FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC - 10-Q Quarterly Report

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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

The number of shares outstanding of the issuer’s classes of common stock as of the close of business on September 28, 2003:

See accompanying notes to unaudited condensed consolidated financial statements.

The accompanying interim condensed consolidated financial statements of Fairchild Semiconductor International, Inc. (the “company”) have been prepared in conformity with accounting principles generally accepted in the United States of America, consistent in all material respects with those applied in the company’s Annual Report on Form 10-K for the year ended December 29, 2002. The interim financial information is unaudited, but reflects all normal adjustments, which are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. The financial statements should be read in conjunction with the financial statements in the company’s Annual Report on Form 10-K for the year ended December 29, 2002. Certain amounts for prior periods have been reclassified to conform to the current presentation.

Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Potentially dilutive common equivalent shares consist of stock options, deferred stock units and shares obtainable upon the conversion of the convertible senior subordinated notes.

As a result of the net loss reported for the three and nine months ended September 28, 2003 and the nine months ended September 29, 2002, approximately 2.7 million, 1.5 million, and 4.3 million common equivalent shares, respectively, have been excluded from the calculation of diluted loss per common share because their effect would have been anti-dilutive. In addition, $1.8 million and $5.4 million were not included in the computation of net loss for the three and nine months ended September 28, 2003 and September 29, 2002, respectively, and 6.7 million potential common shares were not included in the computation of diluted earnings per share as a result of the assumed conversion of the convertible senior subordinated notes because the effect would have been anti-dilutive.

The company has certain stock option plans. The company accounts for those plans under Auditing Practices Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. The following table illustrates the effect on net income (loss) and net income (loss) per common share as if the company applied the fair value based method of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to record expense for stock option compensation.

The following table illustrates the effect on net income (loss) and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.

The weighted average fair value of options granted was $10.38 and $7.57 for the three and nine months ended September 28, 2003 and $11.80 and $13.82 for the three and nine months ended September 29, 2002, respectively. The fair value of each option grant for the company’s plans is estimated on the date of the grant using the Black-Scholes option pricing model, with the following weighted average assumptions.

Effective December 31, 2001, the company adopted SFAS No. 142, which addresses financial accounting and reporting for acquired goodwill and other intangible assets. Goodwill and other intangibles with indefinite lives are no longer amortized. Instead, the company performs an annual test during the fourth quarter for impairment of these assets.

The carrying amount of goodwill by reporting unit for the quarter ended September 28, 2003 is as follows:

During the nine months September 28, 2003, there were no changes to the carrying amount of goodwill due to acquisitions and divestitures. The annual test for impairment of goodwill as required by SFAS No. 142 was completed during the fourth quarter of 2002. No impairment was indicated. The fair value of the reporting units for purposes of the annual impairment test was estimated using discounted future cash flows. Identified reporting units which carry goodwill include domestic analog, discrete power products, which are included in the Analog and Discrete segments, respectively, and Optoelectronics, which does not meet the requirements of a reportable segment as defined in SFAS No. 131.

The estimated amortization expense for the remainder of Fiscal 2003 and for each of the five succeeding fiscal years is as follows:

The company is currently organized into three reportable segments: the Analog and Mixed Signal Products Group (“Analog”), the Discrete Products Group (“Discrete”) and the Logic and Memory Products Group (“Logic and Memory”). As discussed in Note 8 — Restructuring and Impairments, the company will be exiting the Memory business in future periods.

The company has determined that its Optoelectronics Group does not meet the threshold for a separate reportable segment under SFAS No. 131, and accordingly this segment’s results are included as part of the “Other” category for all periods presented. Similarly, the company’s contract manufacturing business is not a separate reportable segment and its results are also recorded in the “Other” category.

Selected operating segment financial information for the three and nine months ended September 28, 2003 and September 29, 2002 is as follows:

closure of our 6” fab in Mountaintop, Pennsylvania recorded in the first quarter and $20.1 million of separation costs associated with the termination of approximately 1,600 salaried and hourly employees in the United States, South Korea, Europe, Japan, Hong Kong, Malaysia and China, resulting from the closure of our 4” fab in South Portland, Maine, plant closures in Wuxi, China and Kuala Lumpur, Malaysia and other workforce reduction actions recorded in the second quarter. The remaining $34.5 million of restructuring charges relate to asset impairments and other charges associated with the Mountaintop, Pennsylvania 6” fab closure and the closure of the Carlsbad, California office in the first quarter ($4.9 million), and asset impairments in Bucheon, South Korea, asset impairments and other charges associated with the closure of the 4” fab in South Portland, Maine and plant closures in Wuxi, China and Kuala Lumpur, Malaysia recorded in the second quarter ($29.6 million). The company also recorded charges of $3.2 million of sales reserves and $2.9 of inventory reserves, recorded in revenue and cost of sales, respectively as a result of the discontinuation of certain products in connection with the closure of our 6” fab in Mountaintop, Pennsylvania and the exit from the hybrid and non-volatile memory businesses in the first and second quarters.

During the nine months ended September 29, 2002, the company recorded a restructuring charge of $3.6 million which occurred in the first quarter. The restructuring charge consisted of employee separation costs relating primarily to severance and other costs associated with the termination of approximately 150 salaried and hourly employees in the United States, Europe, Japan, and Malaysia.

The following table summarizes the activity in the company’s accrual for restructuring and impairment costs for the three and nine months ended September 28, 2003 (in millions):

The company expects that all amounts will be substantially paid within the next year.

At our annual stockholders’ meeting on May 8, 2003, our stockholders approved amendments to our restated certificate of incorporation. These changes eliminated the non-voting Class B Common Stock and changed the name of the Class A Common Stock to be simply “Common Stock.” No Class B Common Stock was outstanding at December 29, 2002.

On June 19, 2003, the company completed a refinancing of its senior credit facility. The new $480 million senior credit facility includes a $300 million term loan and a $180 million revolving line of credit. The new

term loan will carry an interest rate of LIBOR plus 2.75%, which was 3.9375% at September 28, 2003. On October 28, 2003, the senior credit facility was amended to, among other things, reduce the interest rate to LIBOR plus 2.5%. Borrowings under the agreement are secured by a pledge of common stock Fairchild Semiconductor Corporation, the company’s principal operating subsidiary and the stock of that company’s significant subsidiaries. In connection with the June refinancing of the $300 million term loan, the company recorded $4.1 million in deferred financing fees, which are being amortized over five years, and $2.5 million in deferred financing fees in connection with the revolving line of credit, which are being amortized over four years.

The company used the proceeds from the new $300 million term loan to redeem the 10 3/8% senior subordinated notes that were due in October 2007 at a price of 105.19% of face value. The new $180 million revolving line of credit replaces the company’s previous $300 million revolving line of credit. In connection with the refinancing, the company incurred charges totaling $23.4 million, including $17.4 million for the call premium on the 10 3/8% senior subordinated notes and other transaction fees and $6.0 million for a non-cash write-off of deferred financing fees associated with the redeemed notes and the previous credit facility.

The company uses derivative instruments to manage exposures to foreign currencies. In accordance with SFAS No. 133, the fair value of these hedges is recorded on the balance sheet. Certain forecasted transactions are exposed to foreign currency risks. The company monitors its foreign currency exposures to maximize the overall effectiveness of its foreign currency hedge positions. Principal currencies hedged include the euro and the Japanese yen. The company’s objectives for holding derivatives are to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures.

Changes in the fair value of derivative instruments related to time value are included in the assessment of hedge effectiveness. Hedge ineffectiveness, determined in accordance with SFAS No. 133 and SFAS No. 138, had no impact on earnings for the nine months ended September 28, 2003. No cash flow hedges were derecognized or discontinued for the nine months ended September 28, 2003.

Derivative gains and losses included in other comprehensive income (OCI) are reclassified into earnings at the time the forecasted transaction revenue is recognized. The company estimates that the entire $(0.5) million of net unrealized derivative loss included in OCI will be reclassified into earnings within the next twelve months.

The company operates through its wholly owned subsidiary, Fairchild Semiconductor Corporation, and other indirect wholly-owned subsidiaries. Fairchild Semiconductor International, Inc. and certain of Fairchild Semiconductor Corporation’s subsidiaries are guarantors under Fairchild Semiconductor Corporation’s 10 1/2% Senior Subordinated Notes and its 5% Convertible Senior Subordinated Notes. These guarantees are full and unconditional. In addition, all guaranties are joint and several. Accordingly, the interim condensed consolidating financial statements are presented below.

Unless otherwise indicated, references in this discussion and analysis to “we,” “our,” the “company,” “Fairchild,” and “Fairchild International” refer to Fairchild Semiconductor International, Inc. and its consolidated subsidiaries, including Fairchild Semiconductor Corporation, our principal operating subsidiary. We refer to individual corporations where appropriate. Readers are cautioned not to place undue reliance on forward-looking statements in this report. See “Forward-Looking Statements,” “Outlook” and “Business Risks” below.

We are one of the largest independent semiconductor companies focused solely on developing, manufacturing and selling high performance semiconductors critical to multiple end markets. We are a global company that designs, develops and markets analog, interface, discrete, standard logic and optoelectronic semiconductors. Within our broad product portfolio, we focus on providing power discrete and analog products for power management applications. Over two-thirds of our sales in the first nine months of 2003 were from power discrete and analog products used directly in power applications, such as voltage conversion, power regulation, power distribution and power and battery management. We believe that we are the world’s leading supplier of combined power analog and power discrete products. Our products are used as building block components in a wide variety of electronic applications, including computers and internet hardware; communications; networking and storage equipment; industrial power supply and instrumentation equipment; portable digital consumer cameras, displays, audio/video devices, household appliances; and automotive ignition applications. Because of their basic functionality, our products provide customers with greater design flexibility than more highly integrated products and help to improve the performance of more complex devices or systems. Given these characteristics, our products generally have a wide range of applications. Our products are sold to customers in the personal computer, industrial, communications, consumer electronics and automotive markets.

