UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 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) |
Registrants telephone number, including area code: (408) 822-2000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the Registrants Common Stock as of October 25, 2015 was 113,394,533.
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Part I. Financial Information | 3 | |||||
Item 1. |
3 | |||||
Consolidated Balance Sheets as of September 27, 2015 and December 28, 2014 |
3 | |||||
4 | ||||||
5 | ||||||
6 | ||||||
7 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
22 | ||||
Item 3. |
34 | |||||
Item 4. |
34 | |||||
Part II. Other Information | 34 | |||||
Item 1. |
34 | |||||
Item 1A. |
34 | |||||
Item 2. |
35 | |||||
Item 6. |
36 | |||||
37 |
2
Item 1. | Financial Statements |
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions)
As of | ||||||||
September 27, 2015 |
December 28, 2014 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 242.9 | $ | 352.9 | ||||
Short-term marketable securities |
0.2 | 0.1 | ||||||
Accounts receivable, net of allowances of $38.9 and $32.0 at September 27, 2015 and December 28, 2014, respectively |
157.9 | 124.0 | ||||||
Inventories, net |
303.8 | 264.9 | ||||||
Deferred income taxes, net of allowances |
12.9 | 13.2 | ||||||
Other current assets |
48.0 | 30.2 | ||||||
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Total current assets |
765.7 | 785.3 | ||||||
Property, plant and equipment, net |
563.3 | 627.7 | ||||||
Deferred income taxes, net of allowances |
5.5 | 5.3 | ||||||
Intangible assets, net |
30.0 | 37.2 | ||||||
Goodwill |
205.4 | 209.2 | ||||||
Long-term marketable securities |
2.0 | 2.2 | ||||||
Other assets |
18.6 | 22.2 | ||||||
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Total assets |
$ | 1,590.5 | $ | 1,689.1 | ||||
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LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
$ | 121.5 | $ | 106.2 | ||||
Accrued expenses and other current liabilities |
112.3 | 129.6 | ||||||
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Total current liabilities |
233.8 | 235.8 | ||||||
Long-term debt |
198.0 | 197.1 | ||||||
Deferred income taxes |
33.9 | 34.2 | ||||||
Other liabilities |
25.3 | 23.9 | ||||||
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Total liabilities |
491.0 | 491.0 | ||||||
Commitments and contingencies |
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Temporary equity deferred stock units |
6.1 | 4.0 | ||||||
Stockholders equity: |
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Common stock |
1.4 | 1.4 | ||||||
Additional paid-in capital |
1,554.5 | 1,542.5 | ||||||
Accumulated deficit |
(55.7 | ) | (47.6 | ) | ||||
Accumulated other comprehensive loss |
(19.2 | ) | (10.3 | ) | ||||
Treasury stock, at cost |
(387.6 | ) | (291.9 | ) | ||||
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Total stockholders equity |
1,093.4 | 1,194.1 | ||||||
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Total liabilities, temporary equity and stockholders equity |
$ | 1,590.5 | $ | 1,689.1 | ||||
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See accompanying notes to unaudited consolidated financial statements.
3
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2015 |
September 28, 2014 |
September 27, 2015 |
September 28, 2014 |
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Total revenue |
$ | 342.1 | $ | 381.1 | $ | 1,053.0 | $ | 1,096.8 | ||||||||
Cost of sales |
227.1 | 248.3 | 720.2 | 735.6 | ||||||||||||
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Gross margin |
115.0 | 132.8 | 332.8 | 361.2 | ||||||||||||
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Gross margin % |
33.6 | % | 34.8 | % | 31.6 | % | 32.9 | % | ||||||||
Operating expenses: |
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Research and development |
40.4 | 41.6 | 124.4 | 125.7 | ||||||||||||
Selling, general and administrative |
47.9 | 53.8 | 158.4 | 164.3 | ||||||||||||
Amortization of acquisition-related intangibles |
1.9 | 2.1 | 6.1 | 8.5 | ||||||||||||
Restructuring, impairments, and other costs |
27.7 | 31.7 | 36.6 | 42.5 | ||||||||||||
Charge for litigation |
| | | 4.4 | ||||||||||||
Goodwill impairment charge |
| | 0.6 | | ||||||||||||
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Total operating expenses |
117.9 | 129.2 | 326.1 | 345.4 | ||||||||||||
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Operating income (loss) |
(2.9 | ) | 3.6 | 6.7 | 15.8 | |||||||||||
Other expense, net |
1.4 | 1.5 | 4.2 | 5.2 | ||||||||||||
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Income (loss) before income taxes |
(4.3 | ) | 2.1 | 2.5 | 10.6 | |||||||||||
Provision for income taxes |
3.9 | 3.1 | 10.5 | 3.1 | ||||||||||||
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Net income (loss) |
$ | (8.2 | ) | $ | (1.0 | ) | $ | (8.0 | ) | $ | 7.5 | |||||
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Net income (loss) per common share: |
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Basic |
$ | (0.07 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | 0.06 | |||||
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Diluted |
$ | (0.07 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | 0.06 | |||||
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Weighted average common shares: |
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Basic |
114.6 | 119.5 | 116.0 | 122.5 | ||||||||||||
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Diluted |
114.6 | 119.5 | 116.0 | 124.4 | ||||||||||||
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See accompanying notes to unaudited consolidated financial statements.
4
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in millions)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2015 |
September 28, 2014 |
September 27, 2015 |
September 28, 2014 |
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Net income (loss) |
$ | (8.2 | ) | $ | (1.0 | ) | $ | (8.0 | ) | $ | 7.5 | |||||
Other comprehensive loss, net of tax: |
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Net change associated with hedging transactions (2) |
(8.8 | ) | 2.8 | (7.3 | ) | 4.1 | ||||||||||
Net amount reclassified to earnings for hedging (1) |
3.2 | (1.7 | ) | 2.6 | (6.7 | ) | ||||||||||
Net change associated with fair value of securities |
| | | 0.1 | ||||||||||||
Net change associated with pension transactions |
| | 0.1 | 0.1 | ||||||||||||
Foreign currency translation adjustment |
| (3.2 | ) | (4.3 | ) | (3.5 | ) | |||||||||
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Total other comprehensive loss, net of tax |
(5.6 | ) | (2.1 | ) | (8.9 | ) | (5.9 | ) | ||||||||
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Comprehensive income (loss) |
$ | (13.8 | ) | $ | (3.1 | ) | $ | (16.9 | ) | $ | 1.6 | |||||
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Three Months Ended | Nine Months Ended | |||||||||||||||||
September 27, 2015 |
September 28, 2014 |
September 27, 2015 |
September 28, 2014 |
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(1) |
Net amount reclassified for cash flow hedges included in total revenue |
$ | (1.1 | ) | $ | (0.6 | ) | $ | (5.2 | ) | $ | 0.2 | ||||||
Net amount reclassified for cash flow hedges included in cost of sales |
3.0 | (0.9 | ) | 6.0 | (5.2 | ) | ||||||||||||
Net amount reclassified for cash flow hedges included in selling, general and administrative |
| (0.2 | ) | | (1.7 | ) | ||||||||||||
Net amount reclassified for cash flow hedges included in research and development |
| | 0.5 | | ||||||||||||||
Net amount reclassified for cash flow hedges included in restructuring, impairments, and other costs |
1.3 | | 1.3 | | ||||||||||||||
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Total net amount reclassified to earnings for hedging |
$ | 3.2 | $ | (1.7 | ) | $ | 2.6 | $ | (6.7 | ) | ||||||||
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(2) | Net of tax of $(0.8) million in the third quarter of 2015. |
See accompanying notes to unaudited consolidated financial statements.
5
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
Nine Months Ended | ||||||||
September 27, 2015 |
September 28, 2014 |
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Cash flows from operating activities: |
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Net income (loss) |
$ | (8.0 | ) | $ | 7.5 | |||
Adjustments to reconcile net income (loss) to cash provided by operating activities: |
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Depreciation and amortization |
103.0 | 102.5 | ||||||
Non-cash stock-based compensation expense |
23.6 | 25.0 | ||||||
Non-cash restructuring and impairments expense |
0.8 | 1.5 | ||||||
Non-cash financing expense |
1.1 | 0.9 | ||||||
Gain from sale of equity investment |
| (1.4 | ) | |||||
Goodwill impairment charge |
0.6 | | ||||||
Loss on disposal of property, plant and equipment |
0.7 | 1.9 | ||||||
Deferred income taxes, net |
(0.3 | ) | (5.9 | ) | ||||
Charge for litigation |
| 4.4 | ||||||
Changes in operating assets and liabilities, net of effects of acquisitions: |
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Accounts receivable, net |
(33.9 | ) | (13.7 | ) | ||||
Inventories |
(39.1 | ) | (24.2 | ) | ||||
Other current assets |
(5.1 | ) | 0.8 | |||||
Accounts payable |
12.6 | 16.4 | ||||||
Accrued expenses and other current liabilities |
(19.7 | ) | 13.0 | |||||
Other assets and liabilities, net |
3.4 | 18.7 | ||||||
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Net cash provided by operating activities |
$ | 39.7 | $ | 147.4 | ||||
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Cash flows from investing activities: |
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Capital expenditures |
$ | (50.8 | ) | $ | (41.3 | ) | ||
Proceeds from the sale of property, plant and equipment, net |
7.1 | | ||||||
Purchase of molds and tooling |
(1.0 | ) | (1.8 | ) | ||||
Maturity of marketable securities |
0.1 | | ||||||
Sale of equity investment |
| 2.1 | ||||||
Acquisitions and divestitures, net of cash acquired |
| (56.6 | ) | |||||
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Net cash used in investing activities |
$ | (44.6 | ) | $ | (97.6 | ) | ||
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Cash flows from financing activities: |
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Repayment of long-term debt |
$ | | $ | (200.0 | ) | |||
Issuance of long-term debt |
| 200.0 | ||||||
Proceeds from issuance of stock for share-based compensation arrangements |
1.4 | 1.4 | ||||||
Purchase of treasury stock |
(95.7 | ) | (124.6 | ) | ||||
Shares withheld for employee taxes |
(10.7 | ) | (7.7 | ) | ||||
Debt financing costs |
(0.1 | ) | (1.7 | ) | ||||
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Net cash used in financing activities |
$ | (105.1 | ) | $ | (132.6 | ) | ||
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Net change in cash and cash equivalents |
(110.0 | ) | (82.8 | ) | ||||
Cash and cash equivalents at beginning of period |
352.9 | 417.8 | ||||||
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Cash and cash equivalents at end of period |
$ | 242.9 | $ | 335.0 | ||||
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See accompanying notes to unaudited consolidated financial statements.
6
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 Basis of Presentation
The accompanying interim consolidated financial statements of Fairchild Semiconductor International, Inc. (Fairchild International, we, our or the company) have been prepared in conformity with accounting principles generally accepted in the United States of America, consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended December 28, 2014. The interim financial information is unaudited, but reflects all normal adjustments, which are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. The financial statements should be read in conjunction with the financial statements in our Annual Report on Form 10-K for the year ended December 28, 2014. Our accounting policies are described in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K and updated, as necessary, in Form 10-Q. The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the full year.
