10-K 1 d112557d10k.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 27, 2015

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.  ¨

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 28, 2015 was $2,064,994,388.

The number of shares outstanding of the Registrant’s Common Stock as of February 21, 2016 was 113,576,543.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of either (a) a definitive proxy statement involving the election of directors or (b) an amendment to this Form 10-K, either of which will be filed within 120 days after December 27, 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      27   
Item 2.   Properties      27   
Item 3.   Legal Proceedings      28   
Item 4.   Mine Safety Disclosures      28   
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      29   
Item 6.   Selected Financial Data      31   
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      34   
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk      51   
Item 8.   Consolidated Financial Statements and Supplementary Data      52   
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      98   
Item 9A.   Controls and Procedures      98   
Item 9B.   Other Information      98   
Item 10.   Directors, Executive Officers and Corporate Governance      99   
Item 11.   Executive Compensation      99   
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      99   
Item 13.   Certain Relationships and Related Transactions, and Director Independence      99   
Item 14.   Principal Accountant’s Fees and Services      100   
Item 15.   Exhibits and Financial Statement Schedules      100   

Exhibit Index

     102   

Signatures

     106   

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 27, 2015, December 28, 2014 and December 29, 2013 all consist of 52 weeks.

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.

Pending Acquisition

On November 18, 2015, Fairchild Semiconductor International, Inc. (“Fairchild Semiconductor”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ON Semiconductor Corporation and its wholly owned subsidiary, Falcon Operations Sub, Inc. (together, “ON Semiconductor”), under which ON Semiconductor agreed to acquire Fairchild Semiconductor. The total transaction value is expected to be approximately $2.4 billion. Under the terms of the Merger Agreement, on December 4, 2015, ON Semiconductor commenced a tender offer to acquire outstanding shares of Fairchild Semiconductor common stock from our stockholders for $20.00 per share, net to each holder in cash (the “Offer Price”). The tender offer is described in a Tender Offer Statement on Schedule TO filed by ON Semiconductor with the Securities and Exchange Commission on December 4, 2015 (as amended, the “ON Schedule TO”). The closing of the tender offer is subject to various conditions, including there being validly tendered in the tender offer at least a majority of our then-outstanding shares, and the receipt of customary regulatory approvals in the U.S. and other countries. Following receipt of those approvals and after such time as all shares tendered in the tender offer are accepted for payment, the Merger Agreement provides for the parties to effect a merger which would result in all shares not tendered in the tender offer (other than shares held by (i) ON Semiconductor, Fairchild Semiconductor or their respective subsidiaries immediately prior to the effective time of the merger, and (ii) stockholders of Fairchild Semiconductor who properly exercised their appraisal rights under the Delaware General Corporation Law) being converted into the right to receive the Offer Price. In addition, immediately prior to the effective time of the merger, all outstanding options to purchase shares of Fairchild Semiconductor common stock, restricted stock units, deferred stock units and performance units will become fully vested and be converted into the right to receive the Offer Price (net of any applicable exercise price with respect to options).

At the completion of the merger, Fairchild Semiconductor would become a wholly-owned subsidiary of ON Semiconductor. Additional information about our pending acquisition by ON Semiconductor is available in the

 

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Solicitation/Recommendation Statement on Schedule 14D-9 filed with the Securities and Exchange Commission by Fairchild Semiconductor International, Inc. (as amended, our “Schedule 14D-9”). The foregoing description of the Merger Agreement and the terms and conditions of the tender offer and merger do not purport to be complete and are qualified in their entirety by reference to the Merger Agreement, and to ON Semiconductor’s tender offer to purchase and other related documents, copies of which are filed as Exhibits (e)(1) and (a)(1)(A), respectively, of our Schedule 14D-9, and which are incorporated herein by reference. The Merger Agreement is also filed as Exhibit 2.01 to this Annual Report on Form 10-K. The transaction is expected to close in the second quarter of 2016.

Products and Technology

We changed our reportable segments effective in the first quarter of fiscal year 2015 to reflect changes in the way we currently manage the business. Our two main product segments are the Switching Power Solutions segment (SPS) and the Analog Power and Signal Solutions segment (APSS). Our third reportable segment is the Standard Products Group (SPG), 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, is 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 have gradually loaded this plant with a combination of new products and existing devices transferred from older, less efficient factories.

Switching Power Solutions (SPS)

The Switching Power Solutions segment (SPS) contains our low and high voltage switch operating segments, integrated power modules, as well as our automotive and cloud operating segments. This segment provides a wide range of highly efficient discrete and integrated power management solutions across a broad range of end markets.

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 management functions to a diverse set of end market applications including automotive, industrial, home appliances, mobile, server and cloud computing and consumer electronics.

Our discrete devices are individual diodes or transistors that perform power switching, power conditioning and signal amplification functions in electronic circuits. We have a leadership position in the power MOSFET market with our portfolio of PowerTrench® technology products.

We manufacture high voltage 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., 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.

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.

Analog Power and Signal Solutions (APSS)

The Analog Power and Signal Solutions segment (APSS) contains our mobile solutions, power conversion and motion tracking operating segments. This segment focuses on developing innovative analog solutions including power management, sensor and signal path applications for the mobile, industrial and consumer end markets.

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. Our power conversion 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 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.

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.

Standard Products Group (SPG)

SPG 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,

 

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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.

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 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.

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 2015, we derived approximately 63%, 29% and 8% 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 27, 2015. 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 Part II Item 8. Note 17 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 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

 

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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. Manufacturers’ representatives generally do not offer products that compete directly with our products, but may carry complementary items manufactured by others. Manufacturers’ 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 2015, 2014 and 2013 were $162.6 million, $165.8 million and $171.6 million, respectively. These expenditures represented 11.9%, 11.6%, and 12.2% of revenue for 2015, 2014 and 2013, 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’ design 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 five manufacturing facilities, three of which are “front-end” wafer fabrication plants in the U.S. and South Korea, and two 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 two years can be found in Part II Item 8. Note 17 Segments and Geographic Information to the consolidated financial statements of this report. We ended production at our sites in Penang, Malaysia and West Jordan, Utah in 2015. These facilities are currently classified as assets held for sale. Please refer to Part II Item 8. Note 15 Restructuring, Impairments and Other Costs and Part II Item 8. Note 6 Financial Statement Details to our consolidated financial statements included within this report for further information.

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

Bucheon, South Korea

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

Back-End Facilities:

  

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, Greatek Electronics Inc, GEM Services, AUK Semiconductor PTE, 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.

Backlog

Backlog at December 27, 2015 was approximately $337.2 million, in line with approximately $338.7 million at December 28, 2014. 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 2015, 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 2015.

 

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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 27, 2015, we held 1,623 issued U.S. patents and 1,530 issued non-U.S. patents with expiration dates ranging from 2016 through 2034. We also have trademarks that are used in the conduct of our business to distinguish genuine Fairchild products. We believe that while our patents provide important competitive advantages, our competitive position is also affected 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.

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

 

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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 (where manufacturing operations have been discontinued), have ongoing remediation projects to respond to releases of hazardous materials that occurred prior to our separation from National Semiconductor Corporation. National Semiconductor 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 2015, 2014 and 2013. 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 6,379 full and part-time employees as of December 27, 2015. We believe that our relations with our employees are satisfactory.

At December 27, 2015, 95 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, 2019 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.

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 a 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 1,772 formal Chinese employees, who are members of Fairchild Suzhou Labor Union, are covered by the collective bargaining

 

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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

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

Mark S. Frey

     62       Executive Vice President, Chief Financial Officer and Treasurer

Chris Allexandre

     41       Senior Vice President, Worldwide Sales and Marketing

Paul D. Delva

     53       Senior Vice President, General Counsel and Corporate Secretary

Steve Fu

     51       Senior Vice President and Chief Strategy Officer

Marion Limmer

     51       Senior Vice President, Discrete Power Solutions Group

Gaurang Shah

     47       Senior Vice President, Analog Power Group

Wei-Chung Wang

     50       Senior Vice President, Manufacturing Operations

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 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

 

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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.

The announcement and pendency of our agreement to be acquired by ON Semiconductor may have a material adverse effect on our business and our stock price.

The pending acquisition by ON Semiconductor could have a material adverse effect on our revenue in the near term if our customers delay, defer or cancel purchases pending completion of the acquisition. While we are attempting to address this risk through communications with our customers, current and prospective customers may be reluctant to purchase our products due to uncertainty about the direction of our product offerings and the support and service of our products after the acquisition is consummated. Additionally, we are subject to additional risks in connection with the announcement and pendency of the acquisition, any of which could have a material adverse effect on the Company’s business, including:

 

   

the pendency and outcome of any legal proceedings that have been or may be instituted against us, our directors and others relating to the transactions contemplated by the Merger Agreement;

 

   

potential adverse effects on our relationships with our current suppliers and other business partners, or those with which we are seeking to establish business relationships;

 

   

the restrictions imposed on our business and operations under the Merger Agreement, which may prevent us from pursuing opportunities without ON’s approval or taking other actions, whether in the form of dividend payments, stock repurchases, restructurings, asset dispositions, acquisitions, equity awards to employees or other employee actions or otherwise, that we might have undertaken in the absence of this transaction;

 

   

that we may forego opportunities we might otherwise have pursued in the absence of the transaction with ON Semiconductor;

 

   

potential adverse effects on our ability to attract, recruit, retain and motivate current and prospective employees who may be uncertain about their future roles and relationships with us following the completion of the acquisition; and

 

   

the significant diversion of our employees’ and management’s attention resulting from the transactions contemplated by the acquisition.

