10-K 1 d841677d10k.htm 10-K 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

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

For the fiscal year ended December 28, 2014

OR

 

¨ 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, CA   95134
(Address of principal executive offices)   (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $.01 per share

(Title of each class)

NASDAQ Stock Market

(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 aggregate market value of the voting stock held by non-affiliates of the registrant as of June 29, 2014 was $1,841,259,389

The number of shares outstanding of the Registrant’s Common Stock as of February 20, 2015 was 117,090,937

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 2015 are incorporated by reference into Part III.


Table of Contents

TABLE OF CONTENTS

 

        

Page

 
Item 1.   Business      3   
Item 1A.   Risk Factors      12   
Item 1B.   Unresolved Staff Comments      25   
Item 2.   Properties      26   
Item 3.   Legal Proceedings      26   
Item 4.   Mine Safety Disclosures      26   
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      27   
Item 6.   Selected Financial Data      29   
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk      52   
Item 8.   Consolidated Financial Statements and Supplementary Data      53   
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      97   
Item 9A.   Controls and Procedures      97   
Item 9B.   Other Information      97   
Item 10.   Directors, Executive Officers and Corporate Governance      98   
Item 11.   Executive Compensation      98   
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.      98   
Item 13.   Certain Relationships and Related Transactions, and Director Independence.      98   
Item 14.   Principal Accountant’s Fees and Services      99   
Item 15.   Exhibits and Financial Statement Schedules      99   

Exhibit Index

     101   

Signatures

     104   

Certifications

     See Exhibits   

 

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PART I

 

ITEM 1. BUSINESS

Except as otherwise indicated in this Annual Report on Form 10-K, 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.

Our fiscal year ends on the last Sunday in December. The years ended December 28, 2014, December 29, 2013, and December 30, 2012 consist of 52 weeks, 52 weeks, and 53 weeks, respectively.

General

We are focused on developing, manufacturing and selling highly efficient power management solutions utilizing our deep expertise in power analog and discrete design as well as advanced packaging. We also make certain non-power semiconductor and MEMS-based solutions. Our products are used in a wide variety of end market applications including industrial, home appliance, automotive, mobile, server and cloud computing, lighting, and consumer electronics. We believe that our focus on the power market, our diverse end market exposure and our strong penetration into the growing Asian region provides us with excellent opportunities to expand our business.

With a history dating back approximately 50 years, the original Fairchild was one of the founders of the semiconductor industry. Established in 1959 as a provider of memory and logic semiconductors, the Fairchild Semiconductor business was acquired by Schlumberger Limited in 1979 and by National Semiconductor Corporation in 1987. In March 1997, as part of its recapitalization, much of the Fairchild Semiconductor business was sold to a new, independent company-Fairchild Semiconductor Corporation.

Products and Technology

Two of our product segments are organized by the end markets they support and include: (1) Mobile, Computing, Consumer and Communication (MCCC) and (2) Power Conversion, Industrial and Automotive (PCIA). Our third reportable segment is Standard Discrete and Standard Linear (SDT), which contains a wide array of mature, standard products.

We develop a wide range of power and signal path products that are primarily focused on enabling greater energy efficiency in industrial, appliance, cloud computing, and automotive applications. The mobile applications market including smart phones and tablets are also a key area of product design for us. We invest in wafer fabrication and packaging technology to support the development of these innovative products. In 2013, we opened our new 8-inch wafer fabrication site in Bucheon, Korea and expect to gradually load this plant with a combination of new products and existing devices transferred from older, less efficient factories.

Mobile, Computing, Consumer and Communication (MCCC)

We design, manufacture and market high-performance analog components, mixed signal integrated circuits, and low voltage power metal oxide semiconductor field effect transistors (MOSFETs) for mobile, consumer, computing, and communication applications. We have a leadership position in the power MOSFET market with our portfolio of PowerTrench® technology products. Our analog and mixed signal products are focused on the mobile, server and cloud computing end markets and are the primary growth engine for the MCCC group.

Our development of new products for the mobile market is largely driven by evolving end-system requirements such as extending battery life, improving audio quality, and USB connections. The drive for more features and capabilities in smart phones drives the demand for higher performance of our products in the smallest form factor possible. Major competitors include Analog Devices, Inc., Linear Technology Corporation, Maxim Integrated Products, Inc., ON Semiconductor Corporation, ST Microelectronics N.V., Infineon Technologies AG, and Texas Instruments Inc.

 

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Analog products monitor, interpret, and control continuously variable functions such as light, color, sound, and energy. Frequently, they form the interface with the digital world. We provide a wide range of analog products that perform such tasks as voltage regulation, audio amplification, power and signal switching and system management. Analog voltage regulation circuits are used to provide constant voltages as well as step up or step down voltage levels on a circuit board. These products enable improvements in power efficiency, lighting management, and improve charge times in ultra-portable products. These products are used in a variety of mobile, computing, communications, and consumer applications.

In addition to the power analog and interface products we also offer signal path products. These include analog and digital switches, USB switches, video filters and high performance audio amplifiers. The analog switch functions are typically found in cellular handsets and other ultra portable applications. The video products provide a single chip solution to video filtering and amplification. Video filtering applications include set top boxes and digital televisions.

We believe our analog and mixed signal product portfolio is further enhanced by a broad offering of packaging solutions that we have developed. These solutions include surface mount devices, tiny packages, chip scale packages, and leadless carriers.

Our power MOSFETs are primarily used in power delivery and power control applications. Power delivery and control applications are ubiquitous across computing, mobile, consumer electronic and communication infrastructure markets. We produce advanced low voltage and medium voltage MOSFETs under our PowerTrench® brands. Examples of applications where our advanced power MOSFETs are used include smart phones, tablets, notebook PCs, high performance gaming, home entertainment systems, servers, data communication, and routers where our products enable efficient power delivery. This enables longer battery life, lower power consumption and better thermal performance of our customers’ products.

Power Conversion, Industrial and Automotive (PCIA)

We design, manufacture and market analog and mixed signal integrated circuits (ICs), multi-chip smart power modules and discrete power products that provide a broad range of power conversion and power management functions to a diverse set of end market applications including industrial, home appliances, automotive, mobile, server and cloud computing and consumer electronics. Our power solutions typically convert a semi-regulated energy source (AC-alternating current or DC-direct current) to a regulated output for electronic systems (AC-DC, DC-AC, and DC-DC conversion). Our discrete devices are individual diodes or transistors that perform power switching, power conditioning and signal amplification functions in electronic circuits. Our analog and mixed signal ICs are used to control discrete semiconductors in applications such as power switching, conditioning, signal amplification, power distribution, and power consumption. Driving the demand and growth of our business is the increasing need for higher efficiency and higher power density for space savings. We manufacture discrete products using state-of-the-art vertical Diffusion Metal Oxide Semiconductor (DMOS) MOSFETs, Insulated Gate Bipolar Transistors (IGBT), Bipolar and ultrafast rectifier technologies. We manufacture analog and mixed signal ICs using a variety of bipolar (Bi), complementary metal oxide (CMOS), BiCMOS, and bipolar/CMOS/DMOS (BCDMOS) state-of-the-art processes up to 1200V and down to 0.35µm (microns) minimum geometry. Major competitors include Infineon Technologies AG, ST Microelectronics N.V., Toshiba Corporation, Mitsubishi Corporation, Texas Instruments, Inc., Power Integrations, Inc., ON Semiconductor Corporation, NXP Semiconductors N.V., Alpha & Omega Semiconductor, Ltd. and Vishay Intertechnology, Inc.

Power MOSFETs are used in applications to switch, shape or transfer energy. These products are used in a variety of high-growth applications including solar inverters, uninterruptible power supplies (UPS), data centers & communications, motors, lighting, automotive, computing, displays, and industrial supplies. We produce advanced power MOSFETs under our SupreMOS®, SuperFET®, PowerTrench®, UniFET® and QFET® brands.

 

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IGBTs are high-voltage power discrete devices. They are used in switching applications for solar inverters, UPS, data centers & communications, motors, power supplies, displays, TVs, and automotive ignition systems. These applications require lower switching frequencies, higher power, and/or higher voltages than a power MOSFET can provide. We are a leading supplier of IGBTs. We have developed various planar and trench IGBT technologies for these applications.

Rectifier products work with IGBTs and MOSFETs in many applications to provide power conversion and conditioning. Our premier product is the STEALTHTM rectifier, providing industry leading performance and efficiencies in data communications, industrial power supply, displays, TVs, and motor applications.

Leveraging our power MOSFET and IGBT technologies, we also design and manufacture modules for the industrial, automotive, and home appliance end markets which are growing with the worldwide need to improve efficiency, increase power density, and conserve energy.

We design, manufacture, and sell a family of proprietary, high-performance SPM® brand smart power module products targeted at various end applications in consumer white goods and industrial applications such as room air conditioners, industrial power supplies, solar inverters, pumps, and industrial motors. These are multi-chip modules containing up to 28 components in a single package that includes diodes, power discrete IGBTs or MOSFETs, high voltage power management driver ICs, and current and temperature sensors. Similar modules, called Automotive Power Modules (APMs), are used in automotive applications. These innovative products provide customers with a fully integrated power management solution designed to increase power efficiency, power density, system reliability, system functionality, and reduce engineering development time.

We sell custom and standard analog and mixed signal ICs to enable management of power systems. We design and manufacture power management semiconductors for line-powered and off-line powered systems that integrate or complement our Power MOSFETs to simplify engineering challenges to increase efficiency, increase power density for space savings, and reduce energy consumption. The integration improves system reliability by reducing the total number of components, while offering comparable robustness. We sell and market off-line and isolated DC-DC ICs, MOSFET and IGBT gate driver ICs, and power factor correction ICs to the consumer, computing, display, TV, lighting, and industrial markets.

Off-line and isolated DC to DC IC products address power conversion from less than one watt output up to 1 kilowatt. The solutions target circuit board space saving by improving overall system efficiency and reducing the total number of components. Additionally, our devices help the designer conserve system power. These products primarily target the high volume consumer and computing markets with a smaller percentage aimed towards the lower volume, diversified industrial markets.

MOSFET and IGBT Gate Driver IC products complement our off-line and isolated DC to DC, power MOSFETs, and IGBTs for applications from less than one hundred watts output to greater than 2 kilowatts. These gate drivers are often required for higher power MOSFET and IGBT applications where there is a need for higher efficiency, additional system functionality, and reduced design complexity.

Power Factor Correction (PFC) ICs complement our off-line and isolated DC to DC, power MOSFETs, rectifiers, and IGBTs for applications from less than one hundred watts output to 2 kilowatts. Undesired by-products of electronic equipment include inefficient power usage from an AC source, higher AC noise and undesired harmonics. PFC ICs are needed to improve the power efficiency and to lower noise or harmonics to government and industry mandated levels.

Optoelectronics covers a wide range of semiconductor devices that emit and sense both visible and infrared light. We participate in the optocoupler segment of the optoelectronics market. Optocouplers incorporate infrared emitter and detector combinations in a single package. These products are used to transmit signals between two electronic circuits while maintaining a safe electrical isolation between them. Major applications for these devices include power supplies, UPS, solar inverters, motor controls and power modules & industrial control

 

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system. Our focus in optoelectronics is aligned with our power management business, as these products are used extensively in power supplies and AC to DC power conversion applications. Major competitors for this business include Avago Technologies Ltd., Vishay Intertechnology, Inc and Liteon, Inc.

Standard Products (SDT)

SDT combines the management of mature and multiple market products which provide generic solutions from the product lines discussed below.

Standard Diodes and Transistors products cover a wide range of semiconductor products including: MOSFET, junction field effect transistors (JFETs), high power bipolar, discrete small signal transistors, Zener diodes, rectifiers, bridge rectifiers, Schottky devices and diodes. Our parts can be found in a wide range of applications however our portfolio is focused on general power switching, power conditioning, circuit protection, and signal amplification functions supporting the computing, industrial, mobile, ultra-portable, and consumer markets. The portfolio is enhanced with single and multi-chip solutions in industry leading small packages that add value with performance and minimal footprint on the PCB. Major competitors include Infineon Technologies AG, Diodes Incorporated, NXP Semiconductors N.V., ST Microelectronics N.V., ON Semiconductor Corporation and Vishay Intertechnology, Inc.

We design, manufacture and market analog integrated circuits for computing, consumer, communications, ultra-portable and industrial applications. These products are manufactured using bipolar, CMOS and BiCMOS technologies. Standard Linear solutions range from bipolar regulators, shunt regulators, low drop out regulators, standard op-amp/comparators, low voltage op-amps, and others. Analog voltage regulator circuits are used to provide constant voltages as well as to step up or step down voltage levels on a circuit board. Op-amps/comparators are designed specifically to operate from a single power supply over a wide range of voltages. We also offer low-voltage op-amps that provide a combination of low power, rail-to-rail performance, low voltage operation, and tiny package options which are well suited for use in personal electronics equipment.

