UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Amendment No. 3)

 

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

For the fiscal year ended December 27, 2015

OR

 

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

For the transition period from to

Commission File Number 001-15181

Fairchild Semiconductor International, Inc.

(Exact name of Registrant as specified in its charter)

 

Delaware		04-3363001
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1272 Borregas Avenue, Sunnyvale, CA		94089
(Address of principal executive offices)		(Zip Code)

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

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

Common Stock, par value $.01 per share

(Title of each class)

NASDAQ Stock Market

(Name of each exchange on which registered)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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

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

 

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2015 was $2,064,994,388.

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

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EXPLANATORY NOTE

Fairchild Semiconductor International, Inc. (“we”, “our” or the “company”) is filing this amendment no. 3 (this “Amendment”) to its annual report on Form 10-K for the year ended December 27, 2015, as filed with the SEC on February 25, 2016 and amended on April 25, 2016 and May 19, 2016 (the “Original Form 10-K”) for the reason and in the manner described below.

As previously disclosed, during the quarter ended June 26, 2016, as a result of our discovery of an embezzlement by a former non-management employee of our Korean subsidiary of local currency valued at approximately $630,000, we determined that a material weakness existed at December 27, 2015. No restatement of prior period financial statements and no change in previously released financial results were required as a result of these findings.

We are amending Item 1A (Risk Factors) and Item 9A (Controls and Procedures) of the Original Form 10-K to reflect our determination that a material weakness existed as of December 27, 2015. Our independent registered public accounting firm, KPMG LLP, has reissued its report, included in Item 8 (Consolidated Financial Statements and Supplementary Data), to reflect an adverse opinion on the effectiveness of internal control over financial reporting as of December 27, 2015, due to the existence of a material weakness. Our consolidated financial statements included in the Original Form 10-K, and KPMG LLP’s opinion regarding our consolidated financial statements, which are also included in Item 8, are not affected by this Amendment. We are also amending Item 15 (Exhibits, Financial Statement Schedules) and the Exhibit Index to include currently dated certifications of our CEO and CFO and the consent of KPMG LLP. The foregoing summary is qualified in its entirety by reference to the complete text of the respective items that follow.

Except as specifically described in this Amendment, information in the Original Form 10-K remains unchanged and reflects the disclosures made at the time of the Original Form 10-K. Also, except as specifically described herein, this Amendment does not describe events occurring after the Original Form 10-K, including exhibits, or modify or update disclosures affected by such subsequent events. This Amendment should be read in conjunction with the Original Form 10-K and other filings we have made with the SEC, including without limitation those made subsequent to the filing of the Original Form 10-K. Information in such subsequent reports and documents may update or supersede information contained in the Original Form 10-K.

 

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ITEM 1A.

RISK FACTORS

Part I, Item 1A of the Original Form 10-K is amended by adding at the end the following new Risk Factor:

We have identified a material weakness in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.

Although we have concluded that our consolidated financial statements as of December 27, 2015 present fairly, in all material respects, the results of operations, financial position, and cash flows of our company and its subsidiaries in conformity with generally accepted accounting principles, we have identified a material weakness in internal control over financial reporting in the operation of certain of our controls that would have prevented and detected a misappropriation on a timely basis, and therefore, affected our ability to safeguard cash. Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. See Part II, Item 9A, “Controls and Procedures.”

We have initiated remedial measures, but if our remedial measures are insufficient to address the material weakness, or if the material weakness is not remediated within the time period we currently anticipate, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements, and we could be required to restate our financial results. In addition, if we are unable to successfully remediate this material weakness and if we are unable to produce accurate and timely financial statements, our stock price may be materially adversely affected and we may be unable to maintain compliance with applicable stock exchange listing requirements.

 

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ITEM 8.

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Fairchild Semiconductor International, Inc.:

We have audited the accompanying consolidated balance sheets of Fairchild Semiconductor International, Inc. and subsidiaries as of December 27, 2015 and December 28, 2014, and the related consolidated statements of operations, comprehensive income (loss), cash flows and stockholders’ equity for each of the years in the three-year period ended December 27, 2015. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed in Item 15(b) of the 2015 Form 10-K/A. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fairchild Semiconductor International, Inc. and subsidiaries as of December 27, 2015 and December 28, 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 27, 2015, in conformity with U.S. generally accepted accounting principles. In our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Fairchild Semiconductor International, Inc. and subsidiaries’ internal control over financial reporting as of December 27, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2016, except for the restatement as to the effectiveness of internal control over financial reporting for the material weakness related to the design and operating effectiveness of controls over the safeguarding of cash, as to which the date is August 17, 2016, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Boston, Massachusetts

February 25, 2016, except for the restatement as to the effectiveness of internal control over financial reporting for the material weakness related to the design and operating effectiveness of controls over the safeguarding of cash, as to which the date is August 17, 2016

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Fairchild Semiconductor International, Inc.:

We have audited Fairchild Semiconductor International, Inc. and subsidiaries’ internal control over financial reporting as of December 27, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Fairchild Semiconductor International, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to the design and operating effectiveness of controls over safeguarding of cash has been identified and included in management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Fairchild Semiconductor International, Inc. and subsidiaries as of December 27, 2015 and December 28, 2014, and the related consolidated statements of operations, comprehensive income (loss), cash flows and stockholders’ equity for each of the years in the three-year period ended December 27, 2015. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2015 consolidated financial statements, and this report does not affect our report dated February 25, 2016, except for the restatement as to the effectiveness of internal control over financial reporting for the material weakness related to the design and operating effectiveness of controls over safeguarding of cash, as to which the date is August 17, 2016, which expressed an unqualified opinion on those consolidated financial statements.

The assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting has been restated by the Company’s management to disclose the aforementioned material weakness and the resultant ineffectiveness of its internal control over financial reporting.

In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, Fairchild Semiconductor International, Inc. and subsidiaries has not maintained effective internal control over financial reporting as of December 27, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ KPMG LLP

Boston, Massachusetts

February 25, 2016, except for the restatement as to the effectiveness of internal control over financial reporting for the material weakness related to the design and operating effectiveness of controls over safeguarding of cash, as to which the date is August 17, 2016

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

		Year Ended
		December 27, 2015				December 28, 2014
ASSETS
Current assets:
Cash and cash equivalents		$	279.4			$	352.9
Short-term marketable securities			0.2				0.1
Accounts receivable, net of allowances of $36.2 and $32.0 at December 27, 2015 and December 28, 2014, respectively			132.6				124.0
Inventories, net			304.2				264.9
Deferred income taxes, net of allowances			—				13.2
Other current assets			50.5				30.2
Total current assets			766.9				785.3
Property, plant and equipment, net			550.4				627.7
Deferred income taxes, net of allowances			16.8				5.3
Intangible assets, net			27.5				37.2
Goodwill			204.5				209.2
Long-term marketable securities			2.0				2.2
Other assets			17.8				22.2
Total assets		$	1,585.9			$	1,689.1
LIABILITIES, TEMPORARY EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	110.6			$	106.2
Accrued expenses and other current liabilities			115.6				129.6
Total current liabilities			226.2				235.8
Long-term debt			198.4				197.1
Deferred income taxes			34.2				34.2
Other liabilities			24.6				23.9
Total liabilities			483.4				491.0
Commitments and contingencies (Note 9)
Temporary equity—deferred stock units			6.3				4.0
Stockholders’ equity:
Common stock, $.01 par value, voting; 340,000,000 shares authorized; 141,663,388 and 140,069,287 shares issued and 113,483,950 and 117,677,463 shares outstanding at December 27, 2015 and December 28, 2014, respectively			1.4				1.4
Additional paid-in capital			1,560.6				1,542.5
Accumulated deficit			(62.7	)			(47.6	)
Accumulated other comprehensive loss			(15.5	)			(10.3	)
Treasury stock at cost			(387.6	)			(291.9	)
Total stockholders’ equity			1,096.2				1,194.1
Total liabilities, temporary equity and stockholders’ equity		$	1,585.9			$	1,689.1

See accompanying notes to consolidated financial statements.

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
Total revenue		$	1,370.2			$	1,433.4			$	1,405.4
Cost of sales			932.4				967.8				988.9
Gross margin			437.8				465.6				416.5
Operating expenses:
Research and development			162.6				165.8				171.6
Selling, general and administrative			205.8				215.9				205.7
Amortization of acquisition-related intangibles			8.4				10.6				15.5
Restructuring, impairments, and other costs			47.6				49.8				15.9
Acquisition related costs			6.5				—				—
Charge for (release of) litigation			—				4.4				(12.6	)
Goodwill impairment charge			0.6				—				—
Total operating expenses			431.5				446.5				396.1
Operating income			6.3				19.1				20.4
Other expense, net			5.4				6.5				9.2
Income before income taxes			0.9				12.6				11.2
Provision for income taxes			16.0				47.8				6.2
Net income (loss)		$	(15.1	)		$	(35.2	)		$	5.0
Net income (loss) per common share:
Basic		$	(0.13	)		$	(0.29	)		$	0.04
Diluted		$	(0.13	)		$	(0.29	)		$	0.04
Weighted average common shares:
Basic			115.4				121.4				127.2
Diluted			115.4				121.4				128.7

See accompanying notes to consolidated financial statements.

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
Net income (loss)		$	(15.1	)		$	(35.2	)		$	5.0
Other comprehensive income (loss), net of tax:
Net change associated with hedging transactions			(4.5	)			(0.7	)			2.2
Net amount reclassified to earnings for hedging (1)			3.6				(6.4	)			(4.9	)
Net change associated with fair value of securities			—				0.1				(0.2	)
Net change associated with pension transactions (2)			1.3				(0.2	)			1.0
Foreign currency translation adjustment			(5.6	)			(6.2	)			—
Total other comprehensive loss, net of tax			(5.2	)			(13.4	)			(1.9	)
Comprehensive income (loss)		$	(20.3	)		$	(48.6	)		$	3.1

(1)

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
Net amount reclassified for cash flow hedges included in total revenue		$	(5.8	)		$	(0.9	)		$	(0.2	)
Net amount reclassified for cash flow hedges included in cost of sales			7.2				(4.0	)			(3.7	)
Net amount reclassified for cash flow hedges included in selling, general and administrative			—				(1.5	)			(1.1	)
Net amount reclassified for cash flow hedges included in research and development			0.9				—				0.1
Net amount reclassified for cash flow hedges included in restructuring, impairments, and other costs			1.3				—				—
Total net amount reclassified to earnings for hedging		$	3.6			$	(6.4	)		$	(4.9	)

 

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

See accompanying notes to consolidated financial statements.

