News Column

FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

February 27, 2014

Introduction

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



Liquidity and Capital Resources of Fairchild International, Excluding

Subsidiaries Critical Accounting Policies and Estimates Forward Looking Statements New Policy on Business Outlook Disclosure Status of First Quarter Business Recently Issued Financial Accounting Standards



Overview

Fairchild reported solid sales growth into industrial, appliance and automotive end markets during 2013 while demand from the mobile sector was weaker than expected. Demand from the consumer and notebook PC markets continued to be weak due to economic pressure on consumer spending, lack of compelling new TV or notebook products and competition from tablets and smart phones. Overall Fairchild sales were flat compared to 2012 at $1.4 billion. 34



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The Mobile, Computing, Consumer and Communication (MCCC) group's main focus is to supply the mobile, computing, consumer and communication end market segments with innovative power and signal path solutions including our low voltage metal oxide semiconductor field effect transistors (MOSFETs), Power Management integrated circuits (IC's), Mixed Signal Analog and Logic products. We seek to deliver exceptional product performance by optimizing silicon processes and application specific design to satisfy specific requirements for our customers. This enables us to deliver solutions with greater energy efficiency in a smaller footprint than is commonly available. We expect a steady acceleration of new product sales especially for solutions addressing the smart phone and ultraportable market. The Power Conversion, Industrial, and Automotive (PCIA) group's focus is to capitalize on the growing demand for greater energy efficiency and higher power density for space savings in power supplies, consumer electronics, battery chargers, electric motors, industrial electronics and automobiles. We are a leader in power semiconductor devices, low standby power consumption designs, and power module technology that enable greater efficiency, higher power density, and better performance. Improving the efficiency of our customers' products is vital to meeting new energy efficiency regulations. Effectively managing power conversion and distribution in power supplies is one of the greatest opportunities we have to improve overall system efficiency. We believe the growing global focus on energy efficiency will continue to drive growth in this product segment. Standard Discrete and Standard Linear (SDT) products are core building block components for many electronic applications. This segment uses a simplified and focused operating model to make the selling and support of these products easier and more profitable. The current operational structure and part portfolio should enable our standard products group to continue to generate solid cash flow with minimal investment. In 2013, we invested in our business to upgrade technologies, acquire new capabilities, and to fund R&D. Capital spending included significant investments in our new 8 inch wafer fab in Korea. We expect the transition to 8 inch wafer manufacturing for a greater percentage of our production will enable lower costs and improved margins for years to come. In addition, we have increased our focus on streamlining operations, creating greater manufacturing flexibility and having a more balanced internal versus external production mix. We expect this process to enable significant improvements in manufacturing and financial performance beginning in mid-2015.



In addition to investing in the business, we also repurchased more than two million shares of our stock and reduced our debt, ending the year with the highest net cash (cash minus debt) level in the history of the company. In December of 2013, the Fairchild Board of Directors authorized an enhanced stock repurchase program allowing the company to buy back up to $100 million in shares.

We strive to keep inventory as lean as possible while maintaining customer service. We prefer to maintain maximum flexibility by adjusting internal inventories in response to higher demand before adding more inventory to our distribution channels. At the end of the fourth quarter, our channel inventories were at 10 weeks after adjusting for end of life inventory which is within our target range of 10 to 11 weeks. At the end of the fourth quarter of 2013 internal inventories were at $228.1 million, a 4 percent reduction from the end of 2012. We believe Fairchild is in a strong position to take advantage of anticipated improvements in demand in 2014. 35



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Results of Operations

The following table summarizes certain information relating to our operating results as derived from our audited consolidated financial statements as well as certain unaudited non-GAAP financial measures. Year Ended December 29, December 30, December 25, 2013 2012 2011 (Dollars in millions) Total revenues $ 1,405.4 100.0 % $ 1,405.9 100.0 % $ 1,588.8 100.0 % Gross margin 416.5 29.6 % 442.0 31.4 % 559.2 35.2 % Operating Expenses: Research and development 171.6 12.2 % 156.9 11.2 % 153.4 9.7 % Selling, general and administrative 205.7 14.6 % 206.8 14.7 % 218.4 13.7 % Amortization of acquisition-related intangibles 15.5 1.1 % 18.2 1.3 % 19.7 1.2 % Restructuring and impairments 15.9 1.1 % 14.1 1.0 % 2.8 0.2 % Charge for litigation (12.6 ) -0.9 % 1.3 0.1 % - 0.0 % Total operating expenses 396.1 28.2 % 397.3 28.3 % 394.3 24.8 % Operating income 20.4 1.5 % 44.7 3.2 % 164.9 10.4 % Realized loss on sale of securities - 0.0 % 12.9 0.9 % - 0.0 % Other expense, net 9.2 0.7 % 8.1 0.6 % 7.2 0.5 % Income before income taxes 11.2 0.8 % 23.7 1.7 % 157.7 9.9 % Provision (benefit) for income taxes 6.2 0.4 % (0.9 ) -0.1 % 12.2 0.8 % Net income $ 5.0 0.4 % $ 24.6 1.7 % $ 145.5 9.2 % Unaudited NonGAAP Measures Adjusted net income $ 34.6$ 70.5$ 169.7 Adjusted Gross margin 425.2 30.3 % 442.0 31.4 % 561.4 35.3 % Adjusted R&D and SG&A 377.3 363.7 370.8 Free Cash Flow 100.9 31.3 82.1