Infrared products consist of a variety of surface mount and thru-hole Sensors, Detectors and Emitters typically used in most major market segments with telecom and industrial applications presenting the largest opportunities. Historically our focus has been on customized solutions specializing in alignment and media sensing as well as industrial/medical applications. Key competitors are: Vishay Intertechnology, Inc, Osram Opto Semiconductors, OPTEK Technology, OMRON Corporation, Avago Technologies Ltd., and Kodenshi Corp.

Sales, Marketing and Distribution

In 2014, we derived approximately 63%, 30% and 7% of our net sales from distributors, original equipment manufacturers (OEMs), and electronic design and manufacturing services (EMS) customers, respectively, through our regional sales organizations. Our top five distributors worldwide accounted for 37% of our net sales for the year ended December 28, 2014. We operate regional sales organizations in Europe, with principal offices in Munich, Germany; the Americas, with principal offices in San Jose, CA; the Asia/Pacific region (which for these purposes excludes Japan and South Korea), with principal offices in Hong Kong; Japan, with principal offices in Tokyo; and South Korea, with principal offices in Seoul. A discussion of revenue by geographic region for each of the last three years can be found in Item 8, Note 18 Operating Segments and Geographic Information to the consolidated financial statements of this report. Each of the regional sales organizations is supported by the supply chain organization, which manages independently operated warehouses. Product orders flow to our manufacturing facilities, where products are made. Products are then shipped either directly to customers or indirectly to customers through warehouses that are owned and operated by us or by a third party provider.

We have dedicated direct sales organizations operating in Europe, the Americas, the Asia/Pacific region, Japan and Korea that serve our major OEM and EMS customers. We also have a large network of distributors and independent manufacturer’s representatives to distribute and sell our products around the world. We believe

 

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that using a combination of our highly focused, direct sales force selling products for all of our businesses, combined with an extensive network of distributors and manufacturer’s representatives, is the most efficient way to serve our multi-market customer base. Our marketing organization creates demand for our solutions with integrated marketing programs aligned with the sales process and business priorities. Additionally, product line marketing specifically focuses on tactical and strategic marketing for their product and application focus, and marketing personnel located in each of the sales regions provides regional direction and support for products and end applications as applicable for their region.

Typically, distributors handle a wide variety of products and fill orders for many customers. Some of our sales to distributors are made under agreements allowing for market price fluctuations and the right of return on unsold merchandise, subject to time and volume limitations. Many of these distribution agreements contain a standard stock rotation provision allowing for maximum levels of inventory returns. In our experience, these inventory returns can usually be resold, although often at a discount. Manufacturer’s representatives generally do not offer products that compete directly with our products, but may carry complementary items manufactured by others. Manufacturer’s representatives, who are compensated on a commission basis, do not maintain a product inventory; instead, their customers place larger quantity orders directly with us and are referred to distributors for smaller orders.

Research and Development

Our expenditures for research and development (R&D) for 2014, 2013 and 2012 were $165.8 million, $171.6 million and $156.9 million, respectively. These expenditures represented 11.6%, 12.2%, and 11.2% of revenue for 2014, 2013 and 2012, respectively. We invest in the development and design of a wide range of power and non-power integrated and discrete products. Analog and integrated solutions require significant design resources to continuously improve performance, increase integration and meet customers deign challenges. Advanced silicon processing technology is a key determinant in the improvement of semiconductor products. Each new generation of process technology has resulted in products with higher speed, higher power density and greater performance, produced at lower cost. We expect infrastructure investments made in recent years to enable us to continue to achieve high volume, high reliability and low-cost production using leading edge process technology for our classes of products. Our R&D efforts continue to be focused in part on innovative packaging solutions that make use of new assembly methods and high performance packaging materials, as well as in exclusive and patent protected transistor structure development. We are also using our R&D resources to characterize and apply new materials in both our packaging and semiconductor device processing efforts.

Each of our product groups maintains independent product, process and package research and development organizations, which work closely with our manufacturing groups to bring new technologies to market. These groups are located throughout the world in our factories and research centers. We work closely with our major customers in many research and development situations in order to increase the likelihood that our products will be designed directly into customers’ products and achieve rapid and lasting market acceptance.

Manufacturing

We operate seven manufacturing facilities, four of which are “front-end” wafer fabrication plants in the U.S. and South Korea, and three of which are “back-end” assembly and test facilities in Asia. Information about our property, plant and equipment by geographic region for each of the last three years can be found in Item 8, Note 18 Operating Segments and Geographic Information to the consolidated financial statements of this report.

Our products are manufactured and designed using a broad range of manufacturing processes and certain proprietary design methods. We use all of the prevalent function-oriented process technologies for wafer fabrication, including CMOS, Bipolar, BiCMOS, and DMOS. We use primarily mature through-hole and advanced surface mount technologies in our assembly and test operations. We have fully implemented a lead free packaging initiative and all products currently manufactured use a lead free finish in full compliance with RoHS industry environmental requirements.

 

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The table below provides information about our manufacturing facilities and products.

Manufacturing Facilities

 

Location

  

Products

Front-End Facilities:

  

Mountaintop, Pennsylvania

   Discrete Power Semiconductors

South Portland, Maine

   Analog Switches, USB, Interface SerDes, Converters, Logic Gates, Buffers, Counters, Opto Detectors, Ground Fault Interrupters, Power Management ICs

West Jordan, Utah

   Discrete Power Semiconductors

Bucheon, South Korea

   Discrete Power Semiconductors, Standard Analog Integrated Circuits, Power Management ICs

Back-End Facilities:

  

Penang, Malaysia

  

Power Management ICs (AC-DC, Isolated DC-DC, Non-isolated DC-DC, Power Drivers, Supervisory/ Monitor ICs, Voltage Regulators, Pulse width Modulation, Rectifiers)

Power Semiconductors (Integrated Power Solutions, MOSFETs, Transistors)

Automotive Products (Automotive ICs and Drivers, Discrete Power Semiconductors)

Signal Path Products ( Logic, Switching and interface solution, Video filter, Class -G audio amplifier)

Cebu, Philippines

  

Power Management ICs (Isolated DC-DC)

Power Semiconductors (Diodes & Rectifiers, IGBTs, Integrated Power Solutions, MOSFETs, Transistors)

Logic Products

Signal Path Products (Switches)

Optoelectronics (micro-couplers)

Automotive products (Discrete Power)

Suzhou, China

  

Power Semiconductors (Diodes & Rectifiers, IGBTs, Integrated Power Solutions (SPM), MOSFETs, Transistors)

Power Management ICs (AC-DC: PWM (Combo) Controllers)

Automotive Products (Automotive Modules, Discrete Power Semiconductors, Intelligent Power Semiconductors)

We subcontract a minority portion of our wafer fabrication needs, primarily to Taiwan Semiconductor Manufacturing Company, Macronix International Co. Ltd., Phenitec Semiconductor, Showa Denko Singapore (PTE) Ltd, Tower Semiconductor Ltd, Vanguard International Semiconductor, Global Foundries and CSMC Manufacturing Company. In order to maximize our production capacity, some of our back-end assembly and testing operations are also subcontracted. Primary back-end subcontractors include, Liteon Inc, Hana Microelectronics Ltd, AUK Semiconductor PTE, Ltd, Taiwan Semiconductor Co. Ltd, and Panjit International Inc.

Our manufacturing processes use many raw materials, including silicon wafers, gold, copper and aluminum wire, copper/alloy 42 lead frames, mold compound, ceramic and other substrate material and some chemicals and gases. We obtain our raw materials and supplies from a large number of sources.

In accordance with our manufacturing consolidation, we plan to close our wafer fabrication facility in Utah and our assembly and test facility in Malaysia.

 

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Backlog

Backlog at December 28, 2014, was approximately $338.7 million, down from approximately $371.0 million at December 29, 2013. We define backlog as firm orders or customer-provided forecasts with a customer requested delivery date within 26 weeks. We actively manage our supply to keep lead times as short as possible. In periods of increased demand, there is a tendency towards longer lead times which has the effect of increasing backlog and, in some instances we may not have manufacturing capacity sufficient to fulfill all orders. In addition to normal seasonal demand weakness in the fourth quarter of 2014, we also experienced lower demand from a large mobile and consumer electronics customer that reduced our backlog exiting the year. Some of our customers in the air conditioner market are also reducing excess inventory of finished goods which impacted our backlog in the fourth quarter of 2014.

As is customary in the semiconductor industry, we may allow our customers to cancel orders or delay deliveries within agreed upon parameters. Accordingly, our backlog at any time should not be used as an indication of future revenues. For further information on our backlog, please refer to Item 1A Risk Factors included in this report under the heading “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”.

Seasonality

Overall, our sales are closely linked to semiconductor and related electronics industry supply chain and channel inventory trends. We typically experience sequentially higher sales in the first, second and third quarters. Fourth quarter sales are typically lower as customers have completed holiday production, industrial and automotive are seasonally down and distributors and certain other customers reduce inventory. However, economic events and the cyclical nature of the industry can alter these quarterly fluctuations.

Competition

Markets for our products are highly competitive. Although only a few companies compete with us in all of our product lines, we face significant competition within each of our product lines from major international semiconductor companies. Some of our competitors may have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing and distribution of their products. Competitors include manufacturers of standard semiconductors, application-specific integrated circuits and fully customized integrated circuits.

We compete in different product lines to various degrees on the basis of price, technical performance, product features, product system compatibility, customized design, availability, quality and sales and technical support. Our ability to compete successfully depends on elements both within and outside of our control, including successful and timely development of new products and manufacturing processes, product performance and quality, manufacturing yields and product availability, capacity availability, customer service, pricing, industry trends and general economic trends.

Trademarks and Patents

As of December 28, 2014, we held 1,615 issued U.S. patents and 1,711 issued non-U.S. patents with expiration dates ranging from 2015 through 2033. We also have trademarks that are used in the conduct of our business to distinguish genuine Fairchild products. We believe that while our patents may provide some advantage, our competitive position is largely determined by such factors as system and application knowledge, ability and experience of our personnel, the range and number of new products being developed by us, our market brand recognition, ongoing sales and marketing efforts, customer service, technical support and our manufacturing capabilities.

 

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It is generally our policy to seek patent protection for significant inventions that may be patented, though we may elect, in certain cases, not to seek patent protection even for significant inventions, if other protection, such as maintaining the invention as a trade secret, is considered more advantageous. Also, the laws of countries in which we design, manufacture and market our products may afford little or no effective protection of our proprietary technology.

Environmental Matters

Our operations are subject to environmental laws and regulations in the countries in which we operate that regulate, among other things, air and water emissions and discharges at or from our manufacturing facilities; the generation, storage, treatment, transportation and disposal of hazardous materials by our company; the investigation and remediation of environmental contamination; and the release of hazardous materials into the environment at or from properties operated by our company and at other sites. As with other companies engaged in like businesses, the nature of our operations exposes our company to the risk of liabilities and claims, regardless of fault, with respect to such matters, including personal injury claims and civil and criminal fines.

Our facilities in South Portland, Maine, and, to a lesser extent, West Jordan, Utah, have ongoing remediation projects to respond to releases of hazardous materials that occurred prior to our separation from National Semiconductor Corporation. National Semiconductor has agreed to indemnify Fairchild for the future costs of these projects and other environmental liabilities that existed at the time of our acquisition of those facilities from National Semiconductor in 1997. The terms of the indemnification are without time limit and without maximum amount. The costs incurred to respond to these conditions were not material to the consolidated financial statements for any period presented. National Semiconductor Corporation was acquired by Texas Instruments Incorporated during the fourth quarter of 2011.

Although we believe that our Bucheon, South Korea operations, which we acquired in 1999 from Samsung Electronics, have no significant environmental liabilities, Samsung Electronics agreed to indemnify us for remediation costs and other liabilities related to historical contamination, up to $150.0 million, arising out of the business we acquired, including the Bucheon facilities. We are unable to estimate the potential amounts of future payments, if any; however, we do not expect any future payments to have a material impact on our earnings or financial condition.

We believe that our operations are in substantial compliance with applicable environmental laws and regulations. Our costs to comply with environmental regulations were nominal for 2014, 2013 and 2012. Future laws or regulations and changes in existing environmental laws or regulations, however, may subject our operations to different, additional or more stringent standards. While historically the cost of compliance with environmental laws has not had a material adverse effect on our results of operations, business or financial condition, we cannot predict with certainty our future costs of compliance because of changing standards and requirements.

Employees

Our worldwide workforce consisted of 8,272 full and part-time employees as of December 28, 2014. We believe that our relations with our employees are satisfactory.