The failure of our pending acquisition by ON Semiconductor to be completed on the terms contemplated or at all may materially and adversely affect our business and our stock price.

ON Semiconductor’s obligation to complete its tender offer to purchase shares of Fairchild in connection with its acquisition of the company, and our obligations under the Merger Agreement, are subject to a number of conditions specified in the Merger Agreement, including (i) that the number of shares of Fairchild common stock validly tendered in accordance with the terms of ON’s offer, and not validly withdrawn, must equal at least a majority of the then-outstanding shares of common stock; (ii) the expiration of applicable waiting periods or the receipt of antitrust approvals in the U.S. and several other countries and (iii) the absence of any law or order which would prohibit completion of the transaction. There can be no assurance that these conditions to the completion of the transaction will be satisfied in a timely manner or at all. If the transaction is not completed, our stock price could fall to the extent that our current price reflects an assumption that the acquisition will be completed. Furthermore, if the acquisition is not completed, we may suffer other consequences that could adversely affect our business, results of operations and stock price, including the following:

 

   

we could be required to pay a termination fee of up to $72 million to ON under circumstances described in the Merger Agreement;

 

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we would have incurred significant costs in connection with the acquisition that we would be unable to recover;

 

   

we may be subject to legal proceedings related to the acquisition;

 

   

the failure of the acquisition to be consummated may result in adverse publicity and a negative impression of us in the investment community;

 

   

any disruptions to our business resulting from the announcement and pendency of the acquisition, including any adverse changes in our relationships with our customers, vendors and employees, may continue or intensify in the event the transaction is not consummated; and

 

   

we may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures; and we may experience employee departures.

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 manufacturing 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 and supply shortages that have historically accompanied 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.

 

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

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

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

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

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

 

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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. Please refer to Item 1. Research and Development included in this report for a discussion of our research and development investments. Despite such efforts, we may not be successful in developing commercially viable products. Additionally, there is a substantial risk that we may decide to abandon a potential product that is no longer marketable, despite our investment or significant resources in its development.

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

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

 

   

the patents owned by us or numerous other patents which third parties license to us will not be invalidated, circumvented, challenged or licensed to other companies; or

 

   

any of our pending or future patent applications will be issued within the scope of the claims sought by us, if at all.

In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in some countries. We cannot assure that we will be able to effectively enforce our intellectual property rights in every country in which our products are sold or manufactured.

 

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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 Part II 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.

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.

 

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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 to the risk that we will disrupt service to our customers, the risk of inadvertently losing other business not related to the exit activities, the risk that we will be unable to effectively continue, terminate, modify and manage supplier and vendor relationships, and the risk that we may be subject to consequential claims from customers or vendors as a result of eliminating, or transferring the production of affected products or the renegotiation of commitments related to those products.

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

Our manufacturing processes use many raw materials, including silicon wafers, gold, copper lead frames, mold compound, ceramic packages and various chemicals and gases. Our manufacturing operations depend upon our ability to obtain adequate supplies of raw materials on a timely basis. Our results of operations could be adversely affected if we were unable to obtain adequate supplies of raw materials in a timely manner or if the costs of raw materials increased significantly. If the prices of these raw materials rise significantly we may be

 

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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. Please refer to Item 1. Manufacturing Facilities for a list of primary wafer fabrication and back-end assembly and testing operations subcontractors. Our operations and ability to satisfy customer obligations could be adversely affected if our relationships with these subcontractors were disrupted or terminated.

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

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

We may experience delays or problems in bringing new manufacturing capacity to full production. Such delays, as well as possible problems in achieving acceptable yields, or product delivery delays relating to existing or planned new capacity could result from, among other things, capacity constraints, construction delays, upgrading or expanding existing facilities or changing our process technologies, any of which could result in a loss of future revenues. Our operating results could also be adversely affected by the increase in fixed costs and operating expenses related to increases in production capacity if revenues do not increase proportionately.

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

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

 

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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.

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. Sales, Marketing, and Distribution included in this report for a discussion of our distributor sales. 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.

 

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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 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.

 

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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 limit our liability for defective products to an obligation 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 was affected by a magnitude 7.2 earthquake. While we take precautions to mitigate these risks, we cannot be certain that they will be adequate to protect our facilities in the event of a major earthquake, flood, typhoon or other natural disaster. Although we maintain insurance for some of the damage that may be caused by natural disasters, our insurance coverage may not be sufficient to cover all of our potential losses and may not cover us for lost business. As a result, a natural disaster in one of these regions could severely disrupt the operation of our business and have a material adverse effect on our financial condition and results of operations.

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, China, South Korea and Singapore. We have sales offices and customers around the world. Please refer to Part II Item 8. Note

 

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17 Segments and Geographic Information to our consolidated financial statements included in this report for more details regarding our revenue by geographic location. 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 6% of our revenue for the year ended December 27, 2015. As of fiscal year end 2015, approximately 22.6% of our total production is from our South Korea facility.

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

 

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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 operations in China and, as a result, are subject to risks inherent in doing business in China, which may adversely affect our financial performance.

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

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

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To mitigate these risks and to protect against reductions in the value and volatility of future cash flows caused by changes in foreign exchange rates, we currently have established hedging programs. These hedging programs may utilize certain derivative financial instruments. For example, we use currency forward 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. Our hedging programs reduce, but do not always entirely eliminate, the short-term impact of foreign currency exchange rate movements. Please refer to Part II 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

 

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and procedures, particularly if deception or other intentional misconduct is involved. We continue to monitor on an ongoing basis the usage of our established hedging programs and may choose to suspend or discontinue some or all of our programs depending on a variety of factors.

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 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 27, 2015, we had total debt of $198.4 million and the ratio of this debt to equity was approximately 0.2 to 1.0. Please refer to Part II Item 8. Note 8 Indebtedness to our consolidated financial statements included in this report for more details regarding our credit facility. 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;

 

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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 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 27, 2015, 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.

 

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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 25, 2016.

 

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 27, 2015:

 

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 do not identify or allocate assets by operating segment. For information on net property, plant and equipment by geographic location, please refer to Part II Item 8. Note 17 Segments and Geographic Information to our consolidated financial statements included in this report.

We ended production at our sites in Penang, Malaysia and West Jordan, Utah in 2015. These facilities are currently classified as assets held for sale. Please refer to Part II Item 8. Note 15 Restructuring, Impairments and Other Costs and Part II Item 8. Note 6 Financial Statement Details to our consolidated financial statements included within this report for further information.

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.

 

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ITEM 3. LEGAL PROCEEDINGS

For a discussion of legal matters as of December 27, 2015, please read Part II 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  

2015

     

Fourth Quarter (from September 28, 2015 to December 27, 2015)

   $ 20.83       $ 13.05   

Third Quarter (from June 29, 2015 to September 27, 2015)

   $ 17.43       $ 12.66   

Second Quarter (from March 30, 2015 to June 28, 2015)

   $ 20.74       $ 17.98   

First Quarter (from December 29, 2014 to March 29, 2015)

   $ 19.14       $ 15.35   

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   

As of February 22, 2016, there were approximately 91 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. Please refer to Item 7. Liquidity and Capital Resources and Item 8. Note 8 Indebtedness to our consolidated financial statements included within 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 27, 2015. 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      6,001,166       $ 12.82         11,857,839   

 

(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 27, 2015.
(2) Does not include shares subject to DSUs, RSUs or PUs, which do not have an exercise price.
(3) Represents 11,857,839 shares under the Fairchild Semiconductor 2007 Stock Plan (2007 Stock Plan) on December 27, 2015.
(4) Shares issuable include 68,027 options, 367,143 DSUs, 4,498,845 RSUs, and 1,067,151 PUs under the 2007 Stock Plan.

The material terms of the 2007 Stock Plan are described in Item 8. Note 12 Stock-based Compensation to our consolidated financial statements included within this report and our three outstanding stock 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 2015. The following table provides information with respect to purchases made by the company of its own common stock during the fourth quarter of 2015:

 

Period

  Total Number of
Shares (or Units)
Purchased
    Average Price
Paid per Share
    Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or 
Programs
    Maximum Number
(or Approximate
Dollar Value) of
Shares that
May Yet Be
Purchased
Under the Plans
or Programs
 
                (In millions)  

September 28, 2015—October 25, 2015

    —        $ —          —          111.1   

October 26, 2015—November 22, 2015

    —          —          —          111.1   

November 23, 2015—December 27, 2015

    —          —          —          111.1   
 

 

 

     

 

 

   

Total

    —        $ —          —          111.1   
 

 

 

     

 

 

   

On May 20, 2015, the board of directors authorized the additional repurchase of up to $150.0 million of the company’s common stock. This amount is in addition to any previously announced authorizations. 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 three months ended December 27, 2015, we did not repurchase any shares 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 26, 2010 to December 27, 2015. 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 for fiscal years 2015 through 2013 are derived from our audited consolidated financial statements, contained in Item 8. Consolidated Financial Statements and Supplementary Data of this report. The historical consolidated financial data as of December 29, 2013, December 30, 2012 and December 25, 2011 and for the years ended December 30, 2012 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

 

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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 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 27, 2015, December 28, 2014, December 29, 2013 and December 25, 2011 each consist of 52 weeks. The results for the year ended December 30, 2012 consists of 53 weeks.