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

Total Revenues Year Ended December 29, December 30, $ Change % Change 2013 2012 Inc (Dec) Inc (Dec) Total revenues $ 1,405.4$ 1,405.9$ (0.5 ) 0.0 % Revenue was flat on a nominal basis in 2013 compared to 2012, however 2012 contained 53 weeks. Sales in 2013 increased 2% from 2012 when adjusted for the extra week. Revenue in 2012 also included $8.5 million of insurance proceeds related to business interruption claims for the company's optoelectronics supply issues resulting from the Thailand floods in the fourth quarter of 2011. 36



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Geographic revenue information is based on the customer location within the indicated geographic region. The following table presents, as a percentage of sales, geographic sales for the Americas, Europe, China, Taiwan, Korea, and Other Asia/Pacific (which for our geographic reporting purposes includes Japan and Singapore) for 2013 and 2012. Year Ended December 29, December 30, 2013 2012 United States 9 % 9 % Other Americas 2 2 Europe 14 13 China 36 35 Taiwan 11 14 Korea 7 9 Other Asia/Pacific 21 18 Total 100 % 100 % The decrease in Taiwan was due primarily to lower sales into the PC market. Lower Korean sales reflect weaker demand from Samsung and another large Korean manufacturer primarily in the mobile and LCD TV sector. The increase in Other Asia/Pacific revenue was due to continued strong demand for mobile products including smart phones and tablets. Gross Margin Year Ended December 29, December 30, $ Change % Change 2013 2012 Inc (Dec) Inc (Dec) Gross Margin $ $ 416.5$ 442.0$ (25.5 ) -5.8 % Gross Margin % 29.6 % 31.4 % - - Gross margin declined $25.5 million or 180 basis points in 2013 compared to 2012 due primarily to mix/pricing impacts and to higher manufacturing costs associated with qualifying and ramping the new 8 inch wafer fab in Korea. We expect the efforts related to the new fab in Korea to improve manufacturing flexibility, provide better support to our customers as well as reduce costs. Adjusted Gross Margin Year Ended December 29, December 30, $ Change % Change 2013 2012 Inc (Dec) Inc (Dec) Adjusted Gross Margin $ $ 425.2$ 442.0$ (16.8 ) -3.8 % Adjusted Gross Margin % 30.3 % 31.4 % - 0.1 % Adjusted gross margin dollars decreased when compared to 2012 for the same reasons listed above. Adjusted gross margin for 2013 does not include the accelerated depreciation due to the 8 inch line closure at our Salt Lake City fab. There were no adjustments to 2012 gross margin. See reconciliation of gross margin to adjusted gross margin in Item 6. 37



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Table of Contents Operating Expenses Year Ended December 29, December 30, $ Change % Change 2013 2012 Inc (Dec) Inc (Dec)

Research and development $ 171.6$ 156.9$ 14.7 9.4 % Selling, general and administrative $ 205.7$ 206.8$ (1.1 ) -0.5 % Research and development expenses increased 9.4% in 2013 compared to 2012 due to higher spending on a variety of new technologies including silicon carbide and advanced sensors. Selling, general and administrative expenses were down slightly from the prior year due to ongoing cost reductions and one less week of costs in 2013 offset by higher variable compensation expense. Operating expenses included an additional week of costs in 2012. Adjusted Operating Expenses Year Ended December 29, December 30, $ Change % Change 2013 2012 Inc (Dec) Inc (Dec) Adjusted R&D and SG&A $ 377.3$ 363.7$ 13.6 3.7 %



Adjusted operating expenses increased for the same reasons listed above. There were no adjustments to 2012 R&D and SG&A.

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



Restructuring and impairments $ 15.9 $ 14.1

$ 1.8 12.8 % During 2013, we recorded restructuring and impairment charges, net of releases, totaling $15.9 million. The charges included $11.0 million in employee separation costs, $3.0 million in line closure costs, $1.6 million in asset impairment charges, $0.6 million in lease termination costs, and $0.1 million in reserve releases associated with the 2013 Infrastructure Realignment Program. In addition during 2013, we recorded $0.1 million in employee separation costs, and $0.3 million in reserve releases associated with the 2012 Infrastructure Realignment Program.



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

During 2012, we recorded restructuring and impairment charges, net of releases, totaling $14.1 million. The charges included $12.5 million in employee separation costs and $0.4 million in facility closure costs and $0.6 million in lease termination costs, all associated with the 2012 Infrastructure Realignment Program. In addition during 2012, we recorded $1.0 million in employee separation costs, $0.4 million in reserve releases, and $0.1 million in asset impairment charges associated with the 2011 Infrastructure Realignment Program. We also recognized $0.1 million in reserve releases in 2012 associated with the 2010 Infrastructure Realignment Program. The 2012 Infrastructure Realignment Program includes costs for organizational changes in the company's sales organization, manufacturing sites and manufacturing support organizations, the human resources function, executive management levels, and the MCCC and PCIA product lines as well as the termination of an IT systems lease and the final closure of a warehouse in Korea. 38



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The 2011 Infrastructure Realignment Program includes costs for organizational changes in the company's supply chain management group, the website technology group, the quality organization, and other administrative groups. The 2011 program also includes costs to further improve the company's manufacturing strategy and changes in both the PCIA and MCCC groups.