At December 28, 2014, 96 employees at our Mountain Top, PA., manufacturing facility, were covered by a collective bargaining agreement. These employees are members of the Communication Workers of America/International Union of Electronic, Electrical, Salaried Machine and Furniture Workers, AFL-CIO, Local 88177. The current agreement with the union ends June 1, 2015 and provides for guaranteed wage and benefit levels as well as employment security for union members. If a work stoppage were to occur, it could impact our ability to operate our Mountain Top facility. Also, our profitability could be adversely affected if increased costs associated with any future contracts are not recoverable through productivity improvements or price increases. We believe that relations with our unionized employees are satisfactory.

 

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Our wholly-owned Korean subsidiary, which we refer to as Fairchild Korea, sponsors a Korean Labor Council consisting of seven representatives from the non-management workforce and seven members of the management workforce. The Labor Council, under Korean law, is recognized as a representative of the workforce for the purposes of consultation and cooperation. The Labor Council has no right to take a work action or to strike and is not party to any labor or collective bargaining agreements with Fairchild Korea. We believe that relations with Fairchild Korea employees and the Labor Council are satisfactory.

On November 26, 2010, the employees in our facility in Suzhou, China approved the creation of a labor union that was officially established on January 26, 2011 under applicable local law. Currently 1,745 formal Chinese employees, who are members of Fairchild Suzhou Labor Union, are covered by the collective bargaining agreement. The agreement defines the negotiation process for wage and benefit levels as well as employment security for union members. We believe that relations with our unionized employees are satisfactory.

Executive Officers

The following table provides information about the executive officers of our company. There is no family relationship among any of the named executive officers.

 

Name

   Age     

Title

Mark S. Thompson

     58       Chairman of the Board of Directors, President and Chief Executive Officer

Mark S. Frey

     61       Executive Vice President, Chief Financial Officer and Treasurer

Chris Allexandre*

     40       Senior Vice President, Worldwide Sales and Marketing

Paul D. Delva

     52       Senior Vice President, General Counsel and Corporate Secretary

 

* Chris Allexandre, Senior Vice President, Worldwide Sales and Marketing. Mr. Allexandre joined Fairchild in October of 2013 as Senior Vice President of Worldwide Sales. He became Senior Vice President of Worldwide Sales and Marketing in November of 2014. He has 17 years experience, selling both directly and indirectly to customers in many of our focus markets such as mobile handset, consumer, telecom and the broad industrial and automotive market. Prior to joining the company, Mr. Allexandre was Vice President of EMEA (Europe, Middle East & Africa) Regional Sales & Applications at Texas Instruments Inc. from 2012 to 2014. Prior to 2012, Mr. Allexandre was Senior Director for Texas Instruments working in many sales management roles and multiple countries including France, Germany and China. Mr. Allexandre holds a MSc in Electrical Engineering from the Engineering School of North (ISEN).

Available Information

We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (SEC). You may read and copy any reports, statements and other information we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call (800) SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Our filings are also available to the public at the web site maintained by the SEC, http://www.sec.gov.

The address for our company website is http://www.fairchildsemi.com. We make available, free of charge, through our investor relations web site, our reports on Forms 10-K, 10-Q and 8-K, amendments to those reports, and other SEC filings, as soon as reasonably practicable after they are filed with the SEC. The address for our investor relations web site is https://www.fairchildsemi.com/about/investors/ (click on “All SEC Filings and Annual Reports”).

We also make available, free of charge, through our corporate governance website, our corporate charter, bylaws, corporate governance guidelines, charters of the committees of our board of directors, code of business

 

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conduct and ethics and other information and materials, including information about how to contact our board of directors, its committees and their members. To find this information and materials, visit our corporate governance website at http://www.fairchildsemi.com/about/investors/corporate-governance/.

 

ITEM 1A. RISK FACTORS

A description of the risk factors associated with our business is set forth below. 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 the past. 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. Our current business forecasting is still qualified by the risk that our backlog may deteriorate as a result of customer cancellations.

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

 

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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. Most recently, we announced our intention to close our West Jordan and Penang manufacturing facilities and the 5-inch line at our Korea manufacturing facility.

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

 

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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.

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. 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 2014 alone, we invested $165.8 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.

 

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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 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 8. Note 9 Commitments and Contingencies to the consolidated financial statements included in this report. 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.

 

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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.

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;

 

   

increasing the scope, geographic diversity and complexity of our operations; and

 

   

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.

 

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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 other factors. We subcontract a minority of our wafer fabrication needs, primarily to Taiwan Semiconductor Manufacturing Company, Global Foundries, Tower Jazz Semiconductor, 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 Semiconductor 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.

 

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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.

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.

 

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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.

Please refer to Item 1. Business Sales, Marketing, and Distribution included in this report for a discussion of our distributor sales in 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 periodic downturns 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.

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

 

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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, in the ordinary course of our business we receive warranty claims for some 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 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

 

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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.

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 year ended December 28, 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.

Additionally, one of our foundry subcontractors maintains manufacturing facilities and certain of its corporate and sales offices in Israel. Accordingly, political, economic and military conditions in Israel may directly affect us, to the extent we transfer some of our operations to this subcontractor. Since the establishment of the State of Israel in 1948, Israel has been and continues to be subject to armed conflict with neighboring states and terrorist activity, with varying levels of severity. We can provide no assurance that security and political conditions will not adversely impact our subcontractor’s business in the future. Our subcontractor could experience serious disruption to its manufacturing facilities in Israel if acts associated with this conflict result in any serious damage to those facilities.

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 year ended December 28, 2014. As of fiscal year end 2014, approximately 26.0% of our total production is from our South Korea facility.

 

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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 and cyber terrorism capabilities, have created a global security issue that may adversely affect Korean business and economic conditions in South Korea and in the U.S. 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.

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. As of fiscal year end 2014, approximately 22.5% of our 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

 

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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 may 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. Please refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in this report for a discussion on the impacts of an adverse change in exchange rates and an increase in interest rates would have on our financial statements. 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.

In addition to our currency exposure, we have interest rate exposure with respect to our credit facility due to its variable pricing. 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

 

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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 December 28, 2014, we had total debt of $200.1 million and the ratio of this debt to equity was approximately 0.2 to 1.0. As of December 28, 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;

 

   

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

 

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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 December 28, 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.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

We have no unresolved comments from the Securities and Exchange Commission as of February 26, 2015.

 

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ITEM 2. PROPERTIES

We maintain manufacturing and office facilities around the world including the U.S., Asia and Europe. The following table provides information about certain of these facilities at December 28, 2014.

 

Location

   Owned    Leased   

Use

Mountaintop, Pennsylvania

   X      

Manufacturing and office facilities

South Portland, Maine

   X    X   

Manufacturing, office facilities and design center

West Jordan, Utah

   X      

Manufacturing and office facilities

Bucheon, South Korea

   X    X   

Manufacturing, office facilities and design center

Penang, Malaysia

   X    X   

Manufacturing, warehouse and office facilities

Cebu, Philippines

   X    X   

Manufacturing, warehouse and office facilities

Suzhou, China

   X      

Manufacturing, warehouse and office facilities

Taipei, Taiwan

      X   

Office facilities, warehouse and design center

Hwasung City, South Korea

   X      

Warehouse space

In addition to the facilities listed above, we maintain offices and design centers in leased spaces around the world. These locations include California, China, Hong Kong, India, Japan, Singapore, South Korea, England, Finland, Germany, and the Netherlands. Leases affecting the Penang, Suzhou and Cebu facilities are generally in the form of long-term ground leases, while we own improvements on the land. In some cases we have the option to renew the lease term, while in others we have the option to purchase the leased premises. We also have the ability to cancel these leases at any time.

We do not identify or allocate assets by operating segment. For information on net property, plant and equipment by geographic location, please refer to Item 8 Note 18 Operating Segments and Geographic Information to our consolidated financial statements included in this report.

We believe that our facilities around the world, whether owned or leased, are well maintained and are generally suitable and adequate to carry on the company’s business. Our manufacturing facilities contain sufficient productive capacity to meet our needs for the foreseeable future.

 

ITEM 3. LEGAL PROCEEDINGS

For a discussion of legal matters as of December 28, 2014, please read Item 8 Note 9 Commitments and Contingencies to our consolidated financial statements included in this report, which is incorporated into this item by reference.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the NASDAQ Stock Market under the trading symbol “FCS”. The following table sets forth, for the periods indicated, the high and low sales price per share of Fairchild Semiconductor International, Inc. Common Stock.

 

     High      Low  

2014

     

Fourth Quarter (from September 29, 2014 to December 28, 2014)

   $ 17.56       $ 12.33   

Third Quarter (from June 30, 2014 to September 28, 2014)

   $ 18.04       $ 14.80   

Second Quarter (from March 31, 2014 to June 29, 2014)

   $ 16.36       $ 12.57   

First Quarter (from December 30, 2013 to March 30, 2014)

   $ 14.09       $ 12.26   

2013

     

Fourth Quarter (from September 30, 2013 to December 29, 2013)

   $ 14.18       $ 12.01   

Third Quarter (from July 1, 2013 to September 29, 2013)

   $ 14.99       $ 11.55   

Second Quarter (from April 1, 2013 to June 30, 2013)

   $ 14.79       $ 11.48   

First Quarter (from December 31, 2012 to March 31, 2013)

   $ 15.75       $ 13.64   

As of February 20, 2015, there were approximately 109 holders of record of our common stock. We have not paid dividends on our common stock in any of the years presented above. Certain agreements, pursuant to which we have borrowed funds, contain provisions that limit the amount of dividends and stock repurchases that we may make. Refer to Item 7. Liquidity and Capital Resources and Note 8. Indebtedness to our consolidated financial statements contained in Item 8 of this report, for further information about restrictions to our ability to pay dividends.

Securities Authorized for Issuance Under Equity Compensation Programs

The following table provides information about the number of stock options, deferred stock units (DSUs), restricted stock units (RSUs) and performance units (PUs) outstanding and authorized for issuance under all equity compensation plans of the company on December 28, 2014. The notes under the table provide important additional information.

 

     Number of Shares of
Common Stock Issuable
Upon the Exercise of
Outstanding Options,
DSUs, RSUs and PUs (1) (4)
     Weighted-Average
Exercise Price of
Outstanding Options (2)
     Number of Shares
Remaining Available for
Future Issuance
(Excluding
Shares  Underlying
Outstanding Options,
DSUs, RSUs and PUs) (3)
 

Equity compensation plans approved by stockholders

     6,786,657       $ 14.91         10,522,898   

 

(1) Other than as described here, the company had no warrants or rights outstanding or available for issuance under any equity compensation plan at December 28, 2014.
(2) Does not include shares subject to DSUs, RSUs or PUs, which do not have an exercise price.
(3) Represents 10,522,898 shares under the Fairchild Semiconductor 2007 Stock Plan (2007 Stock Plan) and the Fairchild Semiconductor Stock Plan (Stock Plan) on December 28, 2014.
(4) Shares issuable include 205,389 options under the Stock Plan and 242,716 options, 377,143 DSUs, 4,826,438 RSUs, and 1,134,971 PUs under the 2007 Stock Plan.

The material terms of the 2007 Stock Plan are described in Note 13 Stock-based Compensation to our consolidated financial statements contained in Item 8 of this report, and the three plans are included as exhibits to this report.

 

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Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities in the fourth quarter of 2014. The following table provides information with respect to purchases made by the company of its own common stock during the fourth quarter of 2014.

 

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
 

September 29, 2014—October 26, 2014

    488,093      $ 13.70        488,093      $ 67.7   

October 27, 2014—November 23, 2014

    625,772        14.92        625,772        58.4   

November 24, 2014—December 28, 2014

    97,600        16.78        97,600        56.8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1,211,465      $ 14.58        1,211,465      $ 56.8   
 

 

 

   

 

 

   

 

 

   

 

 

 

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 December 28, 2014, we repurchased approximately $17.8 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.

 

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Stockholder Return Performance

The following graph compares the change in the return on the company’s common stock against the return of the Standard & Poor’s 500 Index (^GSPC) and the PHLX Semiconductor Index (^SOX) from December 27, 2009 to December 28, 2014, the last trading day in our fiscal year ended December 28, 2014. Return to stockholders is measured by dividing the per-share price change for the period by the share price at the beginning of the period. The graph assumes that $100 investments in our common stock and each of the indexes were made.

 

 

LOGO

 

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected historical consolidated financial data. The historical consolidated financial data as of December 28, 2014 and December 29, 2013 and for the years ended December 28, 2014, December 29, 2013, and December 30, 2012 are derived from our audited consolidated financial statements, contained in Item 8 of this report. The historical consolidated financial data as of December 30, 2012, December 25, 2011 and December 26, 2010 and for the years ended December 26, 2010 and December 25, 2011 are derived from our audited consolidated financial statements, which are not included in this report. This information should be read in conjunction with our audited consolidated financial statements and Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Adjusted net income, adjusted gross margin, and free cash flow are also included in the table below. These are unaudited non-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 results and the reconciliations to corresponding GAAP financial measures that we also provide in our press releases, provide additional insight to 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

 

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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.

