				2013				Inc (Dec)				Inc (Dec)				2014				2013				Inc (Dec)				Inc (Dec)
		( Dollars in millions)																( Dollars in millions)
Revenue		$	371.6			$	356.5			$	15.1				4.2	%		$	715.7			$	699.7			$	16.0				2.3	%

Revenue in the second quarter and first six months of 2014 was higher as compared to the same periods of 2013 primarily due to better company execution and broad-based demand strength. Distribution sell through increased 11 percent from the prior year quarter and 8 percent, respectively, for the second quarter and first 6 months of 2014 compared to the same periods of 2013 due to solid demand across a wide range of end markets. Sales increased sequentially in all our major end markets in the second quarter.

Geographic revenue information is based on the customer location within the indicated geographic region. The following table presents, as a percentage of total sales, geographic sales for the U.S., Other Americas, Europe, China, Taiwan, Korea and Other Asia/Pacific (which for our geographic reporting purposes includes Japan and Singapore) for the three and six months ended June 29, 2014 and June 30, 2013. The increase in China’s revenue is primarily driven by strong demand from mobile customers. The decrease in Korea and Other Asia/Pacific revenue is due to weaker demand from a significant customer in Asia.

 

24

---

Table of Contents

		Three Months Ended								Six Months Ended
		June 29,				June 30,				June 29,				June 30,
		2014				2013				2014				2013
U.S.			9	%			9	%			9	%			9	%
Other Americas			2				2				2				2
Europe			15				14				15				14
China			40				36				38				34
Taiwan			12				11				11				12
Korea			5				7				5				8
Other Asia/Pacific			17				21				20				21
Total			100	%			100	%			100	%			100	%

 

Gross Margin
		Three Months Ended																Six Months Ended
		June 29,				June 30,				$ Change				% Change				June 29,				June 30,				$ Change				% Change
		2014				2013				Inc (Dec)				Inc (Dec)				2014				2013				Inc (Dec)				Inc (Dec)
		( Dollars in millions)																( Dollars in millions)
Gross Margin		$	124.2			$	103.7			$	20.5				19.8	%		$	228.4			$	196.1			$	32.3				16.5	%
Gross Margin %			33.4	%			29.1	%							4.3	%			31.9	%			28.0	%							3.9	%

The increase in gross margin for the second quarter and first six months of 2014 as compared to the same periods in 2013 was driven by higher factory loading and improved manufacturing execution partially offset by the annual merit increase.

 

Adjusted Gross Margin
		Three Months Ended																Six Months Ended
		June 29,				June 30,				$ Change				% Change				June 29,				June 30,				$ Change				% Change
		2014				2013				Inc (Dec)				Inc (Dec)				2014				2013				Inc (Dec)				Inc (Dec)
		( Dollars in millions)																( Dollars in millions)
Adjusted Gross Margin		$	124.2			$	106.2			$	18.0				16.9	%		$	228.4			$	201.5			$	26.9				13.3	%
Adjusted Gross Margin %			33.4	%			29.8	%							3.6	%			31.9	%			28.8	%							3.1	%

There were no items adjusted out of gross margin in the three and six months ended June 29, 2014. Adjusted gross margin for the three and six months ended June 30, 2013 did not include $2.5 million and $5.4 million, respectively, of accelerated depreciation related to the planned closure of the 8-inch line at our Salt Lake facility.

 

Operating Expenses
		Three Months Ended																Six Months Ended
		June 29,				June 30,				$ Change				% Change				June 29,				June 30,				$ Change				% Change
		2014				2013				Inc (Dec)				Inc (Dec)				2014				2013				Inc (Dec)				Inc (Dec)
		( Dollars in millions)																( Dollars in millions)
Research and development		$	43.0			$	46.0			$	(3.0	)			-6.5	%		$	84.1			$	88.6			$	(4.5	)			-5.1	%
Selling, general and administrative		$	55.0			$	52.2			$	2.8				5.4	%		$	110.5			$	103.8			$	6.7				6.5	%

Research and development (R&D) expenses for the second quarter and first six months of 2014 were lower as compared to the same period in 2013 due to spending controls and a one-time reduction in benefit costs partially offset by the annual merit increase and higher variable compensation. Selling, general and administrative expenses (SG&A) for the second quarter and first six months of 2014 were higher as compared to the same period in 2013 primarily due to higher legal spending, the impact of a recent acquisition, higher variable compensation and the annual merit increase partially offset by spending controls and a one-time reduction in benefit costs.

Restructuring, Impairment and Other Costs. During the three and six months ended June 29, 2014, we recorded restructuring, impairment charges, and other costs, net of releases, of $4.7 million and $10.8 million, respectively. The second quarter charges include $1.5 million of employee separation costs, and $1.9 million of qualification costs associated with the 2014 Infrastructure

 

25

---

Table of Contents

Realignment Program as well as $0.5 million of employee separation costs, $0.1 million of lease termination costs, and $0.8 million of line closure and other costs associated with the 2013 Infrastructure Realignment Program. These costs were partly offset by reserve releases of $0.1 million of employee separation costs associated with the 2013 Infrastructure Realignment Program. The first quarter charges include $3.2 million of employee separation costs, $0.6 million of asset impairments, $0.9 million of line closure costs and $1.9 million of qualification costs associated with the 2013 and 2014 Infrastructure Realignment Programs. It is partly offset by reserve releases of $0.2 million of employee separation costs associated with the 2011 Infrastructure Realignment Program, as well as $0.1 million of employee separation costs and $0.2 million of lease termination costs which are both associated with the 2013 Infrastructure Realignment Program.

During the three and six months ended June 30, 2013, we recorded restructuring and impairment charges, net of releases, of $3.4 million and $4.6 million, respectively. The second quarter charges include $2.4 million of employee separation costs, $1.0 million of line closure costs, and $0.1 million of lease termination costs associated with the 2013 Infrastructure Realignment Program as well as a $0.1 million reserve release of employee separation costs associated with the 2012 Infrastructure Realignment Program. The first quarter charges include $0.6 million of employee separation costs and $0.5 million of line closure costs as well as $0.1 million of employee separation costs associated with the 2012 Infrastructure Realignment Program.

The 2014 Infrastructure Realignment Program consists of product line and sales organizational changes, costs associated with streamlining operations creating greater manufacturing flexibility and having a more balanced internal versus external production mix, and other related costs mainly associated with qualification costs.

The 2013 Infrastructure Realignment Program includes costs to close the 8-inch line at our Salt Lake wafer fab facility and the transfer of manufacturing to our 8-inch lines in Korea and Mountaintop, as well as various other organizational changes. The 2012 Infrastructure Realignment Program includes costs for organization changes in our sales organization and MCCC and PCIA product lines as well as the final closure of a warehouse in Korea. The 2011 Infrastructure Realignment Program includes costs for organizational changes in our supply chain management group, website technology group, quality organization, and other administrative groups. The 2011 program also includes costs to further improve our manufacturing strategy and changes in both the PCIA and MCCC groups as well as a primarily voluntary retirement program at our Mountaintop, Pennsylvania location.

Other Expense, net

The following table presents a summary of other expense, net for the three and six months ended June 29, 2014 and June 30, 2013.

 

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
		(In millions)
Other expense, net
Interest expense		$	2.1			$	1.6			$	3.4			$	3.3
Interest income			(0.2	)			(0.1	)			(0.4	)			(0.3	)
Other (income) expense, net			0.7				0.1				0.7				3.2
Other expense, net		$	2.6			$	1.6			$	3.7			$	6.2

Interest expense. Interest expense in the second quarter of 2014 increased when compared to the same period in 2013 primarily due to an accrual related to an indirect tax item. Interest expense in the first six months of 2014 is flat when compared to the same period in 2013.