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
Cash flows from operating activities:
Net income (loss)		$	(15.1	)		$	(35.2	)		$	5.0
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization			132.4				139.7				145.2
Non-cash stock-based compensation expense			30.8				32.6				27.9
Non-cash restructuring and impairments expense			0.4				1.9				1.5
Non-cash interest income			—				—				(0.1	)
Non-cash financing expense			1.5				1.3				0.9
Gain from sale of equity investment			—				(1.4	)			—
Goodwill impairment charge			0.6				—				—
Non-cash write-off of equity investment			—				—				3.0
Loss on disposal of property, plant and equipment			0.7				1.9				1.4
Deferred income taxes, net			1.6				34.9				(4.8	)
Charge for (release of) litigation			—				4.4				(12.6	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable			(8.6	)			4.6				9.3
Inventories			(39.8	)			(35.6	)			9.0
Other current assets			(6.9	)			1.6				4.2
Accounts payable			7.0				8.8				(15.6	)
Accrued expenses and other current liabilities			(13.3	)			30.1				(2.3	)
Other assets and liabilities, net			3.1				4.1				4.1
Net cash provided by operating activities		$	94.4			$	193.7			$	176.1
Cash flows from investing activities:
Capital expenditures			(69.1	)			(54.5	)			(75.2	)
Proceeds from the sale of property, plant and equipment			8.0				3.8				—
Purchase of molds and tooling			(1.4	)			(1.7	)			(2.1	)
Maturity of marketable securities		$	0.1			$	0.1			$	0.3
Sale of equity investment			—				2.1				—
Acquisitions and divestitures, net of cash acquired			—				(56.6	)			—
Net cash used in investing activities		$	(62.4	)		$	(106.8	)		$	(77.0	)
Cash flows from financing activities:
Repayment of long-term debt		$	—			$	(200.0	)		$	(50.0	)
Issuance of long-term debt			—				200.0				—
Proceeds from issuance of stock for share-based compensation arrangements			1.8				1.5				1.1
Purchase of treasury stock			(95.7	)			(142.5	)			(29.0	)
Shares withheld for employee taxes			(11.5	)			(9.1	)			(9.3	)
Debt financing costs			(0.1	)			(1.7	)			—
Net cash used in financing activities		$	(105.5	)		$	(151.8	)		$	(87.2	)
Net change in cash and cash equivalents			(73.5	)			(64.9	)			11.9
Cash and cash equivalents at beginning of period			352.9				417.8				405.9
Cash and cash equivalents at end of period		$	279.4			$	352.9			$	417.8
Supplemental cash flow information:
Cash paid during the period for:
Income taxes, net		$	12.8			$	13.1			$	12.1
Interest		$	3.4			$	3.8			$	4.7

See accompanying notes to consolidated financial statements.

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions)

 

																		Accumulated Other Comprehensive Income (Loss)
		Common Stock																												Foreign Currency Translation Adjustment
		Number of Shares				At Par Value				Additional Paid-in Capital				Accumulated Deficit				Securities				Hedging Transactions				Pensions								Treasury Stock				Total
Balance at December 27, 2015			113.5			$	1.4			$	1,560.6			$	(62.7	)		$	0.2			$	(3.6	)		$	(0.3	)		$	(11.8	)		$	(387.6	)		$	1,096.2
Net loss															(15.1	)																							(15.1	)
Exercise or settlement of plan awards			1.6								1.8																												1.8
Stock-based compensation expense											30.1																												30.1
Purchase of treasury stock			(5.8	)																															(95.7	)			(95.7	)
Cash flow hedges																							(0.9	)															(0.9	)
Net amount reclassified to earnings for sale of marketable securities																																							—
Pension transactions																											1.3												1.3
Foreign currency translation adjustment																															(5.6	)							(5.6	)
Shares withheld for employee taxes											(11.5	)																											(11.5	)
Temporary equity reclassification, deferred stock units											(2.3	)																											(2.3	)
Balance at December 28, 2014			117.7			$	1.4			$	1,542.5			$	(47.6	)		$	0.2			$	(2.7	)		$	(1.6	)		$	(6.2	)		$	(291.9	)		$	1,194.1
Net loss															(35.2	)																							(35.2	)
Exercise or settlement of plan awards			1.6								1.5																												1.5
Stock-based compensation expense											32.7																												32.7
Purchase of treasury stock			(10.1	)																															(142.5	)			(142.5	)
Cash flow hedges																							(7.1	)															(7.1	)
Unrealized holding gain on marketable securities																			0.1																				0.1
Pension transactions																											(0.2	)											(0.2	)
Foreign currency translation adjustment																															(6.2	)							(6.2	)
Shares withheld for employee taxes											(9.1	)																											(9.1	)
Temporary equity reclassification, deferred stock units											(0.4	)																											(0.4	)
Balance at December 29, 2013			126.2			$	1.4			$	1,517.8			$	(12.4	)		$	0.1			$	4.4			$	(1.4	)		$	—			$	(149.4	)		$	1,360.5
Net income															5.0																								5.0
Exercise or settlement of plan awards			1.6								1.4																												1.4
Stock-based compensation expense											27.9																												27.9
Purchase of treasury stock			(2.3	)																															(28.9	)			(28.9	)
Cash flow hedges																							(2.8	)															(2.8	)
Unrealized holding loss on marketable securities																			(0.2	)																			(0.2	)
Pension transactions																											1.0												1.0
Shares withheld for employee taxes											(9.3	)																											(9.3	)
Temporary equity reclassification, deferred stock units											(0.7	)																											(0.7	)
Balance at December 30, 2012			126.9			$	1.4			$	1,498.5			$	(17.4	)		$	0.3			$	7.2			$	(2.4	)		$	—			$	(120.5	)		$	1,367.1

See accompanying notes to consolidated financial statements.

 

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FAIRCHILD SEMICONDUCTOR INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Background and Basis of Presentation

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

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

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

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

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

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

Pending Acquisition

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

 

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

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

Note 2—Summary of Significant Accounting Policies

Fiscal Year

Our fiscal year ends on the last Sunday in December. Our fiscal calendar, in which each quarter ends on a Sunday, contains 53 weeks every seven years. This additional week is included in the first quarter of the year. Our results for the years ended December 27, 2015, December 28, 2014, and December 29, 2013 all consist of 52 weeks.

Principles of Consolidation

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

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (U.S. GAAP) requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, inventories, goodwill, investments, intangible assets and other long-lived assets, business combinations, loss contingencies, and assumptions used in the calculation of income taxes, valuation of deferred tax assets, and customer incentives, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and

 

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circumstances dictate. Illiquid credit markets, volatile equity, and foreign currency markets, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Revenue Recognition

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

In 2015, approximately 63% of our revenue was from distributors. Distributor payments are due under agreed terms and are not contingent upon resale or any other matter other than the passage of time. We have agreements with some distributors and customers for various programs, including prompt payment discounts, pricing protection, scrap allowances and stock rotation. Sales to these distributors and customers, as well as the existence of sales incentive programs, are in accordance with terms set forth in written agreements with these distributors and customers. In general, credits allowed under these programs are capped based upon individual distributor agreements. We record charges associated with these programs as a reduction of revenue at the time of sale based upon historical activity. Our policy is to use both a three to six month rolling historical experience rate as well as a prospective view of products in the distributor channel for distributors who participate in an incentive program in order to estimate the necessary allowance to be recorded. In addition, under our standard terms and conditions of sale, the products sold by us are subject to a limited product quality warranty. The standard limited warranty period is one year. We accrue for the estimated cost of incurred but unidentified quality issues based upon historical activity and known quality issues if a loss is probable and can be reasonably estimated. Quality returns are accounted for as a reduction of revenue.

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

Advertising

Advertising expenditures are charged to expense as incurred.

Research and Development Costs

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

Fair Value Measurements

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

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

 

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

 

•

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

 

•

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

 

•

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

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

Cash, Cash Equivalents and Other Securities

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

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

Derivatives

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

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

 

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

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

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

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

Concentration of Credit Risk

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

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

 

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Geographic Concentration Risk

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

Inventories

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

Property, Plant and Equipment

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

Investments

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

Other Assets

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

Goodwill, Intangible Assets, and Long-Lived Assets

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

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

 

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

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

Currencies

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

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

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The realizability of deferred tax assets must also be assessed. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. A valuation allowance must be established for deferred tax assets which the company does not believe will more likely than not be realized in the future. Deferred taxes are not provided for the undistributed earnings of the company’s foreign subsidiaries that are considered to be indefinitely reinvested outside of the U.S. in accordance with applicable authoritative accounting guidance. We plan to repatriate certain non-U.S. earnings which have been taxed in the U.S. but earned offshore as well as any non-U.S. earnings which are not considered to be indefinitely reinvested outside the U.S.

Authoritative accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This guidance also provides guidance on derecognition, classification, interest and penalties, accounting in the

 

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

Computation of Net Income (Loss) Per Share

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

Restructuring Charges

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

Accounting for Stock-Based Compensation

Our stock-based compensation programs grant awards which include stock options, RSUs, PUs and DSUs. We charge the estimated fair value of awards against income over the requisite service period, which is generally the vesting period. The fair values of our stock option grants are estimated as of the date of grant using a Black-Scholes option valuation model. The estimated fair values of the stock options are then expensed over the options’ vesting periods. The fair values of our RSUs, PUs, and DSUs are based on the market value of our stock on the date of grant. The fair values of our PUs with market-based performance metrics are estimated as of the date of grant using a Monte-Carlo simulation model. Compensation expense, net of forfeitures, for RSUs is recognized over the applicable vesting period. We apply an accelerated attribution method to recognize stock-based compensation expense when accounting for our PUs. The number of units reflected as granted represents the target number of shares that are eligible to vest in full or in part and are earned subject to the attainment of certain performance criteria established at the beginning of the performance period. Compensation expense associated with these units is initially based upon the number of shares expected to vest after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved, net of estimated forfeitures. Cumulative adjustments are recorded quarterly to reflect subsequent changes in the estimated outcome of performance-related conditions until the date results are determined. For PUs with performance metrics that provide for vesting only at the end of the measurement period, related stock-compensation cost is amortized over the performance period on a straight-line basis.

Contingencies

We are currently involved in various claims and legal proceedings. Loss contingency provisions are recorded if the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated or a range of loss can be determined. These accruals represent

 

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management’s best estimate of probable loss. Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. On a quarterly basis, we review the status of each significant matter and assess its potential financial exposure. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may revise our estimates. These revisions in the estimates of the potential liabilities could have a material impact on our consolidated results of operations and financial position.

Note 3—Fair Value Measurements

The assets and liabilities measured at fair value on a recurring basis include securities and derivatives. Financial instruments classified as Level 1 are securities traded on an active exchange as well as U.S. Treasury, and other U.S. government and agency-backed securities that are traded by dealers or brokers in active over-the-counter markets. Derivatives are classified as Level 2 financial instruments. We do not have any financial instruments classified as Level 3.

The fair value of securities is based on quoted market prices at the date of measurement.

All of our derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For these derivatives, we measured fair value utilizing a third-party pricing service. The pricing service utilizes industry standard valuation models, including both income and market-based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. Accordingly, the fair value of these assets are classified as Level 2 within the fair value hierarchy.

The tables below present information about our assets and liabilities that are regularly measured and carried at fair value and indicate the level within the fair value hierarchy of the valuation techniques we utilized to determine such fair value:

 

		As of December 27, 2015
		Fair Value Measurements
		Total				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In millions)
Foreign Currency Derivatives
Assets		$	1.0			$	—			$	1.0			$	—
Liabilities			(4.4	)			—				(4.4	)			—
		$	(3.4	)		$	—			$	(3.4	)		$	—
Securities
Marketable securities		$	2.2			$	2.2			$	—			$	—

 

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		As of December 28, 2014
		Fair Value Measurements
		Total				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In millions)
Foreign Currency Derivatives
Assets		$	2.8			$	—			$	2.8			$	—
Liabilities			(5.5	)			—				(5.5	)			—
		$	(2.7	)		$	—			$	(2.7	)		$	—
Securities
Marketable securities		$	2.3			$	2.3			$	—			$	—

The fair value of our debt instruments, which are classified as Level 2 liabilities, are carried at amortized cost. The carrying amount of the revolving facility is considered to approximate fair value as the interest rate on the loan is in line with current market rates. Please refer to Note 8 Indebtedness for further information about the credit facility.