 

    Year Ended  
    December 27,
2015
    December 28,
2014
    December 29,
2013
    December 30,
2012
    December 25,
2011
 
    (In millions, except per share data)  

Consolidated Statements of Operations Data:

         

Total revenue

  $ 1,370.2      $ 1,433.4      $ 1,405.4      $ 1,405.9      $ 1,588.8   

Total gross margin

    437.8        465.6        416.5        442.0        559.2   

% of total revenue

    32.0     32.5     29.6     31.4     35.2

Net income (loss)

    (15.1     (35.2     5.0        24.6        145.5   

Net income (loss) per common share:

         

Basic

  $ (0.13   $ (0.29   $ 0.04      $ 0.19      $ 1.15   

Diluted

  $ (0.13   $ (0.29   $ 0.04      $ 0.19      $ 1.12   

Consolidated Balance Sheet Data (End of Period):

         

Inventories, net

  $ 304.2      $ 264.9      $ 228.1      $ 236.7      $ 234.2   

Total assets (1)

    1,585.9        1,689.1        1,793.4        1,880.4        1,932.3   

Long-term debt (1)

    198.4        197.1        197.5        246.6        295.5   

Total stockholders’ equity

    1,096.2        1,194.1        1,360.5        1,367.1        1,322.2   

Other Financial Data:

         

Research and development

  $ 162.6      $ 165.8      $ 171.6      $ 156.9      $ 153.4   

Depreciation and amortization

    132.4        139.7        145.2        135.3        150.5   

Amortization of acquisition-related intangibles

    8.4        10.6        15.5        18.2        19.7   

Capital expenditures

    69.1        54.5        75.2        151.9        186.4   

Adjusted net income

    63.2        76.4        34.6        70.5        169.7   

Adjusted gross margin

    452.0        472.1        425.2        442.0        561.4   

% of total revenue

    33.0     32.9     30.3     31.4     35.3

Free cash flow

    33.3        139.2        100.9        31.3        82.1   

 

(1) During the second quarter of 2015, we changed our presentation of debt issuance costs in the balance sheet. Debt issuance costs are reflected as a reduction of the related debt liability rather than as an asset. We applied this change in accounting principle retrospectively. Accordingly all previously reported financial information has been revised. Please refer to Item 8. Note 1 Background and Basis of Presentation to our consolidated financial statements for additional details regarding this accounting policy change.

 

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Table of Contents
    Year Ended  
    December 27,
2015
    December 28,
2014
    December 29,
2013
    December 30,
2012
    December 25,
2011
 
    (In millions)  
Reconciliation of Net Income (Loss) to Adjusted Net Income          

Net income (loss)

  $ (15.1   $ (35.2   $ 5.0      $ 24.6      $ 145.5   
Adjustments to reconcile net income (loss) to adjusted net income:          

Restructuring, impairments, and other costs

    47.6        49.8        15.9        14.1        2.8   

Acquisition-related costs

    6.5        —          —          —          —     

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 closures

    8.7        6.5        8.7        —          0.7   

Write-off of deferred financing fees

    —          —          —          —          2.1   

Inventory write-offs associated with factory closures

    5.5        —          —          —          (0.2

Charge for (release of) litigation

    —          4.4        (12.6     1.3        —     

Goodwill impairment charge

    0.6        —          —          —          —     

Realized loss on sale of securities

    —          —          —          12.9        —     

Change in retirement plans

    —          —          —          —          2.7   

Amortization of acquisition-related intangibles

    8.4        10.6        15.5        18.2        19.7   

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

    1.0        3.0        (0.9     (2.7     (3.6

Change in deferred tax asset value

    —          36.8        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income

  $ 63.2      $ 76.4      $ 34.6      $ 70.5      $ 169.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Year Ended  
    December 27,
2015
    December 28,
2014
    December 29,
2013
    December 30,
2012
    December 25,
2011
 
    (In millions)  
Reconciliation of Gross Margin to Adjusted Gross Margin          

Gross margin

  $ 437.8      $ 465.6      $ 416.5      $ 442.0      $ 559.2   
Adjustments to reconcile gross margin to adjusted gross margin:          

Change in retirement plans

    —          —          —          —          1.7   

Accelerated depreciation on assets related to factory closures

    8.7        6.5        8.7        —          0.7   

Inventory write-offs associated with factory closures

    5.5        —          —          —          (0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted gross margin

  $ 452.0      $ 472.1      $ 425.2      $ 442.0      $ 561.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Year Ended  
     December 27,
2015
     December 28,
2014
     December 29,
2013
     December 30,
2012
     December 25,
2011
 
     (In millions)  
Reconciliation of R&D and SG&A to Adjusted R&D and SG&A               

R&D and SG&A

   $ 368.4       $ 381.7       $ 377.3       $ 363.7       $ 371.8   
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

   $ 368.4       $ 381.7       $ 377.3       $ 363.7       $ 370.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Year Ended  
     December 27,
2015
    December 28,
2014
    December 29,
2013
    December 30,
2012
    December 25,
2011
 
     (In millions)  
Reconciliation of Operating Cash Flow to Free Cash Flow           

Cash provided by operating activities

   $ 94.4      $ 193.7      $ 176.1      $ 183.2      $ 268.5   

Capital expenditures

     (69.1     (54.5     (75.2     (151.9     (186.4

Proceeds from the sale of property, plant and equipment

     8.0        —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

   $ 33.3      $ 139.2      $ 100.9      $ 31.3      $ 82.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Introduction

This discussion and analysis of our 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

 

   

Recently Issued Financial Accounting Standards

Overview

Our sales for 2015 were down 4% compared to 2014. Sales of our products serving the automotive end market grew 9% in 2015. Demand from the enterprise computing and telecom sector finished the year with good momentum. The industrial, appliance and consumer end markets were weaker than expected, especially in greater China. Mobile sales were lower for 2015 compared to 2014 as demand from a large mobile customer decreased significantly in the second half and was partially offset by rising sales and content at two other large mobile accounts.

 

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We completed the previously announced factory closures during the third quarter of 2015 to improve our manufacturing cost structure. We announced in the third quarter of 2015 that we streamlined our leadership structure which will significantly reduce operating expenses. These are structural cost reductions that are designed to improve profitability and cash flow even at current revenue levels.

In addition to investing in the business, we also repurchased 5.8 million shares of our stock during 2015. We used available cash 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 of 2015, internal inventories were $304.2 million, a 15% build from the end of 2014. A portion of this growth is attributable to the building of buffer inventory related to the closure of our Penang, Malaysia and West Jordan, Utah facilities as well as the remaining 5-inch wafer fabrication lines in Bucheon, South Korea in 2015. In addition, we have increased inventory at our outsourced locations, in line with our plans to increase our manufacturing flexibility.

During the first quarter of 2015, we changed our reportable segments effective to better reflect the way we currently manage the business. During the second quarter of 2015, we changed our presentation of debt issuance costs in the balance sheet. Accordingly, all previously reported financial information related to both items has been revised. During the fourth quarter of 2015, we changed our presentation of current and long-term deferred tax assets and liabilities. This accounting change was adopted on a prospective basis, effective as of the fourth quarter of 2015. Please refer to Item 8. Note 1 Background and Basis of Presentation to our consolidated financial statements included in this report for additional details regarding these accounting policy changes.

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 27,
2015
    December 28,
2014
    December 29,
2013
 
     (Dollars in millions)  

Total revenues

   $ 1,370.2        100.0   $ 1,433.4        100.0   $ 1,405.4        100.0

Gross margin

     437.8        32.0     465.6        32.5     416.5        29.6

Operating expenses:

      

Research and development

     162.6        11.9     165.8        11.6     171.6        12.2

Selling, general and administrative

     205.8        15.0     215.9        15.1     205.7        14.6

Amortization of acquisition-related intangibles

     8.4        0.6     10.6        0.7     15.5        1.1

Restructuring, impairments, and other costs

     47.6        3.5     49.8        3.5     15.9        1.1

Acquisition-related costs

     6.5        0.5     —          0.0     —          0.0

Charge for (release of) litigation

     —          0.0     4.4        0.3     (12.6     -0.9

Goodwill impairment charge

     0.6        0.0     —          0.0     —          0.0
  

 

 

     

 

 

     

 

 

   

Total operating expenses

     431.5        31.5     446.5        31.1     396.1        28.2

Operating income

     6.3        0.5     19.1        1.3     20.4        1.5

Other expense, net

     5.4        0.4     6.5        0.5     9.2        0.7
  

 

 

     

 

 

     

 

 

   

Income before income taxes

     0.9        0.1     12.6        0.9     11.2        0.8

Provision for income taxes

     16.0        1.2     47.8        3.3     6.2        0.4
  

 

 

     

 

 

     

 

 

   

Net income (loss)

   $ (15.1     -1.1   $ (35.2     -2.5   $ 5.0        0.4
  

 

 

     

 

 

     

 

 

   

Unaudited non-GAAP measures

      

Adjusted net income

   $ 63.2        $ 76.4        $ 34.6     

Adjusted gross margin

     452.0        33.0     472.1        32.9     425.2        30.3

Free Cash Flow

     33.3          139.2          100.9     

 

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Table of Contents

Year Ended December 27, 2015 Compared to Year Ended December 28, 2014

Total Revenues

 

     Year Ended  
     December 27,
2015
     December 28,
2014
     $ Change
Inc (Dec)
     % Change
Inc (Dec)
 
     (Dollars in millions)  

Total revenues

   $ 1,370.2       $ 1,433.4       $ (63.2      (4.4 )% 

Revenue decreased 4.4% in 2015 compared to 2014 due primarily to pricing impacts.