Our fiscal calendar, in which each quarter ends on a Sunday, contains 53 weeks every seven years compared to the usual 52 weeks. This additional week is included in the first quarter of the year. Our results for the three months ended September 27, 2015 and September 28, 2014 both consisted of 13 weeks. Our results for the nine months ended September 27, 2015 and September 28, 2014 both consisted of 39 weeks.
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 12 Segments and Geographic Information for further details.
Change in Accounting Principle Related to Accounting for Debt Issuance Costs
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, long-term assets, long-term debt and long-term liabilities changed for all periods presented.
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 managements best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, 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.
Note 2 Fair Value Measurements
The assets and liabilities measured at fair value on a recurring basis include securities and derivatives. Financial instruments categorized as Level 1 are securities traded on an active exchange as well as U.S. Treasury, and other U.S. government and agency-backed securities that are traded by dealers or brokers in active over-the-counter markets. The fair value of securities is based on quoted market prices at the date of measurement.
All of our derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, we measured fair value using prices obtained from the counter-parties with whom we have traded. The counter-parties price the derivatives based on models that use primarily market observable inputs, such as yield curves and option volatilities. Accordingly, the fair value of these assets are categorized as Level 2 within the fair value hierarchy.
7
We do not have any financial instruments categorized as Level 3.
The tables below present information about our assets and liabilities that are regularly measured and carried at fair value and indicate the level within the fair value hierarchy of the valuation techniques we utilized to determine such fair value:
As of September 27, 2015 | ||||||||||||||||
Total | Quoted Prices in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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(In millions) | ||||||||||||||||
Derivative contract assets |
$ | 0.3 | $ | | $ | 0.3 | $ | | ||||||||
Derivative contract liabilities |
(8.0 | ) | | (8.0 | ) | | ||||||||||
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Total derivative contracts |
$ | (7.7 | ) | $ | | $ | (7.7 | ) | $ | | ||||||
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Marketable securities |
$ | 2.2 | $ | 2.2 | $ | | $ | | ||||||||
As of December 28, 2014 | ||||||||||||||||
Total | Quoted Prices in Active Markets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
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(In millions) | ||||||||||||||||
Derivative contract assets |
$ | 2.8 | $ | | $ | 2.8 | $ | | ||||||||
Derivative contract liabilities |
(5.5 | ) | | (5.5 | ) | | ||||||||||
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Total derivative contracts |
$ | (2.7 | ) | $ | | $ | (2.7 | ) | $ | | ||||||
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Marketable securities |
$ | 2.3 | $ | 2.3 | $ | | $ | |
The fair values of our debt instruments, which are Level 2 liabilities, are carried at amortized cost. The carrying amount of the revolving credit facility is considered to approximate fair value as the interest rate on the loan is in line with current market rates. Please refer to Note 7 Indebtedness for further information about the revolving credit facility.
As of September 27, 2015 | As of December 28, 2014 | |||||||||||||||
Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value |
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(In millions) | ||||||||||||||||
Revolving credit facility borrowings |
$ | 200.0 | $ | 200.0 | $ | 200.0 | $ | 200.0 |
8
Note 3 Marketable Securities
Our marketable securities are categorized as available-for-sale and are summarized as follows:
As of September 27, 2015 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
(In millions) | ||||||||||||||||
U.S. Treasury securities and obligations of U.S. government agencies |
$ | 0.2 | $ | | $ | | $ | 0.2 | ||||||||
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Total short-term marketable securities |
$ | 0.2 | $ | | $ | | $ | 0.2 | ||||||||
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U.S. Treasury securities and obligations of U.S. government agencies |
$ | 1.7 | $ | 0.2 | $ | | $ | 1.9 | ||||||||
Corporate debt securities |
0.1 | | | 0.1 | ||||||||||||
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Total long-term marketable securities |
$ | 1.8 | $ | 0.2 | $ | | $ | 2.0 | ||||||||
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As of December 28, 2014 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
(In millions) | ||||||||||||||||
U.S. Treasury securities and obligations of U.S. government agencies |
$ | 0.1 | $ | | $ | | $ | 0.1 | ||||||||
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Total short-term marketable securities |
$ | 0.1 | $ | | $ | | $ | 0.1 | ||||||||
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U.S. Treasury securities and obligations of U.S. government agencies |
$ | 1.8 | $ | 0.2 | $ | | $ | 2.0 | ||||||||
Corporate debt securities |
0.2 | | | 0.2 | ||||||||||||
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Total long-term marketable securities |
$ | 2.0 | $ | 0.2 | $ | | $ | 2.2 | ||||||||
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The amortized cost and estimated fair value of our marketable securities available-for-sale by contractual maturity are summarized as follows:
As of September 27, 2015 | ||||||||
Amortized Cost |
Fair Value | |||||||
(In millions) | ||||||||
Due in one year or less |
$ | 0.2 | $ | 0.2 | ||||
Due after one year through five years |
0.7 | 0.8 | ||||||
Due after five years |
1.1 | 1.2 | ||||||
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$ | 2.0 | $ | 2.2 | |||||
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Note 4 Derivatives
We use derivative instruments to manage exposures to changes in foreign currency exchange rates. The fair value of these hedges is recorded on the balance sheet. Please refer to Note 2 Fair Value Measurements for further information about the fair value of derivatives.
Foreign Currency Derivatives. We use foreign currency forward contracts to hedge a portion of our forecasted foreign exchange denominated revenues and expenses. We monitor our foreign currency exposures in an effort to maximize the overall effectiveness of our foreign currency hedge positions. Our objective for holding derivatives is to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures. The maturities of the cash flow hedges are 12 months or less as of September 27, 2015.
9
Changes in the fair value of derivative instruments related to time value are included in the assessment of hedge effectiveness. Hedge ineffectiveness did not have a material impact on earnings for the nine months ended September 27, 2015. No cash flow hedges were derecognized or discontinued in the nine months ended September 27, 2015.
Derivative gains and losses included in accumulated other comprehensive income (AOCI) are reclassified into earnings at the time the forecasted transaction is recognized. We estimate that $7.6 million of net unrealized derivative losses included in AOCI will be reclassified into earnings within the next twelve months.
The following tables present derivatives designated as hedging instruments:
As of September 27, 2015 | As of December 28, 2014 | |||||||||||||||||||||||||||
Balance Sheet Classification |
Notional Amount |
Fair Value |
Amount of Gain (Loss) Recognized In AOCI |
Balance Sheet Classification |
Notional Amount |
Fair Value |
Amount of Gain (Loss) Recognized In AOCI |
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(In millions) | (In millions) | |||||||||||||||||||||||||||
Derivatives Designated as Cash Flow Hedges |
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Derivatives for forecasted revenues |
Current assets | $ | 46.6 | $ | 0.3 | $ | 0.3 | Current assets | $ | 43.3 | $ | 2.7 | $ | 2.7 | ||||||||||||||
Derivatives for forecasted revenues |
Current liabilities | 3.6 | | | Current liabilities | | | | ||||||||||||||||||||
Derivatives for forecasted expenses |
Current assets | | | | Current assets | 13.7 | | | ||||||||||||||||||||
Derivatives for forecasted expenses |
Current liabilities | 179.4 | (7.9 | ) | (7.9 | ) | Current liabilities | 205.2 | (5.5 | ) | (5.5 | ) | ||||||||||||||||
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Total foreign exchange contracts, net |
$ | 229.6 | $ | (7.6 | ) | $ | (7.6 | ) | $ | 262.2 | $ | (2.8 | ) | $ | (2.8 | ) | ||||||||||||
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For the Nine Months Ended September 27, 2015 |
For the Nine Months Ended September 28, 2014 |
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Income Statement Classification of Gain (Loss) |
Amount of Gain (Loss) Recognized In Income |
Amount of Gain (Loss) Reclassified from AOCI |
Income Statement Classification of Gain (Loss) |
Amount of Gain (Loss) Recognized In Income |
Amount of Gain (Loss) Reclassified from AOCI |
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(In millions) | (In millions) | |||||||||||||||||||
Derivatives Designated as Cash Flow Hedges |
||||||||||||||||||||
Foreign exchange contract |
Revenue | $ | 5.2 | $ | 5.2 | Revenue | $ | (0.2 | ) | $ | (0.2 | ) | ||||||||
Foreign exchange contract |
Expenses | (7.8 | ) | (7.8 | ) | Expenses | 6.9 | 6.9 | ||||||||||||
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Net gain (loss) recognized in income |
$ | (2.6 | ) | $ | (2.6 | ) | $ | 6.7 | $ | 6.7 | ||||||||||
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Gain (Loss) Recognized in OCI for Derivative Instruments (1) |
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For the Nine Months Ended September 27, 2015 |
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(In millions) | ||||
Foreign exchange contracts |
$ | (4.7 | ) | |
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(1) | This amount is inclusive of both realized and unrealized gains and losses recognized in OCI. |
10
The following tables present derivatives not designated as hedging instruments.
As of September 27, 2015 | As of December 28, 2014 | |||||||||||||||||||
Balance Sheet Classification |
Notional Amount |
Fair Value | Balance Sheet Classification |
Notional Amount |
Fair Value | |||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||
Derivatives Not Designated as Hedging Instruments |
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Foreign exchange contracts |
Current assets | $ | 15.3 | $ | | Current assets | $ | 8.5 | $ | 0.1 | ||||||||||
Foreign exchange contracts |
Current liabilities | 30.8 | (0.1 | ) | Current liabilities | 20.1 | | |||||||||||||
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Total foreign exchange contracts, net |
$ | 46.1 | $ | (0.1 | ) | $ | 28.6 | $ | 0.1 | |||||||||||
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For the Nine Months Ended September 27, 2015 |
For the Nine Months Ended September 28, 2014 |
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Income Statement Classification of Gain (Loss) |
Amount of Gain (Loss) Recognized In Income |
Income Statement Classification of Gain (Loss) |
Amount of Gain (Loss) Recognized In Income |
|||||||||
(In millions) | (In millions) | |||||||||||
Derivatives Not Designated as Hedging Instruments |
||||||||||||
Foreign exchange contracts |
Revenue | $ | | Revenue | $ | | ||||||
Foreign exchange contracts |
Expenses | (2.0 | ) | Expenses | (0.2 | ) | ||||||
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Net gain (loss) recognized in income |
$ | (2.0 | ) | $ | (0.2 | ) | ||||||
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We net the fair value of all derivative financial instruments with counter-parties for which a master netting arrangement is utilized.