The 2010 Infrastructure Realignment Program includes costs to simplify and realign some activities within the MCCC segment, costs for the continued refinement of the company's manufacturing strategy, and costs associated with centralizing the company's accounting functions.

The 2009 Infrastructure Realignment Program includes costs associated with the previously planned closure of the Mountaintop, Pennsylvania manufacturing facility and the four-inch manufacturing line in Bucheon, South Korea, both of which were announced in the first quarter of 2009. The 2009 Program also includes charges for a smaller worldwide cost reduction plan to further right-size our company and remain financially healthy. The consolidation of the South Korea fabrication processes was completed in 2011



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

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



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

Year Ended December 29, December 30, 2013 2012 (In millions) Interest expense $ 6.4 $ 7.6 Interest income (0.6 ) (2.0 ) Other (income) expense, net 3.4 2.5 Other expense, net $ 9.2 $ 8.1



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

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

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

Income before income taxes $ 11.2 $ 23.7 $ (12.5 ) -52.7 % Provision (benefit) for income taxes $ 6.2 $ (0.9 ) $ 7.1 788.9 % The effective tax rate for 2013 was 55.4% compared to (3.8%) for 2012. The change in effective tax rate while impacted by foreign exchange rates, was primarily driven by changes in profits among legal jurisdictions with differing tax rates. In 2013, the valuation allowance on the company's deferred tax assets decreased by $6.9 million as deferred tax assets decreased primarily due to U.S. profits before tax as well as $2.8 million decrease to the valuation allowance related to the company's Malaysian cumulative reinvestment allowance and manufacturing incentives. The overall decrease did not impact our results of operations. 39



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In accordance with the Income Taxes Topic in the FASB Accounting Standards Codification (ASC), deferred taxes have not been provided on undistributed earnings of foreign subsidiaries which are reinvested indefinitely. Certain non-U.S. earnings, which have been taxed in the U.S. but earned offshore, have and continue to be part of our repatriation plan. As of December 29, 2013, we have recorded a deferred tax liability of $2.5 million, with no impact to the consolidated statement of operations as we have a full valuation allowance against our net U.S. deferred tax assets. Free Cash Flow Year Ended December 29, December 30, $ Change % Change 2013 2012 Inc (Dec) Inc (Dec) Free Cash Flow $ 100.9 $ 31.3 $ 69.6 222.4 % Free cash flow is a non-GAAP financial measure. To determine free cash flow, we subtract capital expenditures from cash provided by operating activities. Free cash flow increased in 2013 primarily due to lower capital expenditures. See Free cash flow reconciliation in Item 6.



Reportable Segments The following table represents comparative disclosures of revenue and gross margin of our reportable segments.

Year Ended December 29, 2013 December 30, 2012 % of Gross Gross Operating % of Gross Gross Operating Revenue total Margin Margin % Income (loss) Revenue total Margin Margin % Income (loss) (Dollars in millions) MCCC $ 534.1 38.0 % $ 195.6 36.6 % $ 84.7 $ 570.2 40.5 % $ 214.9 37.7 % $ 103.5 PCIA 733.4 52.2 % 210.6 28.7 % 115.8 694.0 49.4 % 204.1 29.4 % 120.2 SDT 137.9 9.8 % 24.1 17.5 % 16.5 141.7 10.1 % 26.9 19.0 % 18.6 Corporate (1,2) - - (13.8 ) - (196.6 ) - - (3.9 ) - (197.6 ) Total $ 1,405.4 100.0 % $ 416.5 29.6 % $ 20.4 $ 1,405.9 100.0 % $ 442.0 31.4 % $ 44.7 (1) Year Ended December 29, December 30, 2013 2012 Non-cash stock based compensation expense $ 4.9 $ 4.4 Accelerated depreciation on assets related to line closure 8.7 - Other 0.2 (0.5 ) Total $ 13.8 $ 3.9 (2) Year Ended December 29, December 30, 2013 2012 Non-cash stock based compensation expense $ 27.9$ 22.6 Restructuring and impairments expense 15.9



14.1

Accelerated depreciation on assets related to line closure 8.7 - Charge for (release of) litigation (12.6 ) 1.3 Selling, general and administrative expense 156.5 159.8 Other 0.2 (0.2 ) Total $ 196.6$ 197.6 40