Geographic revenue information is based on the customer location within the indicated geographic region. Please refer to Item 8. Note 17 Segments and Geographic Information to our consolidated financial statements included within this report for further details regarding our geographic revenue by location.

The increase in China revenue for 2015 compared to 2014 is due to broad-based higher demand, especially in the mobile end market. The decrease in Taiwan and Other Asia/Pacific for 2015 compared to 2014 is due to lower demand in the consumer electronics market.

Gross Margin

 

     Year Ended  
     December 27,
2015
    December 28,
2014
    $ Change
Inc (Dec)
     % Change
Inc (Dec)
 
     (Dollars in millions)  

Gross Margin $

   $ 437.8      $ 465.6      $ (27.8      (6.0 )% 

Gross Margin %

     32.0     32.5     

Gross margin decreased $27.8 million in 2015 compared to 2014 due primarily to pricing impacts, as well as accelerated depreciation and inventory write-offs associated with factory closures, partially offset by improved product mix.

Adjusted Gross Margin

 

     Year Ended  
     December 27,
2015
    December 28,
2014
    $ Change
Inc (Dec)
     % Change
Inc (Dec)
 
     (Dollars in millions)  

Adjusted Gross Margin $

   $ 452.0      $ 472.1      $ (20.1      (4.3 )% 

Adjusted Gross Margin %

     33.0     32.9     

Adjusted gross margin does not include accelerated depreciation or inventory write-offs 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 27,
2015
     December 28,
2014
     $ Change
Inc (Dec)
     % Change
Inc (Dec)
 
     (Dollars in millions)  

Research and development

   $ 162.6       $ 165.8       $ (3.2      (1.9 )% 

Selling, general and administrative

   $ 205.8       $ 215.9       $ (10.1      (4.7 )% 

 

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Table of Contents

Research and development expenses decreased 1.9% in 2015 compared to 2014 due primarily to selectivity in funding various programs and other spending reductions. Selling, general and administrative expenses decreased 4.7% in 2015 compared to 2014 due primarily to reductions in variable compensation and regional selling costs.

Restructuring, Impairments and Other Costs

During 2015 and 2014, we recorded restructuring, impairment charges and other costs, net of releases, totaling $47.6 million and $49.8 million, respectively. Please refer to Item 8. Note 15 Restructuring, Impairments and Other Costs to our consolidated financial statements included within this report for further details regarding our restructuring plans.

Charge for (Release of) Litigation

In 2014, we incurred a $4.4 million litigation charge 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.

Goodwill Impairment Charge

In the first quarter of 2015, we incurred a $0.6 million goodwill impairment charge as a result of the impairment test performed in conjunction with our operating segment reorganization. Please refer to Item 8. Note 7 Goodwill and Intangible Assets to our consolidated financial statements included within this report for further details regarding this matter.

Other Expense, net

During 2015 and 2014, we recorded other expense, net of $5.4 million and $6.5 million, respectively. Please refer to Item 8. Note 6 Financial Statement Details to our consolidated financial statements included within this report for further details regarding this matter.

Income Taxes

 

     Year Ended  
     December 27,
2015
     December 28,
2014
     $ Change
Inc (Dec)
     % Change
Inc (Dec)
 
     (Dollars in millions)  

Income before income taxes

   $ 0.9       $ 12.6       $ (11.7      (92.9 )% 

Provision for income taxes

   $ 16.0       $ 47.8       $ (31.8      (66.5 )% 

The effective tax rate for 2015 was 1858.1% compared to 378.9% for 2014. The change in the effective tax rate was primarily driven by the decrease in profitability in addition to losses incurred in jurisdictions with full valuation allowances against their deferred tax assets.

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 27, 2015, we have recorded a deferred tax liability of $4.2 million for these earnings that are part of our repatriation plan with no impact to the consolidated statement of operations as we have a full valuation allowance against our net U.S. deferred tax assets.

 

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Table of Contents

Foreign Currency Exchange Risk

Our results of operations are subject to foreign currency exchange rate fluctuations due to the global nature of our operations. We have operations or maintain distribution relationships in the U.S., Europe, Asia/Pacific, Japan and Korea. As a result, our financial position, results of operations and cash flows can be affected by market fluctuations in foreign exchange rates, primarily with respect to the Euro and South Korean won. Fluctuations in the foreign currency exchange rates of the countries in which we do business will affect our operating results, often in ways that are difficult to predict. In particular, as the U.S. dollar strengthens versus other currencies the value of the non-U.S. revenue will decline when reported in U.S. dollars. The impact to net income as a result of a U.S. dollar strengthening will be partially mitigated by the value of non-U.S. expense which will also decline when reported in U.S. dollars. As the U.S. dollar weakens versus other currencies the value of the non-U.S. revenue and expenses will increase when reported in U.S. dollars. In 2015 and 2014, we had established revenue and expense hedging and balance sheet risk management programs to protect against short term volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates.

Free Cash Flow

 

     Year Ended  
     December 27,
2015
     December 28,
2014
     $ Change
Inc (Dec)
     % Change
Inc (Dec)
 
     (Dollars in millions)  

Free Cash Flow

   $ 33.3       $ 139.2       $ (105.9      (76.1 )% 

Free cash flow is a non-GAAP financial measure. To determine free cash flow, we subtract capital expenditures and add back proceeds from the sale of property, plant, and equipment to cash provided by operating activities. Free cash flow decreased in 2015 compared to 2014 due primarily to significant cash payments for restructuring and increases in internal inventory. 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 27, 2015     December 28, 2014  
    Revenue     % of
Total
    Gross
Margin
    Gross
Margin %
    Operating
Income (Loss)
    Revenue     % of
Total
    Gross
Margin
    Gross
Margin %
    Operating
Income (Loss)
 
    (Dollars in millions)  

SPS

  $ 798.9        58.3   $ 253.7        31.8   $ 172.1      $ 838.2        58.5   $ 264.7        31.6   $ 181.8   

APSS

    385.2        28.1     152.1        39.5     58.7        399.1        27.8     158.3        39.7     60.3   

SPG

    186.1        13.6     46.2        24.8     41.2        196.1        13.7     49.1        25.0     43.8   

Corporate (1,2)

    —          —          (14.2     —          (265.7     —          —          (6.5     —          (266.8
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total

  $ 1,370.2        100.0   $ 437.8        32.0   $ 6.3      $ 1,433.4        100.0   $ 465.6        32.5   $ 19.1   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

(1)

 

    Year Ended  
    December 27,
2015
    December 28,
2014
 
    (In millions)  

Accelerated depreciation on assets related to factory closures

  $ (8.7   $ (6.5

Inventory write-offs associated with factory closures

    (5.5     —     
 

 

 

   

 

 

 

Corporate gross margin total

  $ (14.2   $ (6.5
 

 

 

   

 

 

 

 

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Table of Contents

(2)

    Year Ended  
    December 27,
2015
    December 28,
2014
 
    (In millions)  

Restructuring, impairments, and other costs

  $ (47.6   $ (49.8

Acquisition-related costs

    (6.5     —     

Accelerated depreciation on assets related to factory closures

    (8.7     (6.5

Inventory write-offs associated with factory closures

    (5.5     —     

Selling, general and administrative expense

    (182.7     (190.7

Charge for litigation

    —          (4.4

Corporate research and development expense

    (14.7     (15.4
 

 

 

   

 

 

 

Corporate operating loss total

  $ (265.7   $ (266.8
 

 

 

   

 

 

 

Total Revenue

 

     Year Ended  
     December 27,
2015
     December 28,
2014
     % Change  
     (Dollars in millions)  

SPS

   $ 798.9       $ 838.2         (4.7 )% 

APSS

     385.2         399.1         (3.5 )% 

SPG

     186.1         196.1         (5.1 )% 

Corporate

     —           —           —  
  

 

 

    

 

 

    

Total revenue

   $ 1,370.2       $ 1,433.4         (4.4 )% 
  

 

 

    

 

 

    

SPS and SPG revenue decreased 4.7% and 5.1%, respectively, in 2015 compared to 2014 due primarily to pricing impacts and lower product volume. APSS revenue decreased 3.5% in 2015 compared to 2014 due primarily to pricing impacts, partially offset by improved product volume.

Gross Margin

 

     Year Ended  
     December 27,
2015
    December 28,
2014
    %
Change
 
     (Dollars in millions)  

SPS

   $ 253.7      $ 264.7        (4.2 )% 

APSS

     152.1        158.3        (3.9 )% 

SPG

     46.2        49.1        (5.9 )% 

Corporate (1)

     (14.2     (6.5     118.5
  

 

 

   

 

 

   

Total gross margin $

   $ 437.8      $ 465.6        (6.0 )% 
  

 

 

   

 

 

   
     Year Ended        
     December 27,
2015
    December 28,
2014
       

SPS

     31.8     31.6  

APSS

     39.5     39.7  

SPG

     24.8     25.0  

Corporate

     —       —    

Total gross margin %

     32.0     32.5  

 

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Table of Contents
(1) Please refer to Reconciliation of Gross Margin to Adjusted Gross Margin in Item 6. Selected Financial Data for more details.