The gross amounts of the derivative assets and liabilities are as follows:
As of | ||||||||
September 27, 2015 |
December 28, 2014 |
|||||||
(In millions) | ||||||||
Gross Assets |
$ | 0.6 | $ | 2.8 | ||||
Gross Liabilities |
(0.3 | ) | | |||||
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Current Assets |
$ | 0.3 | $ | 2.8 | ||||
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Gross Assets |
$ | | $ | 0.1 | ||||
Gross Liabilities |
(8.0 | ) | (5.6 | ) | ||||
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Current Liabilities |
$ | (8.0 | ) | $ | (5.5 | ) | ||
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Note 5 Financial Statement Details
As of | ||||||||
September 27, 2015 |
December 28, 2014 |
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(In millions) | ||||||||
Inventories, net |
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Raw materials |
$ | 34.3 | $ | 44.0 | ||||
Work in process |
158.5 | 141.4 | ||||||
Finished goods |
111.0 | 79.5 | ||||||
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Total inventories, net |
$ | 303.8 | $ | 264.9 | ||||
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11
As of | ||||||||
September 27, 2015 |
December 28, 2014 |
|||||||
(In millions) | ||||||||
Property, plant and equipment |
||||||||
Land and improvements |
$ | 17.4 | $ | 19.8 | ||||
Buildings and improvements |
281.2 | 397.5 | ||||||
Machinery and equipment |
1,687.2 | 1,902.4 | ||||||
Construction in progress |
55.6 | 52.1 | ||||||
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Total property, plant and equipment |
2,041.4 | 2,371.8 | ||||||
Less accumulated depreciation |
1,478.1 | 1,744.1 | ||||||
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Total property, plant, and equipment, net |
$ | 563.3 | $ | 627.7 | ||||
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Assets classified as held for sale are required to be recorded at the lower of carrying value or fair value less any costs to sell. The carrying value of these assets, as of the third quarter of 2015, was $15.5 million and is reported in the other current assets line of our statement of financial position. We expect to dispose of these assets within the next twelve months.
As of | ||||||||
September 27, 2015 |
December 28, 2014 |
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(In millions) | ||||||||
Accrued expenses and other current liabilities |
||||||||
Payroll and employee related accruals |
$ | 53.9 | $ | 64.0 | ||||
Accrued interest |
0.4 | 0.3 | ||||||
Taxes payable |
11.5 | 9.0 | ||||||
Restructuring |
20.7 | 30.2 | ||||||
Other |
25.8 | 26.1 | ||||||
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Total accrued expenses and other current liabilities |
$ | 112.3 | $ | 129.6 | ||||
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2015 |
September 28, 2014 |
September 27, 2015 |
September 28, 2014 |
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(In millions) | ||||||||||||||||
Other expense, net |
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Interest expense |
$ | 1.5 | $ | 1.5 | $ | 4.3 | $ | 4.9 | ||||||||
Interest income |
(0.2 | ) | (0.1 | ) | (0.5 | ) | (0.5 | ) | ||||||||
Other, net |
0.1 | 0.1 | 0.4 | 0.8 | ||||||||||||
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Other expense, net |
$ | 1.4 | $ | 1.5 | $ | 4.2 | $ | 5.2 | ||||||||
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Note 6 Goodwill and Intangible Assets
We assess the impairment of goodwill on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is subject to an annual impairment test in the fourth quarter of the fiscal year, or more frequently, if indicators of potential impairment arise. In the first quarter of 2015, we reorganized our operating segments. This reorganization required us to assess the impairment of our goodwill and other long-lived assets. The goodwill impairment guidance requires that entities designate reporting units at the lowest level of an entity that is a business and that can be distinguished, physically and operationally and for internal reporting purposes, from the other activities, operations, and assets of the entity. In previous periods, our reporting units were equivalent to our reportable segments and are consistent with the operating segments described in Note 12 Segments and Geographic Information.
12
The impairment assessment is based on a combination of the income approach, which estimates the fair value of our reporting units based on a discounted cash flow approach, and the market approach which estimates the fair value of our reporting units based on comparable market multiples. The average fair value is then reconciled to our market capitalization with an appropriate control premium. The discount rates utilized in the discounted cash flows in the first quarter of 2015 ranged from approximately 11.5% to 14.0%, reflecting market based estimates of capital costs and discount rates adjusted for a market participants view with respect to execution, concentration, and other risks associated with the projected cash flows of the individual segments. The peer companies used in the market approach are primarily the major competitors of each reporting unit. Our valuation methodology requires management to make judgments and assumptions based on historical experience and projections of future operating performance. In addition, we performed various sensitivity analyses based on several key input variables, which further supported our assessment. If these assumptions differ materially from future results, we may record impairment charges in the future. In the first quarter of 2015, we conducted step one of the quantitative goodwill impairment test as of the first day of fiscal year 2015. After completing step one of the impairment test, we determined that the estimated fair value of one of our goodwill reporting units was less than the carrying value of that reporting unit. In the first quarter of 2015, we wrote off the entire goodwill balance for the reporting unit with an estimated fair value less than the carrying value, which resulted in an impairment loss of $0.6 million. This goodwill reporting unit is included in the Analog Power and Systems Solutions (APSS) reportable segment described in Note 12 Segments and Geographic Information. The remainder of our reporting units with goodwill had fair values substantially in excess of book values. We generally allocated goodwill to the reporting units based on relative fair value of the respective unit. In 2014, there were no goodwill impairments and the fair values of the reporting units with goodwill were substantially in excess of book values.
The following table presents the carrying amount of goodwill by operating segment:
SPS | APSS | SPG | Total | |||||||||||||
(In millions) | ||||||||||||||||
Balance at December 28, 2014 |
$ | 105.1 | $ | 103.0 | $ | 1.1 | $ | 209.2 | ||||||||
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Impairment loss |
$ | | $ | (0.6 | ) | $ | | $ | (0.6 | ) | ||||||
Foreign exchange impact |
$ | | $ | (3.2 | ) | $ | | $ | (3.2 | ) | ||||||
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Balance at September 27, 2015 |
$ | 105.1 | $ | 99.2 | $ | 1.1 | $ | 205.4 | ||||||||
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The following table presents a summary of acquired intangible assets.
As of September 27, 2015 | As of December 28, 2014 | |||||||||||||||||||
Period of Amortization |
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
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(In millions) | ||||||||||||||||||||
Developed technology |
8-10 years | $ | 260.4 | $ | (247.5 | ) | $ | 261.4 | $ | (245.3 | ) | |||||||||
Customer base |
6-10 years | 85.8 | (80.1 | ) | 86.1 | (77.4 | ) | |||||||||||||
Core technology |
10-15 years | 15.7 | (7.0 | ) | 15.7 | (6.3 | ) | |||||||||||||
In-process R&D |
3-10 years | 3.3 | (0.9 | ) | 3.3 | (0.7 | ) | |||||||||||||
Trademarks and trade names |
5 years | 0.5 | (0.2 | ) | 0.5 | (0.1 | ) | |||||||||||||
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Total identifiable intangible assets |
$ | 365.7 | $ | (335.7 | ) | $ | 367.0 | $ | (329.8 | ) | ||||||||||
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The estimated amortization expense for intangible assets for each of the five succeeding fiscal years is as follows:
Estimated Amortization Expense: |
(In millions) | |||
Remaining Fiscal 2015 |
$ | 3.0 | ||
Fiscal 2016 |
8.1 | |||
Fiscal 2017 |
5.4 | |||
Fiscal 2018 |
4.1 | |||
Fiscal 2019 |
4.0 |
13
Note 7 Indebtedness
Our indebtedness consists of the following:
As of | ||||||||
September 27, 2015 |
December 28, 2014 |
|||||||
(In millions) | ||||||||
Revolving credit facility borrowings |
$ | 200.0 | $ | 200.0 | ||||
Less debt issuance costs (1) |
(2.1 | ) | (3.0 | ) | ||||
Other debt |
0.1 | 0.1 | ||||||
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Total long-term debt |
$ | 198.0 | $ | 197.1 | ||||
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(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 Note 1 Basis of Presentation for additional details regarding this accounting policy change. |
Revolving Credit Facility
On September 26, 2014, we entered into our current $400.0 million, five-year senior secured revolving credit facility. Please refer to our Annual Report in form 10-K for the year ended December 28, 2014, for details regarding our current credit facility. On June 23, 2015, we amended our current credit agreement to remove certain provisions from the definition of change in control. The amendment was filed as Exhibit 10.37 to our Quarterly Report on Form 10-Q filed with the SEC on August 6, 2015.
After adjusting for outstanding letters of credit, we have $199.3 million available under the credit facility as of September 27, 2015. We have additional outstanding letters of credit of $0.4 million that do not fall under the credit facility as of September 27, 2015. We also have $4.0 million of undrawn credit facilities at certain of our foreign subsidiaries as of September 27, 2015. These outstanding amounts do not impact available borrowings under the credit facility.
Note 8 Contingencies
Litigation
From time to time, the company is involved in legal proceedings in the ordinary course of business. We analyze potential outcomes from current and potential litigation as loss contingencies in accordance with U.S. GAAP. Since most potential claims against the company may involve the enforcement of complex intellectual property rights or complicated damages calculations, we generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of these matters, or the magnitude of the eventual loss related to each pending matter.
For a limited number of matters disclosed in this note for which a loss, whether in excess of a related accrued liability or where there is no accrued liability, is reasonably possible in future periods, we estimate a range of possible loss. In determining whether it is possible to estimate a range of possible loss, we review and evaluate our material litigation on an ongoing basis in light of potentially relevant factual and legal developments. These may include information learned through the discovery process, rulings on dispositive motions, settlement discussions, and other rulings by courts, arbitrators or others. If we possess sufficient information to develop an estimate of loss or range of possible loss, that estimate is disclosed either individually or in the aggregate. Finally, for loss contingencies for which we believe the possibility of loss is remote, we do not record a reserve or assess the range of possible losses.
Based on current knowledge, management does not believe that loss contingencies arising from pending matters will have a material adverse effect on our business, financial condition, results of operations or cash flows. However, in light of the inherent uncertainties involved in these matters, some of which are beyond our control, an adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.
14
Patent Litigation with Power Integrations, Inc.
There are five outstanding proceedings with Power Integrations.
POWI 1: On October 20, 2004, the company and its wholly owned subsidiary, Fairchild Semiconductor Corporation, were sued by Power Integrations, Inc. in the U.S. District Court for the District of Delaware. Power Integrations alleged that certain of the companys pulse width modulation (PWM) integrated circuit products infringed four Power Integrations U.S. patents, and sought a permanent injunction preventing the company from manufacturing, selling or offering the products for sale in the U.S., or from importing the products into the U.S., as well as money damages for past infringement.
The trial in the case was divided into three phases. In the first phase of the trial that occurred in October of 2006, a jury returned a verdict finding that thirty-three of the companys PWM products willfully infringed one or more of seven claims asserted in the four patents and assessed damages against the company. The company voluntarily stopped U.S. sales and importation of those products in 2007 and has been offering replacement products since 2006. Subsequent phases of the trial conducted during 2007 and 2008 focused on the validity and enforceability of the patents. In December of 2008, the judge overseeing the case reduced the jurys 2006 damages award from $34.0 million to approximately $6.1 million and ordered a new trial on the issue of willfulness. Following the new trial held in June of 2009, the court found the companys infringement to have been willful, and in January 2011 the court awarded Power Integrations final damages in the amount of $12.2 million. The company appealed the final damages award, willfulness finding, and other issues to the U.S. Court of Appeals for the Federal Circuit. On March 26, 2013, the court of appeals vacated almost the entire damages award, ruling that there was no basis upon which a reasonable jury could find the company liable for induced infringement. The court also vacated the earlier ruling of willful patent infringement by the company. The full court of appeals and the Supreme Court of the United States have since denied Power Integrations request to review the appeals court ruling. Although the appeals court instructed the lower court to conduct further proceedings to determine damages based upon approximately $500,000 to $750,000 worth of sales and imports of affected products, the company believes that damages on the basis of that level of infringing activity would not be material. Accordingly, the company released $12.6 million from its reserves relating to this case during the first quarter of 2013.