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Table of Contents MCCC Year Ended December 29, December 30, $ Change % Change 2013 2012 Inc (Dec) Inc (Dec) Revenue $ 534.1$ 570.2$ (36.1 ) -6.3 % Gross Margin $ $ 195.6$ 214.9$ (19.3 ) -9.0 % Gross Margin % 36.6 % 37.7 % -1.1 % Operating Income $ 84.7$ 103.5$ (18.8 ) -18.2 % MCCC 2013 revenue decreased from the prior year due primarily to lower demand for MOSFETs supporting the computing and consumer end markets and one less week in 2013 compared to 2012. Gross margin and operating income decreased in 2013 compared to 2012 due primarily to underutilization charges associated with the lower sales level and higher variable compensation spending. Operating income was also impacted by higher R&D spending primarily for mobile applications. PCIA Year Ended December 29, December 30, $ Change % Change 2013 2012 Inc (Dec) Inc (Dec) Revenue $ 733.4$ 694.0$ 39.4 5.7 % Gross Margin $ $ 210.6$ 204.1$ 6.5 3.2 % Gross Margin % 28.7 % 29.4 % -0.7 % Operating Income $ 115.8$ 120.2$ (4.4 ) -3.7 % PCIA revenue increased in 2013 compared to 2012 due to higher high voltage sales into the industrial, appliance and automotive end markets. PCIA revenue in 2012 included $8.5 million of insurance proceeds related to the business interruption claims for the company's optoelectronics supply issues resulting from flooding in Thailand in the fourth quarter of 2011. 2012 also included one additional week of sales. Gross margin percent decreased 70 basis points due to higher costs associated with the start up costs associated with the new 8 inch wafer fab in Korea partially offset by better utilization in other plants driven by higher sales. Lower operating income was mainly due to lower gross margin combined with higher variable compensation expenses in 2013 compared to 2012. SDT Year Ended December 29, December 30, $ Change % Change 2013 2012 Inc (Dec) Inc (Dec) Revenue $ 137.9$ 141.7$ (3.8 ) -2.7 % Gross Margin $ $ 24.1$ 26.9$ (2.8 ) -10.4 % Gross Margin % 17.5 % 19.0 % -1.5 % Operating Income $ 16.5$ 18.6$ (2.1 ) -11.3 % SDT revenue in 2013 decreased as compared to 2012 as a result of one less week. The decrease in gross margin and operating income was due primarily to changes in mix and higher variable compensation expense in 2013 compared to 2012. 41



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Year Ended December 30, 2012 Compared to Year Ended December 25, 2011

Total Revenues Year Ended December 30, December 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) Total revenues $ 1,405.9$ 1,588.8$ (182.9 ) -11.5 % Revenue in 2012 included $8.5 million of insurance proceeds related to business interruption claims for the company's optoelectronics supply issues resulting from the Thailand floods in the fourth quarter of 2011. Revenue decreased in 2012 when compared to 2011, despite an extra week in 2012. The decrease in revenue was driven primarily by a decrease in average selling price, with decreases in unit volumes sold contributing an additional 1% of the change. Geographic revenue information is based on the customer location within the indicated geographic region. The following table presents, as a percentage of sales, geographic sales for the Americas, Europe, China, Taiwan, Korea and Other Asia/Pacific (which for our geographic reporting purposes includes Japan and Singapore) for 2012 and 2011. Year Ended December 30, December 25, 2012 2011 United States 9 % 10 % Other Americas 2 2 Europe 13 13 China 35 33 Taiwan 14 14 Korea 9 11 Other Asia/Pacific 18 17 Total 100 % 100 % The increase in Other Asia/Pacific revenue was due to continued strong demand for mobile products including smart phones and tablets. There was also a shift in sales to a major customer from their Korea location to an Other Asia/Pacific location, which decreased our Korea sales and also contributed to the increase in Other Asia Pacific. The increase in China revenue was driven by growth in automotive sales as well as strong demand for mobile products. All other locations had minimal percentage changes. Gross Margin Year Ended December 30, December 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) Gross Margin $ $ 442.0$ 559.2$ (117.2 ) -21.0 % Gross Margin % 31.4 % 35.2 % - 0.0 % Effective the first day of 2012, expected asset lives and amortization schedules for certain factory equipment was adjusted to better reflect actual performance of the tools, favorably impacting gross margin by approximately $17.2 million in 2012 when compared to depreciation expense under the previous useful life policy. In addition, we reassessed the lives of our molds and tooling equipment which caused an increase in depreciation expense of $0.7 million in 2012 when compared to depreciation expense under the previous useful life policies. 42



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The net favorable impact to gross margin was offset by decreased revenue and higher unit costs of inventory due to lower production rates in 2012. Increased expenses from 8-inch conversion costs and 8-inch start up costs, higher inventory write downs in 2012, unfavorable foreign exchange impacts from the strengthening of the Korean Won and Malaysian Ringgit, increased depreciation expenses from 2011 capital expenditures, and increased payroll costs from 2012 annual merit increases also contributed to the increase in costs of sales and decrease in gross margin. These additional costs were partially offset by reduced variable compensation in 2012 as we did not meet our targets. These changes resulted in a net overall decrease in gross margin for 2012 as compared to 2011. Adjusted Gross Margin Year Ended December 30, December 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) Adjusted Gross Margin $ $ 442.0$ 561.4$ (119.4 ) -21.3 % Adjusted Gross Margin % 31.4 % 35.3 % - 0.1 % Adjusted gross margin dollars decreased when compared to 2011 for the same reasons listed above. Adjusted gross margin for 2011 does not include the accelerated depreciation and inventory write-offs due to the previously planned closure of the Mountaintop facility and the expense associated with a change in retirement plans at two of our Asian locations. There were no adjustments to 2012 gross margin. See reconciliation of gross margin to adjusted gross margin in Item 6. Operating Expenses Year Ended December 30, December 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) Research and development $ 156.9$ 153.4$ 3.5 2.3 %