Interest income. Interest income in the second quarter and first six months of 2014 is flat when compared to the same period in 2013.

Other (income) expense, net. Other expense in the second quarter of 2014 includes the net impact of the write-down of an asset held for sale and the gain on sale of an equity investment. Other expense in the first six months of 2013 includes the write-off of a $3.0 million strategic investment.

 

26

---

Table of Contents

Income Taxes. Income tax provision (benefit) in the second quarter and first six months of 2014 was ($1.1) million and zero provision on income before taxes of $16.7 million and $8.5 million, respectively, as compared to income tax provisions of $4.1 million and $5.8 million on loss before taxes of ($3.4) million and ($2.2) million for the comparable periods of 2013. The effective tax rate for the second quarter and first six months of 2014 was (6.4%) and zero percent, respectively, compared to (122.7%) and (264.8%), respectively, for the comparable periods of 2013. The change in effective tax rate was primarily driven by shifts of income and loss among legal jurisdictions with differing tax rates as well as the effect of a non-cash revaluation of deferred assets due to the fluctuation of the Korean Won. In the first six months of 2014, the valuation allowance on the company’s deferred tax assets decreased by $8.3 million as deferred tax assets decreased primarily due to U.S. profits before tax. The overall decrease did not impact our results of operations.

In accordance with the Income Taxes Topic in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), deferred taxes have not been provided on undistributed earnings of foreign subsidiaries which are reinvested indefinitely. Certain non-U.S. earnings, which have been taxed in the U.S. but earned offshore, have and continue to be part of our repatriation plan. As of June 29, 2014, we have recorded a deferred tax liability of $2.5 million, with no impact to the consolidated statement of operations as we have a full valuation allowance against our net U.S. deferred tax assets.

 

Free Cash Flow
		Three Months Ended																Six Months Ended
		June 29, 2014				June 30, 2013				$ Change Inc (Dec)				% Change Inc (Dec)				June 29, 2014				June 30, 2013				$ Change Inc (Dec)				% Change Inc (Dec)
		( Dollars in millions)																( Dollars in millions)
Free Cash Flow		$	69.6			$	30.0			$	39.6				132.0	%		$	64.5			$	6.1			$	58.4				957.4	%

Free cash flow is a non-GAAP financial measure. To determine free cash flow, we subtract capital expenditures from cash provided by operating activities. Free cash flow for the second quarter of 2014 increased as compared to the same period in 2013 primarily due to the increase in operating cash flow driven by higher net income, the changes in other working capital accounts, as well as lower capital expenditures. Free cash flow for the first six months of 2014 increased as compared to the same period in 2013 primarily due to increase in operating cash flow driven by higher net income, the charge for (release of) litigation, the changes in other working capital accounts, and lower capital expenditures. See Free Cash Flow reconciliation in results of operations section above.

Reportable Segments

The following tables present comparative disclosures of revenue, gross margin, and operating income of our reportable segments.

 

		Three Months Ended
		June 29, 2014																				June 30, 2013
		Revenue				% of total				Gross Margin				Gross Margin %				Operating Income (Loss)				Revenue				% of total				Gross Margin				Gross Margin %				Operating Income (Loss)
		(Dollars in millions)
MCCC		$	142.8				38.4	%		$	60.3				42.2	%		$	34.8			$	131.4				36.9	%		$	47.3				36.0	%		$	17.3
PCIA			193.1				52.0	%			58.3				30.2	%			37.2				188.7				52.9	%		$	54.2				28.7	%			29.7
SDT			35.7				9.6	%			7.1				19.9	%			6.5				36.4				10.2	%		$	5.9				16.2	%			4.0
Corporate (1,2)			—				—				(1.5	)			—				(59.2	)			—				—				(3.7	)			—				(52.8	)
Total		$	371.6				100.0	%		$	124.2				33.4	%		$	19.3			$	356.5				100.0	%		$	103.7				29.1	%		$	(1.8	)

 

27

---

Table of Contents

		Three Months Ended
(1)		June 29, 2014				June 30, 2013
Non-cash stock-based compensation expense		$	1.5			$	1.3
Accelerated depreciation on assets related to line closure			—				2.5
Other			—				(0.1	)
Corporate gross margin total		$	1.5			$	3.7

 

		Three Months Ended
(2)		June 29, 2014				June 30, 2013
Non-cash stock-based compensation expense		$	8.8			$	7.9
Restructuring, impairments, and other costs			4.7				3.4
Accelerated depreciation on assets related to line closure			—				2.5
Selling, general and administrative expense			45.8				38.8
Other			(0.1	)			0.2
Corporate operating expense total		$	59.2			$	52.8

 

		Six Months Ended
		June 29, 2014																				June 30, 2013
		Revenue				% of total				Gross Margin				Gross Margin %				Operating Income (Loss)				Revenue				% of total				Gross Margin				Gross Margin %				Operating Income (Loss)
		(Dollars in millions)
MCCC		$	272.9				38.1	%		$	109.5				40.1	%		$	57.9			$	266.6				38.1	%		$	93.8				35.2	%		$	35.3
PCIA			375.1				52.4	%			108.8				29.0	%			65.4				363.3				51.9	%			98.7				27.2	%			50.7
SDT			67.7				9.5	%			12.6				18.6	%			10.8				69.8				10.0	%			11.3				16.2	%			7.2
Corporate (1,2)			—				—				(2.5	)			—				(121.9	)			—				—				(7.7	)			—				(89.2	)
Total		$	715.7				100.0	%		$	228.4				31.9	%		$	12.2			$	699.7				100.0	%		$	196.1				28.0	%		$	4.0

 

		Six Months Ended
(1)		June 29, 2014				June 30, 2013
Non-cash stock-based compensation expense		$	2.5			$	2.4
Accelerated depreciation on assets related to line closure			—				5.4
Other			—				(0.1	)
Corporate gross margin total		$	2.5			$	7.7

 

		Six Months Ended
(2)		June 29, 2014				June 30, 2013
Non-cash stock-based compensation expense		$	16.6			$	14.2
Restructuring, impairments, and other costs			10.8				4.6
Accelerated depreciation on assets related to line closure			—				5.4
Charge for (release of) litigation			4.4				(12.6	)
Selling, general and administrative expense			90.2				77.6
Other			(0.1	)			—
Corporate operating expense total		$	121.9			$	89.2

 

28

---

Table of Contents

MCCC
		Three Months Ended																Six Months Ended
		June 29, 2014				June 30, 2013				$ Change Inc (Dec)				% Change Inc (Dec)				June 29, 2014				June 30, 2013				$ Change Inc (Dec)				% Change Inc (Dec)
		(Dollars in millions)
Revenue		$	142.8			$	131.4			$	11.4				8.7	%		$	272.9			$	266.6			$	6.3				2.4	%
Gross Margin		$	60.3			$	47.3			$	13.0				27.5	%		$	109.5			$	93.8			$	15.7				16.7	%
Gross Margin %			42.2	%			36.0	%							6.2	%			40.1	%			35.2	%							4.9	%
Operating Income		$	34.8			$	17.3			$	17.5				101.2	%		$	57.9			$	35.3			$	22.6				64.0	%

MCCC revenue in the second quarter and first six months of 2014 was higher as compared to the same periods of 2013 due to higher power management product sales into computing and mobile end markets. Higher gross margin was driven by better manufacturing execution and higher factory loading.

MCCC operating income in the second quarter and first six months of 2014 increased from the same period of 2013 due primarily to higher sales and increased gross margin coupled with stable operating expenses.