POWI 2: On May 23, 2008, Power Integrations filed another lawsuit against the company, Fairchild Semiconductor Corporation and its wholly owned subsidiary System General Corporation in the U.S. District Court for the District of Delaware, alleging infringement of three patents. Of the three patents asserted in that lawsuit, two were asserted against the company and Fairchild Semiconductor Corporation in the October 2004 lawsuit described above. In 2011, Power Integrations added a fourth patent to this case.
On October 14, 2008, Fairchild Semiconductor Corporation and System General Corporation filed a patent infringement lawsuit against Power Integrations in the U.S. District Court for the District of Delaware, alleging that certain PWM integrated circuit products infringe one or more claims of two U.S. patents owned by System General. The lawsuit seeks monetary damages and an injunction preventing the manufacture, use, sale, offer for sale or importation of Power Integrations products found to infringe the asserted patents.
Both lawsuits were consolidated and heard together in a jury trial in April of 2012. On April 27, 2012, the jury found that Power Integrations infringed one of the two U.S. patents owned by System General and upheld the validity of both System General patents. In the same verdict, the jury found that the company infringed two of four U.S. patents asserted by Power Integrations and that the company had induced its customers to infringe the asserted patents. (The court later ruled that the company infringed one other asserted Power Integrations patent that the jury found was not infringed.) The jury also upheld the validity of the asserted Power Integrations patents. The verdict concluded the first phase of trial in the litigation. On June 30, 2014, the court issued an order enjoining Fairchild from making, using, selling, offering to sell or importing into the United States the products found to infringe the Power Integrations patents in the case as well as certain products that were similar to the products found to infringe. Willfulness and damages in the case will be determined in a second phase, which has yet to be scheduled and will occur after appeals of the first phase. The company and Power Integrations have filed appeals from the first phase.
POWI 3: On November 4, 2009, Power Integrations filed a complaint for patent infringement against the company and two of its subsidiaries in the U.S. District Court for the Northern District of California alleging that several of its products infringe three of Power Integrations patents. Fairchild filed counterclaims asserting that Power Integrations infringes two Fairchild patents. A trial was held from February 10-27, 2014 on two Power Integrations patents and one Fairchild patent. On March 4, 2014, the jury returned a verdict finding that Fairchild willfully infringed both Power Integrations patents, awarding Power Integrations $105.0 million in damages, and finding that Power Integrations did not infringe the Fairchild patent. Both parties filed various post-trial motions, which were denied by the court with the exception of Fairchilds motion to set aside the jurys determination that it acted willfully. On September 9, 2014, the court granted the companys motion and determined that, as a matter of law, Fairchilds actions were not willful.
15
In addition to the ruling on willfulness, the company continued to challenge several other aspects of the verdict during post-trial review. Specifically, the company asserted that the damages award included legal and evidentiary defects that were inconsistent with recent rulings by the U.S. Court of Appeals for the Federal Circuit. On November 25, 2014, the trial court ruled that the jury lacked sufficient evidence on which to base its damages award and, consequently, vacated the $105.0 million verdict and ordered a new trial on damages. On February 12, 2015, the court denied Power Integrations request to enjoin the Fairchild products that were found to infringe, finding, among other things, that the evidence at trial failed to establish a causal connection between the alleged harm and the alleged infringement. The court ruled that Power Integrations can request an injunction after the new trial on damages. The new damages trial is scheduled for December of 2015.
POWI 4: On February 10, 2010, Fairchild and System General filed a lawsuit in Suzhou, China against four Power Integrations entities and seven vendors. The lawsuit claims that Power Integrations violates certain Fairchild/System General patents. Fairchild is seeking an injunction against the Power Integrations products and over $17.0 million in damages. Hearings comparable to a trial in U.S. litigation were held in January, May and July 2012. In December of 2012, the Suzhou court ruled in favor of Power Integrations and denied the companys claims. Fairchild appealed the ruling but ultimately withdrew its appeal in the fourth quarter of 2014.
POWI 5: On May 1, 2012, the company sued Power Integrations in U.S. District Court for the District of Delaware. The lawsuit accuses Power Integrations LinkSwitch-PH LED power conversion products of violating three of the companys patents. Power Integrations filed counterclaims of patent infringement against the company asserting five Power Integrations patents. Prior to the trial, the Court granted Fairchild summary judgment of no infringement on one of the patents and Power Integration voluntarily withdrew another. Trial in the case began on May 26, 2015. On June 5, 2015, the jury found that Power Integrations induced infringement of Fairchilds patent rights, and awarded Fairchild $2.4 million in damages. The same jury found that Fairchild did not infringe one of the two remaining Power Integrations patents and found that Fairchild infringed two claims of one Power Integrations patent, and awarded Power Integrations damages of $0.1 million. Power Integrations was forced to remove the final patent from the case during the trial.
POWI 6: On October 21, 2015, Power Integrations filed another complaint for patent infringement against Fairchild Semiconductor International, Inc., Fairchild Semiconductor Corporation and Fairchild (Taiwan) Corporation in the U.S. District Court for the Northern District of California. The lawsuit alleges certain products infringe two Power Integrations patents. The company is reviewing the allegations in the complaint.
Other Legal Claims
From time to time we are involved in legal proceedings in the ordinary course of business. We believe we have valid defenses with respect to matters currently pending against us and we intend to vigorously defend against those claims. For example, in December 2013, a 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. We are contesting that claim vigorously. We believe there is no such ordinary-course pending litigation that could have, individually or in the aggregate, a material adverse effect on our business, financial condition, results of operations, or cash flows.
For matters where an estimate of the range of possible loss is possible, management currently estimates the aggregate range of reasonably possible loss, in excess of amounts accrued for outstanding matters, is $1.2 million to $15.9 million. The estimated range of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. Those matters for which an estimate is not possible are not included within this estimated range. Therefore, this estimated range of possible loss represents what we believe to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent our maximum exposure.
Note 9 Common Stock Repurchases
On May 20, 2015, the board of directors authorized the additional repurchase of up to $150.0 million of the companys common stock. This amount is in addition to the two separate authorizations of $100.0 million disclosed in May 2014 and December 2013, respectively. The repurchase program is currently funded using available cash. During the three months ended September 27, 2015, we repurchased 2,430,477 shares of common stock, under repurchase programs for $35.2 million, at an average purchase price of $14.48 per share. During the nine months ended September 27, 2015, we repurchased 5,787,614 shares of common stock, under repurchase programs for $95.7 million, at an average purchase price of $16.54 per share.
16
Note 10 Restructuring, Impairments and Other Costs
During the three months ended September 27, 2015 and September 28, 2014, we recorded restructuring, impairment and other costs, net of releases, of $27.7 million and $31.7 million, respectively. During the nine months ended September 27, 2015 and September 28, 2014, we recorded restructuring, impairment and other costs, net of releases, of $36.6 million and $42.5 million, respectively. The detail of the charges for the three and nine months ended September 27, 2015 is presented in the summary tables below.
2014 Infrastructure Realignment Program
The 2014 Infrastructure Realignment Program consists of product line and sales organizational changes, costs associated with streamlining operations creating greater manufacturing flexibility and having a more balanced internal versus external production mix, and other related costs mainly associated with product qualification activities. In 2014, we announced our 2014 Manufacturing Footprint Consolidation Plan. We plan to eliminate our internal 5-inch and significantly reduce 6-inch wafer fabrication lines and rationalize our assembly and test capacity, resulting in the closure of our manufacturing and assembly facilities in West Jordan, Utah and Penang, Malaysia, as well as the remaining 5-inch wafer fabrication lines in Bucheon, South Korea. We ended production at these sites during the third quarter.
In addition to the amounts recorded in the summary below, we expect to incur an additional $4.0 million in restructuring costs and an additional $9.0 million in site closure costs to complete this program by the fourth quarter of fiscal year 2015.
2015 Operating Expense Reduction Program
In the third quarter of 2015, we announced a program to reduce operating expenses by approximately $30.0 million to $34.0 million annually. This is a structural change to the operating expense level of the company and the anticipated savings contain no temporary measures. We recorded $12.5 million of employee separation expense in the third quarter of 2015, which represents the full cost of this program. We expect this program to be substantially complete by the end of fiscal year 2015.