 

		December 27, 2015								December 28, 2014
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
		(In millions)
Long-term debt:
Revolving credit facility		$	200.0			$	200.0			$	200.0			$	200.0

Note 4—Marketable Securities

Our marketable securities are categorized as available-for-sale and are summarized as follows:

 

		As of December 27, 2015
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In millions)
Short-term available for sale:
U.S. Treasury securities and obligations of U.S. government agencies		$	0.2			$	—			$	—			$	0.2
Total short-term marketable securities		$	0.2			$	—			$	—			$	0.2
Long-term available for sale:
U.S. Treasury securities and obligations of U.S. government agencies		$	1.7			$	0.2			$	—			$	1.9
Corporate debt securities			0.1				—				—				0.1
Total long-term marketable securities		$	1.8			$	0.2			$	—			$	2.0

 

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Our marketable securities are categorized as available-for-sale and are summarized as follows:

 

		As of December 28, 2014
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In millions)
Short-term available for sale:
U.S. Treasury securities and obligations of U.S. government agencies		$	0.1			$	—			$	—			$	0.1
Total short-term marketable securities		$	0.1			$	—			$	—			$	0.1
Long-term available for sale:
U.S. Treasury securities and obligations of U.S. government agencies		$	1.8			$	0.2			$	—			$	2.0
Corporate debt securities			0.2				—				—				0.2
Total long-term marketable securities		$	2.0			$	0.2			$	—			$	2.2

The estimated fair value and amortized cost of our marketable securities available-for-sale by contractual maturity are summarized as follows:

 

		As of December 27, 2015
		Amortized Cost				Fair Value
		(In millions)
Due in one year or less		$	0.2			$	0.2
Due after one year through five years			0.7				0.8
Due after five years through ten years			0.7				0.8
Due after ten years			0.4				0.4
		$	2.0			$	2.2

Note 5—Derivatives

We used derivative instruments in 2015 and 2014 to manage exposures to changes in foreign currency exchange rates. The fair value of these hedges is recorded on the balance sheet. Please refer to Note 3 Fair Value Measurements for further information about the fair value of derivatives. Currencies hedged include the Euro, Japanese yen, Philippine peso, Malaysian ringgit, Korean won, Taiwanese dollar and Chinese yuan. Our objectives for holding derivatives are to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures.

Foreign Currency Forward Contracts—Hedging Instruments

In 2015 and 2014, we used foreign currency forward contracts to hedge a portion of our forecasted foreign exchange denominated revenues and expenses. We monitor our foreign currency exposures in an effort to maximize the overall effectiveness of our foreign currency hedge positions. Our objective for holding derivatives is to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures. The maturities of the hedges are 12 months or less as of the end of December 27, 2015.

Changes in the fair value of derivative instruments related to time value are included in the assessment of hedge effectiveness. Hedge ineffectiveness did not have a material impact on earnings for the years ended December 27, 2015, December 28, 2014, and December 29, 2013.

 

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Derivative gains and losses included in AOCI are reclassified into earnings at the time the forecasted transaction is recognized. For derivative transactions related to inventory, the effective portion of foreign exchange gains and losses deferred in AOCI is reclassified into earnings as the underlying inventory is sold, using historical inventory turnover rates. We estimate that $3.6 million of net unrealized derivative losses included in AOCI will be reclassified into earnings within the next twelve months.

The following tables present derivatives designated as hedging instruments:

 

		As of December 27, 2015																As of December 28, 2014
		Balance Sheet Classification				Notional Amount				Fair Value				Amount of Gain (Loss) Recognized In AOCI				Balance Sheet Classification				Notional Amount				Fair Value				Amount of Gain (Loss) Recognized In AOCI
		(In millions)																(In millions)
Derivatives Designated as Hedging Instruments
Foreign exchange contracts
Derivatives for forecasted revenues			Other current assets			$	30.8			$	0.7			$	0.7				Other current assets			$	43.3			$	2.7			$	2.7
Derivatives for forecasted revenues			Other current liabilities				7.6				(0.1	)			(0.1	)			Other current liabilities				—				—				—
Derivatives for forecasted expenses			Other current assets				29.1				0.3				0.3				Other current assets				13.7				—				—
Derivatives for forecasted expenses			Other current liabilities				121.0				(4.3	)			(4.3	)			Other current liabilities				205.2				(5.5	)			(5.5	)
Total foreign exchange contract derivatives						$	188.5			$	(3.4	)		$	(3.4	)						$	262.2			$	(2.8	)		$	(2.8	)

 

		For the Twelve Months Ended December 27, 2015								For the Twelve Months Ended December 28, 2014
		Amount of Gain (Loss) Recognized In Income				Amount of Gain (Loss) Reclassified from AOCI				Amount of Gain (Loss) Recognized In Income				Amount of Gain (Loss) Reclassified from AOCI
		(In millions)
Derivatives Designated as Hedging Instruments
Total revenue		$	5.8			$	5.8			$	0.9			$	0.9
Expenses			(9.4	)			(9.4	)			5.5				5.5
Net gain (loss) recognized in income		$	(3.6	)		$	(3.6	)		$	6.4			$	6.4

 

		Gain (Loss) Recognized in OCI for Derivative Instruments (1)
		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
						(In millions)
Foreign exchange contracts		$	(0.9	)		$	(7.1	)		$	(2.7	)

 

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

Foreign Currency Forward Contracts—Other Derivatives

We also enter into other foreign currency forward contracts, usually with one month durations, to mitigate the foreign currency risk related to certain balance sheet positions. We have not elected hedge accounting for these transactions.

 

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The following tables present derivatives not designated as hedging instruments:

 

		As of December 27, 2015								As of December 28, 2014
		Notional Amount				Fair Value				Notional Amount				Fair Value
		(In millions)
Derivatives Not Designated as Hedging Instruments
Other current assets		$	14.7			$	—			$	8.5			$	0.1
Other current liabilities			5.4				—				20.1				—
Total derivatives, net		$	20.1			$	—			$	28.6			$	0.1

 

		For the Twelve Months Ended December 27, 2015				For the Twelve Months Ended December 28, 2014
		Amount of Gain (Loss) Recognized In Income				Amount of Gain (Loss) Recognized In Income
		(In millions)
Derivatives Not Designated as Hedging Instruments
Total revenue		$	0.1			$	—
Expenses			(2.0	)			0.1
Net gain (loss) recognized in income		$	(1.9	)		$	0.1

We net the fair value of all derivative instruments with counter-parties for which a master netting arrangement is utilized. Please refer to Note 2 Summary of Significant Accounting Policies for a description of our derivative instruments under master netting agreements.

The gross amounts of the derivative assets and liabilities are as follows:

 

		As of December 27, 2015				As of December 28, 2014
		(In millions)
Gross Assets		$	1.0			$	2.8
Gross Liabilities			—				—
Current Assets		$	1.0			$	2.8
Gross Assets		$	—			$	0.1
Gross Liabilities			(4.4	)			(5.6	)
Current Liabilities		$	(4.4	)		$	(5.5	)

Note 6—Financial Statement Details

 

		Year Ended
		December 27, 2015				December 28, 2014
		(In millions)
Inventories, net
Raw materials		$	40.4			$	44.0
Work in process			157.6				141.4
Finished goods			106.2				79.5
Total inventories, net		$	304.2			$	264.9

 

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		Year Ended
		December 27, 2015				December 28, 2014
		(In millions)
Property, plant and equipment
Land and improvements		$	17.7			$	19.8
Buildings and improvements			284.6				397.5
Machinery and equipment			1,667.4				1,902.4
Construction in progress			52.1				52.1
Total property, plant and equipment			2,021.8				2,371.8
Less accumulated depreciation			1,471.4				1,744.1
Total property, plant, and equipment, net		$	550.4			$	627.7

Depreciation expense totaled $124.0 million, $129.1 million and $129.7 million for 2015, 2014 and 2013, respectively.

Assets classified as held for sale are required to be recorded at the lower of carrying value or fair value less any costs to sell. The carrying value of these assets, as of the fourth quarter of 2015, was $15.4 million and is reported in the other current assets line of our statement of financial position. We expect to dispose of these assets within the next twelve months.

 

		Year Ended
		December 27, 2015				December 28, 2014
		(In millions)
Accrued expenses and other current liabilities
Payroll and employee related accruals		$	60.9			$	64.0
Accrued interest			0.4				0.3
Taxes payable			12.1				9.0
Restructuring			7.5				30.2
Other			34.7				26.1
Total accrued expenses and other current liabilities		$	115.6			$	129.6

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
		(in millions)
Other expense, net
Interest expense		$	5.7			$	6.3			$	6.4
Interest income			(0.6	)			(0.6	)			(0.6	)
Other, net			0.3				0.8				3.4
Other expense, net		$	5.4			$	6.5			$	9.2

Note 7—Goodwill and Intangible Assets

We assess the impairment of goodwill on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is subject to an annual impairment test in the fourth quarter of the fiscal year, or more frequently, if indicators of potential impairment arise. In the first quarter of 2015, we reorganized our operating segments. This reorganization required us to assess the impairment of our goodwill and other long-lived assets. The goodwill impairment guidance requires that entities designate reporting units at the lowest level of an entity that is a business and that can be

 

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distinguished, physically and operationally and for internal reporting purposes, from the other activities, operations, and assets of the entity. In previous periods, our reporting units were equivalent to our reportable segments and are now consistent with the operating segments described in Note 17 Segments and Geographic Information.

The impairment assessment is based on a combination of the income approach, which estimates the fair value of our reporting units based on a discounted cash flow approach, and/or the market approach which estimates the fair value of our reporting units based on comparable market multiples. The average fair value is then reconciled to our market capitalization with an appropriate control premium. The discount rates utilized in the discounted cash flows in the first quarter of 2015 ranged from approximately 11.5% to 14.0%, reflecting market based estimates of capital costs and discount rates adjusted for a market participant’s view with respect to execution, concentration, and other risks associated with the projected cash flows of the individual segments. The peer companies used in the market approach are primarily the major competitors of each reporting unit. Our valuation methodology requires management to make judgments and assumptions based on historical experience and projections of future operating performance. In addition, we performed various sensitivity analyses based on several key input variables, which further supported our assessment. If these assumptions differ materially from future results, we may record impairment charges in the future. In the first quarter of 2015, we conducted step one of the quantitative goodwill impairment test as of the first day of fiscal year 2015. After completing step one of the impairment test, we determined that the estimated fair value of one of our goodwill reporting units was less than the carrying value of that reporting unit. In the first quarter of 2015, we wrote off the entire goodwill balance for the reporting unit with an estimated fair value less than the carrying value, which resulted in an impairment loss of $0.6 million. This goodwill reporting unit is included in the Analog Power and Systems Solutions (APSS) reportable segment described in Note 17 Segments and Geographic Information. The remainder of our reporting units with goodwill had fair values substantially in excess of book values. We generally allocated goodwill to the reporting units based on relative fair value of the respective unit.