Selling, general and administrative $ 206.8$ 218.4

$ (11.6 ) -5.3 % Operating expenses included an additional week of costs in 2012 as compared to 2011. Overall R&D expenses increased slightly in 2012 when compared to 2011. Increases in R&D project spending were partially offset by decreases in variable compensation as we did not meet the associated targets for 2012. Selling and general and administration expenses (SG&A) expense decreased in 2012 when compared to 2011 driven primarily by decreases in variable compensation and equity compensation as we did not meet our performance targets for 2012. Adjusted Operating Expenses Year Ended December 30, December 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) Adjusted R&D and SG&A $ 363.7$ 370.8$ (7.1 ) -1.9 % Adjusted operating expenses increased for the same reasons listed above. 2011 Adjusted operating expenses do not include the expense associated with a change in retirement plans at two of our Asian locations. There were no adjustments to 2012 R&D and SG&A. 43



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Table of Contents Restructuring and Impairments Year Ended December 30, December 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec)



Restructuring and impairments $ 14.1 $ 2.8

$ 11.3 403.6 % During 2012, we recorded restructuring and impairment charges, net of releases, totaling $14.1 million. The charges included $12.5 million in employee separation costs and $0.4 million in facility closure costs and $0.6 million in lease termination costs, all associated with the 2012 Infrastructure Realignment Program. In addition during 2012, we recorded $1.0 million in employee separation costs, $0.4 million in reserve releases, and $0.1 million in asset impairment charges associated with the 2011 Infrastructure Realignment Program. We also recognized $0.1 million in reserve releases in 2012 associated with the 2010 Infrastructure Realignment Program. The 2012 Infrastructure Realignment Program includes costs for organizational changes in the company's sales organization, manufacturing sites and manufacturing support organizations, the human resources function, executive management levels, and the MCCC and PCIA product lines as well as the termination of an IT systems lease and the final closure of a warehouse in Korea. During 2011, we recorded restructuring and impairment charges, net of releases, totaling $2.8 million. The charges included $5.4 million in employee separation costs and $0.2 million in reserve releases, all associated with the 2011 Infrastructure Realignment Program. In addition during 2011, we recorded $3.6 million in employee separation costs and $0.4 million in reserve releases associated with the 2010 Infrastructure Realignment Program. We also recorded $1.9 million of employee separation costs, $0.7 million of fab closure costs, and $8.2 million in reserve releases in 2011, all associated with the 2009 Infrastructure Realignment Program. This large release was driven by our decision to keep open the Mountain Top facility reversing the March 2009 announcement to close the site. Since the original announcement, we have experienced strong growth and profitability in the High Voltage and Automotive businesses. The company expects to continue the expansion of these businesses and determined that retaining the Mountain Top facility will be essential to our automotive customers' current and future needs. As a result of this decision, we released the reserves related to Mountain Top restructuring action and paid out previously accrued employee stay-on bonuses. The 2011 Infrastructure Realignment Program includes costs for organizational changes in the company's supply chain management group, the website technology group, the quality organization, and other administrative groups. The 2011 program also includes costs to further improve the company's manufacturing strategy and changes in both the PCIA and MCCC groups.



The 2010 Infrastructure Realignment Program includes costs to simplify and realign some activities within the MCCC segment, costs for the continued refinement of the company's manufacturing strategy, and costs associated with centralizing the company's accounting functions.

The 2009 Infrastructure Realignment Program includes costs associated with the previously planned closure of the Mountaintop, Pennsylvania manufacturing facility and the four-inch manufacturing line in Bucheon, South Korea, both of which were announced in the first quarter of 2009. The 2009 Program also includes charges for a smaller worldwide cost reduction plan to further right-size our company and remain financially healthy. The consolidation of the South Korea fabrication processes was completed in 2011 Charge for Litigation In 2012, we increased our reserves for potential litigation outcomes by $1.0 million as a result of the ongoing developments in the POWI 2 litigation. In addition, we accrued $0.3 million for an unrelated legal settlement. Realized Loss on Sale of Securities In 2012, we sold our auction rate security portfolio for $23.3 million and incurred a realized loss of approximately $12.9 million on the sale. 44



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Other Expense, net The following table presents a summary of Other expense, net for 2012 and 2011, respectively.

Year Ended December 30, December 25, 2012 2011 (In millions) Interest expense $ 7.6 $ 7.3 Interest income (2.0 ) (2.7 ) Other (income) expense, net 2.5 2.6 Other expense, net $ 8.1 $ 7.2



Interest expense Interest expense in 2012 increased $0.3 million as compared to 2011, primarily due to higher net interest rates.

Interest income Interest income in 2012 decreased $0.7 million as compared to 2011, primarily driven by the loss of interest income on our auction rate security portfolio and slightly lower cash and investment balances.