 

PCIA
		Three Months Ended																Six Months Ended
		June 29, 2014				June 30, 2013				$ Change Inc (Dec)				% Change Inc (Dec)				June 29, 2014				June 30, 2013				$ Change Inc (Dec)				% Change Inc (Dec)
		(Dollars in millions)
Revenue		$	193.1			$	188.7			$	4.4				2.3	%		$	375.1			$	363.3			$	11.8				3.2	%
Gross Margin		$	58.3			$	54.2			$	4.1				7.6	%		$	108.8			$	98.7			$	10.1				10.2	%
Gross Margin %			30.2	%			28.7	%							1.5	%			29.0	%			27.2	%							1.8	%
Operating Income		$	37.2			$	29.7			$	7.5				25.3	%		$	65.4			$	50.7			$	14.7				29.0	%

PCIA revenue in the second quarter and first six months of 2014 was higher as compared to the same periods of 2013 due to strong automotive end market demand coupled with steady growth in the industrial and appliance markets. Gross margin was also higher due primarily to better manufacturing execution and higher factory loading.

Higher PCIA operating income in the second quarter and first six months of 2014 as compared to the same periods in 2013 was due primarily to higher sales and increased gross margin coupled with stable operating expenses.

 

SDT
		Three Months Ended																Six Months Ended
		June 29, 2014				June 30, 2013				$ Change Inc (Dec)				% Change Inc (Dec)				June 29, 2014				June 30, 2013				$ Change Inc (Dec)				% Change Inc (Dec)
		(Dollars in millions)
Revenue		$	35.7			$	36.4			$	(0.7	)			-1.9	%		$	67.7			$	69.8			$	(2.1	)			-3.0	%
Gross Margin		$	7.1			$	5.9			$	1.2				20.3	%		$	12.6			$	11.3			$	1.3				11.5	%
Gross Margin %			19.9	%			16.2	%							3.7	%			18.6	%			16.2	%							2.4	%
Operating Income		$	6.5			$	4.0			$	2.5				62.5	%		$	10.8			$	7.2			$	3.6				50.0	%

SDT revenue decreased in the second quarter of 2014 and first six months of 2014 as compared to the same period in 2013 due to normal pricing actions as we selectively manage this business. Higher gross margin during the second quarter and first six months of 2014 as compared to the same periods in 2013 was due to better manufacturing execution, higher factory loading and continued pricing actions to manage the business.

The increase in SDT operating income in the second quarter and first six months of 2014 as compared to the same period in 2013 was primarily due to increased gross margin coupled with stable operating expenses.

 

29

---

Table of Contents

Liquidity and Capital Resources

Our main sources of liquidity are our cash flows from operations, cash and cash equivalents and our revolving credit facility. Our credit agreement became effective on May 20, 2011 and matures on the fifth anniversary of its effective date. As of June 29, 2014, $108.1 million of our $319.8 million of cash and marketable securities balance was located in the United States. We believe that funds generated from operations, together with existing cash and funds from our revolving credit facility will be sufficient to meet our cash needs over the next twelve months.

Our credit facility consists of a $400.0 million revolving loan agreement of which $200.0 million was drawn as of June 29, 2014. After adjusting for outstanding letters of credit, we had $199.4 million available under the credit facility. This revolving borrowing capacity is available for working capital and general corporate purposes, including acquisitions. We had additional outstanding letters of credit of $765 thousand that do not fall under the senior credit facility. We also had $3.5 million of undrawn credit facilities at certain of our foreign subsidiaries. These outstanding amounts do not impact available borrowings under the senior credit facility.

The credit facility includes restrictive covenants that place limitations on our ability to consolidate, merge, or enter into acquisitions, create liens or pay dividends, or make similar restricted payments, sell assets, limit judgments, invest in capital expenditures, and incur indebtedness. It also places limitations on our ability to modify our certificate of incorporation and bylaws, or enter into shareholder agreements, voting trusts or similar arrangements. In addition, the affirmative covenants in the credit facility also require our financial performance to comply with certain financial measures, as defined by the credit agreement. These financial covenants require us to maintain a minimum interest coverage ratio of 3.00 to 1.00 and a maximum leverage ratio of 3.25 to 1.00. It defines the interest coverage ratio as the ratio of the cumulative four quarter trailing consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated cash interest expense and defines the maximum leverage ratio as the ratio of total consolidated debt to the cumulative four quarter trailing consolidated EBITDA. Consolidated EBITDA, as defined by the credit agreement excludes restructuring, non-cash equity compensation and other certain adjustments.

At June 29, 2014, we were in compliance with all our covenants and we expect to remain in compliance with them. This expectation is subject to various risks and uncertainties discussed more thoroughly in Item 1A, and include, among others, the risk that our assumptions and expectations about business conditions, legal contingencies, expenses and cash flows for the remainder of the year may be inaccurate.

While our credit facility places restrictions on the payment of dividends, it does not restrict the subsidiaries of Fairchild Semiconductor Corporation, except to a limited extent, from paying dividends or making advances to Fairchild Semiconductor Corporation. As a result, we believe that funds generated from operations, together with existing cash and funds from our senior credit facility will be sufficient to meet our debt obligations, operating requirements, capital expenditures and research and development funding needs over the next twelve months. In the six months ended June 29, 2014, our capital expenditures totaled $28.9 million.

We frequently evaluate opportunities to sell additional equity or debt securities, obtain credit facilities from lenders or restructure our long-term debt to further strengthen our financial position. The sale of additional equity securities would cause dilution to our existing stockholders. Additional borrowing or equity investment may be required to fund future acquisitions.

During the first six months of 2014, our cash provided by operating activities was $93.4 million compared to cash provided by operating activities of $46.2 million in the same period of 2013. The following table presents a summary of net cash provided by operating activities during the first six months of 2014 and 2013.

 

30

---

Table of Contents

		Six Months Ended
		June 29, 2014						June 30, 2013
		(In millions)
Net income (loss)		$	8.5					$	(8.0	)
Depreciation and amortization			68.0						72.5
Non-cash stock-based compensation			16.6						14.2
Non-cash restructuring and impairments			0.6						—
Deferred income taxes, net			(4.7	)					1.4
Charge for (release of) litigation			4.4						(12.6	)
Other, net			1.0						4.3
Change in other working capital accounts			(1.0	)					(25.6	)
Net cash provided by operating activities		$	93.4					$	46.2

The increase in cash provided by operating activities during the first six months of 2014 as compared to the same period of 2013 was primarily driven by the increase in net income, the impact of the litigation charge in the current period compared to the release of the litigation accrual during the same period in 2013, as well as changes in the other working capital accounts.

Cash used in investing activities during the first six months of 2014 totaled $88.2 million compared to $41.1 million for the same period of 2013. This increase was driven by the acquisition of a private sensor company during the period, partly offset by lower capital expenditures.

Cash used in financing activities totaled $105.6 million in the first six months of 2014 compared to $16.2 million in the same period of 2013. The increase was mainly due to stock repurchases.

As of June 29, 2014, we continue to have $3.3 million of unrecognized tax benefits, compared to approximately $3.3 million at December 29, 2013. The timing of the expected cash outflow relating to the balance is not reliably determinable at this time.

Forward Looking Statements

This quarterly report contains “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. All forward-looking statements in this 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 Risk Factors section. Among these factors are the following: current economic uncertainty, including disruptions in the credit markets, as well as future economic conditions; changes in demand for our products; changes in inventories at our customers and distributors; changes in regional or global economic or political conditions (including as a result of terrorist attacks and responses to them); technological and product development risks, including the risks of failing to maintain the right to use some technologies or failing to adequately protect our own intellectual property against misappropriation or infringement; availability of manufacturing capacity; the risk of production delays; the inability to attract and retain key management and other employees; risks related to warranty and product liability claims; risks inherent in doing business internationally; changes in tax regulations or the migration of profits from low tax jurisdictions to higher tax jurisdictions; availability and cost of raw materials; competitors’ actions; loss of key customers, including but not limited to distributors; 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 Risk Factors 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.