17
Accrual Balance at December 28, 2014 |
Restructuring Charges |
Other Charges |
Reserve Release |
Cash Paid |
Non-Cash Items |
Accrual Balance at March 29, 2015 |
||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
2014 Infrastructure Realignment Program: |
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Employee separation costs |
$ | 28.7 | $ | 2.2 | $ | | $ | (0.2 | ) | $ | (2.1 | ) | $ | (0.6 | ) | $ | 28.0 | |||||||||||
Asset disposal (gain) loss |
| (0.5 | ) | | | 0.5 | | | ||||||||||||||||||||
Factory closure costs |
0.4 | 0.2 | | | | (0.2 | ) | 0.4 | ||||||||||||||||||||
Qualification costs |
1.1 | | 3.0 | | (3.0 | ) | | 1.1 | ||||||||||||||||||||
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$ | 30.2 | $ | 1.9 | $ | 3.0 | $ | (0.2 | ) | $ | (4.6 | ) | $ | (0.8 | ) | $ | 29.5 | ||||||||||||
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Accrual Balance at March 29, 2015 |
Restructuring Charges |
Other Charges |
Reserve Release |
Cash Paid |
Non-Cash Items |
Accrual Balance at June 28, 2015 |
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(In millions) | ||||||||||||||||||||||||||||
2014 Infrastructure Realignment Program: |
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Employee separation costs |
$ | 28.0 | $ | 1.1 | $ | | $ | (0.5 | ) | $ | (2.3 | ) | $ | (0.2 | ) | $ | 26.1 | |||||||||||
Asset disposal (gain) loss |
| 0.3 | | | (0.3 | ) | | | ||||||||||||||||||||
Factory closure costs |
0.4 | 1.0 | | | (1.2 | ) | 0.2 | 0.4 | ||||||||||||||||||||
Qualification costs |
1.1 | | 2.3 | | (3.4 | ) | | | ||||||||||||||||||||
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$ | 29.5 | $ | 2.4 | $ | 2.3 | $ | (0.5 | ) | $ | (7.2 | ) | $ | | $ | 26.5 | |||||||||||||
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Accrual Balance at June 28, 2015 |
Restructuring Charges |
Other Charges |
Reserve Release |
Cash Paid |
Non-Cash Items |
Accrual Balance at September 27, 2015 |
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(In millions) | ||||||||||||||||||||||||||||
2014 Infrastructure Realignment Program: |
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Employee separation costs |
$ | 26.1 | $ | 2.9 | $ | | $ | (0.2 | ) | $ | (19.6 | ) | $ | (0.7 | ) | $ | 8.5 | |||||||||||
Lease termination costs |
| 0.2 | | | (0.1 | ) | | 0.1 | ||||||||||||||||||||
Asset disposal (gain) loss |
| 1.0 | | | (1.0 | ) | | | ||||||||||||||||||||
Factory closure costs |
0.4 | 8.6 | | | (9.0 | ) | | | ||||||||||||||||||||
Qualification costs |
| | 2.7 | | (2.7 | ) | | | ||||||||||||||||||||
2015 Operating Expense Reduction Program: |
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Employee separation costs |
| 12.5 | | | (0.4 | ) | | 12.1 | ||||||||||||||||||||
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$ | 26.5 | $ | 25.2 | $ | 2.7 | $ | (0.2 | ) | $ | (32.8 | ) | $ | (0.7 | ) | $ | 20.7 | ||||||||||||
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18
Note 11 Net Income (Loss) Per Share
Basic and diluted net income (loss) per share are calculated as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2015 |
September 28, 2014 |
September 27, 2015 |
September 28, 2014 |
|||||||||||||
(In millions, except per share data) | ||||||||||||||||
Net income (loss) |
$ | (8.2 | ) | $ | (1.0 | ) | $ | (8.0 | ) | $ | 7.5 | |||||
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Weighted average number of common shares outstanding basic |
114.6 | 119.5 | 116.0 | 122.5 | ||||||||||||
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Effect of dilutive securities: |
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Stock options and restricted stock units |
| | | 1.9 | ||||||||||||
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Weighted average number of common shares outstanding diluted |
114.6 | 119.5 | 116.0 | 124.4 | ||||||||||||
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Basic net income (loss) per share |
$ | (0.07 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | 0.06 | |||||
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Diluted net income (loss) per share |
$ | (0.07 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | 0.06 | |||||
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Anti-dilutive common stock equivalents |
3.7 | 2.6 | 2.5 | 0.5 |
Note 12 Segments and Geographic Information
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. All periods presented have been revised accordingly to reflect the new reportable segments.
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. 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. The Standard Products Group (SPG) includes a broad portfolio of standard discrete, analog, logic and optoelectronic products.
In addition to the operating segments mentioned above, we also operate global operations, sales and marketing, information systems, finance and administration groups that are led by senior vice presidents who report to the Chief Executive Officer. Also, only direct SG&A and R&D spending by the segments is included in the calculation of their operating income. All other corporate level SG&A and R&D spending is included in the corporate category. We do not allocate income taxes or interest expense to our operating segments as the operating segments are principally evaluated on operating profit before interest and taxes.
We do not specifically identify and allocate all assets by operating segment. It is our policy to fully allocate depreciation and amortization, with the exception of accelerated depreciation related to restructuring activities, to our operating segments. Operating segments do not sell products to each other, and accordingly, there are no inter-segment revenues to be reported. The accounting policies for segment reporting are the same as for the company as a whole.
19
The following table presents selected statement of operations information on reportable segments for the three and nine months ended September 27, 2015 and September 28, 2014.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2015 |
September 28, 2014 |
September 27, 2015 |
September 28, 2014 |
|||||||||||||
(In millions) | ||||||||||||||||
Revenue and operating income: |
||||||||||||||||
SPS |
||||||||||||||||
Total revenue |
$ | 194.0 | $ | 219.8 | $ | 615.5 | $ | 642.2 | ||||||||
Operating income |
40.7 | 52.9 | 134.1 | 139.7 | ||||||||||||
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APSS |
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Total revenue |
103.2 | 107.7 | 296.1 | 304.6 | ||||||||||||
Operating income |
21.5 | 23.6 | 44.4 | 47.5 | ||||||||||||
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SPG |
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Total revenue |
44.9 | 53.6 | 141.4 | 150.0 | ||||||||||||
Operating income |
10.5 | 13.3 | 31.1 | 34.3 | ||||||||||||
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Corporate |
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Restructuring, impairments, and other costs |
(27.7 | ) | (31.7 | ) | (36.6 | ) | (42.5 | ) | ||||||||
Accelerated depreciation on assets related to factory closures |
(0.8 | ) | (1.8 | ) | (8.8 | ) | (1.8 | ) | ||||||||
Inventory write-offs associated with factory closures |
(1.0 | ) | | (5.6 | ) | | ||||||||||
Selling, general and administrative expense |
(42.4 | ) | (47.8 | ) | (140.4 | ) | (145.0 | ) | ||||||||
Charge for litigation |
| | | (4.4 | ) | |||||||||||
Corporate research and development expense |
(3.7 | ) | (4.9 | ) | (11.5 | ) | (12.0 | ) | ||||||||
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Total consolidated |
||||||||||||||||
Total revenue |
$ | 342.1 | $ | 381.1 | $ | 1,053.0 | $ | 1,096.8 | ||||||||
Operating income (loss) |
$ | (2.9 | ) | $ | 3.6 | $ | 6.7 | $ | 15.8 | |||||||
Other expense, net |
$ | 1.4 | $ | 1.5 | $ | 4.2 | $ | 5.2 | ||||||||
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Income (loss) before income taxes |
$ | (4.3 | ) | $ | 2.1 | $ | 2.5 | $ | 10.6 | |||||||
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Note 13 Recently Issued Accounting Standards
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. This ASU permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15) Presentation of Financial Statements Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. Currently, there is no guidance in U.S. GAAP about managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern or to provide related footnote disclosures. The amendments in this ASU provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entitys ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of managements plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of managements plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This ASU is effective for fiscal years beginning after December 15, 2017. The adoption of ASU 2014-15 is not expected to have a material effect on our consolidated financial position and results of operations and statements of cash flows.
20
In January 2015, the FASB issued Accounting Standards Update No. 2015-01, (ASU 2015-01) Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from U.S. GAAP the concept of extraordinary items. Prior to this ASU entities were required to separately classify, present, and disclose extraordinary events and transactions. Events or transactions were presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction met the criteria for extraordinary classification, an entity was required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also was required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of ASU 2015-01 is not expected to have a material effect on our consolidated financial position and results of operations and statements of cash flows.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, (ASU 2015-05) IntangiblesGoodwill and Other Internal-Use Software (Subtopic 350-40). This ASU clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We are currently evaluating the impact this guidance may have on our consolidated financial position and results of operations.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The new standard applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard will be effective for us in the first quarter of fiscal year 2017. The adoption of this standard is not expected to have a material effect on our consolidated financial position and results of operations and statements of cash flows.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The new standard requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined and sets forth new disclosure requirements related to the adjustments. The new standard will be effective for us in the first quarter of fiscal year 2016. The adoption of this standard is not expected to have an impact on our financial position or results of operations.
Note 14 Subsequent Events
We have evaluated subsequent events and did not identify any events that required disclosure.
21
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes of this quarterly report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 28, 2014.
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 |
| Forward Looking Statements |
Overview
Fairchild sales for the third quarter were down 4 percent sequentially and 10 percent lower than the year ago quarter. Distribution sell through was weaker than seasonal and we reduced our shipments into the channel accordingly which was the primary cause of the sales decline in the third quarter.
Sales were sequentially higher for our products serving the mobile, enterprise computing and telecom end markets. Demand was weaker than expected for the industrial, appliance and consumer markets, especially in China. Sales for our automotive products were seasonally lower in the third quarter but are still on track for another year of solid growth.
We completed the previously announced factory closures during the third quarter to improve our manufacturing cost structure. We also announced 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 2.4 million shares of our stock during the third quarter of 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 third quarter of 2015, our non-catalog channel inventory was at approximately 9.5 weeks of sales which is within our target range of 9 to 10 weeks. Internal inventory increased by $16 million sequentially to 123 days as we reduced our shipments plan late in the quarter and built inventory to support higher mobile demand.
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 Item 1. Note 12 Segments and Geographic Information to our unaudited consolidated financial statements included in this report for details.
During the second quarter of 2015, we changed our presentation of debt issuance costs in the balance sheet. Debt issuances 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 1. Note 1 Basis of Presentation to our unaudited consolidated financial statements included in this report for additional details regarding this accounting policy change.
22
Results of Operations
The following table summarizes certain information relating to our operating results as derived from our unaudited consolidated financial statements, including results as a percent of revenue.
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 27, 2015 |
September 28, 2014 |
September 27, 2015 |
September 28, 2014 |
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(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Total revenues |
$ | 342.1 | 100.0 | % | $ | 381.1 | 100.0 | % | $ | 1,053.0 | 100.0 | % | $ | 1,096.8 | 100.0 | % | ||||||||||||||||
Gross margin |
115.0 | 33.6 | % | 132.8 | 34.8 | % | 332.8 | 31.6 | % | 361.2 | 32.9 | % | ||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||||||
Research and development |
40.4 | 11.8 | % | 41.6 | 10.9 | % | 124.4 | 11.8 | % | 125.7 | 11.5 | % | ||||||||||||||||||||
Selling, general and administrative |
47.9 | 14.0 | % | 53.8 | 14.1 | % | 158.4 | 15.0 | % | 164.3 | 15.0 | % | ||||||||||||||||||||
Amortization of acquisition-related intangibles |
1.9 | 0.6 | % | 2.1 | 0.6 | % | 6.1 | 0.6 | % | 8.5 | 0.8 | % | ||||||||||||||||||||
Restructuring, impairments, and other costs |
27.7 | 8.1 | % | 31.7 | 8.3 | % | 36.6 | 3.5 | % | 42.5 | 3.9 | % | ||||||||||||||||||||
Charge for litigation |
| 0.0 | % | | 0.0 | % | | 0.0 | % | 4.4 | 0.4 | % | ||||||||||||||||||||
Goodwill impairment charge |
| 0.0 | % | | 0.0 | % | 0.6 | 0.1 | % | | 0.0 | % | ||||||||||||||||||||
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Total operating expenses |
117.9 | 34.5 | % | 129.2 | 33.9 | % | 326.1 | 31.0 | % | 345.4 | 31.5 | % | ||||||||||||||||||||
Operating income (loss) |
(2.9 | ) | -0.8 | % | 3.6 | 0.9 | % | 6.7 | 0.6 | % | 15.8 | 1.4 | % | |||||||||||||||||||
Other expense, net |
1.4 | 0.4 | % | 1.5 | 0.4 | % | 4.2 | 0.4 | % | 5.2 | 0.5 | % | ||||||||||||||||||||
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Income (loss) before income taxes |
(4.3 | ) | -1.3 | % | 2.1 | 0.6 | % | 2.5 | 0.2 | % | 10.6 | 1.0 | % | |||||||||||||||||||
Provision for income taxes |
3.9 | 1.1 | % | 3.1 | 0.8 | % | 10.5 | 1.0 | % | 3.1 | 0.3 | % | ||||||||||||||||||||
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Net income (loss) |
$ | (8.2 | ) | -2.4 | % | $ | (1.0 | ) | -0.3 | % | $ | (8.0 | ) | -0.8 | % | $ | 7.5 | 0.7 | % | |||||||||||||
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Adjusted net income (loss), adjusted gross margin, and free cash flow are also included in the table below. These are non-GAAP financial measures and should not be considered a replacement for GAAP results. We present adjusted results because we use these measures, together with GAAP measures, for internal managerial purposes and as a means to evaluate period-to-period comparisons. However, we do not, and you should not, rely on non-GAAP financial measures alone as measures of our performance. We believe that non-GAAP financial measures reflect an additional way of viewing aspects of our operations that when taken together with GAAP results and the reconciliations to corresponding GAAP financial measures that we also provide in our press releases provide a more complete understanding of factors and trends affecting our business. We strongly encourage you to review all of our financial statements and publicly-filed reports in their entirety and to not rely on any single financial measure. Our criteria for adjusted results may differ from methods used by other companies and may not be comparable and should not be considered as alternatives to net income or loss, gross margin, or other measures of consolidated operations and cash flow data prepared in accordance with U.S. GAAP as indicators of our operating performance or as alternatives to cash flow as a measure of liquidity.