Income Taxes Year Ended December 30, December 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) Income (loss) before income taxes $ 23.7 $ 157.7$ (134.0 ) -85.0 % Provision (benefit) for income taxes $ (0.9 ) $ 12.2$ (13.1 ) -107.4 % The effective tax rate for 2012 was (3.8)% compared to 7.7% for 2011. The change in effective tax rate is primarily due to shifts of income and loss among jurisdictions with differing tax rates and foreign currency revaluations of tax assets and liabilities. In 2012, the valuation allowance on the company's deferred tax assets decreased by $16.6 million as deferred tax assets decreased due to the expiration of credit carry forwards and adjustments to other comprehensive income. The overall decrease did not impact our results of operations. In accordance with the Income Taxes Topic in the FASB Accounting Standards Codification (ASC), deferred taxes have not been provided on undistributed earnings of foreign subsidiaries which are reinvested indefinitely. Certain non-U.S. earnings, which have been taxed in the U.S. but earned offshore, have and continue to be part of our repatriation plan. As of December 30, 2012, we have recorded a deferred tax liability of $1.8 million, with no impact to the consolidated statement of operations as we have a full valuation allowance against our net U.S. deferred tax assets. Free Cash Flow Year Ended December 30, December 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) Free Cash Flow $ 31.3 $ 82.1 $ (50.8 ) -61.9 % Free cash flow is a non-GAAP financial measure. To determine free cash flow, we subtract capital expenditures from cash provided by operating activities. Free cash flow decreased in 2012 as a result of decreased cash provided by operating activities primarily driven by reduced net income. This was partially offset by a decrease in capital expenditures of $34.5 million. See free cash flow reconciliation in Item 6. 45



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Reportable Segments The following table represents comparative disclosures of revenue and gross margin of our reportable segments.

Year Ended December 30, 2012 December 25, 2011 % of Gross Gross Operating % of Gross Gross Operating Revenue total Margin Margin % Income (loss) Revenue total Margin Margin % Income (loss) (Dollars in millions) MCCC $ 570.2 40.5 % $ 214.9 37.7 % $ 103.5 $ 579.1 36.5 % $ 215.1 37.2 % $ 100.4 PCIA 694.0 49.4 % 204.1 29.4 % 120.2 807.4 50.8 % 296.4 36.7 % 211.9 SDT 141.7 10.1 % 26.9 19.0 % 18.6 202.3 12.7 % 54.3 26.8 % 46.3 Corporate (1,2) - - (3.9 ) - (197.6 ) - - (6.6 ) - (193.7 ) Total $ 1,405.9 100.0 % $ 442.0 31.4 % $ 44.7 $ 1,588.8 100.0 % $ 559.2 35.2 % $ 164.9 (1) Year Ended December 30, December 25, 2012 2011 Non-cash stock based compensation expense $ 4.4 $ 4.3 Accelerated depreciation on assets related to fab closure - 0.7 Retirement plan changes - 1.7 Other (0.5 ) (0.1 ) Total $ 3.9 $ 6.6 (2) Year Ended December 30, December 25, 2012 2011



Non-cash stock based compensation expense $ 22.6 $

24.8

Restructuring and impairments expense 14.1



2.8

Charge for litigation 1.3



-

Selling, general and administrative expense 159.8

162.8 Other (0.2 ) 3.3 Total $ 197.6$ 193.7 MCCC Year Ended December 30, December 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) Revenue $ 570.2$ 579.1$ (8.9 ) -1.5 % Gross Margin $ $ 214.9$ 215.1$ (0.2 ) -0.1 % Gross Margin % 37.7 % 37.2 % 0.5 % Operating Income $ 103.5$ 100.4$ 3.1 3.1 % MCCC's 2012 revenue was slightly lower when compared to 2011 due to a decline in average selling prices which was attributable to competitive pricing pressure on existing products, offset slightly by increased prices on newly introduced products. The decline in overall average selling prices was offset by increased unit sales on mobile products in 2012. Gross margin dollars were flat when compared to 2011, while gross margin percent improved slightly. Improvement in gross margin percent was driven by reduced variable compensation as well as cost savings programs in the low voltage group. These improvements were offset in part by higher inventory reserves and increased subcontractor qualification costs for mobile products. 46



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MCCC operating income increased slightly in 2012 as compared to 2011 as a result of reduced variable compensation expense and lower general and administrative expense (G&A) even with an additional week of costs during 2012. These decreases were offset in part by additional R&D investment in our mobile business. PCIA Year Ended December 30, December 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) Revenue $ 694.0$ 807.4$ (113.4 ) -14.0 % Gross Margin $ $ 204.1$ 296.4$ (92.3 ) -31.1 % Gross Margin % 29.4 % 36.7 % -7.3 % Operating Income $ 120.2$ 211.9$ (91.7 ) -43.3 % PCIA revenue in 2012 included $8.5 million of insurance proceeds related to the business interruption claims for the company's optoelectronics supply issues resulting from flooding in Thailand in the fourth quarter of 2011. The 14% revenue decrease in 2012 as compared to 2011 was driven by a 7% decrease in average selling prices and a 7% decrease in overall unit sales. The decrease in average selling prices and units was primarily driven by our high voltage group and was attributable to reduced market demand for these products and efforts to reduce channel inventory. The decreased revenue from high voltage products was mitigated in part by increased revenue for our automotive and power conversion products. Favorable gross margin impacts in 2012 from lower variable compensation were offset by decreased high voltage revenue, increased 8 inch conversion costs, and unfavorable foreign exchange impacts in 2012.



Lower operating income was mainly due to decreased gross margin as well as increased R&D expense in high voltage and auto product lines. In addition, operating expenses included an additional week of costs in 2012 as compared to 2011. These increases were offset in part by lower selling, general and administrative expenses (SG&A) and reduced variable compensation expenses.