SPS and APSS gross margin decreased 4.2% and 3.9%, respectively, in 2015 compared to 2014 due primarily to pricing impacts, partially offset by improved product mix. SPG gross margin decreased 5.9% in 2015 compared to 2014 due primarily to pricing impacts.

Operating Income (Loss)

 

     Year Ended  
     December 27,
2015
     December 28,
2014
     % Change  
     (Dollars in millions)  

SPS

   $ 172.1       $ 181.8         (5.3 )% 

APSS

     58.7         60.3         (2.7 )% 

SPG

     41.2         43.8         (5.9 )% 

Corporate

     (265.7      (266.8      (0.4 )% 
  

 

 

    

 

 

    

Total operating income

   $ 6.3       $ 19.1         (67.0 )% 
  

 

 

    

 

 

    

Total operating income decreased 67.0% in 2015 compared to 2014 due primarily to the reasons described under the heading “Gross Margin” within the Results From Operations section of this report, partially offset by reductions in variable compensation costs, other selling, general and administrative costs and research and development spending rationalization. SPS, APSS, and SPG operating income decreased 5.3%, 2.7%, and 5.9%, respectively, in 2015 compared to 2014 due primarily to the reasons described under the heading “Gross Margin” within this section. Corporate operating loss was relatively flat in 2015 compared to 2014.

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)
 
     (Dollars in millions)  

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.

Geographic revenue information is based on the customer location within the indicated geographic region. Please refer to Item 8. Note 17 Segments and Geographic Information to our consolidated financial statements included within this report for further details regarding our geographic revenue by location.

The increase in China revenue for 2014 from 2013 is due to broad-based higher demand especially in the mobile end market. Lower Korean sales in 2014 versus 2013 reflect weaker demand from two large Korean manufacturers primarily in the mobile and LCD TV sector. The decrease in Other Asia/Pacific revenue in 2014 as compared to 2013 was due to lower consumer demand.

 

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Gross Margin

 

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

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)
 
     (Dollars in millions)  

Adjusted Gross Margin $

   $ 472.1      $ 425.2      $ 46.9         11.0

Adjusted Gross Margin %

     32.9     30.3     

Adjusted gross margin does not include accelerated depreciation or inventory write-offs 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)
 
     (Dollars in millions)  

Research and development

   $ 165.8       $ 171.6       $ (5.8      (3.4 )% 

Selling, general and administrative

   $ 215.9       $ 205.7       $ 10.2         5.0

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 costs.

Restructuring, Impairments and Other Costs

During 2014 and 2013, we recorded restructuring, impairment charges and other costs, net of releases, totaling $49.8 million and $15.9 million, respectively. Please refer to Item 8. Note 15 Restructuring, Impairments and Other Costs to our consolidated financial statements included within this report for further details regarding our restructuring plans.

Charge for (Release of) 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.

 

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Other Expense, net

During 2014 and 2013 we recorded other expense, net of $6.5 million and $9.2 million, respectively. Please refer to Item 8. Note 6 Financial Statement Details to our consolidated financial statements included within this report for further details regarding this matter.

Income Taxes

 

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

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)
 
     (Dollars in millions)  

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 and may add back proceeds from the sale of property, plant, and equipment to 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)  

SPS

  $ 838.2        58.5   $ 264.7        31.6   $ 181.8      $ 793.7        56.5   $ 227.4        28.7   $ 143.6   

APSS

    399.1        27.8     158.3        39.7     60.3        413.8        29.4     151.4        36.6     31.6   

SPG

    196.1        13.7     49.1        25.0     43.8        197.9        14.1     46.4        23.4     36.2   

Corporate (1,2)

    —          —       (6.5     —       (266.8     —          —       (8.7     —       (191.0
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

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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(1)

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

Accelerated depreciation on assets related to factory closures

  $ (6.5   $ (8.7
 

 

 

   

 

 

 

Corporate gross margin total

  $ (6.5   $ (8.7
 

 

 

   

 

 

 

(2)

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

Restructuring, impairments, and other costs

  $ (49.8   $ (15.9

Accelerated depreciation on assets related to factory closures

    (6.5     (8.7

Selling, general and administrative expense

    (190.7     (171.5

Release of (charge for) litigation

    (4.4     12.6   

Corporate research and development expense

    (15.4     (7.5
 

 

 

   

 

 

 

Corporate operating loss total

  $ (266.8   $ (191.0
 

 

 

   

 

 

 

Total Revenue

 

     Year Ended  
     December 28,
2014
     December 29,
2013
     %
Change
 
     (Dollars in millions)  

SPS

   $ 838.2       $ 793.7         5.6

APSS

     399.1         413.8         (3.6 )% 

SPG

     196.1         197.9         (0.9 )% 

Corporate

     —           —           —  
  

 

 

    

 

 

    

Total revenue

   $ 1,433.4       $ 1,405.4         2.0
  

 

 

    

 

 

    

SPS revenue increased 5.6% in 2014 from the prior year due primarily to higher product volume, partially offset by pricing impacts. APSS and SPG revenue decreased 3.6% and 0.9%, respectively, in 2014 from the prior year due primarily to pricing impacts, partially offset by higher product volume.

Gross Margin

 

     Year Ended  
     December 28,
2014
     December 29,
2013
     %
Change
 
     (Dollars in millions)  

SPS

   $ 264.7       $ 227.4         16.4

APSS

     158.3         151.4         4.6

SPG

     49.1         46.4         5.8

Corporate (1)

     (6.5      (8.7      (25.3 )% 
  

 

 

    

 

 

    

Total gross margin $

   $ 465.6       $ 416.5         11.8
  

 

 

    

 

 

    

 

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     Year Ended  
     December 28,
2014
    December 29,
2013
 

SPS

     31.6     28.7

APSS

     39.7     36.6

SPG

     25.0     23.4

Corporate

     —       —  

Total gross margin %

     32.5     29.6

 

(1) Please refer to Reconciliation of Gross Margin to Adjusted Gross Margin in Item 6. Selected Financial Data for more details.

SPS gross margin increased 16.4% in 2014 from the prior year due primarily to improved internal manufacturing utilization and product mix, as well as a reduction in global operating expenditures, partially offset by pricing impacts. APSS gross margin increased 4.6% in 2014 from the prior year due primarily to product mix impacts. SPG gross margin increased 5.8% in 2014 from the prior year due primarily to improved product mix, reductions in warehousing costs and lower excess inventory write downs, partially offset by pricing impacts.

Operating Income (Loss)

 

     Year Ended  
     December 28,
2014
     December 29,
2013
     %
Change
 
     (Dollars in millions)  

SPS

   $ 181.8       $ 143.6         26.6

APSS

     60.3         31.6         90.8

SPG

     43.8         36.2         21.0

Corporate

     (266.8      (191.0      39.7
  

 

 

    

 

 

    

Total operating income

   $ 19.1       $ 20.4         (6.4 )% 
  

 

 

    

 

 

    

Total operating income decreased 6.4% in 2014 from the prior year due primarily to the reasons described under the heading “Gross Margin” within this section, partially offset by increased restructuring, impairments and other charges, and increased litigation charges. SPS and APSS operating income increased 26.6% and 90.8%, respectively, in 2014 from the prior year due primarily to the reasons described under the heading “Gross Margin” within this section. SPG operating income increased 21.0% in 2014 from the prior year due primarily to the reasons described under the heading “Gross Margin” within this section, as well as a reduction in research and development costs. Corporate operating loss increased 39.7% in 2014 from the prior year due primarily to increased restructuring, impairments and other charges, and increased litigation charges.

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 27, 2015, $68.3 million of our $281.6 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 our current $400.0 million, five-year senior secured revolving credit facility and on June 23, 2015 we amended it to remove certain provisions from the definition of change in control. As of December 27, 2015, $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.

 

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As of December 27, 2015, 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 Part 1 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 2015, we incurred capital expenditures of $69.1 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 result in additional dilution to our stockholders. Please refer to Item 8. Note 10 Stockholder’s Equity to our consolidated financial statements included within this report which describes our share repurchase plan.

Cash Flows

Our cash flows for each period were as follows:

 

     Year Ended  
     December 27,
2015
     December 28,
2014
 
     (In millions)  

Net cash provided by operating activities

   $ 94.4       $ 193.7   

Net cash used in investing activities

     (62.4      (106.8

Net cash used in financing activities

     (105.5      (151.8
  

 

 

    

 

 

 

Net change in cash and cash equivalents

   $ (73.5    $ (64.9
  

 

 

    

 

 

 

Operating Activities

Operating cash flows represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net income (loss) for non-cash operating items, such as depreciation and amortization, impairment charges and stock-based compensation expense; and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations.

Cash provided by operating activities in 2015 decreased by $99.3 million compared to 2014, due primarily to significant cash payments for restructuring and increases in internal inventory.

Investing Activities

Investing cash flows consist primarily of capital expenditures; investment purchases, sales, maturities, and disposals; as well as proceeds from divestitures and cash used for acquisitions.

Cash used in investing activities in 2015 decreased by $44.4 million compared to 2014, primarily driven by the acquisition of a private sensor company during 2014, partially offset by an increase in capital expenditures.

Financing Activities

Financing cash flows consist primarily of repurchases of common stock, issuance and repayment of long-term debt, and proceeds from the sale of shares of common stock through employee equity incentive plans.

 

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Cash used in financing activities in 2015 decreased by $46.3 million compared to 2014, primarily driven by a decreased amount of treasury shares purchased.