On a segment basis, Analog had operating income of $1.3 million and $3.6 million in the third quarter and first nine months of 2003, respectively, compared to operating income of $11.7 million and $30.8 million in the comparable periods of 2002. The decrease in Analog’s operating income was due to decreases in average selling prices across most product families, which negatively impacted revenue and gross profit, and increases in selling, general and administrative expenses. The decreases in operating margins also include $0.4 million in inventory reserves recorded in the second quarter and $0.3 million of sales and inventory reserves recorded in the third quarter, both associated with the discontinuation of certain products as a result of our fab closures. Discrete had operating income of $15.9 million and $41.5 million in the third quarter and first nine months of 2003, respectively, compared to $20.4 million and $52.5 million in the comparable periods of 2002. The decrease in Discrete’s operating income was due to volume declines offset by an improved mix of smaller die products and manufacturing cost improvement as a result of our conversion to PowerTrench III® technology, and increased selling, general and administrative expenses. For the first nine months of 2003, the decreases also include $3.5 million of sales and inventory reserves associated with discontinuation of certain products in connection with our 6” fab closure in Mountaintop, Pennsylvania. Logic and Memory had operating losses of $4.3 million for both the third quarter and first nine months of 2003, compared to operating income (loss) of $(1.5) million and $1.3 million in the comparable periods of 2002. The decrease in Logic and Memory’s operating margins was primarily due to lower gross profit resulting from decreases in average selling prices, offset slightly by reductions in both selling, general and administrative and research and development costs. These decreases also include $2.2 million recorded in the second quarter and $3.1 million in the third quarter, of sales and inventory reserves associated with the discontinuation of certain products as a result of our restructuring actions.

Revenues were $328.4 million and $1,026.6 million in the third quarter and first nine months of 2003, respectively, compared to $360.6 million and $1,058.0 million in the comparable periods of 2002. The decrease in revenues in the third quarter was driven primarily by lower average selling prices in Analog and Logic and Memory, partially offset by higher average selling prices in Discrete. Units shipped were also lower in the third quarter of 2003 compared to the third quarter of 2002, in part due to excess inventory in the Asian distribution channel at the beginning of the quarter. On a year to date basis, the decrease in revenues was also driven by lower average selling prices in Analog and Logic and Memory. Units shipped were nearly flat when comparing the first nine months of 2003 to the comparable period in 2002. The lingering effect of SARS and related economic conditions continued to impact our year over year performance, as well.

On a segment basis, Analog revenues decreased to $74.8 million in the third quarter of 2003 from $94.2 million in the third quarter of 2002, and to $240.2 million for the first nine months of 2003 from $264.7 million, in the comparable period of 2002. The quarterly decline in revenues was driven by both average selling price declines and unit shipment declines. On a year to date basis, we saw increased unit shipments, while prices were down on average, across most analog product families. Discrete revenues decreased to $186.3 million in the third quarter of 2003 from $188.3 million in the third quarter of 2002, and increased to $566.7 million for the first nine months of 2003 from $553.7 million, in the comparable period of 2002. For the quarter, Discrete showed stronger average selling prices, partially offset by weaker unit volume, keeping revenues roughly flat to the prior year. On a year to date basis, these increases were offset by $2.2 million of sales reserves recorded in the first quarter associated with discontinuation of certain products in connection with our 6” fab closure. Logic and Memory revenues decreased to $37.7 million in the third quarter of 2003 from $45.8 million in the third quarter of 2002, and to $124.8 million for the first nine months of 2003 from $149.1 in the comparable period of 2002. The decreases were primarily due to lower average selling prices across all products. On a quarterly basis, price declines were offset slightly by increased volume, particularly in Tiny Logic®. The year over year decreases also include $1.0 million and $2.1 million of sales reserves associated with the discontinuation of certain products in connection with our restructuring actions, recorded in the second and third quarter, respectively.

As a percentage of sales, geographic sales for North America, Europe, Asia/ Pacific (which for our geographic reporting purposes excludes Korea) and Korea were as follows for the three and nine months ended September 28, 2003 and September 29, 2002:

Gross profit was $69.3 million and $219.0 million for the three and nine months ended September 28, 2003, compared to $90.1 million and $266.1 million in the comparable periods of 2002.

For the third quarter of 2003, gross profit includes the previously discussed sales reserves ($2.3 million) and inventory charges ($1.1 million) associated with the discontinuation of certain products in connection with our restructuring actions. On a year-to-date basis, gross profit also includes sales reserves ($5.5 million) and inventory reserves ($4.0 million) in connection with product discontinuations as a result of our various restructuring actions. The remaining decrease in gross profit for the third quarter and first nine months of 2003 compared to the same periods of 2002 was a result of continued pricing pressures across most product lines, partially offset by on-going manufacturing cost reductions.

R&D expenses were $17.9 million, or 5.5% of sales, in the third quarter of 2003, compared to $20.0 million, or 5.5% of sales, in the third quarter of 2002. On a year-to-date basis, R&D was $55.8 million, or 5.4% of sales, compared to $62.5 million, or 5.9% of sales for the comparable period of 2002. The decreases for both the quarter and first nine months of 2003 as compared to the comparable periods of 2002 were due to spending reductions in response to softer market conditions, while continuing to focus our resources on high growth projects.

SG&A was $35.5 million, or 10.8% of sales, in the third quarter of 2003, compared to $36.4 million, or 10.1% of sales, in the third quarter of 2002. On a year-to-date basis, SG&A expenses were $112.2 million, or 10.9% of sales, compared to $108.5 million, or 10.3% of sales, for the comparable period of 2002. The decrease in SG&A expenses for the quarter is a result of spending reductions in response to soft market conditions. On a year-to-date basis, the increase in SG&A expenses is primarily a result of the resumption of certain employee-related benefits beginning in the first quarter of 2003, offset by spending reductions.

Amortization of acquisition-related intangibles was $7.9 million in the third quarter of 2003, compared to $9.5 million in the third quarter of 2002. On a year-to-date basis, amortization of acquisition related intangibles was $25.3 million, compared to $28.3 million for the comparable period of 2002. The decreases in amortization are due to certain intangibles becoming fully amortized during the first quarter of 2003.

During the three and nine months ended September 28, 2003, the company recorded restructuring charges of $2.6 million and $62.7 million, respectively. In the third quarter of 2003, the charges related to additional costs, primarily severance, associated with the restructuring action initiated in the second quarter of 2003. In addition, the company recorded charges of $2.3 million of sales reserves and $1.1 million of inventory reserves recorded in revenues and cost of sales, respectively as a result of the discontinuation of certain products in connection with the closure of our 4” fab in South Portland, Maine. For the nine months ended September 28, 2003, these restructuring charges also include $5.5 million of severance and other employee separation costs associated with the termination of 190 salaried and hourly employees resulting from the closure of our 6” fab in Mountaintop, Pennsylvania recorded in the first quarter and $20.1 million of separation costs associated with the termination of approximately 1,600 salaried and hourly employees in the United States, South Korea, Europe, Japan, Hong Kong, Malaysia and China, resulting from the closure of our 4” fab in South Portland, Maine, plant closures in Wuxi, China and Kuala Lumpur, Malaysia and other workforce reduction actions recorded in the second quarter. The remaining $34.5 million of restructuring charges relate to asset impairments and other charges associated with the Mountaintop, Pennsylvania 6” fab closure and the closure of the Carlsbad, California office in the first quarter ($4.9 million), and asset impairments in Bucheon, South Korea, asset impairments and other charges associated with the closure of the 4” fab in South Portland, Maine and plant closures in Wuxi, China and Kuala Lumpur, Malaysia recorded in the second quarter ($29.6 million). The company also recorded charges of $3.2 million of sales reserves and $2.9 of inventory reserves, recorded in revenue and cost of sales, respectively in connection with the 6” fab closure and the exit from the hybrid and non-volatile memory businesses in the first and second quarters.

Purchased in-process research and development was recorded in the first quarter of 2002 in connection with our acquisitions of certain assets from I-Cube, Inc. ($1.0 million) and Signal Processing Technologies, Inc. (SPT) ($0.7 million).

Interest expense was $16.0 million and $58.2 million in the third quarter and first nine months of 2003, respectively, compared to $21.1 million and $78.3 million in the comparable periods of 2002. The decrease in interest expense in the third quarter of 2003 and first nine months of 2003 is the result of the redemption of $285.0 million of 10 1/8% senior subordinated notes on June 28, 2002 as well as the redemption of $300 million of 10 3/8% senior subordinated notes on June 19, 2003. These redemptions are offset by interest on our new $300 million term loan which carried an interest rate of 3.9375% at September 28, 2003.

Interest income was $1.7 million and $6.0 million in the third quarter and first nine months of 2003, respectively, compared to $3.6 million and $9.2 million in the comparable periods of 2002. The decreases in interest income are due to declines in the returns earned on our cash and investment balances.

In the second quarter, $23.4 million of other expense was recorded for costs associated with the redemption of our 10 3/8% senior subordinated notes and the refinancing of our revolving line of credit. These costs included $17.4 million for the call premium on the 10 3/8% senior subordinated notes and other transaction fees and a $6.0 million non-cash write-off of deferred financing fees associated with the original bond offering and revolving line of credit.

During the first nine months of 2002 we recorded other expense, net of $1.6 million. In the second quarter, $22.1 million was recorded for costs associated with the redemption of our 10 1/8% senior subordinated notes. These costs included $14.5 million for the call premium on the 10 1/8% senior subordinated notes and other transaction fees and a $7.6 million non-cash write-off of deferred financing fees associated with the original bond offering. In the first quarter of 2002, we recorded a gain of $20.5 million related to the sale of our military and space-related discrete power product line.