In the fourth quarter of 2015, we reviewed our goodwill reporting units for impairment. One of our goodwill reporting units, which is included in our APSS reportable segment, performed slightly below expectations in 2015. Therefore, we conducted step one of the quantitative goodwill impairment test for that reporting unit. We elected to assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test for the remaining goodwill reporting units. We believe, based on either the qualitative or quantitative assessment, that the fair value of each goodwill reporting unit was greater than its carrying amount, therefore, no further testing was required and there was no goodwill impairment.

 

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The following table presents the carrying amount of goodwill by reportable segment:

 

		SPS				APSS				SPG				Total
		(In millions)
Balance at December 27, 2015
Goodwill		$	219.6			$	111.1			$	77.7			$	408.4
Accumulated impairment losses			(114.5	)			(12.8	)			(76.6	)			(203.9	)
		$	105.1			$	98.3			$	1.1			$	204.5
Impairment loss		$	—			$	(0.6	)		$	—			$	(0.6	)
Foreign exchange impact		$	—			$	(4.1	)		$	—			$	(4.1	)
Balance at December 28, 2014
Goodwill		$	219.6			$	115.2			$	77.7			$	412.5
Accumulated impairment losses			(114.5	)			(12.2	)			(76.6	)			(203.3	)
		$	105.1			$	103.0			$	1.1			$	209.2
Xsens acquisition		$	—			$	44.4			$	—			$	44.4
Foreign exchange impact		$	—			$	(4.5	)		$	—			$	(4.5	)
Balance at December 29, 2013
Goodwill		$	219.6			$	75.3			$	77.7			$	372.6
Accumulated impairment losses			(114.5	)			(12.2	)			(76.6	)			(203.3	)
		$	105.1			$	63.1			$	1.1			$	169.3

The following table presents a summary of acquired intangible assets:

 

						As of December 27, 2015								As of December 28, 2014
		Period of Amortization				Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
						(In millions)
Identifiable intangible assets:
Developed technology			8-10 years			$	260.1			$	(248.1	)		$	261.4			$	(245.3	)
Customer base			6-10 years				85.7				(80.9	)			86.1				(77.4	)
Core technology			10-15 years				15.7				(7.4	)			15.7				(6.3	)
In-process R&D			3-10 years				3.3				(1.2	)			3.3				(0.7	)
Trademarks and trade names			5 years				0.5				(0.2	)			0.5				(0.1	)
Total identifiable intangible assets						$	365.3			$	(337.8	)		$	367.0			$	(329.8	)

Amortization expense for intangible assets was $8.4 million, $10.6 million and $15.5 million for 2015, 2014 and 2013, respectively.

The estimated amortization expense for intangible assets for each of the five succeeding fiscal years is as follows:

 

		(In millions)
2016		$	8.0
2017			5.5
2018			4.1
2019			3.6
2020			3.1

 

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Note 8—Indebtedness

Our indebtedness consists of the following:

 

		December 27, 2015				December 28, 2014
		(In millions)
Revolving credit facility borrowings		$	200.0			$	200.0
Less debt issuance costs (1)			(1.7	)			(3.0	)
Other debt			0.1				0.1
Total long-term debt		$	198.4			$	197.1

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

Revolving Credit Facility

On September 26, 2014, we entered into a new $400.0 million, five-year senior secured revolving credit facility. The facility primarily consists of the credit agreement dated as of September 26, 2014 among Fairchild, the lenders named therein and Bank of America, NA, as administrative agent. At closing, we paid off all indebtedness under the prior credit facility using approximately $200.0 million of the proceeds provided by the new facility. The prior credit facility was terminated concurrent with the closing of the new facility. The new facility consists of a $400.0 million five-year revolving credit facility with a $50.0 million sub-limit for the issuance of standby letters of credit and a $20.0 million sub-limit for swing line loans. We have the ability to increase the facility from time to time by the addition of one or more tranches of incremental loans in the form of either (i) incremental term loan facilities or, (ii) incremental increases in the revolving credit facility.

The aggregate principal amount of all incremental facilities cannot exceed $300.0 million. After adjusting for outstanding letters of credit, we have $199.3 million available under the credit facility as of December 27, 2015. This revolving borrowing capacity is available for working capital and general corporate purposes, including acquisitions. We have additional outstanding letters of credit of $0.4 million that do not fall under the credit facility as of December 27, 2015. We also have $4.2 million of undrawn credit facilities at certain foreign subsidiaries as of December 27, 2015. These outstanding letters of amounts do not impact available borrowings under the credit facility.

Our obligations under the facility are guaranteed by certain of our domestic subsidiaries and are secured by a pledge of 100% of the equity interests in our material domestic subsidiaries and 65% of the equity interests of certain of our first-tier non-U.S. subsidiaries. Additionally, the credit agreement contains affirmative and negative covenants that are customary for a senior secured credit agreement of this nature. The negative covenants include, among other things, limitations on asset sales, mergers and acquisitions, indebtedness, liens, dividends, investments, loans, guarantees and transactions with the company’s affiliates. The credit agreement contains only two financial covenants: (i) a maximum leverage ratio of total consolidated indebtedness to adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) for the trailing four consecutive quarters of 3.25 to 1.00 and (ii) a minimum interest coverage ratio of adjusted EBITDA to consolidated interest expense for the trailing four consecutive quarters of at least 3.0 to 1.0. Interest expenses and commitment fees for the facility are determined on a sliding scale and are based upon its then current leverage ratio. Interest expenses range from LIBOR plus 1.25% to a maximum rate of LIBOR plus 2.00% for Eurodollar rate loans. Unused commitment fees are calculated as a percentage of the entire facility and range between .20% at the low end of the range to a maximum rate of 0.35%. At December 27, 2015, we were in compliance with all of our covenants and we expect to remain in compliance.

 

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Aggregate maturities of long-term debt for each of the next five fiscal years and thereafter are as follows:

 

		(In millions)
2016		$	—
2017			0.1
2018			—
2019			198.3
2020			—
Thereafter			—
		$	198.4

Note 9—Commitments and Contingencies

Commitments

We have future commitments to purchase chemicals for certain wafer fabrication facilities. In the event we were to end the agreements, we would be required to pay future minimum payments of approximately $15.3 million. We do not accrue for this liability, as we expect to use these chemicals in the ordinary course of business.

Our facilities in South Portland, Maine and West Jordan, Utah have ongoing environmental remediation projects to respond to certain releases of hazardous substances that occurred prior to the leveraged recapitalization of the company from National Semiconductor. Pursuant to the Asset Purchase Agreement with National Semiconductor Corporation, National Semiconductor has agreed to indemnify us for the future costs of these projects. The terms of the indemnification are without time limit and without maximum amount. The costs incurred to respond to these conditions were not material to the consolidated financial statements for any period presented. National Semiconductor Corporation was purchased by Texas Instruments Incorporated during the fourth quarter of 2011.

Pursuant to the 1999 asset agreement to purchase the power device business of Samsung Electronics Co., Ltd., Samsung agreed to indemnify us for remediation costs and other liabilities related to historical contamination, up to $150.0 million. We are unable to estimate the potential amounts of future payments, if any; however, any future payments are not expected to have a material effect on our consolidated financial position and results of operations and statements of cash flows.

Litigation

From time to time, the company is involved in legal proceedings in the ordinary course of business. We analyze potential outcomes from current and potential litigation as loss contingencies in accordance with U.S. GAAP. Since most potential claims against the company may involve the enforcement of complex intellectual property rights or complicated damages calculations, we generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of these matters, or the magnitude of the eventual loss related to each pending matter.

For a limited number of matters disclosed in this note for which a loss, whether in excess of a related accrued liability or where there is no accrued liability, is reasonably possible in future periods, we estimate a range of possible loss. In determining whether it is possible to estimate a range of possible loss, we review and evaluate our material litigation on an ongoing basis in light of potentially relevant factual and legal developments. These may include information learned through the discovery process, rulings on dispositive motions, settlement discussions, and other rulings by courts, arbitrators or others. If we possess sufficient information to develop an estimate of loss or range of possible loss, that estimate is disclosed either individually or in the aggregate. Finally, for loss contingencies for which we believe the possibility of loss is remote, we do not record a reserve or assess the range of possible losses.

 

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

Patent Litigation with Power Integrations, Inc.

There are six outstanding proceedings with Power Integrations.

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

The trial in the case was divided into three phases. In the first phase of the trial that occurred in October of 2006, a jury returned a verdict finding that thirty-three of the company’s PWM products willfully infringed one or more of seven claims asserted in the four patents and assessed damages against the company. The company voluntarily stopped U.S. sales and importation of those products in 2007 and has been offering replacement products since 2006. Subsequent phases of the trial conducted during 2007 and 2008 focused on the validity and enforceability of the patents. In December of 2008, the judge overseeing the case reduced the jury’s 2006 damages award from $34.0 million to approximately $6.1 million and ordered a new trial on the issue of willfulness. Following the new trial held in June of 2009, the court found the company’s infringement to have been willful, and in January 2011 the court awarded Power Integrations final damages in the amount of $12.2 million. The company appealed the final damages award, willfulness finding, and other issues to the U.S. Court of Appeals for the Federal Circuit. On March 26, 2013, the court of appeals vacated almost the entire damages award, ruling that there was no basis upon which a reasonable jury could find the company liable for induced infringement. The court also vacated the earlier judgment of willful patent infringement by the company. The full court of appeals and the Supreme Court of the United States have since denied Power Integrations’ request to review the appeals court ruling. Although the appeals court instructed the lower court to conduct further proceedings to determine damages based upon approximately $500,000 to $750,000 worth of sales and imports of affected products, the company believes that damages on the basis of that level of infringing activity would not be material. Accordingly, the company released $12.6 million from its reserves relating to this case during the first quarter of 2013.

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

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

Both lawsuits were consolidated and heard together in a jury trial in April of 2012. On April 27, 2012, the jury found that Power Integrations infringed one of the two U.S. patents owned by System General and upheld

 

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the validity of both System General patents. In the same verdict, the jury found that the company infringed two of four U.S. patents asserted by Power Integrations and that the company had induced its customers to infringe the asserted patents. (The court later ruled that the company infringed one other asserted Power Integrations patent that the jury found was not infringed.) The jury also upheld the validity of the asserted Power Integrations patents. The verdict concluded the first phase of trial in this case. On June 30, 2014, the court issued an order enjoining Fairchild from making, using, selling, offering to sell or importing into the United States the products found to infringe the Power Integrations patents in the case as well as certain products that were similar to the products found to infringe. Willfulness and damages in the case will be determined in a second phase, which has yet to be scheduled and will occur after appeals of the first phase. The company and Power Integrations have filed appeals from the first phase.

POWI 3: On November 4, 2009, Power Integrations filed another patent infringement lawsuit against the company, Fairchild Semiconductor Corporation and its wholly owned subsidiary, System General Corporation (now named Fairchild (Taiwan) Corporation), in the U.S. District Court for the Northern District of California alleging that several of its products infringe three of Power Integrations’ patents. Fairchild filed counterclaims asserting that Power Integrations infringes two Fairchild patents. A trial was held from February 10-27, 2014 on two Power Integrations’ patents and one Fairchild patent. On March 4, 2014, the jury returned a verdict finding that Fairchild willfully infringed both Power Integrations patents, awarding Power Integrations $105.0 million in damages, and finding that Power Integrations did not infringe the Fairchild patent. Both parties filed various post-trial motions, which were denied by the court with the exception of Fairchild’s motion to set aside the jury’s determination that it acted willfully. On September 9, 2014, the court granted the company’s motion and determined that, as a matter of law, Fairchild’s actions were not willful.