The results for the years ended December 28, 2014, December 29, 2013, December 25, 2011, and December 26, 2010 each consist of 52 weeks. The results for the year ended December 30, 2012 consists of 53 weeks.

 

    Year Ended  
    December 28,
2014
    December 29,
2013
    December 30,
2012
    December 25,
2011
    December 26,
2010
 
    (In millions, except percent and per share data)  

Consolidated Statements of Operations Data:

       

Total revenue

  $ 1,433.4      $ 1,405.4      $ 1,405.9      $ 1,588.8      $ 1,599.7   

Total gross margin

    465.6        416.5        442.0        559.2        563.0   

% of total revenue

    32.5     29.6     31.4     35.2     35.2

Net income (loss)

    (35.2     5.0        24.6        145.5        153.2   

Net income (loss) per common share:

       

Basic

  $ (0.29   $ 0.04      $ 0.19      $ 1.15      $ 1.23   

Diluted

  $ (0.29   $ 0.04      $ 0.19      $ 1.12      $ 1.20   

Consolidated Balance Sheet Data (End of Period):

       

Inventories, net

  $ 264.9      $ 228.1      $ 236.7      $ 234.2      $ 232.7   

Total assets

    1,692.1        1,796.0        1,883.9        1,936.9        1,849.1   

Current portion of long-term debt

    —          —          —          —          3.8   

Long-term debt, less current portion

    200.1        200.1        250.1        300.1        316.9   

Total stockholders’ equity

    1,194.1        1,360.5        1,367.1        1,322.2        1,176.3   

Other Financial Data:

       

Research and development

  $ 165.8      $ 171.6      $ 156.9      $ 153.4      $ 120.2   

Depreciation and amortization

    139.7        145.2        135.3        150.5        156.3   

Amortization of acquisition-related intangibles

    10.6        15.5        18.2        19.7        22.4   

Interest expense, net

    5.7        5.8        5.6        4.6        7.2   

Capital expenditures

    54.5        75.2        151.9        186.4        158.0   

Adjusted net income

    76.4        34.6        70.5        169.7        193.2   

Adjusted gross margin

    472.1        425.2        442.0        561.4        565.7   

% of total revenue

    32.9     30.3     31.4     35.3     35.4

Free cash flow

    139.2        100.9        31.3        82.1        174.5   

 

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     Year Ended  
     December 28,
2014
    December 29,
2013
    December 30,
2012
    December 25,
2011
    December 26,
2010
 

Reconciliation of Net Income (Loss) to Adjusted Net Income

          

Net income (loss)

   $ (35.2   $ 5.0      $ 24.6      $ 145.5      $ 153.2   

Adjustments to reconcile net income (loss) to adjusted net income:

          

Restructuring, impairments, and other costs

     49.8        15.9        14.1        2.8        7.0   

VAT expense on internal IP sale

     —          —          2.1        —          —     

Write-off of equity investments

     —          3.0        —          —          —     

Gain from sale of equity investment

     (1.4     —          —          —          —     

Loss on disposal of property, plant and equipment

     1.9        —          —          —          —     

Accelerated depreciation on assets related to factory closure

     6.5        8.7        —          0.7        2.9   

Write-off of deferred financing fees

     —          —          —          2.1        2.1   

Inventory write-off associated with factory closure

     —          —          —          (0.2     (0.2

Charge for (release of) litigation

     4.4        (12.6     1.3        —          8.0   

Realized loss on sale of securities

     —          —          12.9        —          —     

Change in retirement plans

     —          —          —          2.7        —     

Amortization of acquisition-related intangibles

     10.6        15.5        18.2        19.7        22.4   

Associated tax effects of the above and other acquisition-related intangibles

     3.0        (0.9     (2.7     (3.6     (2.2

Change in deferred tax asset value

     36.8        —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income

   $ 76.4      $ 34.6      $ 70.5      $ 169.7      $ 193.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Year Ended  
     December 28,
2014
     December 29,
2013
     December 30,
2012
     December 25,
2011
    December 26,
2010
 

Reconciliation of Gross Margin to Adjusted Gross Margin

             

Gross margin

   $ 465.6       $ 416.5       $ 442.0       $ 559.2      $ 563.0   

Adjustments to reconcile gross margin to adjusted gross margin:

             

Change in retirement plans

     —           —           —           1.7        —     

Accelerated depreciation on assets related to factory closure

     6.5         8.7         —           0.7        2.9   

Inventory write-off associated with factory closure

     —           —           —           (0.2     (0.2
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted gross margin

   $ 472.1       $ 425.2       $ 442.0       $ 561.4      $ 565.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     Year Ended  
     December 28,
2014
     December 29,
2013
     December 30,
2012
     December 25,
2011
    December 26,
2010
 

Reconciliation of R&D and SG&A to Adjusted R&D and SG&A

             

R&D and SG&A

   $ 381.7       $ 377.3       $ 363.7       $ 371.8      $ 341.0   

Adjustments to reconcile R&D and SG&A to adjusted R&D and SG&A:

             

Change in retirement plans

     —           —           —           (1.0     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Adjusted R&D and SG&A

   $ 381.7       $ 377.3       $ 363.7       $ 370.8      $ 341.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     Year Ended  
     December 28,
2014
    December 29,
2013
    December 30,
2012
    December 25,
2011
    December 26,
2010
 

Reconciliation of Operating Cash Flow to Free Cash Flow

          

Cash provided by operating activities

   $ 193.7      $ 176.1      $ 183.2      $ 268.5      $ 332.5   

Capital expenditures

     (54.5     (75.2     (151.9     (186.4     (158.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

   $ 139.2      $ 100.9      $ 31.3      $ 82.1      $ 174.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes beginning on page 53 of this report. Certain totals may not sum due to rounding.

Introduction

This discussion and analysis of financial condition and results of operations is intended to provide investors with an understanding of our past performance, financial condition and prospects. We will discuss and provide our analysis of the following:

 

   

Overview

 

   

Results of Operations

 

   

Liquidity and Capital Resources

 

   

Critical Accounting Estimates

 

   

Forward Looking Statements

 

   

Policy on Business Outlook Disclosure

 

   

Status of First Quarter Business

 

   

Recently Issued Financial Accounting Standards

Overview

Fairchild reported solid sales growth into industrial, appliance automotive and computing end markets during 2014 while demand from the mobile sector was weaker than expected. Demand from the consumer markets continued to be weak due to economic pressure on consumer spending and lack of compelling new TV products. Additionally, the impact from lower demand for one major customer that has lost market share, especially in the mobile market, impacted Fairchild sales by 3 percentage points compared to 2013. Overall Fairchild sales were 2% higher in 2014 compared to 2013.

 

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Table of Contents

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 ultra-portable 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, solar inverters 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 product portfolio should enable our standard products group to continue to generate solid cash flow with minimal investment.

In 2014, we invested in our business to streamline manufacturing, upgrade technologies, acquire new capabilities and to fund R&D. A key project for the company has been our manufacturing consolidation that is designed to increase manufacturing flexibility, improve customer service and provide a more balanced internal versus external sourcing mix. This project will result in the closure of our wafer fab in Utah and our assembly and test facility in Malaysia as well as a 5-inch wafer fab line in Korea. We are on schedule to complete the consolidation process in mid-2015 and begin to benefit from lower manufacturing costs in the second half of 2015.

In addition to investing in the business, we also repurchased more than ten million shares of our stock during 2014. We used slightly more than 100% of our 2014 free cash flow to repurchase these shares.

We strive to keep inventory as lean as possible while maintaining high customer service levels. We prefer to maintain maximum flexibility by adjusting internal inventories in response to higher demand before adding more inventory to our distribution channels. At the end of the fourth quarter, our non-catalogue channel inventory was at approximately 9 weeks which is at the low end of our target range of 9—10 weeks. At the end of the fourth quarter of 2014 internal inventories were at $264.9 million, a 16% increase from the end of 2013. Roughly 35% of this increase is related to inventory we built to bridge customers through our manufacturing consolidation. We believe Fairchild is in a strong position to take advantage of anticipated improvements in demand in 2015.

 

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Table of Contents

Results of Operations

The following table summarizes certain information relating to our operating results as derived from our audited consolidated financial statements as well as certain unaudited non-GAAP measures, including results as a percent of revenue.

 

     Year Ended  
     December 28,
2014
    December 29,
2013
    December 30,
2012
 

Total revenues

   $ 1,433.4        100.0   $ 1,405.4        100.0   $ 1,405.9        100.0

Gross margin

     465.6        32.5     416.5        29.6     442.0        31.4

Operating expenses:

            

Research and development

     165.8        11.6     171.6        12.2     156.9        11.2

Selling, general and administrative

     215.9        15.1     205.7        14.6     206.8        14.7

Amortization of acquisition-related intangibles

     10.6        0.7     15.5        1.1     18.2        1.3

Restructuring, impairments, and other costs

     49.8        3.5     15.9        1.1     14.1        1.0

Charge for (release of) litigation

     4.4        0.3     (12.6     -0.9     1.3        0.1
  

 

 

     

 

 

     

 

 

   

Total operating expenses

     446.5        31.1     396.1        28.2     397.3        28.3

Operating income

     19.1        1.3     20.4        1.5     44.7        3.2

Realized loss on sale of securities

     —          0.0     —          0.0     12.9        0.9

Other expense, net

     6.5        0.5     9.2        0.7     8.1        0.6
  

 

 

     

 

 

     

 

 

   

Income before income taxes

     12.6        0.9     11.2        0.8     23.7        1.7

Provision for (benefit from) income taxes

     47.8        3.3     6.2        0.4     (0.9     -0.1
  

 

 

     

 

 

     

 

 

   

Net income (loss)

   $ (35.2     -2.5   $ 5.0        0.4   $ 24.6        1.7
  

 

 

     

 

 

     

 

 

   

Unaudited non-GAAP measures

            

Adjusted net income

   $ 76.4        $ 34.6        $ 70.5     

Adjusted gross margin

     472.1        32.9     425.2        30.3     442.0        31.4

Adjusted R&D and SG&A

     381.7          377.3          363.7     

Free Cash Flow

     139.2          100.9          31.3     

Year Ended December 28, 2014 Compared to Year Ended December 29, 2013

Total Revenues

 

     Year Ended  
     December  28,
2014
     December  29,
2013
     $ Change
Inc  (Dec)
     % Change
Inc (Dec)
 

Total revenues

   $ 1,433.4       $ 1,405.4       $ 28.0         2.0

Revenue was 2.0% higher in 2014 compared to 2013 due to solid sales growth for our products serving the industrial, appliance, automotive and computing markets offset by lower mobile demand, especially from one major customer.

 

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Table of Contents

Geographic revenue information is based on the customer location within the indicated geographic region. The following table presents, as a percentage of sales, geographic revenue for 2014 and 2013.

 

     Year Ended  
     December 28,
2014
    December 29,
2013
 

Percent of total revenue:

    

U.S.

     9     9

Other Americas

     2        2   

Europe

     15        14   

China

     39        36   

Taiwan

     12        11   

Korea

     5        7   

Other Asia/Pacific (1)

     18        21   
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

 

(1) For our geographic reporting purposes includes Japan and Singapore.

The increase in China is due to broad-based higher demand especially in the mobile end market. Lower Korean sales reflect weaker demand from two large Korean manufacturers primarily in the mobile and LCD TV sector. The decrease in Other Asia/Pacific revenue was due to lower consumer demand.

Gross Margin

 

     Year Ended  
     December  28,
2014
    December  29,
2013
    $ Change
Inc  (Dec)
     % Change
Inc  (Dec)
 

Gross Margin $

   $ 465.6      $ 416.5      $ 49.1         11.8

Gross Margin %

     32.5     29.6     

Gross margin increased $49.1 million or 290 basis points in 2014 compared to 2013 due primarily to higher manufacturing utilization and greater efficiency partially offset by higher spending and the annual merit increase.

Adjusted Gross Margin

 

     Year Ended  
     December  28,
2014
    December  29,
2013
    $ Change
Inc  (Dec)
     % Change
Inc (Dec)
 

Adjusted Gross Margin $

   $ 472.1      $ 425.2      $ 46.9         11.0

Adjusted Gross Margin %

     32.9     30.3     

Adjusted gross margin increased $46.9 million in 2014 compared to 2013 for the same reasons listed above. Adjusted gross margin does not include the accelerated depreciation due to factory closures. See reconciliation of gross margin to adjusted gross margin in Item 6 Selected Financial Data included in this report.