Income tax provision (benefit) was $(3.5) million and $(25.8) million for the third quarter and first nine months of 2003, respectively, compared to $2.4 million and $(3.2) million for the third quarter and first nine months of 2002. The effective tax rate for the third quarter and first nine months of 2003 was 39.3% and 22.9%, respectively, compared to 35.8% and 34.8% for the third quarter and first nine months of 2002. The change in the effective tax rate in 2003 as compared to 2002 was due to the changes in the magnitude and location of taxable income among taxing jurisdictions. The tax rate was calculated based upon actual tax rates for the quarter rather than using a projected annual tax rate due to the uncertainty of projecting annual taxable income by tax jurisdiction. Changes in the location of taxable income (loss) could result in significant changes in the effective tax rate.

We have a borrowing capacity of $180.0 million on a revolving basis for working capital and general corporate purposes, including acquisitions, under our senior credit facility. At September 28, 2003, adjusted for outstanding letters of credit, we had up to $179.3 million available under this senior credit facility. At September 28, 2003, we had additional outstanding letters of credit and guarantees totaling $5.0 million that were issued on behalf of unaffiliated companies with which we currently have a strategic investment or relationship. These amounts outstanding do not impact available borrowings under the senior credit facility.

Our senior credit facility, the indentures governing our 10 1/2% Senior Subordinated Notes, 5% Convertible Senior Subordinated Notes, $300 million term loan, and other debt instruments we may enter into in the future may impose various restrictions and covenants on us which could potentially limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities. The restrictive covenants include limitations on consolidations, mergers and acquisitions, restrictions on creating liens, restrictions on paying dividends or making other similar restricted payments, restrictions on asset sales, restrictions on capital expenditures and limitations on incurring indebtedness, among other restrictions. The covenants in the senior credit facility also include financial measures such as a minimum interest coverage ratio, a maximum senior leverage ratio and a minimum EBITDA less capital expenditures measure. At September 28, 2003, the company was in compliance with these covenants. The senior credit facility also limits our ability to modify our certificate of incorporation and bylaws, or enter into shareholder agreements, voting trusts or similar arrangements. Under our debt instruments, the subsidiaries of Fairchild Semiconductor Corporation cannot be restricted, except to a limited extent, from paying dividends or making advances to Fairchild Semiconductor Corporation. We believe that funds generated from operations, together with existing cash, will be sufficient to meet our debt obligations over the next twelve months. We expect that existing cash and available funds from our senior credit facility and funds generated from operations will be sufficient to meet our anticipated operating requirements and to fund our research and development and planned capital expenditures for the remainder of the year and for the next twelve months. We intend to invest approximately $120 to $140 million in 2003 on capital expenditures, including the $95.8 million we have spent through September 28, 2003. This capital primarily will be spent to expand capacity in support of in-sourcing of assembly and test capacity, including construction of our new facility in Suzhou, China, and to add capacity in our 8” Mountaintop, Pennsylvania facility and to support cost reduction projects in our manufacturing facilities and information technology infrastructure projects. We frequently evaluate opportunities to sell additional equity or debt securities, obtain credit facilities from lenders or restructure our long-term debt to further strengthen our financial position. The sale of additional equity or convertible securities could result in additional dilution to our stockholders. Additional borrowing or equity investment may be required to fund future acquisitions.

As of September 28, 2003, our cash and cash equivalents were $506.1 million, a decrease of $112.2 million from December 29, 2002 and a decrease of $56.2 from June 29, 2003.

During the first nine months of 2003, our operations provided $65.1 million in cash compared to $74.6 million of cash in the first nine months of 2002. The decrease in cash provided by operating activities reflects a decrease in the first nine months of 2003 in net loss adjusted for non-cash items of $27.0 million offset by an increase in cash flows from changes in operating assets and liabilities of $17.5 million as compared to the first nine months of 2002. Cash used in investing activities during the first nine months of 2003 totaled $171.6 million, compared to $66.3 million used in the first nine months of 2002. The increase primarily results from an increase of $7.8 million in capital expenditures, a cash outflow for purchases of marketable securities, net of sales of marketable securities of $74.8 million in the first nine months of 2003, and net cash acquired from acquisitions and divestitures of $23.9 million in the first nine months of 2002, for which there is no comparable amount in the first nine months of 2003. Cash used in financing activities of $5.7 million for the first nine months of 2003 was primarily the repayment of long-term debt, offset by the proceeds from the issuance of long-term debt. Cash provided by financing activities of $119.7 million for the first nine months of 2002 was primarily from proceeds from the follow on offering and issuance of common stock upon the exercise of options offset by the cash used to redeem the 10 1/8% senior subordinated notes.

It is customary practice in the semiconductor industry to enter into guaranteed purchase commitments or “take or pay” arrangements for purchases of certain equipment and raw materials. At September 28, 2003, obligations under these arrangements were not material to our consolidated financial statements. The table below summarizes aggregate maturities of long-term debt, future minimum lease payments under noncancelable operating leases, and guarantee commitments as of September 28, 2003.

Liquidity and Capital Resources of Fairchild International, Excluding Subsidiaries

Fairchild Semiconductor International, Inc. is a holding company, the principal asset of which is the stock of its sole subsidiary, Fairchild Semiconductor Corporation. Fairchild Semiconductor International on a stand-alone basis had no cash flow from operations in the first nine months of 2003, nor in the first nine months of 2002. Fairchild Semiconductor International on a stand-alone basis has no cash requirements for the next twelve months.

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The U.S. Securities and Exchange Commission has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and which require our most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies include the policies of revenue recognition, sales reserves, inventory valuation, the impairment of long-lived assets and income taxes. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies.

On an ongoing basis, we evaluate the judgments and estimates underlying all of our accounting policies, including those related to revenue recognition, sales reserves, inventory valuation, impairment of long-lived assets and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Materially different results in the amount and timing of our actual results for any period could occur if our management made different judgments or utilized different estimates.

Revenue Recognition. Revenue from the sale of semiconductor products is recognized when title transfers to the customer, including distributors, which is generally upon shipment. No revenue is recognized unless there is persuasive evidence of an arrangement, the price to the buyer is fixed or determinable, and the collectibility of the sales price is reasonably assured. Contract manufacturing revenues are recognized upon completion of the contracted service.

Sales Reserves. Sales reserves generally fall into four categories: customer material return reserves, distributor contract sales debit reserves, prompt payment discount reserves, and other distribution reserves. Customer material returns result from product quality, administrative or other defect issues. Distributor contract sales debits are credits given to distributors to ensure distributor profitability on individual resale transactions. Prompt payment discounts are enticements given to customers to ensure payment is made in a timely manner. Customer material reserves, distributor contract sales debit reserves and prompt payment discount reserves are based upon historical rates of return or claims and any known, specifically identified unusual returns. Other sales reserves are recorded based upon individual contracts with distributors that may call for reimbursement of product scrapped or reimbursement of price changes that affect the distributor’s

Inventory Valuation. In determining the net realizable value of our inventories, we review the valuations of inventory considered excessively old, and therefore subject to, obsolescence and inventory in excess of customer backlog. We also adjust the valuation of inventory when estimated actual cost is significantly different than standard cost and to value inventory at the lower of cost or market. Once established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory.

Impairment of Long-Lived Assets. We assess the impairment of long-lived assets, including goodwill, on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

In conjunction with the implementation of the new accounting rules for goodwill as of the beginning of 2002, we completed a goodwill impairment review for the reporting units that have goodwill associated with them. We also performed an annually required review during the fourth quarter of 2002, and in both reviews we found no impairment.

We will perform a similar review annually, or more frequently, if indicators of potential impairment arise. Our impairment review process is based upon a discounted cash flow analysis, which uses our estimates of revenues, driven by market growth rates and estimated costs, as well as utilizing a discount rate determined by our management to be commensurate with our cost of capital and the risk inherent in our current business model.

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


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

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

	•	significant negative industry or economic trends, and

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

Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying value to the future undiscounted cash flows. Future undiscounted cash flows include estimates of future revenues, driven by market growth rates, and estimated future costs.

Income Taxes. We estimate our income tax provision in each of the jurisdictions in which we operate, including estimating exposures related to examinations by taxing authorities. We must also make judgments regarding the realizability of deferred tax assets. The carrying value of our net deferred tax asset is based on our belief that it is more likely than not that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets. This likelihood is supported by tax planning strategies available to the company that are both prudent and feasible. These strategies would be implemented to preserve the deferred tax asset. A valuation allowance has been established for deferred tax assets which we do not believe meet the more likely than not criteria established by SFAS No. 109, “Accounting for Income Taxes.” Our judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, or other factors. If our assumptions and consequently our estimates, change in the future, the valuation allowances we have established may be increased, resulting in increased income tax expense. Conversely, if we are ultimately able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be released to income as a credit to income tax expense.

This quarterly report includes “forward-looking statements” as that term is defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the use of forward-looking

terminology such as “we believe,” “we expect,” “we intend,” “may,” “will,” “should,” “seeks,” “approximately,” “plans,” “estimates,” “anticipates,” or “hopeful,” or the negative of those terms or other comparable terms, or by discussions of our strategy, plans or future performance. For example, the Outlook section below contains numerous forward-looking statements. All forward-looking statements in this report are made based on management’s current expectations and estimates, which involve risks and uncertainties, including those described below and more specifically in the Business Risks section below. Among these factors are the following: changes in regional or global economic or political conditions (including as a result of terrorist attacks and responses to them); changes in demand for our products; changes in inventories at our customers and distributors; technological and product development risks; availability of manufacturing capacity; availability of raw materials; competitors’ actions; loss of key customers; 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 Business Risks section in the quarterly and annual reports we file with the Securities and Exchange Commission. Such risks and uncertainties could cause actual results to be materially different from those in the forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements.