23
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2015 |
September 28, 2014 |
September 27, 2015 |
September 28, 2014 |
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(Dollars in millions) | (Dollars in millions) | |||||||||||||||
Unaudited non-GAAP measures |
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Adjusted net income |
$ | 23.3 | $ | 34.4 | $ | 50.5 | $ | 64.5 | ||||||||
Adjusted gross margin |
$ | 116.8 | $ | 134.6 | $ | 347.2 | $ | 363.0 | ||||||||
Adjusted gross margin % |
34.1 | % | 35.3 | % | 33.0 | % | 33.1 | % | ||||||||
Free Cash Flow |
$ | (8.9 | ) | $ | 41.6 | $ | (4.0 | ) | $ | 106.1 | ||||||
Reconciliation of Net Income (Loss) to Adjusted Net Income |
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Net income (loss) |
$ | (8.2 | ) | $ | (1.0 | ) | $ | (8.0 | ) | $ | 7.5 | |||||
Adjustments to reconcile net income (loss) to adjusted net income: |
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Restructuring, impairments, and other costs |
27.7 | 31.7 | 36.6 | 42.5 | ||||||||||||
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 |
0.8 | 1.8 | 8.8 | 1.8 | ||||||||||||
Inventory write-offs associated with factory closures |
1.0 | | 5.6 | | ||||||||||||
Charge for litigation |
| | | 4.4 | ||||||||||||
Goodwill impairment charge |
| | 0.6 | | ||||||||||||
Amortization of acquisition-related intangibles |
1.9 | 2.1 | 6.1 | 8.5 | ||||||||||||
Associated tax effects of the above and other acquisition-related intangibles |
0.1 | (0.2 | ) | 0.8 | (0.7 | ) | ||||||||||
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Adjusted net income |
$ | 23.3 | $ | 34.4 | $ | 50.5 | $ | 64.5 | ||||||||
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Reconciliation of Gross Margin to Adjusted Gross Margin |
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Gross margin |
$ | 115.0 | $ | 132.8 | $ | 332.8 | $ | 361.2 | ||||||||
Adjustments to reconcile gross margin to adjusted gross margin: |
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Accelerated depreciation on assets related to factory closures |
0.8 | 1.8 | 8.8 | 1.8 | ||||||||||||
Inventory write-offs associated with factory closures |
1.0 | | 5.6 | | ||||||||||||
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Adjusted gross margin |
$ | 116.8 | $ | 134.6 | $ | 347.2 | $ | 363.0 | ||||||||
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Reconciliation of Operating Cash Flow to Free Cash Flow |
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Cash provided by operating activities |
$ | 5.8 | $ | 54.0 | $ | 39.7 | $ | 147.4 | ||||||||
Capital expenditures |
(21.8 | ) | (12.4 | ) | (50.8 | ) | (41.3 | ) | ||||||||
Proceeds from the sale of property, plant and equipment, net |
7.1 | | 7.1 | | ||||||||||||
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Free Cash Flow |
$ | (8.9 | ) | $ | 41.6 | $ | (4.0 | ) | $ | 106.1 | ||||||
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24
Total Revenues
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
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(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Total revenues |
$ | 342.1 | $ | 381.1 | $ | (39.0 | ) | -10.2 | % | $ | 1,053.0 | $ | 1,096.8 | $ | (43.8 | ) | -4.0 | % |
Revenue was 10.2% and 4.0% lower in the third quarter and first nine months of 2015, respectively, compared to the same periods in the prior year due primarily to lower product volume and pricing impacts. Demand was lower in the industrial, appliance and consumer markets, especially in China. In addition, demand from one large Asian mobile customer decreased significantly.
Geographic revenue information is based on the customer location within the indicated geographic region. The following table presents, as a percentage of sales, geographic revenue for the third quarter and the first nine months of 2015 and the same periods in the prior year.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2015 |
September 28, 2014 |
September 27, 2015 |
September 28, 2014 |
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Percent of total revenue: |
||||||||||||||||
U.S. |
9 | % | 9 | % | 9 | % | 9 | % | ||||||||
Other Americas |
1 | 1 | 1 | 1 | ||||||||||||
Europe |
15 | 15 | 16 | 15 | ||||||||||||
China |
45 | 40 | 43 | 39 | ||||||||||||
Taiwan |
10 | 13 | 9 | 12 | ||||||||||||
Korea |
5 | 4 | 6 | 5 | ||||||||||||
Other Asia/Pacific (1) |
15 | 18 | 16 | 19 | ||||||||||||
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Total |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
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|
|
|
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(1) | For our geographic reporting purposes includes Japan and Singapore. |
The increase in China is due to broad-based higher demand especially in the mobile end market. The decrease in Taiwan and Other Asia/Pacific is due to lower demand in the consumer electronics market.
Gross Margin
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
|||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Gross Margin $ |
$ | 115.0 | $ | 132.8 | $ | (17.8 | ) | -13.4 | % | $ | 332.8 | $ | 361.2 | $ | (28.4 | ) | -7.9 | % | ||||||||||||||
Gross Margin % |
33.6 | % | 34.8 | % | 31.6 | % | 32.9 | % |
Gross margin decreased $17.8 million in the third quarter of 2015 compared to the same period a year ago due primarily to pricing impacts, product mix, and higher excess inventory write downs. Gross margin decreased $28.4 million in the first nine months of 2015 compared to the same period a year ago due primarily to pricing impacts, accelerated depreciation and inventory write off charges associated with factory closures, partially offset by improved product mix.
25
Adjusted Gross Margin
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
|||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Adjusted Gross Margin $ |
$ | 116.8 | $ | 134.6 | $ | (17.8 | ) | -13.2 | % | $ | 347.2 | $ | 363.0 | $ | (15.8 | ) | -4.4 | % | ||||||||||||||
Adjusted Gross Margin % |
34.1 | % | 35.3 | % | 33.0 | % | 33.1 | % |
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 above for explanation of changes.
Operating Expenses
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
|||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Research and development |
$ | 40.4 | $ | 41.6 | $ | (1.2 | ) | -2.9 | % | $ | 124.4 | $ | 125.7 | $ | (1.3 | ) | -1.0 | % | ||||||||||||||
Selling, general and administrative |
$ | 47.9 | $ | 53.8 | $ | (5.9 | ) | -11.0 | % | $ | 158.4 | $ | 164.3 | $ | (5.9 | ) | -3.6 | % |
Research and development expenses decreased 2.9% in the third quarter of 2015 compared to the same period a year ago due primarily to reductions in variable compensation costs. Research and development expenses decreased 1.0% in the first nine months of 2015 compared to the same period a year ago due primarily to selectivity in funding various programs and other spending reductions. Selling, general and administrative expenses decreased 11.0% in the third quarter of 2015 and 3.6% in the first nine months of 2015 compared to the same periods a year ago due primarily to reductions in variable compensation costs.
Restructuring, Impairments and Other Costs
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
|||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Restructuring, impairments, and other costs |
$ | 27.7 | $ | 31.7 | $ | (4.0 | ) | -12.6 | % | $ | 36.6 | $ | 42.5 | $ | (5.9 | ) | -13.9 | % |
During the third quarter of 2015, we recorded restructuring, impairment charges and other costs, net of releases, totaling $27.7 million. The charges included $12.5 million in employee separation costs associated with the 2015 Operating Expense Reduction Program. In addition during third quarter of 2015, we recorded $2.9 million in employee separation costs, $1.0 million in asset disposal loss, $8.6 million in factory closure costs, $2.7 million in qualification costs, $0.2 million in lease termination costs, and $0.2 million in reserve releases associated with the 2014 Infrastructure Realignment Program. During the nine months ended September 27, 2015, we recorded restructuring, impairment charges and other costs, net of releases, totaling $36.6 million. The charges included $12.5 million in employee separation costs associated with the 2015 Operating Expense Reduction Program. In addition during nine months ended September 27, 2015, we recorded $6.2 million in employee separation costs, $0.8 million in asset disposal loss, $9.8 million in factory closure costs, $8.0 million in qualification costs, $0.2 million in lease termination costs, and $0.9 million in reserve releases associated with the 2014 Infrastructure Realignment Program.
During the third quarter of 2014, we recorded restructuring, impairment charges and other costs, net of releases, totaling $31.7 million. The charges included $28.4 million in employee separation costs, $0.9 million in asset disposal loss, $2.2 million in qualification costs, and $0.1 million in reserve releases associated with the associated with the 2014 Infrastructure Realignment Program. In addition during the third quarter of 2014, we recorded $0.5 million in factory closure costs and $0.2 million in reserve releases associated with the 2013 Infrastructure Realignment Program. During the nine months ended September 28, 2014, we recorded restructuring, impairment charges and other costs, net of releases, totaling $42.5 million. The charges included $32.7 million in employee separation costs, $1.0 million in asset disposal loss, $6.0 million in qualification costs, and $0.1 million in reserve releases associated with the 2014 Infrastructure Realignment Program. In addition during the nine months ended September 28, 2014, we recorded $0.9 million in employee separation costs, $0.5 million in asset disposal loss, $0.1 million in lease termination costs, $2.2 million in factory closure costs, and $0.8 million in reserve releases associated with the 2013 and 2011 Infrastructure Realignment Programs.
26
Please refer to Item 1. Note 10 Restructuring, Impairments and Other Costs to our unaudited consolidated financial statements included within this report for further details regarding our restructuring plans.
Charge for Litigation
In the first quarter of 2014, we incurred a $4.4 million litigation charge as a result of ongoing developments with POWI litigation. Please refer to Item 1. Note 8 Contingencies to our unaudited 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 as a result of our operating segment reorganization. Please refer to Item 1. Note 6 Goodwill and Intangible Assets to our unaudited consolidated financial statements included within this report for further details regarding this matter.