Operating Expenses

 

     Year Ended  
     December 28,
2014
     December 29,
2013
     $ Change
Inc  (Dec)
     % Change
Inc (Dec)
 

Research and development

   $ 165.8       $ 171.6       $ (5.8      -3.4

Selling, general and administrative

   $ 215.9       $ 205.7       $ 10.2         5.0

 

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Table of Contents

Research and development expenses decreased 3.4% in 2014 compared to 2013 due to program rationalization and spending reductions partially offset by the addition of Xsens costs, higher variable compensation expenses and the impact of the annual merit increase. Selling, general and administrative expenses were 5.0% higher than the prior year due primarily to higher variable compensation, legal and Xsens costs plus the impact of the annual merit increase partially offset by lower sales and marketing spending as well as reduced information technology (IT) costs.

Restructuring, Impairments and Other Costs

 

     Year Ended  
     December 28,
2014
     December 29,
2013
     $ Change
Inc  (Dec)
     % Change
Inc (Dec)
 

Restructuring, impairments, and other costs

   $ 49.8       $ 15.9       $ 33.9         213.2

During 2014, we recorded restructuring, impairment charges and other costs, net of releases, totaling $49.8 million. The charges included $36.7 million in employee separation costs, $1.3 million in asset impairment charges, $1.2 million in factory closure costs, $8.7 million in qualification costs, and $1.3 million in reserve releases associated with the 2014 Infrastructure Realignment Program. Also during 2014, we recorded $2.5 million in line closure and other costs, $0.9 million in employee separation costs, $0.5 million in asset impairment charges, $0.1 million in lease termination costs, and $0.6 million in reserve releases associated with the 2013 Infrastructure Realignment Program. In addition during 2014, we recorded $0.2 million in reserve releases associated with the 2011 Infrastructure Realignment Program.

During 2013, we recorded restructuring, impairment charges and other costs, net of releases, totaling $15.9 million. The charges included $11.0 million in employee separation costs, $3.0 million in line closure costs, $1.6 million in asset impairment charges, $0.6 million in lease termination costs, and $0.1 million in reserve releases associated with the 2013 Infrastructure Realignment Program. In addition during 2013, we recorded $0.1 million in employee separation costs, and $0.3 million in reserve releases associated with the 2012 Infrastructure Realignment Program.

Please refer to Item 8. Note 16 Restructuring, Impairments and Other Costs to our consolidated financial statements included within this report for further details regarding our restructuring plans.

Charge for Litigation

In 2014, we incurred a $4.4 million litigation charge compared to a release of $12.6 million in 2013, as a result of ongoing developments with POWI litigation. Please refer to Item 8. Note 9 Commitments and Contingencies to our consolidated financial statements included within this report for further details regarding this matter.

Other Expense, net

The following table presents a summary of Other expense, net for 2014 and 2013, respectively.

 

     Year Ended  
     December 28,
2014
     December 29,
2013
 
     (In millions)  

Other expense, net

  

Interest expense

   $ 6.3       $ 6.4   

Interest income

     (0.6      (0.6

Other, net

     0.8         3.4   
  

 

 

    

 

 

 

Other expense, net

   $ 6.5       $ 9.2   
  

 

 

    

 

 

 

 

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Table of Contents

In 2014 other, net consists of a $1.9 million loss on disposal of property, plant, and equipment, a $1.4 million gain on the sale of an equity investment, and $0.3 million in other contributions and donations. In 2013 other, net consists of a $3.0 million write off of an equity investment and $0.4 million in other contributions and donations.

Income Taxes

 

     Year Ended  
     December 28,
2014
     December 29,
2013
     $ Change
Inc  (Dec)
     % Change
Inc (Dec)
 

Income before income taxes

   $ 12.6       $ 11.2       $ (1.4      -12.5

Provision for income taxes

   $ 47.8       $ 6.2       $ (41.6      -671.0

The effective tax rate for 2014 was 378.9% compared to 55.4% for 2013. The change in the effective tax rate was primarily driven by a full valuation allowance against our Korean site’s deferred tax assets, losses incurred in foreign jurisdictions with lower statutory tax rates than that of the U.S., impact of foreign exchange to several of our Asian manufacturing facilities, in addition to an increase in non-deductible expenses within our Penang site subject to closure in 2015.

In accordance with the Income Taxes Topic in the 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 December 28, 2014, we have recorded a deferred tax liability of $3.6 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

 

     Year Ended  
     December 28,
2014
     December 29,
2013
     $ Change
Inc  (Dec)
     % Change
Inc (Dec)
 

Free Cash Flow

   $ 139.2       $ 100.9       $ 38.3         38.0

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 increased in 2014 primarily due to lower capital expenditures. Please refer to Item 6 Selected Financial Data included within this report for our Free Cash Flow reconciliation.

Reportable Segments

The following table represents comparative disclosures of revenue, gross margin and operating income (loss) of our reportable segments.

 

    Year Ended  
    December 28, 2014     December 29, 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

  $ 549.5        38.3   $ 225.5        41.0   $ 125.4      $ 534.1        38.0   $ 195.6        36.6   $ 84.7   

PCIA

    747.1        52.2     223.2        29.9     140.5        733.4        52.2     210.6        28.7     115.8   

SDT

    136.8        9.5     28.6        20.9     25.1        137.9        9.8     24.1        17.5     16.5   

Corporate (1,2)

    —          —          (11.7     —          (271.9     —          —          (13.8     —          (196.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,433.4        100.0   $ 465.6        32.5   $ 19.1      $ 1,405.4        100.0   $ 416.5        29.6   $ 20.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

 

(1)

    Year Ended  
    December 28,
2014
    December 29,
2013
 

Non-cash stock-based compensation expense

  $ 5.3      $ 4.9   

Accelerated depreciation on assets related to factory closure

    6.5        8.7   

Other

    (0.1     0.2   
 

 

 

   

 

 

 

Corporate gross margin total

  $ 11.7      $ 13.8   
 

 

 

   

 

 

 

(2)

    Year Ended  
    December 28,
2014
    December 29,
2013
 

Non-cash stock-based compensation expense

  $ 32.6      $ 27.9   

Restructuring, impairments, and other costs

    49.8        15.9   

Accelerated depreciation on assets related to factory closure

    6.5        8.7   

Charge for (release of) litigation

    4.4        (12.6

Selling, general and administrative expense

    178.8        156.5   

Other

    (0.2     0.2   
 

 

 

   

 

 

 

Corporate operating expense total

  $ 271.9      $ 196.6   
 

 

 

   

 

 

 

MCCC

 

     Year Ended  
     December 28,
2014
    December 29,
2013
    $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Revenue

   $ 549.5      $ 534.1      $ 15.4         2.9

Gross Margin $

   $ 225.5      $ 195.6      $ 29.9         15.3

Gross Margin %

     41.0     36.6     

Operating Income

   $ 125.4      $ 84.7      $ 40.7         48.1

MCCC revenue in 2014 increased 2.9% from the prior year due primarily to higher demand for advanced power management solutions supporting computing and data center end markets partially offset by lower mobile demand. Gross margin and operating income increased substantially in 2014 compared to 2013. Higher gross margin was due primarily to better manufacturing efficiency and lower costs. Operating income was also impacted by lower R&D, selling and marketing and IT spending partially offset by higher variable compensation and the impact of the annual merit increase.

PCIA

 

     Year Ended  
     December 28,
2014
    December 29,
2013
    $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Revenue

   $ 747.1      $ 733.4      $ 13.7         1.9

Gross Margin $

   $ 223.2      $ 210.6      $ 12.6         6.0

Gross Margin %

     29.9     28.7     

Operating Income

   $ 140.5      $ 115.8      $ 24.7         21.3

PCIA revenue in 2014 increased 1.9% from the prior year due to higher sales into the industrial, appliance, and automotive end markets partially offset by lower demand for power conversion products serving the

 

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Table of Contents

consumer and mobile end markets. Gross margin percent increased 120 basis points from the prior year due to higher factory loadings and better utilization of the new 8-inch wafer fab in Korea partially offset by inefficiencies related to the manufacturing consolidation and the impact of the annual merit increase. Operating income was substantially higher in 2014 compared to the prior year due primarily to higher gross margin combined with lower legal, R&D and IT costs.

SDT

 

     Year Ended  
     December 28,
2014
    December 29,
2013
    $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Revenue

   $ 136.8      $ 137.9      $ (1.1      -0.8

Gross Margin $

   $ 28.6      $ 24.1      $ 4.5         18.7

Gross Margin %

     20.9     17.5     

Operating Income

   $ 25.1      $ 16.5      $ 8.6         52.1

SDT revenue in 2014 decreased slightly from the prior year due to ongoing product life cycle management to improve gross margin and profitability. The substantial improvement in gross margin and operating income from the prior year was due primarily to improved product mix and lower manufacturing costs.

Year Ended December 29, 2013 Compared to Year Ended December 30, 2012

Total Revenues

 

     Year Ended  
     December 29,
2013
     December 30,
2012
     $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Total revenues

   $ 1,405.4       $ 1,405.9       $ (0.5      —  

Revenue was flat on a nominal basis in 2013 compared to 2012, however 2012 contained 53 weeks. Sales in 2013 increased 2% from 2012 when adjusted for the extra week. Revenue in 2012 also included $8.5 million of insurance proceeds related to business interruption claims for the company’s optoelectronics supply issues resulting from the Thailand floods in the fourth quarter of 2011.

Geographic revenue information is based on the customer location within the indicated geographic region. The following table presents, as a percentage of sales, geographic sales for 2013 and 2012.

 

     Year Ended  
     December 29,
2013
    December 30,
2012
 

U.S.

     9     9

Other Americas

     2        2   

Europe

     14        13   

China

     36        35   

Taiwan

     11        14   

Korea

     7        9   

Other Asia/Pacific (1)

     21        18   
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

 

(1) For our geographic reporting purposes includes Japan and Singapore.

 

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The decrease in Taiwan was due primarily to lower sales into the PC market. Lower Korean sales reflect weaker demand from two large Korean manufacturers primarily in the mobile and LCD TV sector. The increase in Other Asia/Pacific revenue was due to continued strong demand for mobile products including smart phones and tablets.

Gross Margin

 

     Year Ended  
     December 29,
2013
    December 30,
2012
    $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Gross Margin $

   $ 416.5      $ 442.0      $ (25.5      -5.8

Gross Margin %

     29.6     31.4     

Gross margin declined $25.5 million or 180 basis points in 2013 compared to 2012 due primarily to mix/pricing impacts and to higher manufacturing costs associated with qualifying and ramping the new 8-inch wafer fabrication facility in Korea. We expect the efforts related to the new wafer fabrication facility in Korea to improve manufacturing flexibility, provide better support to our customers as well as reduce costs.

Adjusted Gross Margin

 

     Year Ended  
     December 39,
2013
    December 30,
2012
    $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Adjusted Gross Margin $

   $ 425.2      $ 442.0      $ (16.8      -3.8

Adjusted Gross Margin %

     30.3     31.4     

Adjusted gross margin dollars decreased when compared to 2012 for the same reasons listed above. Adjusted gross margin for 2013 does not include the accelerated depreciation due to the 8-inch line closure at our West Jordan wafer fabrication facility. There were no adjustments to 2012 gross margin. Please refer to Item 6 Selected Financial Data included within this report for our Adjusted Gross Margin reconciliation.

Operating Expenses

 

     Year Ended  
     December 39,
2013
     December 30,
2012
     $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Research and development

   $ 171.6       $ 156.9       $ 14.7         9.4

Selling, general and administrative

   $ 205.7       $ 206.8       $ (1.1      -0.5

Research and development expenses increased 9.4% in 2013 compared to 2012 due to higher spending on a variety of new technologies including silicon carbide and advanced sensors. Selling, general and administrative expenses were down slightly from the prior year due to ongoing cost reductions and one less week of costs in 2013 offset by higher variable compensation expense. Operating expenses included an additional week of costs in 2012.

Restructuring, Impairments and Other Costs

 

     Year Ended  
     December 29,
2013
     December 30,
2012
     $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Restructuring, impairments, and other costs

   $ 15.9       $ 14.1       $ 1.8         12.8

 

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During 2013, we recorded restructuring, impairments and other costs, net of releases, totaling $15.9 million. The charges included $11.0 million in employee separation costs, $3.0 million in line closure costs, $1.6 million in asset impairment charges, $0.6 million in lease termination costs, and $0.1 million in reserve releases associated with the 2013 Infrastructure Realignment Program. In addition during 2013, we recorded $0.1 million in employee separation costs, and $0.3 million in reserve releases associated with the 2012 Infrastructure Realignment Program.