In addition to the ruling on willfulness, the company continued to challenge several other aspects of the verdict during post-trial review. Specifically, the company asserted that the damages award included legal and evidentiary defects that were inconsistent with recent rulings by the U.S. Court of Appeals for the Federal Circuit. On November 25, 2014, the trial court ruled that the jury lacked sufficient evidence on which to base its damages award and, consequently, vacated the $105.0 million verdict and ordered a second trial on damages. On February 12, 2015, the court denied Power Integrations’ request to enjoin the Fairchild products that were found to infringe, finding, among other things, that the evidence at trial failed to establish a causal connection between the alleged harm and the alleged infringement. The court ruled that Power Integrations can request an injunction after the second trial on damages. The second damages trial was held in December 2015. On December 17, 2015, a jury returned a verdict awarding Power Integrations $139.8 million in damages. The company has filed a number of post-trial motions challenging the verdict on several grounds, including several that are similar to challenges to the earlier damages verdict in the case. If the current damages award is not thrown out or significantly reduced in post-trial proceedings, the company plans to appeal the current damages award. The company also plans to appeal the 2014 verdict finding that the asserted Power Integrations’ patents were both infringed and valid.

POWI 4: On February 10, 2010, the company and System General Corporation (now named Fairchild (Taiwan) Corporation) filed a lawsuit in Suzhou, China against four Power Integrations entities and seven vendors. The lawsuit claimed Power Integrations violated certain Fairchild/System General patents. In December of 2012, the Suzhou court ruled in favor of Power Integrations and denied the company’s claims. Fairchild appealed the ruling but ultimately withdrew its appeal in the fourth quarter of 2014.

POWI 5: On May 1, 2012, the company sued Power Integrations in the U.S. District Court for the District of Delaware. The lawsuit accuses Power Integration’s LinkSwitch-PH LED power conversion products of violating three of the company’s patents. Power Integrations filed counterclaims of patent infringement against the company, asserting five Power Integrations patents. Of those five patents, the court granted Fairchild summary judgment of no infringement on one, Power Integration voluntarily withdrew a second and was forced to remove a third patent during the trial. Trial in the case began on May 26, 2015. On June 5, 2015, the jury found that Power Integrations induced infringement of Fairchild’s patent rights, and awarded Fairchild $2.4

 

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million in damages. The same jury found that Fairchild did not infringe one of the two remaining Power Integrations patents and found that Fairchild infringed two claims of the last Power Integrations patent, and awarded Power Integrations damages of $0.1 million.

POWI 6: On October 21, 2015, Power Integrations filed another complaint for patent infringement against Fairchild Semiconductor International, Inc., Fairchild Semiconductor Corporation and Fairchild (Taiwan) Corporation in the U.S. District Court for the Northern District of California. The lawsuit alleges certain products infringe two Power Integrations patents. The company is vigorously defending the lawsuit, which is in its earliest stages.

Other Legal Claims

From time to time we are involved in legal proceedings in the ordinary course of business. We believe we have valid defenses with respect to matters currently pending against us and we intend to vigorously defend against those claims. For example, in December 2013, a customer of one of our distributors filed suit against us claiming damages of $30.0 million arising out of the purchase of $20,000 of our products. We are contesting that claim vigorously. We believe there is no such ordinary-course pending litigation that could have, individually or in the aggregate, a material adverse effect on our business, financial condition, results of operations, or cash flows.

For matters where an estimate of the range of possible loss is possible, management currently estimates the aggregate range of reasonably possible loss, in excess of amounts accrued for outstanding matters, is $1.2 million to $15.9 million. The estimated range of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. Those matters for which an estimate is not possible are not included within this estimated range. Therefore, this estimated range of possible loss represents what we believe to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent our maximum exposure.

Note 10—Stockholders’ Equity

Preferred Stock

Under the company’s restated certificate of incorporation, our board of directors has the authority to issue up to 100,000 shares of $0.01 par value preferred stock, but only in connection with the adoption of a stockholder rights plan. At December 27, 2015 and December 28, 2014, no shares were issued.

Common Stock

The company has authorized 340,000,000 shares of common stock at a par value of $0.01 per share.

Treasury Stock

We account for treasury stock acquisitions using the cost method. At December 27, 2015 and December 28, 2014, we held approximately 28.2 million and 22.4 million treasury shares, respectively. On May 20, 2015, the board of directors authorized the additional repurchase of up to $150.0 million of the company’s common stock. This amount is in addition to the two separate authorizations of $100.0 million disclosed in May 2014 and December 2013, respectively. The repurchase program is currently funded using available cash. During the years ended December 27, 2015 and December 28, 2014, we repurchased 5.8 million shares and 10.1 million shares of common stock, respectively, under repurchase programs for $95.7 million and $142.5 million, respectively, at an average purchase price of $16.54 per share and $14.07 per share, respectively.

 

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Note 11—Income Taxes

Total income tax provision was as follows:

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
		(In millions)
Income tax provision attributable to income before income taxes		$	16.0			$	47.8			$	6.2

Income before income taxes for the years ended December 27, 2015, December 28, 2014, and December 29, 2013 consisted of the following:

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
		(In millions)
Income (loss) before income taxes:
U.S.		$	(26.4	)		$	30.0			$	18.1
Foreign			27.3				(17.4	)			(6.9	)
		$	0.9			$	12.6			$	11.2

Income tax provision (benefit) for the years ended December 27, 2015, December 28, 2014, and December 29, 2013 consisted of the following:

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
		(In millions)
Income tax provision (benefit):
Current:
U.S. federal		$	—			$	—			$	—
U.S. state and local			0.1				0.1				0.1
Foreign			14.3				12.7				10.9
			14.4				12.8				11.0
Deferred:
U.S. federal			1.9				1.8				2.0
U.S. state and local			—				0.4				(0.3	)
Foreign			(0.3	)			32.8				(6.5	)
			1.6				35.0				(4.8	)
Total income tax provision (benefit):
U.S. federal			2.0				1.8				2.1
U.S. state and local			—				0.5				(0.3	)
Foreign			14.0				45.5				4.4
		$	16.0			$	47.8			$	6.2

 

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The reconciliation between the income tax rate computed by applying the U.S. federal statutory rate and the reported worldwide effective tax rate on income before income taxes is as follows:

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
U.S. federal statutory rate			35.0	%			35.0	%			35.0	%
U.S. state and local taxes, net of federal benefit			46.6				(1.8	)			(1.5	)
Foreign tax rate differential			(1,732.2	)			43.3				77.3
Tax credits (generated) or expired			(5.6	)			40.3				(34.8	)
Foreign withholding taxes			86.4				1.5				(17.5	)
Non-deductible expenses			1,002.5				58.4				45.5
Change in valuation allowance			112.6				171.3				(62.4	)
Foreign exchange differences			1,747.3				34.9				(7.9	)
Deferred charge			90.6				6.2				7.0
Tax rate changes			—				—				14.7
Other			474.9				(10.2	)			—
			1,858.1	%			378.9	%			55.4	%

We operate in multiple foreign jurisdictions. We have historically incurred losses from time to time in jurisdictions with lower statutory tax rates than that of the U.S. Losses incurred in foreign jurisdictions with lower tax rates than the U.S. may cause our effective tax rate to increase. In 2015, our effective tax rate was 1858.1% compared to 378.9% for 2014. The primary factor in the increase in effective tax rate was the decrease in company’s profits when compared to 2014. Further contributing to the increase in effective tax rate were the losses incurred in jurisdictions with full valuation allowances against their deferred tax assets. With the ceasing of operations at our Malaysian facility in 2015, the site’s deferred tax asset and valuation allowance attributable to its tax credits were adjusted to reflect the revised carry forward balance as a result of the disposition of its assets. The impact of foreign exchange at several of our Asian manufacturing facilities continued to contribute to the increase in effective rate.

Consistent with prior years and in 2015, a current provision for income taxes was provided for Fairchild Semiconductor Pte. Ltd at the concessionary holiday tax rate of 10% on qualifying income. Fairchild Semiconductor Pte. Ltd is entitled to a concessionary tax rate of 10% through 2019, at which time it will revert to Singapore’s enacted statutory tax rate which is currently 17%.

The tax holidays increased net income by $0.8 million, or less than $0.01 per basic and diluted common share for the year ended December 27, 2015. The tax holidays increased net income by $0.5 million, or less than $0.01 per basic and diluted common share for the year ended December 28, 2014. The tax holidays increased net income by $0.5 million, or $0.01 per basic and diluted common share for the year ended December 29, 2013.

 

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The tax effects of temporary differences in the recognition of income and expense for tax and financial reporting purposes that give rise to significant portions of the deferred tax assets and the deferred tax liabilities at December 27, 2015 and December 28, 2014 are presented below:

 

		Year Ended
		December 27, 2015				December 28, 2014
		(In millions)
Deferred tax assets:
Net operating loss carry-forwards		$	43.6			$	37.0
Reserves and accruals			39.8				45.8
Tax credit and capital allowance carryovers			65.6				77.5
Plant and equipment			24.7				9.2
Unrealized loss in other comprehensive income			1.1				0.8
Total gross deferred tax assets			174.8				170.3
Valuation allowance			(170.5	)			(169.2	)
Net deferred tax assets			4.3				1.1
Deferred tax liabilities:
Undistributed earnings of foreign subsidiaries			(4.2	)			(3.6	)
Unrealized gain in other comprehensive income			—				—
Capitalized research expenses and intangibles			(17.5	)			(13.2	)
Total deferred tax liabilities			(21.7	)			(16.8	)
Net deferred tax liabilities		$	(17.4	)		$	(15.7	)

Net deferred tax assets (liabilities) by jurisdiction are as follows:

 

		Year Ended
		December 27, 2015				December 28, 2014
		(In millions)
U.S.		$	(31.6	)		$	(29.8	)
Europe			(0.5	)			(1.0	)
Japan			0.4				0.4
China			11.3				13.7
Hong Kong			3.5				2.4
Malaysia			—				(1.6	)
Singapore			(0.7	)			—
Korea			—				—
Taiwan			0.2				0.2
Net deferred tax liabilities		$	(17.4	)		$	(15.7	)

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

 

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The deferred tax valuation allowance for the year ended December 27, 2015 and December 28, 2014 was $170.5 million and $169.2 million, respectively.

Gross carry forwards as of December 27, 2015 for foreign tax credits totaled $20.8 million, for research and development credits totaled $26.6 million, for capital loss carry forwards totaled $29.0 million, and for U.S. net operating losses (NOLs) totaled $68.5 million, not including $75.4 million excess tax deductions from shared based payments, the benefit of which would be credited to additional paid in capital. The capital loss carry forwards expire in varying amounts through 2019. The NOLs expire in 2024 through 2035. The foreign tax credits expire in 2016 through 2025. The research and development credits expire in varying amounts through 2035. As of December 27, 2015, the company has NOL carry forwards in Korea of $50.9 million. The Korean NOLs expire in 2022 through 2025.

Our ability to utilize our U.S. net operating loss and credit carry forwards may be limited in the future if the company experiences an ownership change, as defined in the Internal Revenue Code. An ownership change occurs when the ownership percentage of 5% or more stockholders changes by more than 50% over a three year period. In August 1999, the company experienced an ownership change as a result of its initial public offering. This ownership change did not result in a material limitation on the utilization of the loss and credit carry forwards. As of December 27, 2015, we have not undergone a second ownership change.