It is our current policy to update our business outlook at least twice each quarter. The first update is near the beginning of each quarter, within the press release that announces the previous quarter’s results. The business outlook below is consistent with the outlook included in our October 16, 2003 press release announcing third quarter results. The second update is within a press release issued approximately two months into each quarter. The current business outlook is accessible at the Investor Relations section of our website at http://investor.fairchildsemi.com. Toward the end of each quarter, and until that quarter’s results are publicly announced, we observe a “quiet period,” when the outlook is not updated to reflect management’s current expectations. The quiet period for the fourth quarter of 2003 will be from December 13, 2003 to January 15, 2003, when we plan to release our fourth quarter 2003 results. Except during quiet periods, the business outlook posted on our website reflects current guidance unless and until updated through a press release, SEC filing or other public announcement. During quiet periods, our business outlook, as posted on our website, announced in press releases and provided in quarterly, annual and special reports or other filing with the SEC, should be considered to be historical, speaking as of prior to the quiet period only and not subject to update by the company. During quiet periods, Fairchild Semiconductor representatives will not comment about the business outlook of the company’s financial results or expectations.

In the fourth quarter, we expect an increase in revenues of approximately 6% to 8% over the third quarter. We had roughly 75% of this amount already on our backlog as we entered the fourth quarter. This is the highest entering backlog in over a year, and pricing on these backlog orders has begun to stabilize. We believe this level of revenue growth, which is on the high end of typical seasonal growth in the fourth quarter, is being driven largely by our leading position in the fast-growing power analog and discrete market and by our regional strength in Asia. Excluding the effects of restructuring and impairments, the sales and inventory reserves associated with these actions and purchased in-process research and development, we anticipate operating margins to increase 100 to 200 basis points sequentially due to the combined effects of expected higher revenue, a product mix that we expect will include a greater proportion of higher-margin products, which we expect will drive higher aggregate margins, and lower costs.

For the fourth quarter of 2003, we expect interest expense, net, to be about $15 million. We expect that depreciation and amortization will be approximately $39-$40 million and amortization of acquisition-related intangibles to be approximately $7.9 million. We continue to plan capital expenditures of approximately 8-10% of revenue. Finally, we estimate our effective tax rate to be approximately 20% for the fourth quarter and about 25% in 2004.

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 currently has not had an impact on our results of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The purpose of SFAS No. 149 is to amend and clarify financial accounting and reporting for derivative instruments and hedging activities under SFAS No. 133. SFAS No. 149 amends SFAS No. 133 for decisions made: (i) as part of the Derivatives Implementation Group process that require amendment to SFAS No. 133, (ii) in connection with other FASB projects dealing with financial instruments, and (iii) in connection with the implementation issues raised related to the application of the definition of a derivative. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for designated hedging relationships after June 30, 2003. SFAS No. 149 currently has not had an impact on the company’s results of operations or financial position.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. Interpretation No. 46 clarifies Accounting Research Bulletin No. 51, Consolidated Financial Statements related to whether companies should consolidate certain entities, called variable interest entities, for which there is no controlling financial interest but have characteristics of a controlling interest in place, called a variable interest. Interpretation No. 46 is effective immediately for variable interest entities created after January 31, 2003. The provisions, as amended, are effective for the first interim or annual period ending after December 15, 2003 for those variable interests held prior to February 1, 2003. The company is currently assessing the impact of this interpretation on its consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in not only annual, but also interim financial statements about the effect the fair value method would have had on reported results. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. The company intends to continue to account for options under APB Opinion No. 25.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Issue No. 00-21 addresses when an arrangement with multiple deliverables should be divided into separate units of accounting. This consensus is effective for fiscal years beginning after June 15, 2003. We do not believe the impact of adopting EITF Issue No 00-21 will have a material impact on our financial statements.

Our business is subject to a number of risks and uncertainties. Among other things, these risks could cause actual results to differ materially from those expressed in forward-looking statements. The risks described below are not the only ones facing us. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business operations and financial condition.

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

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

Downturns in the highly cyclical semiconductor industry or changes in end user market demands could reduce the value of our business.

The semiconductor industry is highly cyclical, and the value of our business may decline during the “down” portion of these cycles. Beginning in the fourth quarter of 2000 and continuing through most of 2001, we and the rest of the semiconductor industry experienced backlog cancellations and reduced demand for our products, resulting in significant revenue declines, due to excess inventories at computer and telecommunications equipment manufacturers and general economic conditions, especially in the technology sector. Although we believe the low point of this most recent cycle occurred in the third quarter of 2001, the semiconductor industry has only recently experienced what initially appears to be a modest recovery in orders. We may experience renewed, possibly more severe and prolonged, downturns in the future as a result of such cyclical changes. Even as demand increases following such downturns, our profitability may not increase because of price competition that historically accompanies recoveries in demand. For example, in 2002, we sold approximately 7% more units than in 2001, yet our revenues were essentially unchanged. We have continued to sell increasingly greater numbers of units, while at the same time experiencing revenue declines due to price decreases. In addition, we may experience significant changes in our profitability as a result of variations in sales, changes in product mix, changes in end user markets and the costs associated with the introduction of new products. The markets for our products depend on continued demand for personal computers, cellular telephones and consumer electronics and automotive and industrial goods, and these end user markets may experience changes in demand that will adversely affect our prospects.

We may not be able to develop new products to satisfy changes in consumer demands.

Our failure to develop new technologies, or react to changes in existing technologies, could materially delay development of new products, which could result in decreased revenues and a loss of market share to our competitors. Rapidly changing technologies and industry standards, along with frequent new product introductions, characterize the semiconductor industry. Our financial performance depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. We may not successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner. Products or technologies developed by other companies may render our products or technologies obsolete or noncompetitive. Many of our competitors are larger, older and well established international companies with greater engineering and research and development resources than us. A fundamental shift in technologies in our product markets that we fail to identify or capitalize on relative to our competitors could have a material adverse effect on our competitive position within our industry.

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

Failure to protect our existing intellectual property rights may result in the loss of valuable technologies or having to pay other companies for infringing on or using their intellectual property rights. We rely on patent,


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

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

In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in some countries.

We also seek to protect our proprietary technologies, including technologies that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors’ rights agreements with our collaborators, advisors, employees and consultants. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of such research. Some of our technologies have been licensed on a non-exclusive basis from National Semiconductor, Samsung Electronics and other companies which may license such technologies to others, including our competitors. In addition, under a technology licensing and transfer agreement, National Semiconductor has limited royalty-free, worldwide license rights (without right to sublicense) to some of our technologies. If necessary or desirable, we may seek licenses under patents or intellectual property rights claimed by others. However, we cannot assure you that we will obtain such licenses or that the terms of any offered licenses will be acceptable to us. The failure to obtain a license from a third party for technologies we use could cause us to incur substantial liabilities and to suspend the manufacture or shipment of products or our use of processes requiring the technologies.

Our failure to obtain or maintain the right to use some technologies may negatively affect our financial results.

Our future success and competitive position depend in part upon our ability to obtain or maintain proprietary technologies used in our principal products, which is achieved in part by defending claims by competitors and others of intellectual property infringement. The semiconductor industry is characterized by claims of intellectual property infringement and litigation regarding patent and other intellectual property rights. From time to time, we may be notified of claims (often implicit in offers to sell us a license to another company’s patents) that we may be infringing patents issued to other companies, and we may subsequently engage in license negotiations regarding these claims. Such claims relate both to products and manufacturing processes. Even though we maintain procedures to avoid infringing others’ rights as part of our product and process development efforts, it is impossible to be aware of every possible patent which our products may infringe, and we cannot assure you that we will be successful. Furthermore, even if we conclude our products do not infringe another’s patents, others may not agree. We have been involved in lawsuits, and could become subject to other lawsuits, in which it is alleged that we have infringed upon the patent or other intellectual property rights of other companies. Our involvement in existing and future intellectual property litigation, or the costs of avoiding litigation by purchasing licenses rights or by other means, could result in significant expense to our company, adversely affecting sales of the challenged product or technologies and diverting the efforts of our technical and management personnel, whether or not such litigation is resolved in our favor. In the event of an adverse outcome as a defendant in any such litigation, we may be required to:


	•	pay substantial damages;

	•	indemnify our customers for damages they might suffer if the products they purchase from us violate the intellectual property rights of others;

	•	stop our manufacture, use, sale or importation of infringing products;

	•	expend significant resources to develop or acquire non-infringing technologies;

	•	discontinue manufacturing processes; or

	•	obtain licenses to the intellectual property we are found to have infringed.

We cannot assure you that we would be successful in such development or acquisition or that such licenses would be available under reasonable terms. Any such development, acquisition or license could require the expenditure of substantial time and other resources.

We may not be able to consummate future acquisitions or successfully integrate acquisitions into our business.

We have made ten acquisitions of various sizes since we became an independent company in 1997, and we plan to pursue additional acquisitions of related businesses. We believe the semiconductor industry is going through a period of consolidation, and we expect to participate in this development. The costs of acquiring and integrating related businesses, or our failure to integrate them successfully into our existing businesses, could result in our company incurring unanticipated expenses and losses. In addition, we may not be able to identify or finance additional acquisitions or realize any anticipated benefits from acquisitions we do complete.

We are constantly pursuing acquisition opportunities and consolidation possibilities and are in various stages of due diligence or preliminary discussions with respect to a number of potential transactions, some of which would be significant. No material potential transactions are subject to a letter of intent or otherwise so far advanced as to make the transaction reasonably certain.