 

31

---

Table of Contents

Recently Issued Financial Accounting Standards

In February 2013, the FASB issued Accounting Standards Update No. 2013-04 (ASU 2013-04), Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. This update provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within is fixed at the reporting date. Examples include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-04 had no material effect on our consolidated financial statements.

In March 2013, the FASB issued Accounting Standards Update No. 2013-05 (ASU 2013-05), Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The objective of the amendments in this update is to resolve the diversity in practice concerning the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. This statement is effective for fiscal years beginning after December 15, 2014. The adoption of ASU 2010-28 is not expected to have a material effect on our consolidated financial position and results of operations and statements of cash flows.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective of cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

 

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 29, 2013 and under the subheading “Quantitative and Qualitative Disclosures about Market Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Form 10-K. There were no material changes in the information we provided in our Form 10-K during the period covered by this Quarterly Report.

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to assure, as much as is reasonably possible, that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is communicated to management and recorded, processed, summarized and disclosed within the specified time periods. As of the end of the period covered by this report, our chief executive officer (CEO) and chief financial officer (CFO), with the participation of our management, have evaluated the effectiveness of our disclosure controls and procedures. Based on the evaluation, our CEO and CFO concluded that as of June 29, 2014, our disclosure controls and procedures are effective.

Inherent Limitations on Effectiveness of Controls

The company’s management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events. There can be no assurance that any control system will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become less effective if conditions change or compliance with policies or procedures deteriorates.

 

32

---

Table of Contents

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the second quarter of 2014 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

See Litigation in Note 11 – Contingencies to the Financial Statements, which is incorporated by reference in this Item 1.

 

Item 1A.

Risk Factors

A description of the risk factors associated with our business is set forth below. We review and update our risk factors each quarter. The description set forth below includes any changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013. The risks described below are not the only ones facing us. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business operations and financial condition.

The price of our common stock has fluctuated widely in the past and may fluctuate widely in the future.

Our common stock is traded on the NASDAQ Stock Market and its price has fluctuated significantly in recent years. Additionally, our stock has experienced and may continue to experience significant price and volume fluctuations that could adversely affect its market price without regard to our operating performance. We believe that factors such as quarterly fluctuations in financial results, earnings below analysts’ estimates and financial performance and other activities of other publicly traded companies in the semiconductor industry could cause the price of our common stock to fluctuate substantially. In addition, our common stock, the stock market in general and the market for shares of semiconductor industry-related stocks in particular have experienced extreme price fluctuations which have often been unrelated to the operating performance of the affected companies. Similar fluctuations in the future could adversely affect the market price of our common stock.

We maintain a backlog of customer orders that is subject to cancellation, reduction or delay in delivery schedules, which may result in lower than expected revenues.

We manufacture products primarily pursuant to purchase orders for current delivery or to forecast, rather than pursuant to long-term supply contracts. The semiconductor industry is occasionally subject to double booking and rapid changes in customer outlooks or unexpected build ups of inventory in the supply channel as a result of shifts in end market demand and macro economic conditions. Accordingly, many of these purchase orders or forecasts may be revised or canceled without penalty. As a result, we must commit resources to the manufacture of products without binding purchase commitments from customers. Even in cases where our standard terms and conditions of sale or other contractual arrangements do not permit a customer to cancel an order without penalty, we may from time to time accept cancellations to maintain customer relationships or because of industry practice, custom or other factors. Our inability to sell products after we devote significant resources to them could have a material adverse effect on both our levels of inventory and revenues. Additionally, fluctuations in demand may cause our inventories to increase or decrease more than we have anticipated. While we currently believe our inventory levels are appropriate for the current economic environment, continued global economic uncertainty may result in lower than expected demand. When we anticipate increasing demand in our markets, lower than anticipated demand may impact our customers’ target inventory levels. While we focused on reducing channel inventories during 2013; our current business forecasting is still qualified by the risk that our backlog may deteriorate as a result of customer cancellations.

 

33

---

Table of Contents

Downturns in the highly cyclical semiconductor industry or changes in end user market demands could reduce the profitability and overall value of our business, which could cause the trading price of our stock to decline or have other adverse effects on our financial position.

The semiconductor industry is highly cyclical, and the value of our business may decline as a result of market response to this cyclicality. As we have experienced in the past, uncertainty in global economic conditions may continue to negatively affect us and the rest of the semiconductor industry, by causing us to experience backlog cancellations, higher inventory levels and reduced demand for our products. We may experience renewed, possibly severe and prolonged, downturns in the future as a result of this cyclicality. Even as demand increases following such downturns, our profitability may not increase because of price competition and supply shortages that historically accompany recoveries in demand. In addition, we may experience significant fluctuations in our profitability as a result of variations in sales, product mix, end user markets, the costs associated with the introduction of new products, and our efforts to reduce excess inventories that may have built up as a result of any of these factors. The markets for our products depend on continued demand for consumer electronics such as personal computers, cellular telephones, tablet devices, digital cameras, and automotive, household and industrial goods. Deteriorating global economic conditions may cause these end user markets to experience decreases in demand that could adversely affect our business and future prospects.

Our failure to execute on our cost reduction initiatives and the impact of such initiatives could adversely affect our business.

We continue to implement cost reduction initiatives to keep pace with the evolving economic and competitive conditions. These actions include closing our four-inch manufacturing line in South Korea and converting to 8-inch wafers in Bucheon, South Korea and South Portland, Maine. Additionally, we initiated several insourcing programs to replace higher-cost outside subcontractors with internal manufacturing, we lowered our materials costs and implemented workforce reductions in an effort to simplify operations, improve productivity and reduce costs.

We cannot guarantee that we will successfully implement any of these actions, or if these actions and other actions we may take will help reduce costs. Because restructuring activities involve changes to many aspects of our business, the cost reductions could adversely impact productivity and sales to an extent we have not anticipated. Even if we fully execute and implement these activities and they generate the anticipated cost savings, there may be other unforeseeable and unintended factors or consequences that could adversely impact our profitability and business.

We may not be able to develop new products to satisfy changing customer demands or we may develop the wrong products.

Our success is largely dependent upon our ability to innovate and create revenues from new product introductions. Failure to develop new technologies, or react to changes in existing technologies, could materially delay development of new products and lead to decreased revenues and a loss of market share to our competitors. The semiconductor industry is characterized by rapidly changing technologies and industry standards, together with frequent new product introductions. Our financial performance depends on our ability to identify important new technology advances and to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. While new products often command higher prices and higher profit margins, we may not successfully identify new product opportunities and develop and bring new products to market or succeed in selling them for use in new customer applications in a timely and cost-effective manner. Products or technologies developed by other companies may render our products or technologies obsolete or noncompetitive. Many of our competitors are larger and more established companies with greater engineering and research and development resources than us. If we fail to identify a fundamental shift in technologies or in our product markets such failure could have material adverse effects on our competitive position within the industry. In addition, to remain competitive, we must continue our efforts to reduce die sizes, develop new packages and improve manufacturing yields. We cannot assure you that we can accomplish these goals.

If some original equipment manufacturers do not design our products into their equipment, our revenue may be adversely affected.