Significant management judgment is required in determining our provision for income taxes and in determining whether deferred tax assets will be realized. When it is more likely than not that all or some portion of specific deferred tax assets will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that are determined not likely to be realizable. Realization is based on our ability to generate sufficient future taxable income. A valuation allowance is determined, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. In 2005, a full valuation allowance on net U.S. deferred tax assets was recorded and we continue to carry the valuation allowance in 2015 as our trend of evidence does not currently support a release. Until such time that some or all of the valuation allowance is reversed, future income tax expense or benefit in the U.S., excluding any tax expense generated by our indefinite life intangibles, will be offset by adjustments to the valuation allowance to effectively eliminate any income tax expense or benefit in the U.S. Income taxes will continue to be recorded for other tax jurisdictions subject to the need for valuation allowances in those jurisdictions.

As of December 27, 2015, our valuation allowance for U.S. deferred tax assets totaled $114.7 million, which consists of the beginning of the year allowance of $106.9 million, a 2015 charge of $7.5 million to income from operations and a charge of $0.3 million to OCI. The valuation allowance reduces the carrying value of temporary differences generated by capital losses, capitalized research and development expenses, foreign tax credits, reserves and accruals, and NOL carry forwards, which would require sufficient future capital gains and future ordinary income in order to realize the tax benefits. If we are ultimately able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been established, then the related portion of the valuation allowance will be released to income from continuing operations, additional paid in capital or OCI.

In 2008, a deferred tax asset and full valuation allowance was recorded in the amount of $24.8 million relating to our Malaysian cumulative reinvestment allowance and manufacturing incentives. In 2015, the Malaysian deferred tax asset decreased to $15.2 million. As a result of the closure of our Malaysia manufacturing operations in 2015, a full valuation allowance of $15.2 million remains.

In the fourth quarter of 2014, a full valuation allowance was recorded in the amount of $36.8 million against our net Korean deferred tax assets. In 2015, assessing Korea’s three-year cumulative loss in conjunction with the commencement of the foreign investment zone tax holiday, Korea continues to maintain a full valuation allowance. As of December 27, 2015, our valuation allowance for Korean deferred tax assets totaled $38.5 million.

 

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Deferred income taxes have not been provided for the undistributed earnings of our foreign subsidiaries that are reinvested indefinitely. Deferred income taxes have been provided for the undistributed earnings of our foreign subsidiaries that are part of the repatriation plan, which were immaterial at December 27, 2015. In addition, certain non-U.S. earnings, which have been taxed in the U.S. but earned offshore have and will continue to be part of our repatriation plan. At December 27, 2015, the undistributed earnings of our subsidiaries approximated $325.5 million. The amount of taxes attributable to these undistributed earnings is not practicably determinable.

Authoritative accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This guidance also provides guidance on derecognition, classification, interest and penalties, accounting in the interim periods, disclosure, and transition. We adopted the current guidance on January 1, 2007. The unrecognized tax benefits at December 27, 2015 and December 28, 2014 total $59.0 million and $59.0 million respectively. Of the total unrecognized tax benefits at December 27, 2015 and December 28, 2014, $3.4 million and $3.4 million, respectively would impact the effective tax rate, if recognized. The remaining unrecognized tax benefits would not impact the effective tax rate, if recognized, as we had a full valuation allowance against our U.S. deferred taxes. The timing of the expected cash outflow relating to the $3.4 million is not reliably determinable at this time.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
Beginning Balance		$	59.0			$	58.9			$	58.6
Increases related to prior year tax positions			—				0.1				0.3
Decreases related to prior year tax positions			—				—				—
Increases related to current year tax positions			—				—				—
Settlements			—				—				—
Ending Balance		$	59.0			$	59.0			$	58.9

Our major tax jurisdictions are the U.S. and Korea. For the U.S., we have open tax years dating back to 1999 due to the carryforward of tax attributes. In Korea, we have five open tax years dating back to 2010.

As of December 27, 2015 and December 28, 2014, we had accrued for penalties and interest relating to uncertain tax positions totaling $0.9 million.

On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. The IRS has the right to appeal the U.S. Tax Court Decision. At this time, the U.S. Department of the Treasury has not withdrawn the requirements from its regulations to include stock-based compensation. We have reviewed this case and its impact on Fairchild and concluded that no adjustment to the consolidated financial statements is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.

Note 12—Stock-based Compensation

All stock-based awards to employees, including grants of employee stock options, are recognized in the statement of operations based on their fair values at the date of grant.

 

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We grant equity awards under the Fairchild Semiconductor 2007 Stock Plan. In addition, we have occasionally granted equity awards outside our equity compensation plans when necessary.

Fairchild Semiconductor 2007 Stock Plan. Under this plan, officers, employees, non-employee directors, and certain consultants may be granted stock options, stock appreciation rights, restricted stock, restricted stock units (RSUs), performance units (PUs), deferred stock units (DSUs) and other stock-based awards. The plan has been approved by stockholders. The maximum number of shares of common stock that may be issued under the plan is equal to 36,188,118 shares, plus shares available for issuance as of May 2, 2007 under the Fairchild Semiconductor Stock Plan, and shares subject to outstanding awards under the Fairchild Semiconductor Stock Plan as of May 2, 2007 that cease for any reason to be subject to such awards. The maximum life of any option is ten years from the date of grant for incentive stock options and non-qualified stock options. Actual terms for outstanding non-qualified stock options are eight years, although options may be granted under the plan with up to ten-year terms. Options granted under the plan are exercisable at the determination of the compensation committee, generally vesting ratably over four years. PUs are contingently granted depending on the achievement of certain predetermined performance goals. DSUs, RSUs and PUs entitle participants to receive one share of common stock for each DSU, RSU or PU awarded. For RSUs and PUs, the settlement date is the vesting date. For DSUs, the settlement date is selected by the participant at the time of the grant. Grants of PUs generally vest under the plan over a period of three years, and DSUs and RSUs generally vest over a period of three or four years. On May 20, 2015 our stockholders approved an amendment to the plan which reduced the vesting period for equity grants to our nonemployee directors from three years to one year.

The following table presents a summary of our stock options:

 

		Year Ended
		December 27, 2015
		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life				Aggregate Intrinsic Value
		(000’s)								(In years)				(In millions)
Outstanding at beginning of period			448			$	14.91
Granted			—				—
Exercised			(150	)			11.83
Cancelled and forfeited			(20	)			14.25
Expired			(210	)			17.85
Outstanding at end of period			68			$	12.82				2.9			$	0.5
Exercisable at end of period			48			$	12.35				1.9			$	0.4

The weighted average grant date fair value for stock options granted during the year ended December 29, 2013 was $6.33. We did not grant any stock options in fiscal year 2014. Total intrinsic value for stock options exercised (i.e. the difference between the market price at exercise and the price paid by employees to exercise the award) for 2015, 2014 and 2013, is $1.0 million, $1.2 million and $0.3 million, respectively.

 

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The following table presents a summary of our DSUs for the year ended December 27, 2015:

 

		Year Ended
		December 27, 2015
		Shares				Weighted Average Grant Date Fair Value
		(000’s)
Outstanding at beginning of period			377			$	14.50
Granted			50				20.51
Vested and released			(60	)			10.62
Forfeited			—				—
Outstanding at end of period			367			$	15.95

The weighted average grant date fair value for DSUs granted during the years ended December 28, 2014 and December 29, 2013 was $12.90 and $13.98, respectively. The total grant date fair value for DSUs vested during the years ended December 27, 2015, December 28, 2014, and December 29, 2013 was $0.6 million, $0.9 million and $0.6 million, respectively. The number and weighted average remaining contractual term for DSUs vested and outstanding is 234,769 units and 1.5 years, respectively as of December 27, 2015.

Our plan documents governing DSUs contain contingent cash settlement provisions upon a change of control. Accordingly, we present previously recorded expense associated with unvested and unsettled DSUs under the balance sheet caption “Temporary equity-deferred stock units”.

The following table presents a summary of our RSUs for the year ended December 27, 2015:

 

		Year Ended
		December 27, 2015
		Shares				Weighted Average Grant Date Fair Value
		(000’s)
Unvested at beginning of period			4,826			$	14.26
Granted			2,272				17.26
Vested			(1,660	)			14.58
Forfeited			(939	)			14.75
Unvested at end of period			4,499			$	15.53

The weighted average grant date fair value for RSUs granted during the years ended December 28, 2014 and December 29, 2013 was $14.16 and $13.94, respectively. The total grant date fair value for RSUs vested during the year ended December 27, 2015, December 28, 2014, and, December 29, 2013 was $24.2 million, $22.5 million and $19.0 million, respectively.

 

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The following table presents a summary of our PUs for the year ended December 27, 2015:

 

		Year Ended
		December 27, 2015
		Shares				Weighted Average Grant Date Fair Value
		(000’s)
Unvested at beginning of period			1,135			$	13.88
Granted			520				17.18
Vested			(376	)			13.91
Forfeited			(212	)			14.49
Unvested at end of period			1,067			$	14.54

The weighted average grant date fair value for PUs granted during the years ended December 28, 2014 and December 29, 2013 was $13.80 and $13.99, respectively. The total grant date fair value for PUs vested during the year ended December 27, 2015, December 28, 2014 and December 29, 2013 was $5.2 million, $5.5 million and $5.0 million, respectively.

For our relative total shareholder return (TSR) performance-based awards, which are based on market performance, the compensation cost is amortized over the performance period on a straight-line basis net of forfeitures, because the awards vest only at the end of the measurement period and the probability of actual shares expected to be earned is considered in the grant date valuation. As a result, the expense is not adjusted to reflect the actual shares earned. We granted 121,250 TSR PUs during fiscal year 2015, which are included in the above table.

Our practice is to issue shares of common stock upon exercise or settlement of options, DSUs, RSUs and PUs from previously unissued shares. For the years ended December 27, 2015, December 28, 2014, and December 29, 2013, $1.8 million, $1.5 million, and $1.1 million respectively, was received from the exercise of stock options.

Valuation and Expense Information

The following table summarizes stock-based compensation expense by financial statement caption, for the years ended December 27, 2015, December 28, 2014 and December 29, 2013.

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
		(In millions)
Cost of Sales		$	5.2			$	5.3			$	4.9
Research and Development			8.8				8.4				7.5
Selling, General and Administrative			16.8				18.9				15.5
		$	30.8			$	32.6			$	27.9

We also capitalized $1.0 million, $1.5 million and $1.0 million of stock-based compensation into inventory for the years ended December 27, 2015, December 28, 2014 and December 29, 2013, respectively. In addition, due to our valuation allowance for U.S. deferred income tax assets, no tax benefit on U.S. based stock compensation expense was recognized in the years ended December 27, 2015, December 28, 2014 and December 29, 2013. No material income tax benefit was recognized by foreign tax jurisdictions for the year ended December 27, 2015, December 28, 2014 and December 29, 2013.

 

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The following table summarizes total compensation cost related to unvested awards not yet recognized and the weighted average period over which it is expected to be recognized as of our year end.