During 2012, we recorded restructuring, impairments and other costs, net of releases, totaling $14.1 million. The charges included $12.5 million in employee separation costs and $0.4 million in facility closure costs and $0.6 million in lease termination costs, all associated with the 2012 Infrastructure Realignment Program. In addition during 2012, we recorded $1.0 million in employee separation costs, $0.4 million in reserve releases, and $0.1 million in asset impairment charges associated with the 2011 Infrastructure Realignment Program. We also recognized $0.1 million in reserve releases in 2012 associated with the 2010 Infrastructure Realignment Program.

Please refer to Item 8 Note 16 Restructuring, Impairments and Other Costs to our consolidated financial statements included within this report for further details regarding our restructuring plans.

Charge for Litigation

In 2013, we released $12.6 million from reserves for potential litigation liabilities as a result of ongoing developments with the POWI 1 litigation.

Realized Loss on Sale of Securities

In 2012, we sold our auction rate security portfolio for $23.3 million and incurred a realized loss of approximately $12.9 million on the sale.

Other Expense, net

The following table presents a summary of Other expense, net for 2013 and 2012, respectively.

 

     Year Ended  
     December 29,
2013
     December 30,
2012
 
     (In millions)  

Interest expense

   $ 6.4       $ 7.6   

Interest income

     (0.6      (2.0

Other, net

     3.4         2.5   
  

 

 

    

 

 

 

Other expense, net

   $ 9.2       $ 8.1   
  

 

 

    

 

 

 

Interest expense in 2013 decreased $1.2 million as compared to 2012, primarily due to repayment of debt.

Interest income in 2013 decreased $1.4 million as compared to 2012, primarily driven by the loss of interest income on our auction rate security portfolio and very low interest rates.

Income Taxes

 

     Year Ended  
     December 29,
2013
     December 30,
2012
     $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Income before income taxes

   $ 11.2       $ 23.7       $ (12.5      -52.7

Provision for (benefit from) income taxes

   $ 6.2       $ (0.9    $ 7.1         788.9

 

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The effective tax rate for 2013 was 55.4% compared to (3.8%) for 2012. The change in effective tax rate while impacted by foreign exchange rates, was primarily driven by changes in profits among legal jurisdictions with differing tax rates. In 2013, the valuation allowance on the company’s deferred tax assets decreased by $6.9 million as deferred tax assets decreased primarily due to U.S. profits before tax as well as $2.8 million decrease to the valuation allowance related to the company’s Malaysian cumulative reinvestment allowance and manufacturing incentives. The overall decrease did not impact our results of operations.

In accordance with the Income Taxes Topic in the 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 December 29, 2013, we 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

 

     Year Ended  
     December 29,
2013
     December 30,
2012
     $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Free Cash Flow

   $ 100.9       $ 31.3       $ 69.6         222.4

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 increased in 2013 primarily due to lower capital expenditures. Please refer to Item 6 Selected Financial Data included within this report for our Free Cash Flow reconciliation.

Reportable Segments

The following table represents comparative disclosures of revenue, gross margin and operating income (loss) of our reportable segments.

 

    Year Ended  
    December 29, 2013     December 30, 2012  
    Revenue     % of
total
    Gross
Margin
    Gross
Margin  %
    Operating
Income  (loss)
    Revenue     % of
total
    Gross
Margin
    Gross
Margin  %
    Operating
Income  (loss)
 
    (Dollars in millions)  

MCCC

  $ 534.1        38.0   $ 195.6        36.6   $ 84.7      $ 570.2        40.5   $ 214.9        37.7   $ 103.5   

PCIA

    733.4        52.2     210.6        28.7     115.8        694.0        49.4     204.1        29.4     120.2   

SDT

    137.9        9.8     24.1        17.5     16.5        141.7        10.1     26.9        19.0     18.6   

Corporate (1,2)

    —          —          (13.8     —          (196.6     —          —          (3.9     —          (197.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,405.4        100.0   $ 416.5        29.6   $ 20.4      $ 1,405.9        100.0   $ 442.0        31.4   $ 44.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

    Year Ended  
    December  29,
2013
    December  30,
2012
 

Non-cash stock-based compensation expense

  $ 4.9      $ 4.4   

Accelerated depreciation on assets related to factory closure

    8.7        —     

Other

    0.2        (0.5
 

 

 

   

 

 

 

Corporate gross margin total

  $ 13.8      $ 3.9   
 

 

 

   

 

 

 

(2)

 

    Year Ended  
    December  29,
2013
    December  30,
2012
 

Non-cash stock-based compensation expense

  $ 27.9      $ 22.6   

Restructuring, impairments, and other costs

    15.9        14.1   

Accelerated depreciation on assets related to factory closure

    8.7        —     

Charge for (release of) litigation

    (12.6     1.3   

Selling, general and administrative expense

    156.5        159.8   

Other

    0.2        (0.2
 

 

 

   

 

 

 

Corporate operating expense total

  $ 196.6      $ 197.6   
 

 

 

   

 

 

 

MCCC

 

     Year Ended  
     December  29,
2013
    December  30,
2012
    $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Revenue

   $ 534.1      $ 570.2      $ (36.1      -6.3

Gross Margin $

   $ 195.6      $ 214.9      $ (19.3      -9.0

Gross Margin %

     36.6     37.7        -1.1

Operating Income

   $ 84.7      $ 103.5      $ (18.8      -18.2

MCCC revenue in 2013 decreased from the prior year due primarily to lower demand for MOSFETs supporting the computing and consumer end markets and one less week in 2013 compared to 2012. Gross margin and operating income decreased in 2013 compared to 2012 due primarily to underutilization charges associated with the lower sales level and higher variable compensation spending. Operating income was also impacted by higher R&D spending primarily for mobile applications.

PCIA

 

     Year Ended  
     December 29,
2013
    December 30,
2012
    $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Revenue

   $ 733.4      $ 694.0      $ 39.4         5.7

Gross Margin $

   $ 210.6      $ 204.1      $ 6.5         3.2

Gross Margin %

     28.7     29.4        -0.7

Operating Income

   $ 115.8      $ 120.2      $ (4.4      -3.7

 

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PCIA revenue increased in 2013 compared to 2012 due to higher high voltage sales into the industrial, appliance and automotive end markets. PCIA revenue in 2012 included $8.5 million of insurance proceeds related to the business interruption claims for the company’s optoelectronics supply issues resulting from flooding in Thailand in the fourth quarter of 2011. 2012 also included one additional week of sales. Gross margin percent decreased 70 basis points due to higher costs associated with the start up costs associated with the new 8-inch wafer fab in Korea partially offset by better utilization in other plants driven by higher sales. Lower operating income was mainly due to lower gross margin combined with higher variable compensation expenses in 2013 compared to 2012.

SDT

 

     Year Ended  
     December 29,
2013
    December 30,
2012
    $ Change
Inc (Dec)
     % Change
Inc (Dec)
 

Revenue

   $ 137.9      $ 141.7      $ (3.8      -2.7

Gross Margin $

   $ 24.1      $ 26.9      $ (2.8      -10.4

Gross Margin %

     17.5     19.0        -1.5

Operating Income

   $ 16.5      $ 18.6      $ (2.1      -11.3

SDT revenue in 2013 decreased as compared to 2012 as a result of one less week. The decrease in gross margin and operating income was due primarily to changes in mix and higher variable compensation expense in 2013 compared to 2012.

Liquidity and Capital Resources

Our main sources of liquidity are our cash flows from operations, cash and cash equivalents and our revolving credit facility. As of December 28, 2014, $138.6 million of our $355.2 million of cash and marketable securities balance was located in the U.S. 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.

On September 26, 2014, we entered into a new $400.0 million, five-year senior secured revolving credit facility. As of December 28, 2014, $200.0 million was drawn of the $400.0 million credit facility. Please refer to Item 8. Note 8 Indebtedness to our consolidated financial statements included within this report for further details on the terms of this credit facility.

As of December 29, 2014, we were in compliance with the covenants associated with the credit facility and we expect to remain in compliance. This expectation is subject to various risks and uncertainties discussed more thoroughly in Item 1A Risk Factors included in this report, and include, among others, the risk that our assumptions and expectations about business conditions, expenses and cash flows for the remainder of the year may be inaccurate.

While our credit facility places restrictions on the payment of dividends under certain conditions, 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 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 2014, we incurred capital expenditures of $54.5 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. Additional borrowing or equity investment may be required to fund future acquisitions. The sale of additional equity securities could

 

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result in additional dilution to our stockholders. In December 2013, the board of directors authorized the purchase of the company’s common stock up to $100.0 million and on May 7, 2014, the board of directors authorized the additional repurchase of up to $100.0 million of the company’s common stock.

During 2014, our cash provided by operating activities was $193.7 million compared to $176.1 million in 2013. The following table presents a summary of net cash provided by operating activities during 2014 and 2013, respectively.

 

    Year Ended  
    December 28,
2014
    December 29,
2013
 
    (In millions)  

Net income (loss)

  $ (35.2   $ 5.0   

Depreciation and amortization

    139.7        145.2   

Non-cash stock-based compensation expense

    32.6        27.9   

Gain on sale of equity investment

    (1.4     —     

Non-cash restructuring and impairments expense

    1.9        1.5   

Deferred income taxes, net

    34.9        (4.8

Charge for (release of) litigation

    4.4        (12.6

Other, net

    3.2        5.2   

Change in other working capital accounts

    13.6        8.7   
 

 

 

   

 

 

 

Net cash provided by operating activities

  $ 193.7      $ 176.1   
 

 

 

   

 

 

 

Cash provided by operating activities in 2014 increased by $17.6 million compared to 2013 primarily driven by impact of the deferred income taxes, the decrease 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 2014 totaled $106.8 million compared to $77.0 million in 2013. The 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 $151.8 million in 2014 as compared to $87.2 million in 2013. The increase in cash used in 2013 of $64.6 million was driven by an increased amount of treasury shares purchased of $113.5 million.

 

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Contractual Obligations and Off-Balance Sheet Arrangements

The table below summarizes our significant contractual obligations as of December 28, 2014 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

 

Contractual Obligations

   Total      Less than
1 year
     1-3
years
     4-5
years
     After
5 years
 
     (In millions)  

Debt Obligations - Principal

   $ 200.1       $ —         $ 0.1       $ 200.0       $ —     

Debt Obligations - Interest (1)

     16.7         3.3         6.7         6.7         —     

Operating Lease Obligations (2)

     26.2         14.3         9.1         2.5         0.3   

Letters of Credit

     4.4         4.4         —           —           —     

Capital Purchase Obligations (3)

     10.2         10.2         —           —           —     

Other Purchase Obligations and Commitments (4)

     44.0         37.3         2.7         1.0         3.0   

Royalty Obligations

     3.3         0.5         2.8         —           —     

Executive Compensation Agreements

     2.6         0.1         0.2         0.3         2.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (5)

   $ 307.5       $ 70.1       $ 21.6       $ 210.5       $ 5.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Interest rate on debt is variable. Interest payments were estimated using the 1.7% interest rate in effect currently. Refer to Item 8. Note 8 Indebtedness to our consolidated financial statements included in this report for additional information.
(2) Represents future minimum lease payments under non-cancelable operating leases.
(3) Capital purchase obligations represent commitments for purchases of plant and equipment. They are not recorded as liabilities on our balance sheet as of December 28, 2014, as we have not yet received the related goods or taken title to the property.
(4) For the purposes of this table, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons.
(5) We had $3.4 million of unrecognized tax benefits at December 28, 2014. The timing of the expected cash outflow relating to the balance is not reliably determinable at this time. In addition, the total does not include any contractual obligations recorded on the balance sheet as current liabilities other than certain purchase obligations which are discussed below.

It is customary practice in the semiconductor industry to enter into guaranteed purchase commitments or “take or pay” arrangements for purchases of certain equipment and raw materials. Obligations under these arrangements are included in Other Purchase Obligations and Commitments in the above table.

Contractual obligations that are contingent upon the achievement of certain milestones are not included in the above table. These obligations include contingent funding/payment obligations and milestone-based equity compensation funding. These arrangements are not considered contractual obligations until the milestone is met.

We also enter into contracts for outsourced services; however, the obligations under these contracts were not significant at December 28, 2014 and the contracts generally contain clauses allowing for cancellation without significant penalty.

The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.

For additional information related to certain risks that could negatively impact our financial position or future results of operations, please refer to Item 1A Risk Factors and Item 7A Quantitative and Qualitative Disclosures About Market Risk included in this report.

 

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Critical Accounting Estimates

The preparation of our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP), requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We evaluate our estimates, judgments and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. Our most critical accounting estimates include revenue recognition, sales reserves, inventory valuation, fair value of financial instruments, impairment of long-lived assets, business combinations, income taxes, valuation of deferred tax assets, and loss contingencies.