Other Expense, net
During the three months ended September 27, 2015 and September 28, 2014, we recorded other expense, net of $1.4 million and $1.5 million, respectively. During the nine months ended September 27, 2015 and September 28, 2014 we recorded other expense, net of $4.2 million and $5.2 million, respectively. Please refer to Item 1. Note 5 Financial Statement Details to our unaudited consolidated financial statements included within this report for further details regarding this matter.
Income Taxes
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
|||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Income (loss) before income taxes |
$ | (4.3 | ) | $ | 2.1 | $ | (6.4 | ) | -304.8 | % | $ | 2.5 | $ | 10.6 | $ | (8.1 | ) | -76.4 | % | |||||||||||||
Provision for income taxes |
$ | 3.9 | $ | 3.1 | $ | 0.8 | 25.8 | % | $ | 10.5 | $ | 3.1 | $ | 7.4 | 238.7 | % |
The effective tax rate for the third quarter of 2015 was (91.3%) compared to 147.1% for the third quarter of 2014. The effective tax rate for the first nine months of 2015 was 421.6% compared to 29.3% for the first nine months of 2014. The change in the effective rate, while impacted by foreign exchange rates and the tax treatment of restructuring, was primarily driven by losses incurred in Korea during 2015 for which no rate benefit was recorded due to a full valuation allowance against our Korean sites deferred tax assets established in the fourth quarter of 2014. The effective tax rate for the third quarter of 2015 includes the reversal of a $0.8 million benefit recorded during the second quarter of 2015 related to the allocation of tax benefit between continuing operations and other comprehensive income when applying the exception to the ASC 740 intraperiod allocation rule.
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 September 27, 2015, a deferred tax liability of $3.4 million has been recorded, with no impact to the consolidated statement of operations due to having a full valuation allowance against our net U.S. deferred tax assets.
27
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, South Korean won and Malaysian ringgit. 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. We have 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
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
September 27, 2015 |
September 28, 2014 |
$ Change Inc (Dec) |
% Change Inc (Dec) |
|||||||||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||
Free Cash Flow |
$ | (8.9 | ) | $ | 41.6 | $ | (50.5 | ) | -121.4 | % | $ | (4.0 | ) | $ | 106.1 | $ | (110.1 | ) | -103.8 | % |
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, net, to cash provided by operating activities. Free cash flow decreased in the third quarter and the first nine months of 2015 compared to the same periods of 2014 primarily due to changes in working capital. Cash paid for restructuring increased significantly in the third quarter and first nine months of 2015 compared to the same periods in the prior year. Please refer to the non-GAAP measures reconciliation 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.
Three Months Ended | ||||||||||||||||||||||||||||||||||||||||
September 27, 2015 | September 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) | (Dollars in millions) | |||||||||||||||||||||||||||||||||||||||
SPS |
$ | 194.0 | 56.7 | % | $ | 60.8 | 31.3 | % | $ | 40.7 | $ | 219.8 | 57.6 | % | $ | 72.7 | 33.1 | % | $ | 52.9 | ||||||||||||||||||||
APSS |
103.2 | 30.2 | % | 44.3 | 42.9 | % | 21.5 | 107.7 | 28.3 | % | 47.3 | 43.9 | % | 23.6 | ||||||||||||||||||||||||||
SPG |
44.9 | 13.1 | % | 11.7 | 26.1 | % | 10.5 | 53.6 | 14.1 | % | 14.6 | 27.2 | % | 13.3 | ||||||||||||||||||||||||||
Corporate (1,2) |
| | % | (1.8 | ) | | % | (75.6 | ) | | | % | (1.8 | ) | | % | (86.2 | ) | ||||||||||||||||||||||
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Total |
$ | 342.1 | 100.0 | % | $ | 115.0 | 33.6 | % | $ | (2.9 | ) | $ | 381.1 | 100.0 | % | $ | 132.8 | 34.8 | % | $ | 3.6 | |||||||||||||||||||
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Three Months Ended | ||||||||
(1) | September 27, 2015 |
September 28, 2014 |
||||||
(In millions) | ||||||||
Accelerated depreciation on assets related to factory closures |
$ | (0.8 | ) | $ | (1.8 | ) | ||
Inventory write-offs associated with factory closures |
(1.0 | ) | | |||||
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Corporate gross margin total |
$ | (1.8 | ) | $ | (1.8 | ) | ||
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28
Three Months Ended | ||||||||
(2) | September 27, 2015 |
September 28, 2014 |
||||||
(In millions) | ||||||||
Restructuring, impairments, and other costs |
$ | (27.7 | ) | $ | (31.7 | ) | ||
Accelerated depreciation on assets related to factory closures |
(0.8 | ) | (1.8 | ) | ||||
Inventory write-offs associated with factory closures |
(1.0 | ) | | |||||
Selling, general and administrative expense |
(42.4 | ) | (47.8 | ) | ||||
Corporate research and development expense |
(3.7 | ) | (4.9 | ) | ||||
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Corporate operating loss total |
$ | (75.6 | ) | $ | (86.2 | ) | ||
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Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
September 27, 2015 | September 28, 2014 | |||||||||||||||||||||||||||||||||||||||
Revenue | % of Total |
Gross Margin |
Gross Margin % |
Operating Income (Loss) |
Revenue | % of Total |
Gross Margin |
Gross Margin % |
Operating Income (Loss) |
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(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||||||||||||||||||
SPS |
$ | 615.5 | 58.5 | % | $ | 195.8 | 31.8 | % | $ | 134.1 | $ | 642.2 | 58.5 | % | $ | 202.9 | 31.6 | % | $ | 139.7 | ||||||||||||||||||||
APSS |
296.1 | 28.1 | % | 116.3 | 39.3 | % | 44.4 | 304.6 | 27.8 | % | 121.7 | 40.0 | % | 47.5 | ||||||||||||||||||||||||||
SPG |
141.4 | 13.4 | % | 35.1 | 24.8 | % | 31.1 | 150.0 | 13.7 | % | 38.4 | 25.6 | % | 34.3 | ||||||||||||||||||||||||||
Corporate (1,2) |
| | % | (14.4 | ) | | % | (202.9 | ) | | | % | (1.8 | ) | | % | (205.7 | ) | ||||||||||||||||||||||
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Total |
$ | 1,053.0 | 100.0 | % | $ | 332.8 | 31.6 | % | $ | 6.7 | $ | 1,096.8 | 100.0 | % | $ | 361.2 | 32.9 | % | $ | 15.8 | ||||||||||||||||||||
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Nine Months Ended | ||||||||
(1) | September 27, 2015 |
September 28, 2014 |
||||||
(In millions) | ||||||||
Accelerated depreciation on assets related to factory closures |
$ | (8.8 | ) | $ | (1.8 | ) | ||
Inventory write-offs associated with factory closures |
(5.6 | ) | | |||||
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Corporate gross margin total |
$ | (14.4 | ) | $ | (1.8 | ) | ||
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29
Nine Months Ended | ||||||||
(2) | September 27, 2015 |
September 28, 2014 |
||||||
(In millions) | ||||||||
Restructuring, impairments, and other costs |
$ | (36.6 | ) | $ | (42.5 | ) | ||
Accelerated depreciation on assets related to factory closures |
(8.8 | ) | (1.8 | ) | ||||
Inventory write-offs associated with factory closures |
(5.6 | ) | | |||||
Selling, general and administrative expense |
(140.4 | ) | (145.0 | ) | ||||
Charge for litigation |
| (4.4 | ) | |||||
Corporate research and development expense |
(11.5 | ) | (12.0 | ) | ||||
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Corporate operating loss total |
$ | (202.9 | ) | $ | (205.7 | ) | ||
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Total Revenue
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 27, 2015 |
September 28, 2014 |
% Change | September 27, 2015 |
September 28, 2014 |
% Change | |||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||
SPS |
$ | 194.0 | $ | 219.8 | (11.7 | )% | $ | 615.5 | $ | 642.2 | (4.2 | )% | ||||||||||||
APSS |
103.2 | 107.7 | (4.2 | )% | 296.1 | 304.6 | (2.8 | )% | ||||||||||||||||
SPG |
44.9 | 53.6 | (16.2 | )% | 141.4 | 150.0 | (5.7 | )% | ||||||||||||||||
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Total revenue |
$ | 342.1 | $ | 381.1 | (10.2 | )% | $ | 1,053.0 | $ | 1,096.8 | (4.0 | )% | ||||||||||||
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SPS revenue decreased 11.7% in the third quarter of 2015 from the same period in the prior year due primarily to lower product volume and pricing impacts. Demand was lower in the industrial, appliance and consumer markets, especially in China. APSS revenue decreased 4.2% in the third quarter of 2015 from the same period in the prior year due primarily to pricing impacts. In addition, demand from one large Asian mobile customer decreased significantly. SPG revenue decreased 16.2% in the third quarter of 2015 from the same period in the prior year due primarily to lower product volume.
SPS revenue decreased 4.2% in the first nine months of 2015 from the same period in the prior year due primarily to the same reasons described above in the comparison of the third quarter 2015 to the same period in the prior year. APSS revenue decreased 2.8% in the first nine months of 2015 from the same period in the prior year due primarily to pricing impacts, partially offset by improved product volume. SPG revenue decreased 5.7% in the first nine months of 2015 from the same period in the prior year due primarily to lower product volume and pricing impacts.
30
Gross Margin
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 27, 2015 |
September 28, 2014 |
% Change | September 27, 2015 |
September 28, 2014 |
% Change | |||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||
SPS |
$ | 60.8 | $ | 72.7 | (16.4 | )% | $ | 195.8 | $ | 202.9 | (3.5 | )% | ||||||||||||
APSS |
44.3 | 47.3 | (6.3 | )% | 116.3 | 121.7 | (4.4 | )% | ||||||||||||||||
SPG |
11.7 | 14.6 | (19.9 | )% | 35.1 | 38.4 | (8.6 | )% | ||||||||||||||||
Corporate (1) |
(1.8 | ) | (1.8 | ) | | % | (14.4 | ) | (1.8 | ) | 700.0 | % | ||||||||||||
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Total gross margin $ |
$ | 115.0 | $ | 132.8 | (13.4 | )% | $ | 332.8 | $ | 361.2 | (7.9 | )% | ||||||||||||
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 27, 2015 |
September 28, 2014 |
September 27, 2015 |
September 28, 2014 |
|||||||||||||
SPS |
31.3 | % | 33.1 | % | 31.8 | % | 31.6 | % | ||||||||
APSS |
42.9 | % | 43.9 | % | 39.3 | % | 40.0 | % | ||||||||
SPG |
26.1 | % | 27.2 | % | 24.8 | % | 25.6 | % | ||||||||
Total gross margin % |
33.6 | % | 34.8 | % | 31.6 | % | 32.9 | % |
(1) Please refer to Reconciliation of Gross Margin to Adjusted Gross Margin in our Results from Operations for more details.