 

		As of December 27, 2015
		Unrecognized Compensation Cost for Unvested Awards				Weighted Average Remaining Recognition Period
		(In millions)				(In years)
Options		$	0.1				1.4
DSUs			0.2				0.8
RSUs			52.3				2.7
PUs			6.0				1.9

The fair value of each DSU, RSU and non-TSR PU is equal to the closing market price of our common stock on the date of grant.

We did not grant any TSR performance-based awards in 2014 or 2013. The fair value of our TSR performance-based awards at the date of grant was estimated using the Monte-Carlo simulation model with the following assumptions:

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
Stock price		$	17.48			$	—			$	—
Expected volatility			34.4	%			—	%			—	%
Risk-free interest rate			1.0	%			—	%			—	%
Dividend yield			—	%			—	%			—	%

We did not grant any options during 2015 or 2014. The fair value of each option grant for our stock plans is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
Expected volatility			—	%			—	%			50.1	%
Dividend yield			—	%			—	%			—	%
Risk-free interest rate			—	%			—	%			0.7	%
Expected life, in years			—				—				5.33

Stock price. Based on the closing stock price of our common stock as of the grant date.

Expected volatility. We utilize an average of implied volatility and the most recent historical volatility commensurate with the expected life assumption.

Dividend yield. We do not pay a dividend, therefore this input is not applicable.

Risk-free interest rate. We estimate the risk-free interest rate based on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected life assumption.

Expected life. We have evaluated expected life based on history and exercise patterns across our demographic population. We believe that this historical data is the best estimate of the expected life of a new option, and that generally all groups of our employees exhibit similar exercise behavior.

 

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Note 13—Retirement Plans

We sponsor the Fairchild Personal Savings and Retirement Plan (the “Retirement Plan”), a contributory savings plan which qualifies under section 401(k) of the Internal Revenue Code. The Retirement Plan covers substantially all employees in the U.S. As of January 1, 2007, we provide a discretionary matching contribution equal to 100% of employee elective deferrals on the first 3% of pay that is contributed to the Retirement Plan and 50% of the next 2% of pay contributed. We also maintain a non-qualified Benefit Restoration Plan, under which certain eligible employees who have otherwise exceeded annual IRS limitations for elective deferrals can continue to contribute to their retirement savings. We match employee elective deferrals to the Benefit Restoration Plan on the same basis as the Retirement Plan. Total expense recognized under these plans was $4.8 million, $5.2 million and $5.8 million for 2015, 2014 and 2013, respectively.

We also provide certain former executives with health care benefits in accordance with their respective employment agreements. As of December 27, 2015 and December 28, 2014, we have recognized $2.3 million and $2.4 million, respectively, with respect to these agreements as a liability in the consolidated statements of financial position.

Employees in Korea and Malaysia participate in defined contribution plans. We have funded accruals for these plans in accordance with statutory regulations in each location. Amounts recognized as expense for contributions made under the Korean plan were $7.7 million, $7.0 million and $6.5 million in 2015, 2014 and 2013, respectively and for the Malaysian plan were $1.3 million, $2.2 million and $2.4 million in 2015, 2014 and 2013, respectively.

Employees in the United Kingdom, Italy, Germany, Finland, China, Hong Kong, the Philippines, Japan and Taiwan are also covered by a variety of defined benefit or defined contribution pension plans that are administered consistent with local statutes and practices. The expense under each of the respective plans for 2015, 2014 and 2013 was not material to the consolidated financial statements.

We recognize the over-funded or under-funded status of our defined post retirement plans as an asset or liability in our statement of financial position. We currently have defined benefit pension plans in Germany, the Philippines, and Taiwan. The net funded status for our foreign defined benefit plans was $6.4 million and $8.5 million at December 27, 2015 and December 28, 2014, respectively, and was recognized as a liability in the consolidated statements of financial position. We measure plan assets and benefit obligations as of the date of our fiscal year end.

Note 14—Lease Commitments

Rental expense related to our facilities and equipment at our plants were $16.8 million, $17.9 million and $19.5 million, for 2015, 2014 and 2013, respectively.

Certain facility and land leases contain renewal provisions. Future minimum lease payments under non-cancelable operating leases as of December 27, 2015 are as follows:

 

Fiscal year		(In millions)
2016		$	15.1
2017			12.1
2018			10.9
2019			5.2
2020			4.5
Thereafter			19.9
		$	67.7

 

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Note 15—Restructuring, Impairments and Other Costs

During the years ended December 27, 2015, December 28, 2014 and December 29, 2013, we recorded restructuring, impairment and other costs, net of releases, of $47.6 million, $49.8 million and $15.9 million, respectively. The detail of these charges is presented in the summary tables below.

2015 Operating Expense Reduction Program

In the third quarter of 2015, we announced a program to reduce operating expenses by approximately $30.0 million to $34.0 million annually. This is a structural change to the operating expense level of the company and the anticipated savings contain no temporary measures. We recorded $12.9 million of employee separation expense in 2015, which represents the full cost of this program. This program is substantially complete as of December 27, 2015.

Prior Year Infrastructure Realignment Programs

The 2014 Infrastructure Realignment Program consists of product line and sales organizational changes, costs associated with streamlining operations creating greater manufacturing flexibility and having a more balanced internal versus external production mix, and other related costs mainly associated with product qualification activities. In 2014, we announced our 2014 Manufacturing Footprint Consolidation Plan. We eliminated our internal 5-inch and significantly reduced 6-inch wafer fabrication lines and rationalized our assembly and test capacity, resulting in the closure of our manufacturing and assembly facilities in West Jordan, Utah and Penang, Malaysia, as well as the remaining 5-inch wafer fabrication lines in Bucheon, South Korea. We ended production at these sites during the third quarter of fiscal year 2015.

In addition to the amounts recorded in the summary below, we expect to incur an additional $1.0 million in qualification costs and an additional $3.0 million in site closure costs to complete this program in fiscal year 2016.

The 2013 Infrastructure Realignment Program includes costs to close the 8-inch line at our Salt Lake wafer fab facility and transfer the manufacturing to the 8-inch lines in Korea and Mountaintop, as well as organizational changes in our mobile product group, manufacturing support organizations, executive management, and sales organizations.

The 2012 Infrastructure Realignment Program includes costs for organizational changes in our sales organization, manufacturing sites and manufacturing support organizations, the human resources function, executive management levels, and certain product lines as well as the termination of an IT systems lease and the final closure of a warehouse in Korea.

The 2011 Infrastructure Realignment Program includes costs for organizational changes in our supply chain management group, the website technology group, the quality organization, and other administrative groups. The 2011 program also includes costs to further improve our manufacturing strategy and changes in certain product lines.

 

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The 2010 Infrastructure Realignment Program includes costs to simplify and realign some activities within one of our segments, costs for the continued refinement of our manufacturing strategy, and costs associated with centralizing our accounting functions.

 

		Accrual Balance at 12/28/2014				Restructuring Charges				Other Charges				Reserve Release				Cash Paid				Non-Cash Items				Accrual Balance at 12/27/2015
2014 Infrastructure Realignment Program:
Employee separation costs		$	28.7			$	6.6			$	—			$	(0.9	)		$	(29.6	)		$	(1.5	)		$	3.3
Lease termination costs			—				—				2.9				—				(0.1	)			(2.8	)			—
Asset impairment costs			—				0.4				—				—				(0.4	)			—				—
Factory closure costs			0.4				15.1				—				—				(14.3	)			—				1.2
Qualification costs			1.1				—				10.6				—				(11.7	)			—				—
2015 Operating Expense Reduction Program:
Employee separation costs			—				13.0				—				(0.1	)			(9.9	)			—				3.0
		$	30.2			$	35.1			$	13.5			$	(1.0	)		$	(66.0	)		$	(4.3	)		$	7.5
		Accrual Balance at 12/29/2013				Restructuring Charges				Other Charges				Reserve Release				Cash Paid				Non-Cash Items				Accrual Balance at 12/28/2014
2011 Infrastructure Realignment Program:
Employee separation costs		$	0.3			$	—			$	—			$	(0.2	)		$	(0.1	)		$	—			$	—
2012 Infrastructure Realignment Program:																											—
Employee separation costs			0.2				—				—				—				(0.2	)			—				—
Lease termination costs			0.1				—				—				—				(0.1	)			—				—
2013 Infrastructure Realignment Program:
Employee separation costs			3.2				0.9				—				(0.4	)			(3.7	)			—				—
Asset impairment costs			—				0.5				—				—				—				(0.5	)			—
Line closure costs			—				2.5				—				—				(2.5	)			—				—
Lease termination costs			0.4				0.1				—				(0.2	)			(0.3	)			—				—
2014 Infrastructure Realignment Program:
Employee separation costs			—				35.3				—				(1.3	)			(5.3	)			—				28.7
Asset impairment costs			—				1.3				—				—				—				(1.3	)			—
Factory closure costs			—				1.2				—				—				(0.4	)			(0.4	)			0.4
Qualification costs			—				—				8.7				—				(7.6	)			—				1.1
		$	4.2			$	41.8			$	8.7			$	(2.1	)		$	(20.2	)		$	(2.2	)		$	30.2
		Accrual Balance at 12/30/2012				Restructuring Charges				Other Charges				Reserve Release				Cash Paid				Non-Cash Items				Accrual Balance at 12/29/2013
2010 Infrastructure Realignment Program:
Employee separation costs		$	0.2			$	—			$	—			$	—			$	(0.2	)		$	—			$	—
2011 Infrastructure Realignment Program:
Employee separation costs			0.6				—				—				—				(0.3	)			—				0.3
2012 Infrastructure Realignment Program:
Employee separation costs			2.8				0.1				—				(0.2	)			(2.5	)			—				0.2
Lease termination costs			0.5				—				—				(0.1	)			(0.3	)			—				0.1
2013 Infrastructure Realignment Program:
Employee separation costs			—				11.0				—				(0.1	)			(7.7	)			—				3.2
Asset impairment costs			—				1.6				—				—				—				(1.6	)			—
Line closure costs			—				3.0				—				—				(3.0	)			—				—
Lease termination costs			—				0.6				—				—				(0.2	)			—				0.4
		$	4.1			$	16.3			$	—			$	(0.4	)		$	(14.2	)		$	(1.6	)		$	4.2

 

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Note 16—Net Income (Loss) Per Share

Basic and diluted net income (loss) per share are calculated as follows:

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
		(In millions, except per share data)
Net income (loss)		$	(15.1	)		$	(35.2	)		$	5.0
Weighted average number of common shares outstanding - basic			115.4				121.4				127.2
Effect of dilutive securities:
Stock options and restricted stock units			—				—				1.5
Weighted average number of common shares outstanding - diluted			115.4				121.4				128.7
Basic net income (loss) per share		$	(0.13	)		$	(0.29	)		$	0.04
Diluted net income (loss) per share		$	(0.13	)		$	(0.29	)		$	0.04
Anti-dilutive common stock equivalents			2.7				2.6				1.9

Note 17—Segments and Geographic Information

We changed our reportable segments effective in the first quarter of fiscal year 2015 to reflect changes in the way we currently manage the business. All periods presented have been revised accordingly to reflect the new reportable segments.

The Switching Power Solutions segment (SPS) contains our low and high voltage switch operating segments, integrated power modules, as well as our automotive and cloud operating segments. This segment provides a wide range of highly efficient discrete and integrated power management solutions across a broad range of end markets. The Analog Power and Signal Solutions segment (APSS) contains our mobile solutions, power conversion and motion tracking operating segments. This segment focuses on developing innovative analog solutions including power management, sensor and signal path applications. The Standard Products Group (SPG) includes a broad portfolio of standard discrete, analog, logic and optoelectronic products.