Revenue Recognition and Sales Reserves

No revenue is recognized unless there is persuasive evidence of an arrangement, the price to the buyer is fixed or determinable, delivery has occurred and collectability of the sales price is reasonably assured. Revenue from the sale of semiconductor products is recognized when title and risk of loss transfers to the customer, which is generally when the product is received by the customer. In some cases, title and risk of loss do not pass to the customer when the product is received by them. In these cases, we recognize revenue at the time when title and risk of loss is transferred, assuming all other revenue recognition criteria have been satisfied. These cases include several inventory locations where we manage consigned inventory for our customers, some of which is at customer facilities. In such cases, revenue is not recognized when products are received at these locations; rather, revenue is recognized when customers take the inventory from the location for their use. Shipping costs billed to our customers are included within revenue with associated costs classified in cost of goods sold.

Approximately 63% of our revenue in 2014 is generated through sales to distributors. Distributor payments are due under agreed terms and are not contingent upon resale or any other matter other than the passage of time. We have agreements with some distributors and customers for various programs, including prompt payment discounts, pricing protection, scrap allowances and stock rotation. Sales to these distributors and customers, as well as the existence of sales incentive programs, are in accordance with terms set forth in written agreements with these distributors and customers. In general, credits allowed under these programs are capped based upon individual distributor agreements. We record charges associated with these programs as a reduction of revenue based upon historical activity and our expectation of future activity. We also have volume based incentives with certain distributors to encourage stronger resales of our products. Reserves are recorded as a reduction to revenue as they are earned by the distributor. Our policy is to use both a three to six month rolling historical experience rate as well as a prospective view of products in the distributor channel for distributors who participate in an incentive program in order to estimate the necessary allowance to be recorded. In addition, the products sold by us are subject to a limited product quality warranty. We accrue for estimated incurred but unidentified quality issues based upon historical activity and known quality issues if a loss is probable and can be reasonably estimated. The standard limited warranty period is one year. Quality returns are accounted for as a reduction of revenue. Historically, we have not experienced material differences between our estimated sales reserves and actual results.

Inventory Valuation

In determining the net realizable value of our inventories, we review the valuations of inventory considered excessively old, and therefore subject to, obsolescence and inventory in excess of customer backlog and historical rates of demand. We value inventory at the lower of cost or market. Once established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory.

 

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Fair Value of Financial Instruments

Securities and derivatives are financial instruments that are recorded at fair value on a recurring basis. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, we use quoted market prices to measure fair value. If market prices are not available, fair value measurements are 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, we are required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument.

In the valuation of our derivative instruments, we consider our credit risk and the credit risk of our counterparties. Based on our current credit standing and the credit standing of our counterparties credit risk has not had a material impact in the valuation of our derivatives. Refer to Item 8. Note 3 Fair Value Measurements to our consolidated financial statements for a complete discussion on our use of fair valuation of financial instruments, our related measurement techniques, and its impact to our financial statements.

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets, including goodwill, on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is also subject to an annual impairment test, or more frequently, if indicators of potential impairment arise.

In 2014, 2013 and 2012, there were no goodwill impairments and the fair values of the reporting units with goodwill were substantially in excess of book values. Please refer to Item 8. Note 7 Goodwill and Intangible Assets to our consolidated financial statements included in this report for further information.

For all other long-lived assets, our impairment review process is based upon an estimate of future undiscounted cash flows. Factors we consider that could trigger an impairment review include the following:

 

   

significant underperformance relative to expected historical or projected future operating results,

 

   

significant changes in the manner of our use of the acquired assets or the strategy for our overall business,

 

   

significant negative industry or economic trends, and

 

   

significant technological changes, which would render equipment and manufacturing processes obsolete.

Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying value to the future net undiscounted cash flows expected to be generated by the asset or asset group. Future undiscounted cash flows include estimates of future revenues, driven by market growth rates, and estimated future costs. Please refer to Item 8. Note 16 Restructuring, Impairments and Other Costs to our consolidated financial statements included in this report for more information. There were no triggering events in 2013 or 2012 that caused us to evaluate our other long-lived assets for impairment.

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred taxes are not provided for the undistributed earnings of our foreign subsidiaries that are considered to be

 

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indefinitely reinvested outside of the U.S. We plan to repatriate certain non-U.S. earnings which have been taxed in the U.S. but earned offshore as well as any non-U.S. earnings that are not considered to be indefinitely invested outside the U.S.

We make judgments regarding the realizability of our deferred tax assets. In accordance with the Income Tax topic of the ASC, the carrying value of the net deferred tax assets is based on the belief that it is more likely than not that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets after consideration of all available positive and negative evidence. Future realization of the tax benefit of existing deductible temporary differences or carryforwards ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback and carryforward period available under the tax law. Future reversals of existing taxable temporary differences, projections of future taxable income excluding reversing temporary differences and carryforwards, taxable income in prior carryback years, and prudent and feasible tax planning strategies that would, if necessary, be implemented to preserve the deferred tax asset may be considered to identify possible sources of taxable income.

Valuation allowances have been established for deferred tax assets, which we believe do not meet the “more likely than not” criteria established by the Income Tax topic of the ASC. In 2005, we established a full valuation allowance against our net U.S. deferred tax assets excluding certain deferred tax liabilities related to indefinite-lived goodwill. We recorded a valuation allowance in 2005 and continue to carry the valuation allowance in 2014 as our trend of positive evidence does not currently support such a release. In 2008, a deferred tax asset and full valuation allowance was recorded in the amount of $24.8 million relating to our Malaysian cumulative reinvestment allowance and manufacturing incentives. Based on an update of the jurisdictional financial history and current forecast, it was management’s belief that we did meet the standard of “more likely than not” that is required for measuring the likelihood of a realization of net deferred tax assets, and was reflected in the partial release. In 2014, the Malaysian deferred tax asset decreased to $26.8 million while the ending valuation allowance decreased to $23.9 million. In the fourth quarter of 2014, a full valuation allowance was recorded in the amount of $36.8 million against our net Korean deferred tax assets as the cumulative pretax loss and Korean tax holiday, which applies to certain manufacturing activities, raised uncertainty about the likelihood of realization of those deferred tax assets. We will continue to evaluate book and taxable income trends, and their impact on the amount and timing of valuation allowance adjustments.

If we are able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been established, the related portion of the valuation allowance is released to income from continuing operations, additional paid-in capital or to other comprehensive income.

The calculation of our tax liabilities includes addressing uncertainties in the application of complex tax regulations in a multitude of jurisdictions. The Income Tax topic of the ASC clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The topic prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our recognition threshold and measurement attribute of whether it is more likely than not that the positions we have taken in tax filings will be sustained upon tax audit, and the extent to which, additional taxes would be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period in which it is determined the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

$3.4 million of the unrecognized tax benefits at December 28. 2014, if recognized, would reduce the annual effective tax rate. We do not expect any significant increases or decreases for uncertain tax positions during the next twelve months.

 

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Loss Contingencies

We are subject to various legal and administrative proceedings and asserted and potential claims, as well as accruals related to product warranties that arise in the ordinary course of business. The outcomes of legal and administrative proceedings and claims, and the estimation of product warranties and asset impairments, are subject to significant uncertainty. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. At least quarterly, we review the status of each significant matter, and we may revise our estimates. These revisions could have a material impact on our results of operations and financial position. For a discussion of legal matters as of December 28, 2014, please refer to Item 8 Note 9 Commitments and Contingencies to our consolidated financial statements included in this report.

Forward Looking Statements

This annual report, including but not limited to the section entitled “Status of First Quarter Business”, 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. For Example, the Status of First Quarter Business below contains numerous forward-looking statements. 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 SEC. 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.

Policy on Business Outlook Disclosure

Financial information relating to any current quarter should be considered to be speaking as of the date of the press release or other announcement only. Following the date of the press release or other announcement, the information should be considered to be historical and not subject to update. We undertake no obligation to update any such information, although we may choose to do so by press release, SEC filing or other public announcement. Consistent with this policy, Fairchild Semiconductor representatives will not comment about the business outlook or our financial results or expectations for the quarter in question.

Status of First Quarter Business

We expect sales to be in the range of $340 to $360 million for the first quarter. We expect adjusted gross margin to be 31.0% to 32.0% due primarily to lower factory loadings from the prior quarter and the resumption of some payroll related taxes. We anticipate R&D and SG&A spending to be $94 to $96 million due primarily to the resumption of FICA and other payroll related taxes. The adjusted tax rate is forecast at 12 percent plus or minus 3 percentage points for the quarter. Consistent with our usual practices, we are not assuming any obligation to update this information, although we may choose to do so before we announce first quarter results

 

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Recently Issued Financial Accounting Standards

In February 2013, the Financial Accounting Standards Board, or 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 the company on January 1, 2017. Early application is not permitted. This ASU 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.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15) Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this ASU provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt(2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This ASU is effective for fiscal years beginning after December 15, 2017. The adoption of ASU 2014-15 is not expected to have a material effect on our consolidated financial position and results of operations and statements of cash flows.

In January 2015, the FASB issued Accounting Standards Update No. 2015-01, (ASU 2015-01) Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from U.S. GAAP the concept of extraordinary items. Prior to this ASU entities were required to separately classify, present, and disclose extraordinary events and transactions. Events or transactions were presumed to be an ordinary and usual activity

 

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of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction met the criteria for extraordinary classification, an entity was required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also was required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of ASU 2015-01 is not expected to have a material effect on our consolidated financial position and results of operations and statements of cash flows.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks, we utilize derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes. All of the potential changes noted below are based on sensitivity analysis performed on our financial position at December 28, 2014. Actual results may differ materially.

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. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we have established hedging programs. 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 28, 2014, 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 $7.9 million.

We have interest rate exposure with respect to our credit facility due to its variable pricing. For the year ended December 28, 2014, a 50 basis point increase in interest rates would have resulted in increased annual interest expense of $1.0 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 $1.2 million on the cash and investment balances during 2014.

 

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     54   

Consolidated Balance Sheets

     56   

Consolidated Statements of Operations

     57   

Consolidated Statements of Comprehensive Income (Loss)

     58   

Consolidated Statements of Cash Flows

     59   

Consolidated Statements of Stockholders’ Equity

     60   

Notes to Consolidated Financial Statements

     61   

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Fairchild Semiconductor International, Inc.:

We have audited the accompanying consolidated balance sheets of Fairchild Semiconductor International, Inc. and subsidiaries as of December 28, 2014 and December 29, 2013, and the related consolidated statements of operations, comprehensive income (loss), cash flows and stockholders’ equity for each of the years in the three-year period ended December 28, 2014. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in Item 15(b) of the 2014 Form 10-K. We also have audited Fairchild Semiconductor International, Inc.’s internal control over financial reporting as of December 28, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Fairchild Semiconductor International, Inc. management is responsible for these consolidated financial statements, financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fairchild Semiconductor International, Inc. and subsidiaries as of December 28, 2014 and December 29, 2013, and the results of its operations and its cash flows for each of the years in the three-year period ended December 28, 2014, in conformity with U.S. generally accepted accounting principles. In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial

 

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statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also in our opinion, Fairchild Semiconductor International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 28, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ KPMG LLP

Boston, Massachusetts

February 26, 2015

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

     Year Ended  
     December  28,
2014
    December  29,
2013
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 352.9      $ 417.8   

Short-term marketable securities

     0.1        0.1   

Accounts receivable, net of allowances of $32.0 and $25.3 at December 28, 2014 and December 29, 2013, respectively

     124.0        127.4   

Inventories, net

     264.9        228.1   

Deferred income taxes, net of allowances

     13.2        18.6   

Other current assets

     30.2        32.6   
  

 

 

   

 

 

 

Total current assets

     785.3        824.6   

Property, plant and equipment, net

     627.7        707.9   

Deferred income taxes, net of allowances

     5.3        30.9   

Intangible assets, net

     37.2        31.7   

Goodwill

     209.2        169.3   

Long-term marketable securities

     2.2        2.2   

Other assets

     25.2        29.4   
  

 

 

   

 

 

 

Total assets

   $ 1,692.1      $ 1,796.0   
  

 

 

   

 

 

 

LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

     106.2        95.8   

Accrued expenses and other current liabilities

     129.6        88.0   
  

 

 

   

 

 

 

Total current liabilities

     235.8        183.8   

Long-term debt

     200.1        200.1   

Deferred income taxes

     34.2        27.7   

Other liabilities

     23.9        20.3   
  

 

 

   

 

 

 

Total liabilities

     494.0        431.9   

Commitments and contingencies (Note 9)

    

Temporary equity—deferred stock units

     4.0        3.6   

Stockholders’ equity:

    

Common stock, $.01 par value, voting; 340,000,000 shares authorized; 140,069,287 and 138,498,696 shares issued and 117,677,463 and 126,195,375 shares outstanding at December 28, 2014 and December 29, 2013, respectively