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


	•	unexpected losses of key employees, customers or suppliers of the acquired company;

	•	conforming the acquired company’s standards, processes, procedures and controls with our operations;

	•	coordinating new product and process development;

	•	hiring additional management and other critical personnel;

	•	negotiating with labor unions; and

	•	increasing the scope, geographic diversity and complexity of our operations.

In addition, we may encounter unforeseen obstacles or costs in the integration of other businesses we acquire.

Possible future acquisitions could result in the incurrence of additional debt, contingent liabilities and amortization expenses related to goodwill and other intangible assets, all of which could have a material adverse effect on our financial condition and operating results.

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

Our manufacturing operations depend upon obtaining adequate supplies of raw materials on a timely basis. Our results of operations could be adversely affected if we were unable to obtain adequate supplies of raw materials in a timely manner or if the costs of raw materials increased significantly. Results could also be adversely affected if there is a significant degradation in the quality of raw materials used in our products, or if the raw materials give rise to compatibility or performance issues in our products, any of which could lead to an increase in customer returns or product warranty claims. Although we maintain rigorous quality control systems, errors or defects may arise from a supplied raw material and be beyond our detection or control. For example, some phosphorus-containing mold compound received from one supplier and incorporated into our products has resulted in a number of claims for damages from customers. We purchase raw materials such as silicon wafers, lead frames, mold compound, ceramic packages and chemicals and gases from a limited number of suppliers on a just-in-time basis. From time to time, suppliers may extend lead times, limit supplies or increase prices due to capacity constraints or other factors. In addition, we subcontract a portion of our

wafer fabrication and assembly and test operations to other manufacturers, including Amkor, AUK, Enoch, Wooseok, SPS, NS Electronics (Bangkok) Ltd., Samsung Electronics, and ChipPAC. Our operations and ability to satisfy customer obligations could be adversely affected if our relationships with these subcontractors were disrupted or terminated.

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

Our manufacturing efficiency is an important factor in our profitability, and we cannot assure you that we will be able to maintain our manufacturing efficiency or increase manufacturing efficiency to the same extent as our competitors. Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified in an effort to improve yields and product performance. Impurities or other difficulties in the manufacturing process can lower yields. We have begun initial production at a new assembly and test facility in Suzhou, China. We are transferring some production from subcontractors to this new facility. Delays or technical problems in completing these transfers could lead to order cancellations and lost revenue. In addition, we are currently engaged in an effort to expand capacity at some of our manufacturing facilities. As is common in the semiconductor industry, we have from time to time experienced difficulty in beginning production at new facilities or in completing transitions to new manufacturing processes at existing facilities. As a consequence, we have suffered delays in product deliveries or reduced yields.

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

More than half of our sales are made by distributors who can terminate their relationships with us with little or no notice. The termination of a distributor could reduce sales and result in inventory returns.

Distributors accounted for 62% of our net sales for the three months ended September 28, 2003. Our top five distributors worldwide accounted for 16% of our net sales for the three months ended September 28, 2003. As a general rule, we do not have long-term agreements with our distributors and they may terminate their relationships with us with little or no advance notice. Distributors generally offer competing products. The loss of one or more of our distributors, or the decision by one or more of them to reduce the number of our products they offer or to carry the product lines of our competitors, could have a material adverse effect on our business, financial condition and results of operations. The termination of a significant distributor, whether at our or the distributor’s initiative, or a disruption in the operations of one or more of our distributors, could reduce our net sales in a given quarter and could result in an increase in inventory returns.

The semiconductor business is very competitive, especially in the markets we serve, and increased competition could reduce the value of an investment in our company.

The semiconductor industry is, and the multi-market semiconductor product markets in particular are, highly competitive. Competitors offer equivalent or similar versions of many of our products, and customers may switch from our products to competitors’ products on the basis of price, delivery terms, product performance, quality, reliability and customer service or a combination of any of these factors. Competition is especially intense in the multi-market semiconductor segment because it is relatively easier for customers to switch suppliers of more standardized, multi-market products like ours, compared to switching suppliers of more highly integrated or customized semiconductor products such as processors or system-on-a-chip products, which we do not manufacture. Even in strong markets, price pressures may emerge as competitors attempt to gain a greater market share by lowering prices. Competition in the various markets in which we participate comes from companies of various sizes, many of which are larger and have greater financial and other resources than we have and thus are better able to pursue acquisition candidates and can better

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

Our products are typically sold at prices that are significantly lower than the cost of the equipment or other goods in which they are incorporated. For example, our products that are incorporated into a personal computer would be sold for several dollars, whereas the personal computer would be sold by the computer maker for several hundred dollars. Although we maintain rigorous quality control systems, we manufacture and sell approximately 16 billion individual semiconductor devices per year to customers around the world, and in the ordinary course of our business we receive warranty claims for some of these products that are defective or that do not perform to published specifications. Since a defect or failure in our product could give rise to failures in the goods that incorporate them (and consequential claims for damages against our customers from their customers), we may face claims for damages that are disproportionate to the revenues and profits we receive from the products involved. We attempt, through our standard terms and conditions of sale and other customer contracts, to limit our liability for defective products to obligations to replace the defective goods or refund the purchase price. Nevertheless, we receive claims for other charges, such as for labor and other costs of replacing defective parts, lost profits and other damages. In addition, our ability to reduce such liabilities may be limited by the laws or the customary business practices of the countries where we do business. And, even in cases where we do not believe we have legal liability for such claims, we may choose to pay for them to retain a customer’s business or goodwill. Our results of operations and business could be adversely affected as a result of a significant quality or performance issue in our products, if we are required or choose to pay for the damages that result.

For example, from time to time since late 2001 we have received claims from a number of customers seeking damages resulting from certain products manufactured with a phosphorus-containing mold compound. Mold compound is the plastic resin used to encapsulate semiconductor chips. This particular mold compound may cause some chips to short in some situations, resulting in chip failure. In August 2002 we filed a lawsuit against the mold compound supplier, seeking unspecified damages, including damages caused to our customers. Other manufacturers have also filed lawsuits against the supplier in connection with the mold compound issue. Our lawsuit is pending in California Superior Court for Santa Clara County. In addition, we have limited insurance coverage for these customer claims. Based on our assessments of the claims to date, taking into account factors which we believe are relevant, we currently believe the insurance will be sufficient to provide reasonable compensation to affected customers. Accordingly, we do not currently believe that the customer claims will have a material adverse effect on our financial position or results of operations. If we continue to receive additional claims for damages from customers beyond the period of time normally observed for such claims, or if our assessment of such claims is incorrect or less than our actual liability, the amount necessary to resolve such claims may exceed the available insurance and could adversely affect our financial results.

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

Through our subsidiaries we maintain significant operations in the Philippines, Malaysia and South Korea and also operate facilities in China and Singapore. We are constructing another facility in China. We have sales offices and customers around the world. Almost three-quarters of our revenues in 2002 were from Asia. The following are risks inherent in doing business on an international level:


	•	economic and political instability;

	•	foreign currency fluctuations;

	•	transportation delays;

	•	trade restrictions;


	•	work stoppages; and

	•	the laws, including tax laws of, and the policies of the United States toward, countries in which we manufacture our products.

The power device business subjects our company to risks inherent in doing business in Korea, including political risk, labor risk and currency risk.

As a result of the acquisition of the power device business from Samsung Electronics in 1999, we have significant operations and sales in South Korea and are subject to risks associated with doing business there. Korea accounted for 19% of our revenue for the third quarter of 2003.

Relations between South Korea and North Korea have been tense over most of South Korea’s history, and recent concerns over North Korea’s nuclear capability, and relations between the United States and North Korea, have created a global security issue that may adversely affect Korean business and economic conditions. We cannot assure you as to whether or when this situation will be resolved or change abruptly as a result of current or future events. An adverse change in economic or political conditions in South Korea or in its relations with North Korea could have a material adverse effect on our Korean subsidiary and our company. And, in addition to other risks disclosed relating to international operations, some businesses in South Korea are subject to labor unrest.

Our Korean power device business’ sales are denominated primarily in U.S. dollars while a significant portion of its costs of goods sold and its operating expenses are denominated in South Korean won. Although we have taken steps to fix the costs subject to currency fluctuations and to balance won revenues and won costs, a significant change in this balance, coupled with a significant change in the value of the won relative to the dollar, could have a material adverse effect on our financial performance and results of operations. In addition, an unfavorable change in the value of the won could require us to write down our won-denominated assets.

We entered into a number of supply and support contracts with Samsung Electronics in connection with our acquisition of its power device business in 1999, most of which have now ended. Any significant decrease in purchases by Samsung Electronics could substantially reduce our financial performance.

As a result of the acquisition of Samsung Electronics’ power device business in 1999, we entered into numerous arrangements with Samsung Electronics, including arrangements relating to product sales, designation as a preferred vendor to affiliated Samsung companies and other services. Although most of these arrangements have expired, Samsung Electronics remains a significant customer, due in part to the historical relationship between the business we acquired and its former parents and affiliates. There can be no assurances that these relationships will continue at historical levels. Samsung Electronics (together with its affiliates) is our largest customer, accounting for approximately 11% of total sales during the third quarter of 2003. Any material reduction in the purchases of Samsung Electronics could have a material adverse effect on our results of operations.

A change in foreign tax laws or a difference in the construction of current foreign tax laws by relevant foreign authorities could result in us not recognizing the benefits we anticipated in connection with the transaction structure used to consummate the acquisition of the power device business.