Contractual Obligations and Off-Balance Sheet Arrangements

The table below summarizes our significant contractual obligations as of December 27, 2015 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
     3-5
years
     After
5 years
 
     (In millions)  

Debt Obligations—Principal

   $ 200.1       $ —         $ 0.1       $ 200.0       $ —     

Debt Obligations—Interest (1)

     19.1         4.1         5.7         9.3         —     

Operating Lease Obligations (2)

     67.7         15.1         23.0         9.7         19.9   

Letters of Credit

     5.0         5.0         —           —           —     

Capital Purchase Obligations (3)

     4.0         4.0         —           —           —     

Other Purchase Obligations and Commitments (4)

     40.5         28.3         4.5         3.9         3.8   

Royalty Obligations

     2.9         0.5         2.4         —           —     

Executive Compensation Agreements

     2.7         0.1         0.3         0.3         2.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (5)

   $ 342.0       $ 57.1       $ 36.0       $ 223.2       $ 25.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Interest rate on debt is variable. Interest payments were estimated using the 1.5% base interest rate plus future LIBOR rates. 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 27, 2015, 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 27, 2015. 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 27, 2015 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.

 

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

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 63.0% of our revenue in 2015 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

 

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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.

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 the first quarter of 2015, we incurred a $0.6 million goodwill impairment as a result of the impairment test performed in conjunction with our operating segment reorganization. In 2014 and 2013, 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 15 Restructuring, Impairments and Other Costs to our consolidated financial statements included in this report for more information. There were no triggering events in 2015, 2014 or 2013 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

 

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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 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 2015 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. In 2015, the Malaysian deferred tax asset decreased to $15.2 million. As a result of the closure of our Malaysia manufacturing operations in 2015, a full valuation allowance of $15.2 million remains. 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 continue to carry the valuation allowance in Korea in 2015. 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.

 

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$3.4 million of the unrecognized tax benefits at December 27, 2015, if recognized, would reduce our annual effective tax rate. We do not expect any significant increases or decreases for uncertain tax positions during the next twelve months.

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 27, 2015, 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 contains “forward-looking statements” as that term is defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the use of forward-looking terminology such as “we believe,” “we expect,” “we intend,” “may,” “will,” “should,” “seeks,” “approximately,” “plans,” “estimates,” “anticipates,” or “hopeful,” or the negative of those terms or other comparable terms, or by discussions of our strategy, plans or future performance. All forward-looking statements in this report are made based on management’s current expectations and estimates, which involve risks and uncertainties, including those described below and more specifically in the Risk Factors section. Among these factors are the following: current economic uncertainty, including disruptions in the credit markets, as well as future economic conditions; changes in demand for our products; changes in inventories at our customers and distributors; changes in regional or global economic or political conditions (including as a result of terrorist attacks and responses to them); technological and product development risks, including the risks of failing to maintain the right to use some technologies or failing to adequately protect our own intellectual property against misappropriation or infringement; availability of manufacturing capacity; the risk of production delays; the inability to attract and retain key management and other employees; risks related to warranty and product liability claims; risks inherent in doing business internationally; changes in tax regulations or the migration of profits from low tax jurisdictions to higher tax jurisdictions; availability and cost of raw materials; competitors’ actions; loss of key customers, including but not limited to distributors; order cancellations or reduced bookings; changes in manufacturing yields or output; and significant litigation. Factors that may affect our operating results are described in the Risk Factors section in the quarterly and annual reports we file with the 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.

Given the current acquisition process, we have discontinued our practice of providing detailed forward guidance and conducting an earnings conference call to discuss our financial results.

 

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Recently Issued Financial Accounting Standards

For a discussion of new accounting standards, please refer to Item 8. Note 19 Recently Issued Accounting Standards to our consolidated financial statements included within this report for further details regarding this matter.

 

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 may 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 27, 2015. Actual results may differ materially.

We used foreign currency forward contracts to hedge a portion of our forecasted foreign exchange denominated revenues and expenses in 2015 and 2014. Gains and losses on these foreign currency exposures are generally 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, 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 utilized our established hedging programs in 2015 and 2014. 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 27, 2015, 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 $10.7 million.

We have interest rate exposure with respect to our credit facility due to its variable pricing. For the year ended December 27, 2015, 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 $0.8 million on the cash and investment balances during 2015.

 

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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

     53   

Consolidated Balance Sheets

     55   

Consolidated Statements of Operations

     56   

Consolidated Statements of Comprehensive Income (Loss)

     57   

Consolidated Statements of Cash Flows

     58   

Consolidated Statements of Stockholders’ Equity

     59   

Notes to Consolidated Financial Statements

     60   

 

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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 27, 2015 and December 28, 2014, 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 27, 2015. 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 2015 Form 10-K. We also have audited Fairchild Semiconductor International, Inc.’s internal control over financial reporting as of December 27, 2015, based on criteria established in Internal Control—Integrated Framework (2013) 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 27, 2015 and December 28, 2014, and the results of its operations and its cash flows for each of the years in the three-year

 

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period ended December 27, 2015, 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 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 27, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ KPMG LLP

Boston, Massachusetts

February 25, 2016

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

     Year Ended  
     December 27,
2015
    December 28,
2014
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 279.4      $ 352.9   

Short-term marketable securities

     0.2        0.1   

Accounts receivable, net of allowances of $36.2 and $32.0 at December 27, 2015 and December 28, 2014, respectively

     132.6        124.0   

Inventories, net

     304.2        264.9   

Deferred income taxes, net of allowances

     —          13.2   

Other current assets

     50.5        30.2   
  

 

 

   

 

 

 

Total current assets

     766.9        785.3   

Property, plant and equipment, net

     550.4        627.7   

Deferred income taxes, net of allowances

     16.8        5.3   

Intangible assets, net

     27.5        37.2   

Goodwill

     204.5        209.2   

Long-term marketable securities

     2.0        2.2   

Other assets

     17.8        22.2   
  

 

 

   

 

 

 

Total assets

   $ 1,585.9      $ 1,689.1   
  

 

 

   

 

 

 

LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 110.6      $ 106.2   

Accrued expenses and other current liabilities

     115.6        129.6   
  

 

 

   

 

 

 

Total current liabilities

     226.2        235.8   

Long-term debt

     198.4        197.1   

Deferred income taxes

     34.2        34.2   

Other liabilities

     24.6        23.9   
  

 

 

   

 

 

 

Total liabilities

     483.4        491.0   

Commitments and contingencies (Note 9)

    

Temporary equity—deferred stock units

     6.3        4.0   

Stockholders’ equity:

    

Common stock, $.01 par value, voting; 340,000,000 shares authorized; 141,663,388 and 140,069,287 shares issued and 113,483,950 and 117,677,463 shares outstanding at December 27, 2015 and December 28, 2014, respectively

     1.4        1.4   

Additional paid-in capital

     1,560.6        1,542.5   

Accumulated deficit

     (62.7     (47.6

Accumulated other comprehensive loss

     (15.5     (10.3

Treasury stock at cost

     (387.6     (291.9
  

 

 

   

 

 

 

Total stockholders’ equity

     1,096.2        1,194.1   
  

 

 

   

 

 

 

Total liabilities, temporary equity and stockholders’ equity

   $ 1,585.9      $ 1,689.1   
  

 

 

   

 

 

 

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 27,
2015
    December 28,
2014
    December 29,
2013
 

Total revenue

   $ 1,370.2      $ 1,433.4      $ 1,405.4   

Cost of sales

     932.4        967.8        988.9   
  

 

 

   

 

 

   

 

 

 

Gross margin

     437.8        465.6        416.5   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     162.6        165.8        171.6   

Selling, general and administrative

     205.8        215.9        205.7   

Amortization of acquisition-related intangibles

     8.4        10.6        15.5   

Restructuring, impairments, and other costs

     47.6        49.8        15.9   

Acquisition related costs

     6.5        —          —     

Charge for (release of) litigation

     —          4.4        (12.6

Goodwill impairment charge

     0.6        —          —     
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     431.5        446.5        396.1   
  

 

 

   

 

 

   

 

 

 

Operating income

     6.3        19.1        20.4   

Other expense, net

     5.4        6.5        9.2   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     0.9        12.6        11.2   

Provision for income taxes

     16.0        47.8        6.2   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (15.1   $ (35.2   $ 5.0   
  

 

 

   

 

 

   

 

 

 

Net income (loss) per common share:

      

Basic

   $ (0.13   $ (0.29   $ 0.04   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.13   $ (0.29   $ 0.04   
  

 

 

   

 

 

   

 

 

 

Weighted average common shares:

      

Basic

     115.4        121.4        127.2   
  

 

 

   

 

 

   

 

 

 

Diluted

     115.4        121.4        128.7   
  

 

 

   

 

 

   

 

 

 

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 27,
2015
    December 28,
2014
    December 29,
2013
 

Net income (loss)

   $ (15.1   $ (35.2   $ 5.0   

Other comprehensive income (loss), net of tax:

      

Net change associated with hedging transactions

     (4.5     (0.7     2.2   

Net amount reclassified to earnings for hedging (1)

     3.6        (6.4     (4.9

Net change associated with fair value of securities

     —          0.1        (0.2

Net change associated with pension transactions (2)

     1.3        (0.2     1.0   

Foreign currency translation adjustment

     (5.6     (6.2     —     
  

 

 

   

 

 

   

 

 

 

Total other comprehensive loss, net of tax

     (5.2     (13.4     (1.9
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (20.3   $ (48.6   $ 3.1   
  

 

 

   

 

 

   

 

 

 

(1)

 

     Year Ended  
     December 27,
2015
     December 28,
2014
     December 29,
2013
 
Net amount reclassified for cash flow hedges included in total revenue    $ (5.8    $ (0.9    $ (0.2
Net amount reclassified for cash flow hedges included in cost of sales      7.2         (4.0      (3.7
Net amount reclassified for cash flow hedges included in selling, general and administrative      —           (1.5      (1.1
Net amount reclassified for cash flow hedges included in research and development      0.9         —           0.1   
Net amount reclassified for cash flow hedges included in restructuring, impairments, and other costs      1.3         —           —     
  

 

 

    

 

 

    

 

 

 
Total net amount reclassified to earnings for hedging    $ 3.6       $ (6.4    $ (4.9
  

 

 

    

 

 

    

 

 

 

 

(2) Net of $0.4 million tax in 2014 and $(0.3) million tax in 2015.