SPS gross margin decreased 16.4% in the third quarter of 2015 from the same period in the prior year due primarily to product mix and pricing impacts. APSS gross margin decreased 6.3% in the third quarter of 2015 from the same period in the prior year due primarily to pricing impacts, partially offset by improved product mix. SPG gross margin decreased 19.9% in the third quarter of 2015 from the same period in the prior year due primarily to product mix and higher excess inventory write downs.
SPS and APSS gross margin decreased 3.5% and 4.4%, respectively, in the first nine months of 2015 from the same period in the prior year due primarily to pricing impacts, partially offset by improved product mix. SPG gross margin decreased 8.6% in the first nine months of 2015 from the same period in the prior year due primarily to pricing impacts.
Operating Income (Loss)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 27, 2015 |
September 28, 2014 |
% Change | September 27, 2015 |
September 28, 2014 |
% Change | |||||||||||||||||||
(Dollars in millions) | (Dollars in millions) | |||||||||||||||||||||||
SPS |
$ | 40.7 | $ | 52.9 | (23.1 | )% | $ | 134.1 | $ | 139.7 | (4.0 | )% | ||||||||||||
APSS |
21.5 | 23.6 | (8.9 | )% | 44.4 | 47.5 | (6.5 | )% | ||||||||||||||||
SPG |
10.5 | 13.3 | (21.1 | )% | 31.1 | 34.3 | (9.3 | )% | ||||||||||||||||
Corporate |
(75.6 | ) | (86.2 | ) | (12.3 | )% | (202.9 | ) | (205.7 | ) | (1.4 | )% | ||||||||||||
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Total operating income (loss) |
$ | (2.9 | ) | $ | 3.6 | (180.6 | )% | $ | 6.7 | $ | 15.8 | (57.6 | )% | |||||||||||
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Total operating income (loss) decreased 180.6% in the third quarter of 2015 from the same period in the prior year due primarily to the reasons described under the heading Gross Margin within the Results From Operations section of this report, partially offset by lower variable compensation spending and restructuring, impairments and other charges. SPS, APSS, and SPG operating income decreased 23.1%, 8.9%, and 21.1%, respectively, in the third quarter of 2015 from the same period in the prior year due primarily to the reasons described under the heading Gross Margin within this section. Corporate operating loss decreased 12.3% in the third quarter of 2015 from the same period in the prior year due primarily to lower variable compensation spending and restructuring, impairments and other charges.
Total operating income decreased 57.6% in the first nine months of 2015 from the same period in the prior year due primarily to the same reasons described above, partially offset by in an increase in accelerated depreciation and inventory write-offs associated with factory closures. SPS, APSS, and SPG operating income decreased 4.0%, 6.5%, and 9.3% in the first nine months of 2015 from the same period in the prior year due primarily to the reasons described under the heading Gross Margin within this section. Corporate operating loss decreased 1.4% in the first nine months of 2015 from the same period in the prior year due primarily to lower variable compensation spending and restructuring, impairments and other charges, partially offset by an increase in accelerated depreciation and inventory write-offs associated with factory closures.
31
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 September 27, 2015, $65.7 million of our $245.1 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 September 27, 2015, $200.0 million was drawn of the $400.0 million credit facility. Please refer to Item 1. Note 7 Indebtedness to our unaudited consolidated financial statements included within this report for further details regarding this matter.
As of September 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 Item 1A Risk Factors included in our Annual Report on Form 10-K filed with the SEC on February 26, 2015, 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 the first nine months of 2015, we incurred capital expenditures of $50.8 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. On May 20, 2015, the board of directors authorized the additional repurchase of up to $150.0 million of the companys common stock. This amount is in addition to the two separate $100.0 million authorizations, disclosed in May 2014 and December 2013, respectively.
Cash Flows
Our cash flows for each period were as follows:
Nine Months Ended | ||||||||
September 27, 2015 |
September 28, 2014 |
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(In millions) | ||||||||
Net cash provided by operating activities |
$ | 39.7 | $ | 147.4 | ||||
Net cash used in investing activities |
(44.6 | ) | (97.6 | ) | ||||
Net cash used in financing activities |
(105.1 | ) | (132.6 | ) | ||||
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Net change in cash and cash equivalents |
$ | (110.0 | ) | $ | (82.8 | ) | ||
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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 $107.7 million compared to 2014 primarily driven by changes in working capital. Cash paid for restructuring increased significantly in the first nine months of 2015 compared to the same periods in the prior year.
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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 $53.0 million compared to 2014. The decrease was driven by the acquisition of a private sensor company during 2014.
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.
Cash used in financing activities in 2015 decreased by $27.5 million compared to 2014. The decrease in cash used was driven by a decreased amount of treasury shares purchased in 2015 compared to the same period last year.
New Accounting Standards
For a discussion of new accounting standards, please refer to Item 1. Note 13 Recently Issued Accounting Standards to our unaudited consolidated financial statements included within this report for further details regarding this matter.
Forward Looking Statements
This quarterly report contains forward-looking statements as that term is defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the use of forward-looking terminology such as we believe, we expect, we intend, may, will, should, seeks, approximately, plans, estimates, anticipates, or hopeful, or the negative of those terms or other comparable terms, or by discussions of our strategy, plans or future performance. All forward-looking statements in this report are made based on managements current expectations and estimates, which involve risks and uncertainties, including those described above and more specifically in the Risk Factors section included in our Annual Report on Form 10-K. Among these factors are the following: 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 internal and external 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 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.
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Item 3. | Quantitative and Qualitative Disclosure about Market Risk |
Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosure about Market Risk, in our Annual Report on Form 10-K for the year ended December 28, 2014 and under the subheading Quantitative and Qualitative Disclosures about Market Risk in Managements Discussion and Analysis of Financial Condition and Results of Operations. There were no material changes in the information we provided in our Annual Report on Form 10-K for the year ended December 28, 2014 during the period covered by this Quarterly Report.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to assure, as much as is reasonably possible, that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is communicated to management and recorded, processed, summarized and disclosed within the specified time periods. As of the end of the period covered by this report, our chief executive officer (CEO) and chief financial officer (CFO), with the participation of our management, have evaluated the effectiveness of our disclosure controls and procedures. Based on the evaluation, our CEO and CFO concluded that as of September 27, 2015, our disclosure controls and procedures are effective.
Inherent Limitations on Effectiveness of Controls
The companys management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events. There can be no assurance that any control system will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become less effective if conditions change or compliance with policies or procedures deteriorates.
Changes in Internal Control over Financial Reporting
There were no changes in the companys internal controls over financial reporting during the three months ended September 27, 2015 that have materially affected, or are reasonably likely to materially affect, the companys internal control over financial reporting.
Item 1. | Legal Proceedings |
For a discussion of legal matters as of September 27, 2015, please read Part I. Item 1. Note 8 Contingencies to our unaudited consolidated financial statements included in this report, which is incorporated into this item by reference.
Item 1A. | Risk Factors |
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for fiscal year 2014 filed with the SEC on February 26, 2015, which could materially affect our business, financial condition, and future operating results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results. There have been no material changes in our assessment of our risk factors set forth in our Annual Report on Form 10-K for fiscal year 2014.
34
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
There were no sales of unregistered equity securities in the three months ended September 27, 2015. The following table provides information with respect to purchases made by the company of its own common stock during the three months ended September 27, 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 |
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(In millions) | ||||||||||||||||
June 29, 2015 - July 26, 2015 |
271,100 | $ | 15.39 | 271,100 | $ | 142.1 | ||||||||||
July 27, 2015 - August 23, 2015 |
1,268,929 | 14.69 | 1,268,929 | 123.4 | ||||||||||||
August 24, 2015 - September 27, 2015 |
890,448 | 13.90 | 890,448 | 111.1 | ||||||||||||
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Total |
2,430,477 | 2,430,477 | ||||||||||||||
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On May 20, 2015, the board of directors authorized the additional repurchase of up to $150.0 million of the companys common stock. This amount is in addition to the two separate $100.0 million authorizations, disclosed in May 2014 and December 2013, respectively. 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 September 27, 2015, we repurchased approximately $35.2 million of common stock.
For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. Although these withheld shares are not issued or considered common stock repurchases and are not included in the table above, the cash paid for taxes is treated in the same manner as common stock repurchases in our financial statements, as they reduce the number of shares that would have been issued upon vesting.
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Item 6. | Exhibits |
Description | ||
31.01 | Section 302 Certification of the Chief Executive Officer. | |
31.02 | Section 302 Certification of the Chief Financial Officer. | |
32.01 | Certification of the Chief Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.02 | Certification of the Chief Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101. DEF | XBRL Taxonomy Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Items 3, 4 and 5 are not applicable and have been omitted.
36
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. | ||||
/s/ MARK S. FREY | ||||
Mark S. Frey | ||||
Executive Vice President, Chief Financial Officer and Treasurer | ||||
(Principal Accounting Officer) |
Date: November 5, 2015
37
Exhibit 31.01
CERTIFICATION
I, Mark S. Thompson, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Fairchild Semiconductor International, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors : |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 5, 2015 | By: | /s/ Mark S. Thompson | ||||
Mark S. Thompson | ||||||
Chairman, President, and Chief Executive Officer |
Exhibit 31.02
CERTIFICATION
I, Mark S. Frey, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Fairchild Semiconductor International, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 5, 2015 | By: | /s/ Mark S. Frey | ||||
Mark S. Frey | ||||||
Executive Vice President, Chief Financial Officer and Treasurer |
Exhibit 32.01
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Fairchild Semiconductor International, Inc. (the company) on Form 10-Q for the period ended September 27, 2015 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Mark S. Thompson, Chief Executive Officer of the company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and |
(1) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the company. |
/s/ Mark S. Thompson |
Mark S. Thompson |
Chairman, President, and Chief Executive Officer |
November 5, 2015 |
Exhibit 32.02
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Fairchild Semiconductor International, Inc. (the company) on Form 10-Q for the period ended September 27, 2015 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Mark S. Frey, Chief Financial Officer of the company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the company. |
/s/ Mark S. Frey |
Mark S. Frey |
Executive Vice President, Chief Financial Officer and Treasurer |
November 5, 2015 |
Gross amounts of Fair Value of All Derivative Financial Instruments with Counterparties for Which Master Netting Arrangement Utilized (Detail) - USD ($) $ in Millions |
Sep. 27, 2015 |
Dec. 28, 2014 |
---|---|---|
Derivative [Line Items] | ||
Gross Assets | $ 0.6 | $ 2.8 |
Gross Liabilities | (0.3) | |
Current Assets | 0.3 | 2.8 |
Gross Assets | 0.1 | |
Gross Liabilities | (8.0) | (5.6) |
Current Liabilities | $ (8.0) | $ (5.5) |
Schedule of Estimated Amortization Expense for Intangible Assets (Detail) $ in Millions |
Sep. 27, 2015
USD ($)
|
---|---|
Estimated Amortization Expense: | |
Remaining Fiscal 2015 | $ 3.0 |
Fiscal 2016 | 8.1 |
Fiscal 2017 | 5.4 |
Fiscal 2018 | 4.1 |
Fiscal 2019 | $ 4.0 |
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