     1.4        1.4   

Additional paid-in capital

     1,542.5        1,517.8   

Accumulated deficit

     (47.6     (12.4

Accumulated other comprehensive income (loss)

     (10.3     3.1   

Treasury stock at cost

     (291.9     (149.4
  

 

 

   

 

 

 

Total stockholders’ equity

     1,194.1        1,360.5   
  

 

 

   

 

 

 

Total liabilities, temporary equity and stockholders’ equity

   $ 1,692.1      $ 1,796.0   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

 

     Year Ended  
     December  28,
2014
    December  29,
2013
    December  30,
2012
 

Total revenue

   $ 1,433.4      $ 1,405.4      $ 1,405.9   

Cost of sales

     967.8        988.9        963.9   
  

 

 

   

 

 

   

 

 

 

Gross margin

     465.6        416.5        442.0   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     165.8        171.6        156.9   

Selling, general and administrative

     215.9        205.7        206.8   

Amortization of acquisition-related intangibles

     10.6        15.5        18.2   

Restructuring, impairments, and other costs

     49.8        15.9        14.1   

Charge for (release of) litigation

     4.4        (12.6     1.3   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     446.5        396.1        397.3   
  

 

 

   

 

 

   

 

 

 

Operating income

     19.1        20.4        44.7   

Realized loss on sale of securities

     —          —          12.9   

Other expense, net

     6.5        9.2        8.1   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     12.6        11.2        23.7   

Provision for (benefit from) income taxes

     47.8        6.2        (0.9
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (35.2   $ 5.0      $ 24.6   
  

 

 

   

 

 

   

 

 

 

Net income (loss) per common share:

      

Basic

   $ (0.29   $ 0.04      $ 0.19   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.29   $ 0.04      $ 0.19   
  

 

 

   

 

 

   

 

 

 

Weighted average common shares:

      

Basic

     121.4        127.2        126.7   
  

 

 

   

 

 

   

 

 

 

Diluted

     121.4        128.7        129.0   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

 

     Year Ended  
     December 28,
2014
    December 29,
2013
    December 30,
2012
 

Net income (loss)

   $ (35.2   $ 5.0      $ 24.6   

Other comprehensive income (loss), net of tax:

      

Net change associated with hedging transactions

     (0.7     2.2        15.8   

Net amount reclassified to earnings for hedging (1)

     (6.4     (4.9     (3.2

Net change associated with fair value of securities

     0.1        (0.2     (4.4

Net amount reclassified to earnings for securities

     —          —          10.4   

Net change associated with pension transactions (2)

     (0.2     1.0        (1.1

Foreign currency translation adjustment

     (6.2     —          —     
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     (13.4     (1.9     17.5   
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (48.6   $ 3.1      $ 42.1   
  

 

 

   

 

 

   

 

 

 

 

(1)

     Year Ended  
     December 28,
2014
     December 29,
2013
     December 30,
2012
 

Net amount reclassified for cash flow hedges included in total revenue

   $ (0.9    $ (0.2    $ (1.2

Net amount reclassified for cash flow hedges included in cost of sales

     (4.0      (3.7      (1.8

Net amount reclassified for cash flow hedges included in selling, general and administrative

     (1.5      (1.1      (0.2

Net amount reclassified for cash flow hedges included in research and development

     —           0.1         —     
  

 

 

    

 

 

    

 

 

 

Total net amount reclassified to earnings for hedging

   $ (6.4    $ (4.9    $ (3.2
  

 

 

    

 

 

    

 

 

 

 

(2) Net of $0.4 million tax 2014.

See accompanying notes to consolidated financial statements.

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

     Year Ended  
     December 28,
2014
    December 29,
2013
    December 30,
2012
 

Cash flows from operating activities:

      

Net income (loss)

   $ (35.2   $ 5.0      $ 24.6   

Adjustments to reconcile net income (loss) to cash provided by operating activities:

      

Depreciation and amortization

     139.7        145.2        135.3   

Non-cash stock-based compensation expense

     32.6        27.9        22.6   

Non-cash restructuring and impairments expense

     1.9        1.5        0.1   

Non-cash interest income

     —          (0.1     (0.4

Non-cash financing expense

     1.3        0.9        1.0   

Gain from sale of equity investment

     (1.4     —          —     

Non-cash realized loss on sale of investments

     —          —          12.9   

Non-cash write-off of equity investment

     —          3.0        —     

Loss on disposal of property, plant and equipment

     1.9        1.4        1.9   

Deferred income taxes, net

     34.9        (4.8     (11.2

Charge for (release of) litigation

     4.4        (12.6     —     

Changes in operating assets and liabilities, net of effects of acquisitions:

      

Accounts receivable

     4.6        9.3        6.2   

Inventories

     (35.6     9.0        (2.5

Other current assets

     1.6        4.2        6.2   

Accounts payable

     8.8        (15.6     14.4   

Accrued expenses and other current liabilities

     30.1        (2.3     (30.5

Other assets and liabilities, net

     4.1        4.1        2.6   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

   $ 193.7      $ 176.1      $ 183.2   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchase of marketable securities

     —          —          (0.5

Sale of marketable securities

     —          —          23.6   

Maturity of marketable securities

     0.1        0.3        0.2   

Capital expenditures

     (54.5     (75.2     (151.9

Disposal of property, plant and equipment, net

     3.8        —          —     

Purchase of molds and tooling

     (1.7     (2.1     (2.4

Sale of equity investment

     2.1       

Acquisitions and divestitures, net of cash acquired

     (56.6     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

   $ (106.8   $ (77.0   $ (131.0
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Repayment of long-term debt

     (200.0     (50.0     (50.0

Borrowing from revolving credit facility

     200.0        —          —     

Proceeds from issuance of stock for share-based compensation arrangements

     1.5        1.1        5.0   

Purchase of treasury stock

     (142.5     (29.0     (13.9

Shares withheld for employee taxes

     (9.1     (9.3     (10.7

Debt financing costs

     (1.7     —          —     
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

   $ (151.8   $ (87.2   $ (69.6
  

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     (64.9     11.9        (17.4

Cash and cash equivalents at beginning of period

     417.8        405.9        423.3   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 352.9      $ 417.8      $ 405.9   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

      

Cash paid during the period for:

      

Income taxes, net

   $ 13.1      $ 12.1      $ 20.1   

Interest

   $ 3.8      $ 4.7      $ 6.1   

See accompanying notes to consolidated financial statements.

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions)

 

                            Accumulated Other
Comprehensive Income (Loss)
             
    Common Stock                                   Foreign
Currency
Translation
Adjustment
             
    Number
of Shares
    At Par
Value
    Additional
Paid-in Capital
    Accumulated
Deficit
    Securities     Hedging
Transactions
    Pensions       Treasury
Stock
    Total  

Balances at December 25, 2011

    125.8      $ 1.3      $ 1,481.9      $ (42.0   $ (5.7   $ (5.4   $ (1.3   $ —        $ (106.6   $ 1,322.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          24.6                  24.6   

Exercise or settlement of plan awards

    2.2        0.1        5.0                    5.1   

Stock-based compensation expense

        22.9                    22.9   

Purchase of treasury stock

    (1.1                   (13.9     (13.9

Cash flow hedges

              12.6              12.6   

Net amount reclassified to earnings for sale of marketable securities

            10.4                10.4   

Unrealized holding loss on marketable securities

            (4.4             (4.4

Pension transactions

                (1.1         (1.1

Shares withheld for employee taxes

        (10.7                 (10.7

Temporary equity reclassification, deferred stock units

        (0.6                 (0.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 30, 2012

    126.9      $ 1.4      $ 1,498.5      $ (17.4   $ 0.3      $ 7.2      $ (2.4   $ —        $ (120.5   $ 1,367.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          5.0                  5.0   

Exercise or settlement of plan awards

    1.6          1.4                    1.4   

Stock-based compensation expense

        27.9                    27.9   

Purchase of treasury stock

    (2.3                   (28.9     (28.9

Cash flow hedges

              (2.8           (2.8

Net amount reclassified to earnings for sale of marketable securities

                   

Unrealized holding loss on marketable securities

            (0.2             (0.2

Pension transactions

                1.0            1.0   

Shares withheld for employee taxes

        (9.3                 (9.3

Temporary equity reclassification, deferred stock units

        (0.7                 (0.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 29, 2013

    126.2      $ 1.4      $ 1,517.8      $ (12.4   $ 0.1      $ 4.4      $ (1.4   $ —        $ (149.4   $ 1,360.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

          (35.2               (35.2

Exercise or settlement of plan awards

    1.6          1.5                    1.5   

Stock-based compensation expense

        32.7                    32.7   

Purchase of treasury stock

    (10.1                   (142.5     (142.5

Cash flow hedges

              (7.1           (7.1

Net amount reclassified to earnings for sale of marketable securities

                      —     

Unrealized holding loss on marketable securities

            0.1                0.1   

Pension transactions

                (0.2         (0.2

Foreign currency translation adjustment

                  (6.2       (6.2

Shares withheld for employee taxes

        (9.1                 (9.1

Temporary equity reclassification, deferred stock units

        (0.4                 (0.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 28, 2014

    117.7      $ 1.4      $ 1,542.5      $ (47.6   $ 0.2      $ (2.7   $ (1.6   $ (6.2   $ (291.9   $ 1,194.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—Background and Basis of Presentation

Background

Fairchild Semiconductor International, Inc. (“Fairchild International”, “we”, “our” or the “ the company”) designs, develops, manufactures and markets power analog, power discrete and certain non-power semiconductor solutions through its wholly-owned subsidiary Fairchild Semiconductor Corporation (“Fairchild”). We deliver energy-efficient, easy-to-use and value-added semiconductor solutions for power and mobile designs. We help our customers differentiate their products and solve difficult technical challenges with our expertise in power and signal path products. Our products have a wide range of applications and are sold to customers in the mobile, industrial, appliance, automotive, consumer electronics, and computing markets.

The company is headquartered in San Jose, California and has manufacturing operations in South Portland, Maine, West Jordan, Utah, Mountaintop, Pennsylvania, Cebu, the Philippines, Penang, Malaysia, Bucheon, South Korea, and Suzhou, China. We sell our products to customers worldwide.

The accompanying financial statements of the company have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S.).

Note 2—Summary of Significant Accounting Policies

Fiscal Year

Our fiscal year ends on the last Sunday in December. Our fiscal calendar, in which each quarter ends on a Sunday, contains 53 weeks every seven years. This additional week is included in the first quarter of the year. Our results for the years ended December 28, 2014, December 29, 2013, and December 30, 2012 consist of 52 weeks, 52 weeks, and 53 weeks, respectively.

Principles of Consolidation

The consolidated financial statements include the accounts and operations of the company and its wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (U.S. GAAP) 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, business combinations, loss contingencies, and assumptions used in the calculation of income taxes, valuation of deferred tax assets, 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. We adjust 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 will be reflected in the financial statements in future periods.

 

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Revenue Recognition

Revenue is recognized when there is persuasive evidence of an arrangement, the price to the buyer is fixed or determinable, delivery has occurred and collectability of the sales price is reasonably assured. Revenue from the sale of semiconductor products is recognized when title and risk of loss transfers to the customer, which is generally when the product is received by the customer. Shipping costs billed to customers are included within revenue. Associated costs are classified in cost of goods sold.

In 2014, approximately 63% of our revenue was from distributors. Distributor payments are due under agreed terms and are not contingent upon resale or any other matter other than the passage of time. We have agreements with some distributors and customers for various programs, including prompt payment discounts, pricing protection, scrap allowances and stock rotation. Sales to these distributors and customers, as well as the existence of sales incentive programs, are in accordance with terms set forth in written agreements with these distributors and customers. In general, credits allowed under these programs are capped based upon individual distributor agreements. We record charges associated with these programs as a reduction of revenue at the time of sale based upon historical activity. Our policy is to use both a three to six month rolling historical experience rate as well as a prospective view of products in the distributor channel for distributors who participate in an incentive program in order to estimate the necessary allowance to be recorded. In addition, under our standard terms and conditions of sale, the products sold by us are subject to a limited product quality warranty. The standard limited warranty period is 1 year. We accrue for the estimated cost of incurred but unidentified quality issues based upon historical activity and known quality issues if a loss is probable and can be reasonably estimated. Quality returns are accounted for as a reduction of revenue.

In some cases, title and risk of loss do not pass to the customer when the product is received by them. In these cases, we recognize revenue at the time when title and risk of loss is transferred, assuming all other revenue recognition criteria have been satisfied. These cases include several inventory locations where we manage consigned inventory for our customers, including some for which the inventory is at customer facilities. In such cases, revenue is not recognized when products are received at these locations; rather, revenue is recognized when customers take the inventory from the location for their use.

Advertising

Advertising expenditures are charged to expense as incurred.

Research and Development Costs <