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 27,
2015
    December 28,
2014
    December 29,
2013
 

Cash flows from operating activities:

      

Net income (loss)

   $ (15.1   $ (35.2   $ 5.0   

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

      

Depreciation and amortization

     132.4        139.7        145.2   

Non-cash stock-based compensation expense

     30.8        32.6        27.9   

Non-cash restructuring and impairments expense

     0.4        1.9        1.5   

Non-cash interest income

     —          —          (0.1

Non-cash financing expense

     1.5        1.3        0.9   

Gain from sale of equity investment

     —          (1.4     —     

Goodwill impairment charge

     0.6        —          —     

Non-cash write-off of equity investment

     —          —          3.0   

Loss on disposal of property, plant and equipment

     0.7        1.9        1.4   

Deferred income taxes, net

     1.6        34.9        (4.8

Charge for (release of) litigation

     —          4.4        (12.6

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

      

Accounts receivable

     (8.6     4.6        9.3   

Inventories

     (39.8     (35.6     9.0   

Other current assets

     (6.9     1.6        4.2   

Accounts payable

     7.0        8.8        (15.6

Accrued expenses and other current liabilities

     (13.3     30.1        (2.3

Other assets and liabilities, net

     3.1        4.1        4.1   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

   $ 94.4      $ 193.7      $ 176.1   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Capital expenditures

     (69.1     (54.5     (75.2

Proceeds from the sale of property, plant and equipment

     8.0        3.8        —     

Purchase of molds and tooling

     (1.4     (1.7     (2.1

Maturity of marketable securities

   $ 0.1      $ 0.1      $ 0.3   

Sale of equity investment

     —          2.1        —     

Acquisitions and divestitures, net of cash acquired

     —          (56.6     —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

   $ (62.4   $ (106.8   $ (77.0
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Repayment of long-term debt

   $ —        $ (200.0   $ (50.0

Issuance of long-term debt

     —          200.0        —     

Proceeds from issuance of stock for share-based compensation arrangements

     1.8        1.5        1.1   

Purchase of treasury stock

     (95.7     (142.5     (29.0

Shares withheld for employee taxes

     (11.5     (9.1     (9.3

Debt financing costs

     (0.1     (1.7     —     
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

   $ (105.5   $ (151.8   $ (87.2
  

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     (73.5     (64.9     11.9   

Cash and cash equivalents at beginning of period

     352.9        417.8        405.9   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 279.4      $ 352.9      $ 417.8   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

      

Cash paid during the period for:

      

Income taxes, net

   $ 12.8      $ 13.1      $ 12.1   

Interest

   $ 3.4      $ 3.8      $ 4.7   

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  
Balance at December 27, 2015     113.5      $ 1.4      $ 1,560.6      $ (62.7   $ 0.2      $ (3.6   $ (0.3   $ (11.8   $ (387.6   $ 1,096.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net loss           (15.1               (15.1
Exercise or settlement of plan awards     1.6          1.8                    1.8   
Stock-based compensation expense         30.1                    30.1   
Purchase of treasury stock     (5.8                   (95.7     (95.7
Cash flow hedges               (0.9           (0.9
Net amount reclassified to earnings for sale of marketable securities                       —     
Pension transactions                 1.3            1.3   
Foreign currency translation adjustment                   (5.6       (5.6
Shares withheld for employee taxes         (11.5                 (11.5
Temporary equity reclassification, deferred stock units         (2.3                 (2.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net 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
Unrealized holding gain 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 29, 2013     126.2      $ 1.4      $ 1,517.8      $ (12.4   $ 0.1      $ 4.4      $ (1.4   $ —        $ (149.4   $ 1,360.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
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
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 30, 2012     126.9      $ 1.4      $ 1,498.5      $ (17.4   $ 0.3      $ 7.2      $ (2.4   $ —        $ (120.5   $ 1,367.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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, Mountaintop, Pennsylvania, Cebu, the Philippines, 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.).

We changed our reportable segments effective in the first quarter of fiscal year 2015 to better reflect the way we currently manage the business. All periods presented have been revised accordingly to reflect the new reportable segments. Please refer to Note 17 Segments and Geographic Information for details.

In April 2015, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2015-03, (ASU 2015-03) Interest Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires debt issuance costs to be presented in the balance sheet as a reduction of the related debt liability rather than an asset. We adopted this ASU as of June 28, 2015. As a result of the adoption of ASU 2015-03, the presentation of other assets, total assets, long-term debt and total liabilities changed for all periods presented. In 2014, 2013, 2012 and 2011, $3.0 million, $2.6 million, $3.5 million and $4.6 million, respectively, was reclassified from other assets to long-term debt. These reclassifications impacted our total assets, total liabilities, and total liabilities, temporary equity and stockholders’ equity line items within our consolidated balance sheets by corresponding amounts.

In November 2015, the FASB, issued Accounting Standards Update No. 2015-17, (ASU 2015-17) Balance Sheet Classification of Deferred Taxes. This update simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendment eliminates the guidance requiring an entity to separate deferred tax liabilities and assets into a current amount and a noncurrent amount. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted as of the beginning of any interim or annual reporting period and can be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We have elected early adoption of ASU 2015-17 prospectively. Prior periods will not be retrospectively adjusted. The adoption of ASU 2015-17 had no material effect on our consolidated financial statements.

Pending Acquisition

On November 18, 2015, Fairchild Semiconductor International, Inc. (“Fairchild Semiconductor”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with ON Semiconductor Corporation and its wholly owned subsidiary, Falcon Operations Sub, Inc. (together, “ON Semiconductor”), under which ON Semiconductor agreed to acquire Fairchild Semiconductor. The total transaction value is expected to be approximately $2.4 billion. Under the terms of the Merger Agreement, on December 4, 2015, ON Semiconductor

 

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commenced a tender offer to acquire outstanding shares of Fairchild Semiconductor common stock from our stockholders for $20.00 per share, net to each holder in cash (the “Offer Price”). The tender offer is described in a Tender Offer Statement on Schedule TO filed by ON Semiconductor with the Securities and Exchange Commission on December 4, 2015 (as amended, the “ON Schedule TO”). The closing of the tender offer is subject to various conditions, including there being validly tendered in the tender offer at least a majority of our then-outstanding shares, and the receipt of customary regulatory approvals in the U.S. and other countries. Following receipt of those approvals and after such time as all shares tendered in the tender offer are accepted for payment, the Merger Agreement provides for the parties to effect a merger which would result in all shares not tendered in the tender offer (other than shares held by (i) ON Semiconductor, Fairchild Semiconductor or their respective subsidiaries immediately prior to the effective time of the merger, and (ii) stockholders of Fairchild Semiconductor who properly exercised their appraisal rights under the Delaware General Corporation Law) being converted into the right to receive the Offer Price. In addition, immediately prior to the effective time of the merger, all outstanding options to purchase shares of Fairchild Semiconductor common stock, restricted stock units, deferred stock units and performance units will become fully vested and be converted into the right to receive the Offer Price (net of any applicable exercise price with respect to options).

At the completion of the merger, Fairchild Semiconductor would become a wholly-owned subsidiary of ON Semiconductor. Additional information about our pending acquisition by ON Semiconductor is available in the Solicitation/Recommendation Statement on Schedule 14D-9 filed with the Securities and Exchange Commission by Fairchild Semiconductor International, Inc. (as amended, our “Schedule 14D-9”). The foregoing description of the Merger Agreement and the terms and conditions of the tender offer and merger do not purport to be complete and are qualified in their entirety by reference to the Merger Agreement, and to ON Semiconductor’s tender offer to purchase and other related documents, copies of which are filed as Exhibits (e)(1) and (a)(1)(A), respectively, of our Schedule 14D-9, and which are incorporated herein by reference. The Merger Agreement is also filed as Exhibit 2.01 to this Annual Report on Form 10-K. The transaction is expected to close in the second quarter of 2016.

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 27, 2015, December 28, 2014, and December 29, 2013 all consist of 52 weeks.

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

 

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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.

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 2015, 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 one 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

Our research and development expenditures are charged to expense as incurred.

Fair Value Measurements

Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and derivative instruments. The carrying amounts of our financial instruments approximate fair value due to their short-term nature. The fair values of marketable securities are estimated based on quoted market price for these securities.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset transaction between market participants

 

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on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

 

   

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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, the fair value measurement is based on models that use primarily market based parameters including interest rate yield curves, option volatilities and currency rates. In certain cases where market rate assumptions are not available, we are required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows could significantly affect the results of current or future values. The results may not be realized in an actual sale or immediate settlement of an asset or liability. Please refer to Note 3 Fair Value Measurements for further discussion of the fair value of our financial instruments.