In addition to the operating segments mentioned above, we also operate global operations, sales and marketing, information systems, finance and administration groups that are led by senior vice presidents who report to the Chief Executive Officer. Also, only direct SG&A and R&D spending by the segments is included in the calculation of their operating income. All other corporate level SG&A and R&D spending is included in the corporate category. We do not allocate income taxes or interest expense to our operating segments as the operating segments are principally evaluated on operating profit before interest and taxes.

We do not specifically identify and allocate all assets by operating segment. It is our policy to fully allocate amortization to our operating segments. Operating segments do not sell products to each other, and accordingly, there are no inter-segment revenues to be reported. The accounting policies for segment reporting are the same as for the company as a whole.

 

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The following table presents selected statement of operations information on reportable segments for 2015, 2014 and 2013.

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
		(In millions)
Revenue and operating income:
SPS
Total revenue		$	798.9			$	838.2			$	793.7
Operating income			172.1				181.8				143.6
APSS
Total revenue			385.2				399.1				413.8
Operating income			58.7				60.3				31.6
SPG
Total revenue			186.1				196.1				197.9
Operating income			41.2				43.8				36.2
Corporate
Restructuring, impairments, and other costs			(47.6	)			(49.8	)			(15.9	)
Acquisition-related costs			(6.5	)			—				—
Accelerated depreciation on assets related to factory closures			(8.7	)			(6.5	)			(8.7	)
Inventory write-offs associated with factory closures			(5.5	)			—				—
Selling, general and administrative expense			(182.7	)			(190.7	)			(171.5	)
Release of (charge for) litigation			—				(4.4	)			12.6
Corporate research and development expense			(14.7	)			(15.4	)			(7.5	)
Total consolidated
Total revenue		$	1,370.2			$	1,433.4			$	1,405.4
Operating income			6.3				19.1				20.4
Other expense, net			5.4				6.5				9.2
Income before income taxes		$	0.9			$	12.6			$	11.2

Revenue from one customer represents approximately 6.0%, 8.0% and 11.4% of our 2015, 2014 and 2013 revenue, respectively. Revenue from this customer is included in all reportable segments revenue.

Amortization of acquisition-related intangibles by reportable operating segment were as follows:

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
		(In millions)
SPS		$	1.5			$	2.5			$	5.9
APSS			6.9				7.5				6.9
SPG			—				0.6				2.7
Total		$	8.4			$	10.6			$	15.5

 

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Geographic revenue information is based on the customer location within the indicated geographic region. Revenue by geographic region was as follows:

 

		Year Ended
		December 27, 2015				December 28, 2014				December 29, 2013
		(In millions)
Total Revenue:
U.S.		$	123.3			$	129.0			$	126.5
Other Americas			13.7				28.7				28.1
Europe			219.2				215.0				196.8
China			589.2				559.0				505.9
Taiwan			123.3				172.0				154.6
Korea			82.2				71.7				98.4
Other Asia/Pacific			219.3				258.0				295.1
Total		$	1,370.2			$	1,433.4			$	1,405.4

Other Asia/Pacific includes Japan, Singapore, and Malaysia.

Geographic property, plant and equipment balances as of December 27, 2015 and December 28, 2014 are based on the physical locations within the indicated geographic areas and are as follows:

 

		Year Ended
		December 27, 2015				December 28, 2014
		(In millions)
Property, Plant & Equipment, Net:
U.S.		$	131.6			$	176.8
Korea			237.4				240.1
Philippines			79.7				66.0
Malaysia			0.1				44.0
China			84.5				93.8
All Others			17.1				7.0
Total		$	550.4			$	627.7

 

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Note 18—Unaudited Quarterly Financial Information

The following is a summary of unaudited quarterly financial information for 2015 and 2014 (in millions, except per share amounts):

 

		2015
		First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Total revenue		$	355.7			$	355.2			$	342.1			$	317.2
Gross margin			108.0				109.8				115.0				105.0
Net income (loss)			1.1				(0.9	)			(8.2	)			(7.1	)
Basic income (loss) per common share		$	0.01			$	(0.01	)		$	(0.07	)		$	(0.06	)
Diluted income (loss) per common share		$	0.01			$	(0.01	)		$	(0.07	)		$	(0.06	)
		2014
		First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Total revenue		$	344.1			$	371.6			$	381.1			$	336.6
Gross margin			104.2				124.2				132.8				104.4
Net income (loss)			(9.3	)			17.8				(1.0	)			(42.7	)
Basic income (loss) per common share		$	(0.07	)		$	0.14			$	(0.01	)		$	(0.36	)
Diluted income (loss) per common share		$	(0.07	)		$	0.14			$	(0.01	)		$	(0.36	)

Note 19—Recently Issued Accounting Standards

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. This ASU permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

In April 2015, the FASB issued Accounting Standards Update No. 2015-05, (ASU 2015-05) Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This ASU clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We are currently evaluating the impact this guidance may have on our consolidated financial position and results of operations.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The new standard applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard will be effective for us in the first quarter of fiscal year 2017. The adoption of this standard is not expected to have a material effect on our consolidated financial position and results of operations and statements of cash flows.

 

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In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-01, among other things, requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of the amendments in the ASU is not permitted. The adoption of this standard is not expected to have a material effect on our consolidated financial position and results of operations and statements of cash flows.

Note 20—Subsequent Events

We have evaluated subsequent events and did not identify any events that required disclosure as of February 25, 2016.

 

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ITEM 9A.

CONTROLS AND PROCEDURES

The Original Form 10-K is amended by replacing Item 9A, in its entirety, with the following:

Disclosure Controls and Procedures

Under the supervision and with the participation of our senior management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 27, 2015. We first filed our annual report on Form 10-K for the year ended December 27, 2015 before the determination of the material weakness described below. (We refer to our annual report on Form 10-K for the year ended December 27, 2015, as filed with the SEC on February 25, 2016 and amended on April 25, 2016 and May 19, 2016, as our “Original Form 10-K.”). In our Original Form 10-K, our CEO and CFO concluded that, as of December 27, 2015, our disclosure controls and procedures were operating effectively, at a reasonable assurance level. However, after the determination of the material weakness described below, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of December 27, 2015.

During the quarter ended June 26, 2016, as a result of our discovery of an embezzlement by a former non-management employee of our Korean subsidiary of local currency valued at approximately $630,000, we identified a deficiency in the operation of certain of our controls that would have prevented and detected a misappropriation on a timely basis, and therefore, affected our ability to safeguard cash. We have determined that this deficiency in our internal control over financial reporting constituted a material weakness which existed as of December 27, 2015. No restatement of prior period financial statements and no change in previously released financial results were required as a result of these findings.

Inherent Limitations on Effectiveness of Controls

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

Management Report on Internal Control over Financial Reporting

Management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our management assessed the effectiveness of the company’s internal control over financial reporting as of December 27, 2015. In making this assessment, management used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013.

Our management concluded that, as of December 27, 2015, there was a material weakness in the operation of certain of our controls, as described above. The material weakness had no impact on any amounts reported in our consolidated financial statements for the year ended December 27, 2015 or for any previous period.

In the Management Report on Internal Control over Financial Reporting included in our Original Form 10-K, management, including our CEO and CFO, concluded that we maintained effective internal control over financial reporting as of December 27, 2015. Management has subsequently concluded that the material weakness described above existed as of December 27, 2015, and that, as a result of this material weakness, our internal control over financial reporting was not effective as of December 27, 2015. Accordingly, we have restated our Management Report on Internal Control over Financial Reporting.

 

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While the material weakness had no effect on our consolidated financial statements, absent changes to our controls, there is a reasonable possibility that a material misstatement of the company’s annual or interim consolidated financial statements would not be prevented or detected on a timely basis.

Our independent registered public accounting firm, KPMG LLP, has issued an adverse opinion on the effectiveness of our internal control over financial reporting as of December 27, 2015. See “Report of Independent Registered Public Accounting Firm - ICFR” in Part II, Item 8, above. The reissued opinion on internal control over financial reporting does not affect KPMG LLP’s opinion on its audit of our consolidated financial statements, which is also included. See “Report of Independent Registered Public Accounting Firm - FSA” in Part II, Item 8, above.

Changes in Internal Control over Financial Reporting

Except as otherwise discussed above, during the fourth quarter of the year ended December 27, 2015, there were no changes in our internal control over financial reporting identified in connection with management’s evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Remediation

We are currently working to remediate the material weakness. We have reviewed the design, implementation and operation of the controls and have made enhancements and identified new controls that are currently being considered for implementation as part of the remediation plan. We believe these measures, once implemented and operating for a sufficient period of time, will remediate the control deficiency identified and strengthen our internal control over financial reporting.

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)(1)

Financial Statements. Financial Statements included in this Amendment are listed under Item 8. The Financial Statements are unchanged from those included in the Original Form 10-K.

 

(2)

Statement Schedules. Financial Statement schedules included in this Amendment are listed under Item 15(b). The Financial Statement schedules are unchanged from those included in the Original Form 10-K.

 

(3)

List of Exhibits. The List of Exhibits in the Original Form 10-K is amended to include currently dated certifications of our CEO and CFO, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and the consent of KPMG LLP, each as included with this Amendment and listed on the Exhibit Index in this Amendment.

 

(b)

Financial Statement Schedules.

Schedule II—Valuation and Qualifying Accounts

Schedule II—Valuation and Qualifying Accounts.

All other schedules are omitted because of the absence of the conditions under which they are required or because the information required by such omitted schedules are set forth in the financial statements or the notes thereto.

 

Description		Price Protection				Product Returns				Other Returns and Allowances				Deferred Tax Valuation Allowance				Total
		(In millions)
Balances at December 27, 2015		$	26.0			$	7.5			$	2.7			$	170.5			$	205.4
Charged to expenses, or revenues			90.8				19.1				0.9				9.5				110.8
Deductions			(84.3	)			(18.3	)			(3.9	)			(8.5	)			(106.5	)
Charged to other accounts			(0.1	)			—				—				0.3				(0.1	)
Balances at December 28, 2014		$	19.6			$	6.7			$	5.7			$	169.2			$	201.2
Charged to expenses, or revenues			68.0				19.1				12.6				36.8				136.5
Deductions			(61.9	)			(20.1	)			(11.0	)			(17.7	)			(110.7	)
Charged to other accounts			1.2				(1.4	)			0.2				2.5				2.5
Balances at December 29, 2013		$	12.3			$	9.1			$	3.9			$	147.6			$	172.9
Charged to expenses, or revenues			51.8				19.4				11.7				—				82.9
Deductions			(48.2	)			(17.6	)			(12.8	)			(7.9	)			(86.5	)
Charged to other accounts			—				(0.1	)			—				1.0				0.9
Balances at December 30, 2012		$	8.7			$	7.4			$	5.0			$	154.5			$	175.6

 

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EXHIBIT INDEX

 

Exhibit No.		Description
23.01		Consent of KPMG LLP.
31.01		Section 302 Certification of the Chief Executive Officer.
31.02		Section 302 Certification of the Chief Financial Officer.
32.01		Certification, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Mark S. Thompson.
32.02		Certification, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Mark S. Frey.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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.

 

Date: August 17, 2016

 

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