We depend on our ability to have original equipment manufacturers (OEMs), or their contract manufacturers, choose our products. Frequently, an OEM will incorporate or specifically design our products into the products it produces. In such cases the OEM may identify our products, with the products of a limited number of other vendors, as approved for use in particular OEM applications. Without “design wins,” we may only be able to sell our products to customers as a secondary source, if at all. If an OEM designs another supplier’s product into one of its applications, it is more difficult for us to achieve future design wins for that application because changing suppliers involves significant cost, time, effort and risk for the OEM. Even if a customer designs in our products, we are not guaranteed to receive future sales from that customer. We may be unable to achieve these “design wins” because of competition or a product’s functionality, size, electrical characteristics or other aspect of its design or price. Additionally, we may be unable to service expected demand from the customer. In addition, achieving a design win with a customer does not ensure that we will receive significant revenue from that customer and we may be unable to convert design into actual sales.

 

34

---

Table of Contents

We depend on demand from the consumer, original equipment manufacturer, contract manufacturing, industrial, automotive and other markets we serve for the end market applications which incorporate our products. Reduced consumer or corporate spending due to increased energy and commodity prices or other economic factors could affect our revenues.

If we provide revenue, margin or earnings per share guidance, it is generally based on certain assumptions we make concerning the health of the overall economy and our projections of future consumer and corporate spending. If our projections of these expenditures are inaccurate or based upon erroneous assumptions, our revenues, margins and earnings per share could be adversely affected. For example, reduced demand for automobiles and appliances reduced our revenue during 2011 and 2012 while weakness in the high-end smart phone market negatively impacted earnings in 2013. We cannot be certain that a change in macroeconomic conditions will not have an adverse effect on our business.

We have lengthy product development cycles that may cause us to incur significant expenses without realizing meaningful sales, the occurrence of which would harm our business.

Designing and manufacturing semiconductors is a long process that requires the investment of significant resources with no guarantee that the process will ultimately result in sales to customers. In 2013 and in prior years, we have made significant investments in new product designs and technologies. The lengthy front end of our development cycle creates a risk that we may incur significant expenses which we are unable to offset with meaningful sales. Additionally, customers may decide to cancel their products or change production specifications, which may require us to modify product specifications and further increase our cost of production. Failure to meet such specifications may also delay the launch of our products or result in lost sales.

Research and development investments may not yield profitable or commercially viable products and thus will not necessarily result in increases in our revenues.

We invest significant resources in our research and development. In 2013 alone, we invested $171.6 million in research and development. Despite such efforts, we may not be successful in developing commercially viable products. Additionally, there is a substantial risk that we may decide to abandon a potential product that is no longer marketable, despite our investment or significant resources in its development.

Our failure to protect our intellectual property rights could adversely affect our future performance and growth.

Failure to protect our intellectual property rights may result in the loss of valuable technologies. We rely on patent, trade secret, trademark and copyright law to protect such technologies. These laws are subject to legislative and regulatory change or through changes in court interpretations of those laws and regulations. For example, there have been recent developments in the laws and regulations governing the issuance and assertion of patents in the U.S., including modifications to the rules governing patent prosecution. There have also been court rulings on the issues of willfulness, obviousness and injunctions, that may affect our ability to obtain patents and/or enforce our patents against others. Some of our technologies are not covered by any patent or patent application. With respect to our intellectual property generally, we cannot assure you that:

 

•

the 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; 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 countries. We cannot assure that we will be able to effectively enforce our intellectual property rights in every country in which our products are sold or manufactured.

We also seek to protect our proprietary technologies, including technologies that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors’ rights agreements with our collaborators, advisors, employees and consultants. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of such

 

35

---

Table of Contents

research. We have non-exclusive licenses to some of our technology from National Semiconductor (now owned by Texas Instruments), Infineon, Samsung Electronics and other companies. These companies may license such technologies to others, including our competitors or may compete with us directly. In addition, National Semiconductor and Infineon have limited royalty-free, worldwide license rights 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 some 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. From time to time we are required to defend against claims by competitors and others of intellectual property infringement. Claims of intellectual property infringement and litigation regarding patent and other intellectual property rights are commonplace in the semiconductor industry and are frequently time consuming and costly. From time to time, we may be notified of claims that we may be infringing patents issued to other companies. Such claims may relate both to products and manufacturing processes. We may engage in license negotiations regarding these claims from time to time. Even though we maintain procedures to avoid infringing others’ rights as part of our product and process development efforts, it is impossible to be aware of every possible patent which our products may infringe, and we cannot assure you that we will be successful in our efforts to avoid infringement claims. Furthermore, even if we conclude our products do not infringe another’s patents, others may not agree. We have been and 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. For example, since October 2004, we have been in litigation with Power Integrations, Inc. See Item 1, Legal Proceedings. Our involvement in this litigation and future intellectual property litigation, or the costs of avoiding or settling litigation by purchasing licenses rights or by other means, could result in significant expense to our company, adversely affecting sales of the challenged products or technologies and diverting the efforts and attention of our technical and management personnel, whether or not such litigation is resolved in our favor. We may decide to settle patent infringement claims or litigation by purchasing license rights from the claimant, even if we believe we are not infringing, in order to reduce the expense of continuing the dispute or because we are not sufficiently confident that we would eventually prevail. 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 manufacturing 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 have made numerous acquisitions of various sizes since we became an independent company in 1997 and we plan to pursue additional acquisitions of related businesses. The costs of acquiring and integrating related businesses, or our failure to integrate them 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.

 

36

---

Table of Contents

We are constantly evaluating acquisition opportunities and consolidation possibilities and are frequently conducting due diligence or holding preliminary discussions with respect to possible acquisition transactions, some of which could be significant.

If we acquire another business, the process of integrating an acquired business into our existing operations may result in unforeseen operating difficulties and may require us to use significant financial resources on the acquisition that may otherwise be needed for the ongoing development or expansion of existing operations. Some of the risks associated with acquisitions include:

 

•

unexpected losses of key employees, customers or suppliers 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;

 

•

inability to realize anticipated synergies;

 

•

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 intangible assets, all of which could have a material adverse effect on our financial condition and operating results.

We may face risks associated with dispositions of assets and businesses.

From time to time we may dispose of assets and businesses in an effort to grow our more profitable product lines. When we do so, we face certain risks associated with these exit activities, including but not limited the risk that we will disrupt service to our customers, the risk of inadvertently losing other business not related to the exit activities, the risk that we will be unable to effectively continue, terminate, modify and manage supplier and vendor relationships, and the risk that we may be subject to consequential claims from customers or vendors as a result of eliminating, or transferring the production of affected products or the renegotiation of commitments related to those products.

We depend on suppliers for timely deliveries of raw materials of acceptable quality. Production time and product costs could increase if we were to lose a primary supplier or if we experience a significant increase in the prices of our raw materials. Product performance could be affected and quality issues could develop as a result of a significant degradation in the quality of raw materials we use in our products.