The transaction structure we used for the acquisition of the power device business is based on assumptions about the various tax laws, including withholding tax, and other relevant laws of foreign jurisdictions. In addition, our Korean subsidiary was granted a ten-year tax holiday under Korean law in 1999. The first seven years are tax-free, followed by three years of income taxes at 50% of the statutory rate. In 2000, the tax holiday was extended such that the exemption amounts were increased to 75% in the eighth year and a 25% exemption was added to the eleventh year. If our assumptions about tax and other relevant laws are incorrect, or if foreign taxing jurisdictions were to change or modify the relevant laws, or if our Korean subsidiary were to lose its tax holiday, we could suffer adverse tax and other financial consequences or lose the benefits anticipated from the transaction structure we used to acquire that business.

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

We have completed the first phase of an 800,000 square foot assembly and test facility in Suzhou, China, and began production there in July 2003. Although we expect a significant portion of our production from this new facility will be exported out of China, especially initially, we are hopeful that a significant portion of our future revenue will result from the Chinese markets in which our products are sold, and from demand in China for goods that include our products. Our ability to operate in China may be adversely affected by changes in that country’s laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. In addition, our results of operations in China are subject to the economic and political situation there. We believe that our operations in China are in compliance with all applicable legal and regulatory requirements. However, there can be no assurance that China’s central or local governments will not impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures. Changes in the political environment or government policies could result in revisions to laws or regulations or their interpretation and enforcement, increased taxation, restrictions on imports, import duties or currency revaluations. In addition, a significant destabilization of relations between China and the United States could result in restrictions or prohibitions on our operations or the sale of our products in China. The legal system of China relating to foreign trade is relatively new and continues to evolve. There can be no certainty as to the application of its laws and regulations in particular instances. Enforcement of existing laws or agreements may be sporadic and implementation and interpretation of laws inconsistent. Moreover, there is a high degree of fragmentation among regulatory authorities resulting in uncertainties as to which authorities have jurisdiction over particular parties or transactions.

Our business was subject to risks associated with Severe Acute Respiratory Syndrome (SARS) and would be subject to those risks if there is another outbreak of the disease.

As described above, we operate an assembly and test facility in Suzhou, China, near Shanghai as well as a facility in Wuxi, China. Our sales headquarters for the Asia Pacific region are located in Hong Kong and we have sales and administrative offices in Beijing, Shanghai and Shenzhen, China as well as in Singapore and Taiwan. We also have significant facilities in Malaysia, the Philippines and South Korea. During the height of the SARS crisis in the winter and spring of 2003, we restricted employee travel, resulting in reduced direct contacts with customers, and experienced reduced demand for our products as a result of the disease. A renewed SARS outbreak, and the general economic and other disruptions that would likely result, could lead to reduced demand for our products in China and the rest of Asia. In the third quarter of 2003, the Asian region, including Korea, accounted for 73% of our revenue. In addition, a SARS outbreak in one of our manufacturing facilities or the facility of a supplier could have an adverse effect on our operations if we are not able to address the lost production capacity that could result.

We are subject to many environmental laws and regulations that could affect our operations or result in significant expenses.

Increasingly stringent environmental regulations restrict the amount and types of pollutants that can be released from our operations into the environment. While the cost of compliance with environmental laws has not had a material adverse effect on our results of operations historically, compliance with these and any future regulations could require significant capital investments in pollution control equipment or changes in the way we make our products. In addition, because we use hazardous and other regulated materials in our manufacturing processes, we are subject to risks of liabilities and claims, regardless of fault, resulting from accidental releases, including personal injury claims and civil and criminal fines, any of which could be material to our cash flow or earnings. For example:


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

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


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

Although most of our known environmental liabilities are covered by indemnities from Raytheon Company, National Semiconductor, Samsung Electronics and Intersil Corporation, these indemnities are limited to conditions that occurred prior to the consummation of transactions with those companies. Moreover, we cannot assure you that their indemnity obligations to us for the covered liabilities will be adequate to protect us.

We may not be able to attract or retain the technical or management employees necessary to remain competitive in our industry.

Our continued success depends on the retention and recruitment of skilled personnel, including technical, marketing, management and staff personnel. In the semiconductor industry, the competition for qualified personnel, particularly experienced design engineers and other technical employees, is intense, particularly in the “up” portions of our business cycle, when competitors may try to recruit our most valuable technical employees. There can be no assurance that we will be able to retain our current personnel or recruit the key personnel we require.

We are a leveraged company with a debt-to-equity ratio at September 28, 2003 of approximately 0.8 to 1, which could adversely affect our financial health and limit our ability to grow and compete.

At September 28, 2003, we had total long-term debt of $852.7 million and a ratio of debt to equity of approximately 0.8 to 1. On June 19, 2003, we entered into a new credit facility that included a $300 million term B loan, the proceeds of which have been used to redeem our 10 3/8% Senior Subordinated Notes due 2007, as well as a $180 million revolving line of credit. Our substantial indebtedness could have important consequences. For example, it could


	•	require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes;

	•	increase the amount of our interest expense, because certain of our borrowings (namely borrowings under our senior credit facility) are at variable rates of interest, which, if interest rates increase, could result in higher interest expense;

	•	increase our vulnerability to general adverse economic and industry conditions;

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

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

	•	make it more difficult for us to satisfy our obligations with respect to the instruments governing our indebtedness;

	•	place us at a competitive disadvantage compared to our competitors that have less indebtedness; and

	•	limit, along with the financial and other restrictive covenants in our debt instruments, among other things, our ability to borrow additional funds, dispose of assets or pay cash dividends. Failing to comply with those covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations.

Despite current indebtedness levels, we may still be able to incur substantially more indebtedness. Incurring more indebtedness could exacerbate the risks described above.

We may be able to incur substantial additional indebtedness in the future. The indenture governing Fairchild Semiconductor Corporation’s outstanding 5% Convertible Senior Subordinated Notes Due 2008 does not limit the amount of additional debt that we may incur. Although the terms of the indenture governing

Fairchild Semiconductor Corporation’s outstanding 10 1/2% Senior Subordinated Notes, and the credit agreement relating to the senior credit facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, additional indebtedness incurred in compliance with these restrictions could be substantial. The senior credit facility permits borrowings of up to $180.0 million in revolving loans, in addition to the outstanding $300.0 million term B loan that is currently outstanding under that facility. As of September 28, 2003, adjusted for outstanding letters of credit, we had up to $179.3 million available under the revolving loan portion of the senior credit facility. If new debt is added to our subsidiaries’ current debt levels, the substantial risks described above would intensify.

We may not be able to generate the necessary amount of cash to service our indebtedness, which may require us to refinance our indebtedness or default on our scheduled debt payments. Our ability to generate cash depends on many factors beyond our control.

Our historical financial results have been, and our future financial results are anticipated to be, subject to substantial fluctuations. We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule or at all, or that future borrowings will be available to us under our senior credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. In addition, because our senior credit facility has variable interest rates, the cost of those borrowings will increase if market interest rates increase. If we are unable to meet our expenses and debt obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or raise equity. We cannot assure you that we would be able to refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. Restrictions imposed by the credit agreement relating to our senior credit facility and the indenture governing Fairchild Semiconductor Corporation’s 10 1/2% Senior Subordinated Notes restrict or prohibit our ability to engage in or enter into some business operating and financing arrangements, which could adversely affect our ability to take advantage of potentially profitable business opportunities.

The operating and financial restrictions and covenants in most of our debt instruments, such as the credit agreement relating to our senior credit facility and the indenture governing Fairchild Semiconductor Corporation’s 10 1/2% Senior Subordinated Notes may limit our ability to finance our future operations or capital needs or engage in other business activities that may be in our interests. These debt instruments impose significant operating and financial restrictions on us that affect our ability to incur additional indebtedness or create liens on our assets, pay dividends, sell assets, engage in mergers or acquisitions, make investments or engage in other business activities. These restrictions could place us at a disadvantage relative to competitors not subject to such limitations.

In addition, the credit agreement governing our senior credit facility contains other and more restrictive covenants and limits us from prepaying our other indebtedness. The senior credit facility also requires us to maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and we cannot assure you that we will meet those ratios. As of September 28, 2003, we were in compliance with these ratios. A breach of any of these covenants, ratios or restrictions could result in an event of default under the senior credit facility. Upon the occurrence of an event of default under the senior credit facility, the lenders could elect to declare all amounts outstanding under the senior credit facility, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure the indebtedness. If the lenders under the senior credit facility accelerate the payment of the indebtedness, we cannot assure you that our assets would be sufficient to repay in full that indebtedness and our other indebtedness.

Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosure about Market Risk, in Fairchild Semiconductor International’s annual report on Form 10-K for the year ended December 29, 2002

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 disclosed within the specified time periods. Any control system, however, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the system’s objectives will be met. As of the end of the period covered by this report, our CEO and CFO have evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures. Based on the evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

From time to time we are involved in actual or threatened legal proceedings in the ordinary course of business. We believe that there is no such ordinary course litigation pending or threatened that could have, individually or in the aggregate, a material adverse effect on our business, financial condition, results of operations or cash flows.

On July 17, 2003, we filed a current report on Form 8-K relating to financial information for the quarter ended June 29, 2003, and forward-looking statements relating to the third quarter of 2003, as announced in a press release dated July 17, 2003. The press release is incorporated in, and filed as an exhibit to, the current report.

On July 23, 2003, we filed a current report on Form 8-K relating to the reconciliation of non-GAAP financial measures to GAAP equivalents, as required under Regulation G, in conjunction with the filing of our registration statement on Form S-3. The reconciliation is incorporated in, and filed as an exhibit to, the current report.

On September 4, 2003, we filed a current report on Form 8-K relating to the update of our forward-looking guidance for the third quarter of 2003, as announced in a press release dated September 3, 2003. The press release is incorporated in, and filed as an exhibit to, the current report.