Cash, Cash Equivalents and Other Securities

We invest excess cash in marketable securities consisting primarily of money markets and U.S. government securities.

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Highly liquid investments with maturities greater than three months and less than one year are classified as short-term marketable securities. All other investments with maturities that exceed one year are classified as long-term marketable securities. At December 27, 2015 and December 28, 2014, all of our securities are classified as available-for-sale. Available-for-sale securities are carried at fair value with unrealized gains and losses included as a component of other comprehensive income (OCI) within stockholders’ equity, net of any related tax effect, if such gains and losses are considered temporary. Realized gains and losses on these investments are included in other income (expense), net. Declines in value judged by management to be other-than-temporary and credit related are included in impairment of investments in the statement of operations. Unrealized losses are included in accumulated other comprehensive income (AOCI). For the purpose of computing realized gains and losses, cost is identified on a specific identification basis. For further discussion of our securities please refer to Note 4 Marketable Securities.

Derivatives

In 2015 and 2014, we utilized various derivative financial instruments to manage market risks associated with the fluctuations in foreign currency exchange rates. It is our policy to use derivative financial instruments to protect against market risk arising from transactions occurring in normal course of business. The criteria we use for designating an instrument as a hedge is the instrument’s effectiveness in risk reduction. To receive hedge accounting treatment, hedges must be highly effective at offsetting the impact of the hedged transaction.

We recognize all derivative instruments as either assets or liabilities at fair value in our consolidated balance sheets. Changes in the fair value of derivatives are recorded each period in current earnings or AOCI, depending

 

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on whether a derivative is designated as part of a hedge transaction and, if so, the type of hedge transaction. We classify the cash flows from these instruments in the same category as the underlying hedged items. We do not hold or issue derivative instruments for trading or speculative purposes.

We assess, both at inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of the hedged items. We also assess hedge ineffectiveness and record the gain or loss related to the ineffective portion to current earnings. If we determine that a forecasted transaction is no longer probable of occurring, we discontinue hedge accounting for the affected portion of the hedge instrument, and any related unrealized gain or loss on the contract is recognized in current earnings.

We used foreign currency forward contracts to hedge a portion of our forecasted foreign exchange denominated revenues and expenses in 2015 and 2014. These derivatives have twelve month terms and the initial fair value, if any, and the subsequent gains or losses on the change in fair value are reported in earnings within the same statement of operations line as the impact of the foreign currency translation. From time to time, we will also hedge the liability for an expected cash payment in foreign currency. These derivatives have terms that match the expected payment timing. The initial fair value, if any, and the subsequent gains or losses on the change in fair value are reported in earnings within the same statement of operations line as the change in value of the liability due to changes in currency value.

We net the fair value of all derivative financial instruments with counter-parties for which a master netting arrangement is utilized. The notional principal amounts for these instruments provide one measure of the transaction volume outstanding as of year end and do not represent the amount of our exposure to credit or market loss. The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information as of the respective period end. Although we disclose the notional principal and fair value of amounts of derivative financial instruments, we do not disclose the gains or losses associated with the exposures and transactions that these financial instruments are intended to hedge. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures will depend on actual market conditions during the remaining life of the instruments. Please refer to Note 5 Derivatives for the gross amounts of our derivative financial instruments under master netting agreements.

Concentration of Credit Risk

We are subject to concentrations of credit risk in our cash equivalents, marketable securities, derivatives, and trade accounts receivable. We maintain cash, cash equivalents and marketable securities with high credit quality financial institutions based upon our analysis of that financial institution’s relative credit standing. Our investment policy is designed to limit exposure to any one institution. We also are exposed to credit-related losses in the event of non-performance by counter-parties to hedging instruments. The counter-parties to all derivative transactions are major financial institutions. However, this does not eliminate our exposure to credit risk with these institutions. This credit risk is generally limited to the unrealized gains in such contracts should any of these counter-parties fail to perform as contracted. We consider the risk of counter-party default to be minimal.

We sell our products to distributors and original equipment manufacturers involved in a variety of industries including computing, consumer, communications, automotive and industrial. We have adopted credit policies and standards to accommodate industry growth and inherent risk. We perform continuing credit evaluations of our customers’ financial condition and require collateral as deemed necessary. Reserves are provided for estimated amounts of accounts receivable that may not be collected. Amounts determined to be uncollectible are charged or written-off against the reserve.

 

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Geographic Concentration Risk

In 2015, 2014 and 2013, we generated 43%, 39% and 36%, respectively, of our total revenues in China. Accordingly, our revenue and profitability is subject to prevailing regulatory, legal, economic, demographic, competitive and other conditions in this location. Changes in any of these conditions could make it less attractive for us to do business in this location and could have an adverse effect on our financial results.

Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and are generally depreciated based upon the following estimated useful lives: buildings and improvements, ten to thirty years, machinery and equipment and software, three to ten years. Depreciation is principally provided under the straight-line method.

Investments

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

Other Assets

Other assets include mold and tooling costs. Molds and tools are amortized over their expected useful lives, generally three to five years.

Goodwill, Intangible Assets, and Long-Lived Assets

Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but reviewed for impairment. Goodwill is reviewed annually, as of the last day of the fourth fiscal quarter, and whenever events or changes in circumstances indicate that the carrying value of the goodwill might not be recoverable. We have the option to first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test. If we elect this option and believe, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of each reporting unit is less than its carrying amount, the quantitative two-step impairment test is required; otherwise, no further testing is required. Alternatively, we may elect to not first assess qualitative factors and immediately perform the quantitative two-step impairment test. In the first step, we compare the fair value of each reporting unit to its carrying value. If the carrying value of the net assets assigned to each reporting unit exceeds the fair value of each reporting unit, then the second step of the impairment test is performed in order to determine the implied fair value of each reporting unit’s goodwill. If the carrying value of each reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

Our intangible assets are recorded at fair value at the time of their acquisition and are stated within our consolidated balance sheets, net of accumulated amortization and impairments, if applicable. Intangible assets with estimated useful lives are amortized over their estimated useful lives using the economic consumption method if anticipated future revenues can be reasonably estimated; the straight-line method is used when

 

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revenues cannot be reasonably estimated. Amortization is recorded as amortization of acquisition-related intangibles within our consolidated statements of operations. Intangible assets with indefinite lives are not amortized, however, they are subject to review for impairment. We review our intangible assets with indefinite lives for impairment annually, as of the last day of the fourth fiscal quarter, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Intangible assets such as trademarks and trade names are generally recorded in connection with a business acquisition. Values assigned to intangible assets are based on our estimates and judgments regarding expectations of the success and life cycle of products and technology acquired.

Long-lived assets to be held and used, including property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values. We determine the discount rate for this analysis based on the expected internal rate of return for the related business and do not allocate interest charges to the asset or asset group being measured. Considerable judgment is required to estimate discounted future operating cash flows. Long-lived assets to be disposed of are carried at fair value less costs to sell.

Currencies

Our functional currency for the majority of operations worldwide is the U.S. dollar, with the exception of certain foreign subsidiaries, whose respective local currencies are designated as the functional currency. Accordingly, entities with U.S. dollar functional currencies record gains and losses from translation of foreign currency financial statements in current results. In addition, conversion of foreign currency cash and foreign currency transactions are included in current results. For entities with local currencies designated as the functional currency, translation adjustments that arise due to changes in the exchange rate between the functional currency and the reporting currency over the period are presented as a component of OCI in stockholders’ equity.

Realized foreign currency losses were $3.4 million, $1.9 million and $2.2 million for the years ended December 27, 2015, December 28, 2014 and December 29, 2013, respectively.

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. The realizability of deferred tax assets must also be assessed. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. A valuation allowance must be established for deferred tax assets which the company does not believe will more likely than not be realized in the future. Deferred taxes are not provided for the undistributed earnings of the company’s foreign subsidiaries that are considered to be indefinitely reinvested outside of the U.S. in accordance with applicable authoritative accounting guidance. 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 which are not considered to be indefinitely reinvested outside the U.S.

Authoritative accounting guidance 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. This guidance also provides guidance on derecognition, classification, interest and penalties, accounting in the

 

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interim periods, disclosure, and transition. Penalties and interest relating to uncertain tax positions are recognized as a component of income tax expense. To the extent penalties and interest are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

Computation of Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period, plus the dilutive effect of potential future issuances of common stock relating to potentially dilutive securities using the treasury stock method. Potentially dilutive common equivalent securities consist of stock options, deferred stock units (DSUs), restricted stock units (RSUs) and performance units (PUs). In calculating diluted earnings per share, the dilutive effect of stock options is computed using the average market price for the respective period. Certain potential shares of our outstanding stock options are excluded because they are anti-dilutive in the period, but could be dilutive in the future.

Restructuring Charges

We have made estimates and judgments regarding the amount and timing of our restructuring expense and liability, including current and future period termination benefits, lease termination costs, and other exit costs to be incurred when related actions take place. We have also assessed the recoverability of certain long-lived assets employed in the business and, in certain instances shortened the expected useful life of the assets based on changes in their expected use. When we determine that the useful lives of assets are shorter than we had originally estimated, we record additional depreciation to reflect the assets’ new shorter useful lives. Severance and other related costs and asset-related charges are reflected within our consolidated statements of operations as a component of restructuring, impairments and other costs. Actual results may differ from these estimates.