SDT Year Ended December 30, December 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) Revenue $ 141.7$ 202.3$ (60.6 ) -30.0 % Gross Margin $ $ 26.9$ 54.3$ (27.4 ) -50.5 % Gross Margin % 19.0 % 26.8 % -7.8 % Operating Income $ 18.6$ 46.3$ (27.7 ) -59.8 % SDT revenue in 2012 decreased as compared to 2011 as a result of strategic efforts to eliminate lower margin products and also reduced overall market demand. Lower average selling prices also contributed to the decrease in SDT revenue as compared to 2011. Lower gross margin was due to lower revenue and higher overhead costs. The decrease in operating income was primarily due to lower gross margin. R&D and sales and marketing expenses were also higher in 2012 as a result of increased investment in R&D and sales and marketing. In addition operating expenses included an additional week of costs in 2012 as compared to 2011. This increase was offset in part by reduced variable compensation costs.



Liquidity and Capital Resources

Our main sources of liquidity are our cash flows from operations, cash and cash equivalents and revolving credit facility.

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The Credit Facility consists of a $400.0 million revolving loan agreement, of which $200.0 million was drawn as of December 29, 2013. Additionally, we have the ability to incrementally increase the commitments under the agreement up to $300 million. The Credit Facility imposes various restrictions upon us that could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities. It also includes restrictive covenants that limit our ability to consolidate, merge or enter into acquisitions, create liens, pay dividends or make similar restricted payments, sell assets, invest in capital expenditures and incur indebtedness. The Credit Facility also limits our ability to modify our certificate of incorporation and bylaws, or enter into shareholder agreements, voting trusts or similar arrangements. In addition, the affirmative covenants in the Credit Facility also require the company's financial performance to comply with certain financial measures, as defined by the credit agreement. These financial covenants require us to maintain a minimum interest coverage ratio of 3.0 to 1.0 and a maximum leverage ratio of 3.25 to 1.0. It defines the interest coverage ratio as the ratio of the cumulative four quarter trailing consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated cash interest expense and defines the maximum leverage ratio as the ratio of total consolidated debt to the cumulative four quarter trailing consolidated EBITDA. Consolidated EBITDA, as defined by the credit agreement excludes restructuring, non-cash equity compensation and certain other adjustments. At December 29, 2013, we were in compliance with these covenants and we expect to remain in compliance. This expectation is subject to various risks and uncertainties discussed more thoroughly in Item 1A, and include, among others, the risk that our assumptions and expectations about business conditions, expenses and cash flows for the remainder of the year may be inaccurate. Under the Credit Facility, borrowing may be in the form of either Eurocurrency Loans or Alternate Base Rate (ABR) loans. Eurocurrency Loans accrue interest at the London Interbank Offered Rate (LIBOR) plus 1.75%. The ABR is the highest of JP Morgan Chase Bank's prime rate, the federal funds effective rate plus 0.5 percent, or adjusted LIBOR, as defined by the credit agreement, plus 1%. ABR loans accrue interest at the ABR rate plus 0.75%. The company also pays a commitment fee of 0.35% per annum on the unutilized commitments. While our Credit Facility places restrictions on the payment of dividends under certain conditions, it does not restrict the subsidiaries of Fairchild Semiconductor Corporation, except to a limited extent, from paying dividends or making advances to Fairchild Semiconductor Corporation. As a result, we believe that funds generated from operations, together with existing cash and funds from our Credit Facility will be sufficient to meet our debt obligations, operating requirements, capital expenditures and research and development funding needs over the next twelve months. In 2013, we incurred capital expenditures of $75 million. At December 29, 2013, under our Credit Facility, we have borrowing capacity of $200.0 million for working capital and general corporate purposes, including acquisitions. There are also outstanding letters of credit under the Credit Facility totaling $516 thousand. These outstanding letters of credit reduce the amount available under the Credit Facility to $199.5 million. We had additional outstanding letters of credit of $765 thousand that do not fall under the Credit Facility. We also had $3.5 million of undrawn credit facilities at certain of our foreign subsidiaries. These outstanding amounts do not impact available borrowings under the senior credit facility. Borrowings under the Credit Facility are secured by a pledge of common stock of the company's first tier domestic subsidiaries and 65% of the stock of the company's first tier foreign subsidiaries. The payment of principal and interest on the Credit Facility is fully and unconditionally guaranteed by Fairchild Semiconductor International, Inc. and each of its domestic subsidiaries. We frequently evaluate opportunities to sell additional equity or debt securities, obtain credit facilities from lenders or restructure our long-term debt to further strengthen our financial position. Additional borrowing or equity investment may be required to fund future acquisitions. The sale of additional equity securities could result in additional dilution to our stockholders. In December 2013, the Board of Directors authorized the purchase of common stock up to $100 million. Purchases are authorized through December 2014. 48



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As of December 29, 2013, we had $3.0 million of net unrecognized tax benefits recorded in non-current taxes payable. As of December 30, 2012, we had $3.0 million of net unrecognized tax benefits recorded in non-current taxes payable. The timing of the expected cash outflow relating to the balance is not reliably determinable at this time. As of December 29, 2013, our cash, cash equivalents and short-term and long-term securities were $420.1 million, an increase of $11.5 million from December 30, 2012. $208.3 million of the cash and cash equivalents balance is located in the United States. During 2013, our cash provided by operating activities was $176.1 million compared to $183.2 million in 2012. The following table presents a summary of net cash provided by operating activities during 2013 and 2012, respectively. Year Ended December 29, December 30, 2013 2012 (In millions) Net income $ 5.0 $ 24.6 Depreciation and amortization 145.2