On September 25, 2003, we filed a current report on Form 8-K relating to the appointment of a new director, as announced in a press release dated September 25, 2003. The press release is incorporated in, and filed as an exhibit to, the current report.

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.


	By:	/s/ ROBIN A. SAWYER


	Robin A. Sawyer
	Vice President, Corporate Controller
	(Principal Accounting Officer)


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

		For the quarterly period ended September 28, 2003

or

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

		For the transition period from to .


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


Title of Each Class	Number of Shares

Common Stock		117,741,927


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	CONDENSED CONSOLIDATED BALANCE SHEETS
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Disclosure Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Ex 10.1 First Amendment to Credit Agreement
Ex 31.1 Section 302 Certification of CEO
Ex 31.2 Section 302 Certification of CFO
Ex 32.1 Section 906 Certification of CEO
Ex 32.2 Section 906 Certification of CFO


		Page

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 28, 2003 and December 29, 2002		2
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 28, 2003 and September 29, 2002		3
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 28, 2003 and September 29, 2002		4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2003 and September 29, 2002		5
	Notes to Condensed Consolidated Financial Statements (Unaudited)		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		37
Item 4.	Disclosure Controls and Procedures		38
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		39
Item 6.	Exhibits and Reports on Form 8-K		39
Signature			40


			September 28,			December 29,
			2003			2002

ASSETS
Current assets:
	Cash and cash equivalents		$	506.1		$	618.3
	Short-term marketable securities			7.8			2.0
	Accounts receivable, net			146.0			150.6
	Inventories			210.4			208.8
	Deferred income taxes			27.8			28.1
	Other current assets			19.9			12.5

		Total current assets		918.0			1,020.3
Property, plant and equipment, net				617.4			660.9
Deferred income taxes				121.4			81.6
Intangible assets, net				183.1			208.4
Goodwill				230.1			230.1
Long-term marketable securities				98.6			30.4
Other assets				51.0			56.4

		Total assets	$	2,219.6		$	2,288.1

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	3.3		$	0.4
	Accounts payable			96.0			113.7
	Accrued expenses and other current liabilities			121.8			92.8

		Total current liabilities		221.1			206.9
Long-term debt, less current portion				849.4			852.8
Other liabilities				14.1			13.2

		Total liabilities		1,084.6			1,072.9
Commitments and contingencies
Stockholders’ equity:
	Common stock			1.2			1.2
	Additional paid-in capital			1,227.0			1,221.1
	Accumulated deficit			(89.2	)		(2.4	)
	Accumulated other comprehensive loss			(0.5	)		(1.1	)
	Less treasury stock (at cost)			(3.5	)		(3.6	)

		Total stockholders’ equity		1,135.0			1,215.2

		Total liabilities and stockholders’ equity	$	2,219.6		$	2,288.1



			Three Months Ended						Nine Months Ended

			September 28,			September 29,			September 28,			September 29,
			2003			2002			2003			2002

Total revenue			$	328.4		$	360.6		$	1,026.6		$	1,058.0
Cost of sales				259.1			270.5			807.6			791.9

	Gross profit			69.3			90.1			219.0			266.1

Operating expenses:
	Research and development			17.9			20.0			55.8			62.5
	Selling, general and administrative			35.5			36.4			112.2			108.5
	Amortization of acquisition-related intangibles			7.9			9.5			25.3			28.3
	Restructuring and impairments			2.6			—			62.7			3.6
	Purchased in-process research and development			—			—			—			1.7

		Total operating expenses		63.9			65.9			256.0			204.6

Operating income (loss)				5.4			24.2			(37.0	)		61.5
Interest expense				15.9			21.1			58.2			78.3
Interest income				(1.6	)		(3.6	)		(6.0	)		(9.2	)
Other expense, net				—			—			23.4			1.6

Income (loss) before income taxes				(8.9	)		6.7			(112.6	)		(9.2	)
Provision (benefit) for income taxes				(3.5	)		2.4			(25.8	)		(3.2	)

Net income (loss)			$	(5.4	)	$	4.3		$	(86.8	)	$	(6.0	)

Net income (loss) per common share:
	Basic		$	(0.05	)	$	0.04		$	(0.74	)	$	(0.06	)

	Diluted		$	(0.05	)	$	0.04		$	(0.74	)	$	(0.06	)

Weighted average common shares:
	Basic			117.5			117.0			117.4			108.1

	Diluted			117.5			118.7			117.4			108.1



			As of September 28, 2003

			Gross Carrying		Accumulated
			Amount		Amortization


			(In millions)
Identifiable intangible assets:
	Developed technology		$	223.2	$	(68.1	)
	Customer base			55.8		(31.7	)
	Covenant not to compete			30.4		(27.3	)
	Trademarks and tradenames			24.9		(24.9	)
	Patents			5.4		(4.6	)

		Subtotal		339.7		(156.6	)
Goodwill				230.1		—

		Total	$	569.8	$	(156.6	)


			Discrete
	Domestic		Power
	Analog		Products		Optoelectronics		Total


	(In millions)
Balance as of September 28, 2003	$	15.5	$	159.9	$	54.7	$	230.1


Estimated Amortization Expense:	In millions

Remainder of Fiscal 2003	$	7.9
Fiscal 2004		25.6
Fiscal 2005		23.7
Fiscal 2006		23.4
Fiscal 2007		18.2
Fiscal 2008		16.5


Accrual balance as of December 29, 2002		$	4.1
	Accrual		10.4
	Cash payments		(3.7	)
	Non-cash items		(2.7	)

Accrual balance as of March 30, 2003			8.1
	Accrual		49.7
	Cash payments		(7.9	)
	Non-cash items		(28.1	)

Accrual balance as of June 29, 2003			21.8
	Accrual		2.6
	Cash payments		(5.5	)
	Non-cash items		—

Accrual balance as of September 28, 2003		$	18.9



			September 28, 2003

			Unconsolidated			Unconsolidated												Consolidated
			Fairchild			Fairchild						Non-						Fairchild
			Semiconductor			Semiconductor			Guarantor			Guarantor						Semiconductor
			International, Inc.			Corporation			Subsidiaries			Subsidiaries			Eliminations			International, Inc.


			(In millions)
ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	478.7		$	—		$	27.4		$	—		$	506.1
	Short-term marketable securities			—			7.8			—			—			—			7.8
	Accounts receivable, net			—			18.4			0.6			127.0			—			146.0
	Inventories			—			92.9			18.5			99.0			—			210.4
	Deferred income taxes			—			26.5			0.8			0.5			—			27.8
	Other current assets			—			9.8			0.1			10.0			—			19.9

		Total current assets		—			634.1			20.0			263.9			—			918.0
Property, plant and equipment, net				—			260.4			68.6			288.4			—			617.4
Deferred income taxes				5.9			110.1			12.9			(7.5	)		—			121.4
Intangible assets, net				—			4.8			58.9			119.4			—			183.1
Goodwill				—			8.0			221.7			0.4			—			230.1
Long-term marketable securities				—			98.6			—			—			—			98.6
Investment in subsidiary				1,129.6			993.5			263.2			43.5			(2,429.8	)		—
Other assets				—			36.0			1.7			13.3			—			51.0

		Total assets	$	1,135.5		$	2,145.5		$	647.0		$	721.4		$	(2,429.8	)	$	2,219.6

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	—		$	3.3		$	—		$	—		$	—		$	3.3
	Accounts payable			—			54.1			6.4			35.5			—			96.0
	Accrued expenses and other current liabilities			—			59.2			11.4			51.2			—			121.8

		Total current liabilities		—			116.6			17.8			86.7			—			221.1
Long-term debt, less current portion				—			849.4			—			—			—			849.4
Net intercompany (receivable) payable				—			51.1			(24.8	)		(26.3	)		—			—
Other liabilities				—			0.3			1.4			12.4			—			14.1

		Total liabilities		—			1,017.4			(5.6	)		72.8			—			1,084.6

Commitments and contingencies
Stockholders’ equity:
	Common stock			1.2			—			—			—			—			1.2
	Additional paid-in capital			1,227.0			—			—			—			—			1,227.0
	Retained earnings (deficit)			(89.2	)		1,128.6			652.6			648.6			(2,429.8	)		(89.2	)
	Accumulated other comprehensive loss			—			(0.5	)		—			—			—			(0.5	)
	Less treasury stock (at cost)			(3.5	)		—			—			—			—			(3.5	)

		Total stockholders’ equity		1,135.5			1,128.1			652.6			648.6			(2,429.8	)		1,135.0

		Total liabilities and stockholders’ equity	$	1,135.5		$	2,145.5		$	647.0		$	721.4		$	(2,429.8	)	$	2,219.6



				Three Months Ended September 28, 2003

				Unconsolidated			Unconsolidated												Consolidated
				Fairchild			Fairchild						Non-						Fairchild
				Semiconductor			Semiconductor			Guarantor			Guarantor						Semiconductor
				International, Inc.			Corporation			Subsidiaries			Subsidiaries			Eliminations			International, Inc.