Our manufacturing processes use many raw materials, including silicon wafers, gold, copper lead frames, mold compound, ceramic packages and various chemicals and gases. Our manufacturing operations depend upon our ability to obtain 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. If the prices of these raw materials rise significantly we may be unable to pass on our increased operating expenses to our customers. This could result in decreased profit margins for the products in which the materials are used. Results could also be adversely affected if there is a significant degradation in the quality of raw materials used in our products, or if the raw materials give rise to compatibility or performance issues in our products, any of which could lead to an increase in customer returns or product warranty claims. Although we maintain rigorous quality control systems, errors or defects may arise from a supplied raw material and be beyond our detection or control. For example, some phosphorus-containing mold compound received from one supplier and incorporated into our products in the past resulted in a number of claims for damages from customers. We purchase some of our 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

 

37

---

Table of Contents

other factors. We subcontract a minority of our wafer fabrication needs, primarily to Taiwan Semiconductor Manufacturing Company, Advanced Semiconductor Manufacturing Corporation, Central Semiconductor Manufacturing Corporation, Jilin Magic Semiconductor, Macronix International Co. Ltd., and Phenitec Semiconductor. In order to maximize our production capacity, some of our back-end assembly and testing operations are also subcontracted. Primary back-end subcontractors include, Advance Semiconductor Engineering, Inc., AIC Semicondutor Sdn Bhd, Amkor Technology, AUK Semiconductor PTE, Ltd, GEM Services, Inc., Greatek Electronics, Inc., Hana Microelectronics Ltd, Liteon, Inc., Tak Cheong Electronics (Holdings) Co. Ltd, and United Test and Assembly Center Thai Ltd. Our operations and ability to satisfy customer obligations could be adversely affected if our relationships with these subcontractors were disrupted or terminated.

Delays in expanding capacity at existing facilities, implementing new production techniques, or incurring problems associated with technical equipment malfunctions, all could adversely affect our manufacturing efficiencies.

Our manufacturing efficiency is an important factor in determining our profitability, and we cannot assure you that we will be able to maintain 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 and cause defects in the final product. We are constantly looking for ways to expand capacity or improve efficiency at our manufacturing facilities. For example, we are in the process of rationalizing our global manufacturing footprint and increasing our reliance on external foundries, a process that may require us to reduce and/or transfer internal capacities into another existing internal facility or to an external foundry. As is common in the semiconductor industry, we may experience difficulty in completing the transitions. As a consequence, we have suffered delays in product deliveries or reduced yields in the past and may experience such delays again in the future.

We may experience delays or problems in bringing new manufacturing capacity to full production. Such delays, as well as possible problems in achieving acceptable yields, or product delivery delays relating to existing or planned new capacity could result from, 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.

We depend on efficient use of our manufacturing capacity because low utilization rates could have a material adverse effect on our business, financial condition and the results of our operations.

Our ability to efficiently manage the available capacity in our fabrication facilities is a key element of our success. As a result of our high fixed costs, a reduction in capacity utilization, as well as reduced yields or unfavorable product mix, could reduce our profit margins and adversely affect our operating results. Utilization rates may be reduced by many factors including: periods of industry overcapacity, low levels of customer orders, operating inefficiencies, mechanical failures and disruption of operations due to expansion or relocation of operations, power interruptions and fire, flood or other natural disasters or calamities. Potential delays and cost increases that result from these events could have a material adverse effect on our business, financial condition and results of operations.

We rely on subcontractors to reduce production costs and to meet manufacturing demands, which may adversely affect our results of operations.

Many of the processes we use in manufacturing our products are complex requiring, among other things, a high degree of technical skill and significant capital investment in advanced equipment. In some circumstances, we may decide that it is more cost effective to have some of these processes performed by qualified third party subcontractors. In addition, we may utilize a subcontractor to fill unexpected customer demand for a particular product or process or to guaranty supply of a particular product that may be in great demand. More significantly, as a result of the expense incurred in qualifying multiple subcontractors to perform the same function, we may designate a subcontractor as a single source for supplying a key product or service. If a single source subcontractor were to fail to meet our contractual requirements, our business could be adversely affected and we could incur production delays and customer cancellations as a result. We would also be required to qualify other subcontractors, which would be time consuming and cause us to incur additional costs. In addition, even if we qualify alternate subcontractors, those subcontractors may not be able to meet our delivery, quality or yield requirements, which could adversely affect our results of operations. In addition to these operational risks, some of these subcontractors are smaller businesses that may not have the financial ability to acquire the advanced tools and equipment necessary to fulfill our requirements. In some circumstances, we may find it necessary to provide financial support to our subcontractors in the form of advance payments, loans, loan guarantees, equipment financing and similar financial arrangements. In those situations, we could be adversely impacted if the subcontractor failed to comply with its financial obligations to us.

 

38

---

Table of Contents

Compliance with new regulations regarding the use of conflict minerals could limit the supply and increase the cost of certain metals used in manufacturing our products.

Pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act), the SEC has promulgated new disclosure requirements for manufacturers of products containing certain minerals which are mined from the Democratic Republic of Congo and adjoining countries. These “conflict minerals” are commonly found in metals used in the manufacture of semiconductors. Manufacturers are also required to disclose their efforts to prevent the sourcing of such minerals and metals produced from them. While the United States Court of Appeals for the DC Circuit recently determined that certain provisions of the law violate the First Amendment, the new disclosure rules became effective in May of 2014. We filed our first conflict minerals report on Form SD at the end of that month. The implementation of these new regulations may limit the sourcing and availability of some of the metals used in the manufacture of our products. The regulations may also reduce the number of suppliers who provide conflict-free metals, and may affect our ability to obtain products in sufficient quantities or at competitive prices. Finally, some of our customers may elect to disqualify us as a supplier if we are unable to verify that the metals used in our products are free of conflict minerals.

A significant portion of our sales are made to 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 62% of our net sales for the six months ended June 29, 2014. We anticipate that this percentage may decrease as we begin to sell more products directly to our customers. Our top five distributors worldwide accounted for 20% of our net sales for the six months ended June 29, 2014. 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. Additionally, because distributors may offer competing products, certain distributors may be less inclined to sell our products as our direct sales increase. 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, especially in the markets we serve, and increased competition could reduce the value of an investment in our company.

We participate in the standard component or “multi-market” segment of the semiconductor industry. While the semiconductor industry is generally highly competitive, the “multi-market” segment is particularly so. Our competitors offer equivalent or similar versions of many of our products, and customers may switch from our products to our competitors’ products on the basis of price, delivery terms, product performance, quality, reliability and customer service or a combination of any of these factors. Competition is especially intense in the multi-market semiconductor segment because it is relatively easy for customers to switch between suppliers of more standardized, multi-market products like ours. In the past we have experienced decreases in prices during “down” cycles in the semiconductor industry, and this may occur again as a result periodicdownturns in global economic conditions. Even in strong markets, price pressures may emerge as competitors attempt to gain a greater market share by lowering prices. We compete in a global market and our competitors are companies of various sizes in various countries around the world. Many of our competitors are larger than us and have greater financial resources available to them. As such, they tend to have a greater ability to pursue acquisition candidates and can better withstand adverse economic or market conditions. Additionally, companies with whom we do not currently compete may introduce new products that may cause them to compete with us in the future.

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 our ability to attract, motivate and retain 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, particularly when the business cycle is improving. During such periods competitors may try to recruit our most valuable technical employees. While we devote a great deal of our attention to designing competitive compensation programs aimed at accomplishing this goal, specific elements of our compensation programs may not be competitive with those of our competitors and there can be no assurance that we will be able to retain our current personnel or recruit the key personnel we require.

 

39

---

Table of Contents

If we must reduce our use of equity awards to compensate our employees, our competitiveness in the employee marketplace could be adversely affected. Our results of operations could vary as a result of changes in our stock-based compensation programs.