				(In millions)
Total revenue					—			294.7			40.1			371.4			(377.8	)		328.4
Cost of sales					—			256.4			34.8			345.7			(377.8	)		259.1

			Gross profit		—			38.3			5.3			25.7			—			69.3

Operating Expenses:
	Research and development				—			6.7			4.9			6.3			—			17.9
	Selling, general and administrative				—			22.8			2.1			10.6			—			35.5
	Amortization of acquisition-related intangibles				—			—			2.3			5.6			—			7.9
	Restructuring and impairments				—			1.6			0.6			0.4			—			2.6
	Purchased in-process research and development				—			—			—			—			—			—

		Total operating expenses			—			31.1			9.9			22.9			—			63.9

Operating income (loss)					—			7.2			(4.6	)		2.8			—			5.4
Interest expense					—			15.9			—			—			—			15.9
Interest income					—			(1.5	)		—			(0.1	)		—			(1.6	)
Other expense, net					—			—			—			—			—			—
Equity in subsidiary (income) loss					5.3			4.1			(3.1	)		—			(6.3	)		—

Income (loss) before income taxes					(5.3	)		(11.3	)		(1.5	)		2.9			6.3			(8.9	)
Provision (benefit) for income taxes					—			(5.9	)		—			2.4			—			(3.5	)

Net income (loss)				$	(5.3	)	$	(5.4	)	$	(1.5	)	$	0.5		$	6.3		$	(5.4	)



			Nine Months Ended September 28, 2003

			Unconsolidated			Unconsolidated												Consolidated
			Fairchild			Fairchild						Non-						Fairchild
			Semiconductor			Semiconductor			Guarantor			Guarantor						Semiconductor
			International, Inc.			Corporation			Subsidiaries			Subsidiaries			Eliminations			International, Inc.


			(In millions)
Total revenue				—			907.0			113.8			1,155.3			(1,149.5	)		1,026.6
Cost of sales				—			796.8			105.4			1,054.9			(1,149.5	)		807.6

	Gross profit			—			110.2			8.4			100.4			—			219.0

Operating expenses:
	Research and development			—			21.2			15.5			19.1			—			55.8
	Selling, general and administrative			—			72.9			5.2			34.1			—			112.2
	Amortization of acquisition-related intangibles			—			—			6.9			18.4			—			25.3
	Restructuring and impairments			—			13.7			11.7			37.3			—			62.7
	Purchased in-process research and development			—			—			—			—			—			—

		Total operating expenses		—			107.8			39.3			108.9			—			256.0

Operating income (loss)				—			2.4			(30.9	)		(8.5	)		—			(37.0	)
Interest expense				—			58.2			—			—			—			58.2
Interest income				—			(5.4	)		(0.1	)		(0.5	)		—			(6.0	)
Other expense, net				—			23.4			—			—			—			23.4
Equity in subsidiary (income) loss				86.8			43.5			8.5			—			(138.8	)		—

Income (loss) before income taxes				(86.8	)		(117.3	)		(39.3	)		(8.0	)		138.8			(112.6	)
Provision (benefit) for income taxes				—			(30.5	)		(0.5	)		5.2			—			(25.8	)

Net income (loss)			$	(86.8	)	$	(86.8	)	$	(38.8	)	$	(13.2	)	$	138.8		$	(86.8	)



			December 29, 2002

			Unconsolidated			Unconsolidated												Consolidated
			Fairchild			Fairchild						Non-						Fairchild
			Semiconductor			Semiconductor			Guarantor			Guarantor						Semiconductor
			International, Inc.			Corporation			Subsidiaries			Subsidiaries			Eliminations			International, Inc.


			(In millions)
ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	593.4		$	—		$	24.9		$	—		$	618.3
	Short-term marketable securities			—			2.0			—			—			—			2.0
	Accounts receivable, net			—			24.4			1.3			124.9			—			150.6
	Inventories			—			106.5			16.9			85.4			—			208.8
	Deferred income taxes			—			26.8			0.8			0.5			—			28.1
	Other current assets			—			3.8			0.1			8.6			—			12.5

		Total current assets		—			756.9			19.1			244.3			—			1,020.3
Property, plant and equipment, net				—			268.9			64.6			327.4			—			660.9
Deferred income taxes				5.9			72.3			12.7			(9.3	)		—			81.6
Intangible assets, net				—			5.6			65.8			137.0			—			208.4
Goodwill				—			8.0			221.7			0.4			—			230.1
Long-term marketable securities				—			30.4			—			—			—			30.4
Investment in subsidiary				1,210.4			1,010.6			156.0			14.4			(2,391.4	)		—
Other assets				—			39.4			1.7			15.3			—			56.4

		Total assets	$	1,216.3		$	2,192.1		$	541.6		$	729.5		$	(2,391.4	)	$	2,288.1

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	—		$	0.4		$	—		$	—		$	—		$	0.4
	Accounts payable			—			50.7			3.9			59.1			—			113.7
	Accrued expenses and other current liabilities			—			59.8			4.6			28.4			—			92.8

		Total current liabilities		—			110.9			8.5			87.5			—			206.9
Long-term debt, less current portion				—			852.8			—			—			—			852.8
Net intercompany (receivable) payable				—			15.9			(50.8	)		34.9			—			—
Other liabilities				—			3.2			1.7			8.3			—			13.2

		Total liabilities		—			982.8			(40.6	)		130.7			—			1,072.9

Commitments and contingencies Stockholders’ equity:
	Common stock			1.2			—			—			—			—			1.2
	Additional paid-in capital			1,221.1			—			—			—			—			1,221.1
	Retained earnings (deficit)			(2.4	)		1,210.4			582.2			598.8			(2,391.4	)		(2.4	)
	Accumulated other comprehensive loss			—			(1.1	)		—			—			—			(1.1	)
	Less treasury stock (at cost)			(3.6	)		—			—			—			—			(3.6	)

		Total stockholders’ equity		1,216.3			1,209.3			582.2			598.8			(2,391.4	)		1,215.2

		Total liabilities and stockholders’ equity	$	1,216.3		$	2,192.1		$	541.6		$	729.5		$	(2,391.4	)	$	2,288.1


				Remainder		2-3		4-5		After
Contractual Obligations		Total		of 2003		Years		years		5 years


		(In millions)
Debt		$	852.7	$	3.3	$	6.5	$	291.6	$	551.3
Operating Leases			85.8		5.8		32.8		11.9		35.3
Letters of Credit			22.5		22.5		—		—		—
Guarantees			5.0		5.0		—		—		—

	Total	$	966.0	$	36.6	$	39.3	$	303.5	$	586.6



			Three Months Ended September 29, 2002

			Unconsolidated			Unconsolidated												Consolidated
			Fairchild			Fairchild						Non-						Fairchild
			Semiconductor			Semiconductor			Guarantor			Guarantor						Semiconductor
			International, Inc.			Corporation			Subsidiaries			Subsidiaries			Eliminations			International, Inc.


			(In millions)
Total revenue			$	—		$	274.5		$	35.6		$	388.1		$	(337.6	)	$	360.6
Cost of sales				—			239.9			37.3			330.9			(337.6	)		270.5

		Gross profit		—			34.6			(1.7	)		57.2			—			90.1

Operating expenses:
	Research and development			—			8.5			5.1			6.4			—			20.0
	Selling, general and administrative			—			23.7			1.4			11.3			—			36.4
	Amortization of acquisition-related intangibles			—			—			2.3			7.2			—			9.5
	Purchased in-process research and development			—			—			—			—			—			—
	Restructuring and impairments			—			—			—			—			—			—

		Total operating expenses		—			32.2			8.8			24.9			—			65.9

Operating income (loss)				—			2.4			(10.5	)		32.3			—			24.2
Interest expense				—			21.1			—			—			—			21.1
Interest income				—			(3.4	)		—			(0.2	)		—			(3.6	)
Other (income) expense, net				—			—			—			—			—			—
Equity in subsidiary (income) loss				(4.3	)		(20.1	)		(15.4	)		—			39.8			—

Income (loss) before income taxes				4.3			4.8			4.9			32.5			(39.8	)		6.7
Provision (benefit) for income taxes				—			0.5			—			1.9			—			2.4

Net income (loss)			$	4.3		$	4.3		$	4.9		$	30.6		$	(39.8	)	$	4.3



			Nine Months Ended September 29, 2002

			Unconsolidated			Unconsolidated												Consolidated
			Fairchild			Fairchild						Non-						Fairchild
			Semiconductor			Semiconductor			Guarantor			Guarantor						Semiconductor
			International, Inc.			Corporation			Subsidiaries			Subsidiaries			Eliminations			International, Inc.


			(In millions)
Total revenue			$	—		$	900.8		$	116.6		$	1,127.7		$	(1,087.1	)	$	1,058.0
Cost of sales				—			787.4			112.0			979.6			(1,087.1	)		791.9

		Gross profit		—			113.4			4.6			148.1			—			266.1

Operating expenses:
	Research and development			—			27.5			16.9			18.1			—			62.5
	Selling, general and administrative			—			36.4			37.0			35.1			—			108.5
	Amortization of acquisition-related intangibles			—			—			7.0			21.3			—			28.3
	Purchased in-process research and development			—			1.0			0.7			—			—			1.7
	Restructuring and impairments			—			1.7			0.7			1.2			—			3.6

		Total operating expenses		—			66.6			62.3			75.7			—			204.6

Operating income (loss)				—			46.8			(57.7	)		72.4			—			61.5
Interest expense				—			78.3			—			—			—			78.3
Interest income				—			(8.6	)		(0.2	)		(0.4	)		—			(9.2	)
Other (income) expense, net				—			22.1			(20.5	)		—			—			1.6
Equity in subsidiary (income) loss				6.0			(30.6	)		(47.6	)		—			72.2			—

Income (loss) before income taxes				(6.0	)		(14.4	)		10.6			72.8			(72.2	)		(9.2	)
Provision (benefit) for income taxes				—			(8.4	)		—			5.2			—			(3.2	)

Net income (loss)			$	(6.0	)	$	(6.0	)	$	10.6		$	67.6		$	(72.2	)	$	(6.0	)


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations.*


Exhibit
No.		Description

	10.1	First Amendment to Credit Agreement, dated as of October 28, 2003.
	31.1	Section 302 Certification of the Chief Executive Officer.
	31.2	Section 302 Certification of the Chief Financial Officer.
	32.1	Certification, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Kirk P. Pond.
	32.2	Certification, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Matthew W. Towse.