Like most technology companies, we have a history of using employee stock-based incentive programs to recruit and retain our workforce in a competitive employment marketplace. Our success will depend in part upon the continued use of stock options, restricted stock units, deferred stock units and performance-based equity awards as a compensation tool. While this is a routine practice in many parts of the world, foreign exchange and income tax regulations in some countries make this practice more and more difficult. Such regulations tend to diminish the value of equity compensation to our employees in those countries. With regard to all equity based compensation, our current practice is to seek stockholder approval for increases in the number of shares available for grant under the Fairchild Semiconductor 2007 Stock Plan as well as other amendments that may be adopted from time to time which require stockholder approval. If these proposals do not receive stockholder approval, we may not be able to grant stock options and other equity awards to employees at the same levels as in the past, which could adversely affect our ability to attract, retain and motivate qualified personnel, and we may need to increase cash compensation in order to attract, retain and motivate employees, which could adversely affect our results of operations. Additionally, since 2009 we have relied almost exclusively on grants of restricted stock units and performance based equity awards in place of stock options. While we believe that our compensation policies are competitive with our peers, we cannot provide any assurance that we have not, and will not continue in the future to lose opportunities to recruit and retain key employees as a result of these changes.

Changes in forecasted stock-based compensation expense could impact our gross margin percentage, research and development expenses, marketing, general and administrative expenses and our tax rate.

We may face product warranty or product liability claims that are disproportionately higher than the value of the products involved.

Our products are typically sold at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated. For example, our products that are incorporated into a personal computer may be sold for several dollars, whereas the personal computer might be sold by the computer maker for several hundred dollars. Although we maintain rigorous quality control systems, we manufacture and sell approximately 16 billion individual semiconductor devices per year to customers around the world, and in the ordinary course of our business we receive warranty claims for some of these products that are defective or that do not perform to published specifications. Additionally, while we attempt to contractually limit our customers’ use of our products, we cannot be certain that our distributors will not sell our products to customers who intend to use them in applications for which we did not intend them to be used. Since a defect or failure in one of our products could give rise to failures in the goods that incorporate them (and consequential claims for damages against our customers from their customers), we may face claims for damages that are disproportionate to the revenues and profits we receive from the products involved. For example, in December of 2013, the customer of one of our distributors filed suit against us claiming damages of $30.0 million arising out of the purchase of $20,000 of our products. Furthermore, even though we attempt, through our standard terms and conditions of sale and other customer contracts, to contractually limit our liability to replace the defective goods or refund the purchase price, we cannot be certain that these claims will not expose us to potential product liability, warranty liability, personal injury or property damage claims relating to the use of those products. In the past, we have received claims for charges, such as for labor and other costs of replacing defective parts or repairing the products into which the defective products are incorporated, lost profits and other damages. In addition, our ability to reduce such liabilities, whether by contracts or otherwise, may be limited by the laws or the customary business practices of the countries where we do business. And, even in cases where we do not believe we have legal liability for such claims, we may choose to pay for them to retain a customer’s business or goodwill or to settle claims to avoid protracted litigation. Our results of operations and business could be adversely affected as a result of a significant quality or performance issue in our products, if we are required or choose to pay for the damages that result.

Our operations and business could be significantly harmed by natural disasters.

Our manufacturing facilities in China, South Korea, Malaysia, the Philippines and many of the third party contractors and suppliers that we currently use are located in countries that are in seismically active regions of the world where earthquakes and other natural disasters, such as floods and typhoons may occur. For example, on October 15, 2013, our manufacturing facility in the Philippines experienced a magnitude 7.2 earthquake. While we take precautions to mitigate these risks, we cannot be certain that they will be adequate to protect our facilities in the event of a major earthquake, flood, typhoon or other natural disaster. Although we maintain insurance for some of the damage that may be caused by natural disasters, our insurance coverage may not be sufficient to cover all of our potential losses and may not cover us for lost business. As a result, a natural disaster in one of these regions could severely disrupt the operation of our business and have a material adverse effect on our financial condition and results of operations.

 

40

---

Table of Contents

Natural disasters could affect our supply chain or our customer base which, in turn, could have a negative impact on our business, the cost of and demand for our products and our results of operations.

While the earthquake and tsunami in Japan, flooding in Thailand and the recent earthquake in the Philippines did not materially impact us, the occurrence of natural disasters in certain regions, could have a negative impact on our supply chain, our ability to deliver products, the cost of our products and the demand for our products. These events could cause consumer confidence and spending to decrease or result in increased volatility to the U.S. and worldwide economies. Any such occurrences could have a material adverse effect on our business, our results of operations and our financial condition.

Our international operations subject our company to risks not faced by domestic competitors

Through our subsidiaries we maintain significant operations and facilities in the Philippines, Malaysia, China, South Korea and Singapore. We have sales offices and customers around the world. Approximately 74% of our revenues in the six months ended June 29, 2014 were from Asia. The following are some of the risks inherent in doing business on an international level:

 

•

economic and political instability;

 

•

foreign currency fluctuations;

 

•

transportation delays;

 

•

trade restrictions;

 

•

changes in laws and regulations relating to, amongst other things, import and export tariffs, taxation, environmental regulations, land use rights and property,

 

•

work stoppages; and

 

•

the laws, including tax laws, and the policies of the U.S. toward, countries in which we manufacture our products.

We acquired significant operations and revenues when we acquired a business from Samsung Electronics and, as a result, are subject to risks inherent in doing business in Korea, including political risk, labor risk and currency risk.

We have significant operations and sales in South Korea and are subject to risks associated with doing business there. Korea accounted for approximately 5% of our revenue for the six months ended June 29, 2014.

Relations between South Korea and North Korea have been tense over most of South Korea’s history, and more recent concerns over North Korea’s nuclear capability, and relations between the U.S. and North Korea, have created a global security issue that may adversely affect Korean business and economic conditions. 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 and our company. In addition to other risks disclosed relating to international operations, some businesses in South Korea are subject to labor unrest.

Our Korean sales are denominated primarily in U.S. dollars while a significant portion of our Korean operations’ costs of goods sold and 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 as much as possible, 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.

 

41

---

Table of Contents

Increases in our effective tax rate may have a negative impact on our business.

A number of factors may increase our effective tax rates, which could reduce our net income, including: the locations where our profits are determined to be earned and taxed; the outcome of certain tax audits, changes in the valuation of our deferred tax assets or liabilities, increases in non-deductible expenses, changes in available tax credits, changes in tax laws or their interpretation, including changes in the U.S. taxation of non-U.S. income and expenses; changes in U.S. generally accepted accounting principles and our decision to repatriate non U.S. earnings.

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 any anticipated benefits.

Some of our foreign subsidiaries have been granted preferential income tax or other tax holidays as an incentive for locating in those jurisdictions. A change in the foreign tax laws or in the construction of the foreign tax laws governing these tax holidays, or our failure to comply with the terms and conditions governing the tax holidays, could result in us not recognizing the anticipated benefits we derive from them, which would decrease our profitability in those jurisdictions. While we continue to monitor the tax holidays, the income tax laws governing the tax holidays, and our compliance with the terms and conditions of the tax holidays there is still a risk that we may not be able to recognize the anticipated benefits of these tax holidays.

We have significantly expanded our manufacturing operations in China and, as a result, will be increasingly subject to risks inherent in doing business in China, which may adversely affect our financial performance.

We expect a significant portion of our production from our Suzhou, China facility will be exported out of China, however, we are hopeful that a significant portion of our future revenue will result from the Chinese markets in which our products are sold, and from demand in China for goods that include our products. For the second quarter of 2014, approximately 23% of the company’s total production is from the Suzhou facility. Our ability to operate in China may be adversely affected by changes in that country’s laws and regulations, including those relating to taxation, foreign exchange restrictions, import and export tariffs, environmental regulations, land use rights, property and other matters. In addition, our results of operations in China are subject to the economic and political situation there. We believe that our operations in China are in compliance with all applicable legal and regulatory requirements. However, there can be no assurance that China’s central or local governments will not impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures. Changes in the political environment or government policies could result in revisions to laws or regulations or their interpretation and enforcement, increased taxation, restrictions on imports, import duties or currency revaluations. In addition, a significant destabilization of relations between China and the U.S. could result in restrictions or prohibitions on our operations or the sale of our products in China. The legal system of China relating to foreign trade is relatively new and continues to evolve. There can be no certainty as to the application of its laws and regulations in particular instances. Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent. Moreover, there is a high degree of fragmentation among regulatory authorities resulting in uncertainties as to which authorities have jurisdiction over particular parties or transactions.

We are subject to fluctuations in the value of foreign and domestic currency and interest rates.

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks and to protect against reductions in the value and volatility of future cash flows caused by changes in foreign exchange rates, we have established hedging programs. These hedging programs may utilize certain derivative financial instruments. For example, we use a combination of currency forward and option contracts to hedge a portion of our forecasted foreign exchange denominated revenues and expenses. Gains and losses on these foreign currency exposures would generally be offset by corresponding losses and gains on the related hedging instruments, resulting in negligible net exposure to us. A majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we do conduct these activities by way of transactions denominated in other currencies, primarily the Korean won, Malaysian ringgit, Philippine peso, Chinese yuan, Japanese yen, Taiwanese dollar, British pound and the Euro. Our hedging programs reduce, but do not always entirely eliminate, the short-term impact of foreign currency exchange rate movements. For example, during the twelve months ended December 29, 2013, an adverse change (defined as a 20% unfavorable move in every currency where we have exposure) in the exchange rates of all currencies over the course of the year would have resulted in an adverse impact on income before taxes of approximately $13.4 million. While we have established hedging policies and procedures to monitor and prevent unauthorized trading and to maintain substantial balance between purchases and sales or future delivery obligations, we can provide no assurance, however, that these steps will detect and/or prevent all violations of such risk management policies and procedures, particularly if deception or other intentional misconduct is involved.

 

42

---

Table of Contents

In addition to our currency exposure, we have interest rate exposure with respect to our credit facility due to its variable pricing. For example, for the year ended December 29, 2013, a 50 basis point increase in interest rates would have resulted in increased annual interest expense of $1.1 million. The increased annual interest expense due to a 50 basis point increase in LIBOR rates would have been offset by an increase in interest income of $1.1 million on the cash and investment balances during 2013. We do not currently hedge our interest rate exposure and we can provide no assurance that a sudden increase in interest rates would not have a material impact on our financial performance.

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 the cost of compliance with environmental laws has not had a material adverse effect on our results of operations historically, 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 our use, transportation, emission, discharge, storage, recycling or disposal of hazardous materials, including personal injury claims and civil and criminal fines, any of which could be material to our cash flow or earnings. For example:

 

•

we currently are remediating contamination at some of our operating plant sites;

 

•

we have been identified as a potentially responsible party at a number of Superfund sites where we (or our predecessors) disposed of wastes in the past; and

 

•

significant regulatory and public attention on the impact of semiconductor operations on the environment may result in more stringent regulations, further increasing our costs.

Although most of our known environmental liabilities are covered by indemnification agreements with Raytheon Company, National Semiconductor Corporation (now owned by Texas Instruments), Samsung Electronics and Intersil Corporation, these indemnities are limited to conditions that occurred prior to the consummation of the transactions through which we acquired facilities from those companies. Moreover, we cannot assure you that their indemnity obligations to us for the covered liabilities will be available, or, if available, adequate to protect us.

Our senior credit facility limits our flexibility and places restrictions on the manner in which we run our operations.

At June 29, 2014, we had total debt of $200.1 million and the ratio of this debt to equity was approximately 0.2 to 1. As of June 29, 2014, our credit facility consists of a $400.0 million revolving line of credit. Adjusted for outstanding letters of credit, we had up to $199.4 million available under the revolving loan portion of the senior credit facility. In addition, there is a $300.0 million uncommitted incremental revolving loan feature. Despite the significant reductions we have made in our long-term debt, we continue to carry indebtedness which could have significant consequences on our operations. For example, it could:

 

•

require us to dedicate a 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 our borrowings are at variable rates of interest, which, if interest rates increase, could result in higher interest expense;

 

•

increase our vulnerability to general adverse economic and industry conditions;

 

•

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

•

restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities;

 

43

---

Table of Contents

•

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; or

 

•

limit, along with the financial and other restrictive covenants in our debt instruments, our ability to borrow additional funds, dispose of assets, repurchase stock 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.

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 we anticipate that our future financial results may be subject to substantial fluctuations. While we currently have sufficient cash flow to satisfy all of our current obligations, we cannot assure you that our business will continue to generate sufficient cash flow from operations to enable us to pay our indebtedness or to fund our other liquidity needs in the future. Further, we can make no assurances that our 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 satisfy our liquidity needs. In addition, because our senior credit facility has a variable interest rate, our cost of borrowing 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 renew or 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 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 the credit agreement relating to our senior credit facility may limit our ability to finance our future operations or capital needs or engage in other business activities that may be in our interests. The credit agreement imposes 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 our competitors many of which are not subject to such limitations.

In addition, the senior credit facility also requires us to maintain specified financial ratios. 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. As of June 29, 2014, we were in compliance with these ratios. A breach of any of these covenants, ratios or restrictions could result in an event of default under the senior credit facility. Upon the occurrence of an event of default under the senior credit facility, the lenders could elect to declare all amounts outstanding under the senior credit facility, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the lenders could proceed against our assets, including any 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.

Security breaches and other disruptions could compromise the integrity of our information and expose us to liability, which would cause our business and reputation to suffer.

We routinely collect and store sensitive data, including intellectual property and other proprietary information about our business and that of our customers, suppliers and business partners. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings and liability under laws that protect the privacy of personal information. It could also result in regulatory penalties, disrupt our operations and the services we provide to customers, damage our reputation and cause a loss of confidence in our products and services, which could adversely affect our business/operating margins, revenues and competitive position.

 

44

---

Table of Contents

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

Period		Total Number of Shares (or Units) Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
														(In millions)
Mar 31, 2014 - Apr 27, 2014			383,834			$	13.14				383,834			$	63.1
Apr 28, 2014 - May 25, 2014			3,118,950			$	13.30				3,118,950			$	121.6
May 26, 2014 - Jun 29, 2014			1,517,054			$	14.56				1,517,054			$	99.5
Total			5,019,838			$	13.67				5,019,838			$	99.5

On May 7, 2014, our board of directors authorized the repurchase of up to $100.0 million of the company’s common stock. This amount is in addition to the $100.0 million previously authorized and disclosed in December 2013. Share repurchases will be made from time to time in the open market or in privately negotiated transactions. The purchase of these shares satisfied the conditions of the safe harbor provided by the Securities Exchange Act of 1934. During the quarter ended June 29, 2014 we repurchased approximately $68.6 million of common stock.

For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. Although these withheld shares are not issued or considered common stock repurchases and are not included in the table above, the cash paid for taxes is treated in the same manner as common stock repurchases in our financial statements, as they reduce the number of shares that would have been issued upon vesting.

 

Item 6.

Exhibits

 

Exhibit No.		Description
31.01		Section 302 Certification of the Chief Executive Officer.
31.02		Section 302 Certification of the Chief Financial Officer.
32.01		Certification of the Chief Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

45

---

Table of Contents

32.02		Certification of the Chief Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101. DEF		XBRL Taxonomy Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

Items 3, 4 and 5 are not applicable and have been omitted.

 

46

---

Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		Fairchild Semiconductor International, Inc.
Date: August 8, 2014				/s/ Mark S. Frey
				Mark S. Frey
				Executive Vice President, Chief Financial Officer and Treasurer
				(Principal Accounting Officer)

 

47