135.3

Non-cash stock-based compensation 27.9



22.6

Non-cash realized loss on sale of investments - 12.9 Non-cash restructuring 1.5 0.1 Deferred income taxes, net (4.8 ) (11.2 ) Release of Litigation Charge (12.6 ) Other, net 5.2



2.5

Change in other working capital accounts 8.7



(3.6 )

Net cash provided by operating activities $ 176.1 $

183.2

Cash provided by operating activities in 2013 decreased by $7.1 million compared to 2012 primarily due to a decrease in net income which was partially offset by favorable changes is other working capital accounts. Cash used in investing activities during 2013 totaled $77.0 million compared to $131 million in 2012. There were no acquisitions in 2013. Capital expenditures were $75.2 million in 2013 compared to $151.9 million in 2012.



Cash used in financing activities totaled $87.2 million in 2013 as compared to $69.6 million in 2012. The increase in cash used in 2013 was driven by an increased amount of treasury shares purchased as shown in the table below.

Year Ended December 29, December 30, 2013 2012 (In millions) Cash flows from financing activities Repayment of long term debt (50.0 ) (50.0 ) Issuance of long term debt - - Proceeds from issuance of common stock and from exercise of stock options 1.1 5.0 Purchase of treasury stock (29.0 ) (13.9 ) Shares withheld for employee taxes (9.3 )



(10.7 )

Net cash used in financing activites $ (87.2 )$ (69.6 ) 49



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The table below summarizes our significant contractual obligations as of December 29, 2013 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

Less than 1-3 4-5 After Contractual Obligations Total 1 year



years years 5 years

(In



millions)

Debt Obligations - Principle $ 200.0 $



200.0

Debt Obligations - Interest (1) 10.6 4.0



6.6

Operating Lease Obligations (2) 41.5 18.1 20.7 2.7 - Letters of Credit 3.5 3.5 Capital Purchase Obligations (3) 4.5 4.5 Other Purchase Obligations and Commitments (4) 35.1 26.3 4.5 1.1 3.2 Royalty Obligations 3.8 1.0 2.0 0.8 Executive Compensation Agreements 2.5 0.1 0.2 0.3 1.9 Total (5) $ 301.5$ 57.5$ 234.0$ 4.9$ 5.1



(1) Interest rate on debt is variable. Interest payments were estimated using the

2.1% interest rate in effect currently (see Item 8, Note 7 for additional

information

(2) Represents future minimum lease payments under noncancelable operating

leases.

(3) Capital purchase obligations represent commitments for purchase of plant and

equipment. They are not recorded as liabilities on our balance sheet as of

December 29, 2013, as we have not yet received the related goods or taken

title to the property.

(4) For the purposes of this table, contractual obligations for purchase of goods

or services are defined as agreements that are enforceable and legally

binding and that specify all significant terms, including: fixed or minimum

quantities to be purchased; fixed, minimum or variable price provisions; and

the approximate timing of the transaction. Our purchase orders are based on

our current manufacturing needs and are fulfilled by our vendors within short

time horizons.

(5) We had $3.3 million of unrecognized tax benefits at December 29, 2013. The

timing of the expected cash outflow relating to the balance is not reliably

determinable at this time. In addition, the total does not include any

contractual obligations recorded on the balance sheet as current liabilities

other than certain purchase obligations as discussed below.

It is customary practice in the semiconductor industry to enter into guaranteed purchase commitments or "take or pay" arrangements for purchases of certain equipment and raw materials. Obligations under these arrangements are included in (4) above. Contractual obligations that are contingent upon the achievement of certain milestones are not included in the table above. These obligations include contingent funding/payment obligations and milestone-based equity compensation funding. These arrangements are not considered contractual obligations until the milestone is met.



We also enter into contracts for outsourced services; however, the obligations under these contracts were not significant at December 29, 2013 and the contracts generally contain clauses allowing for cancellation without significant penalty.

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



Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments 50



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that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The U.S. Securities and Exchange Commission has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and which require our most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies include the policies of revenue recognition, sales reserves, inventory valuation, fair value of financial instruments, impairment of long-lived assets, income taxes and loss contingencies. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies. On an ongoing basis, we evaluate the judgments and estimates underlying all of our critical accounting policies. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures, and reported amounts of revenues and expenses. These estimates and assumptions are based on our best estimates and judgment. We evaluate our estimates and assumptions using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, and energy 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 and Sales Reserves No revenue is recognized unless there is persuasive evidence of an arrangement, the price to the buyer is fixed or determinable, delivery has occurred and collectability of the sales price is reasonably assured. Revenue from the sale of semiconductor products is recognized when title and risk of loss transfers to the customer, which is generally when the product is received by the customer. In some cases, title and risk of loss do not pass to the customer when the product is received by them. In these cases, we recognize revenue at the time when title and risk of loss is transferred, assuming all other revenue recognition criteria have been satisfied. These cases include several inventory locations where we manage consigned inventory for our customers, some of which is at customer facilities. In such cases, revenue is not recognized when products are received at these locations; rather, revenue is recognized when customers take the inventory from the location for their use. Shipping costs billed to our customers are included within revenue with associated costs classified in cost of goods sold. Approximately 61% of our revenue in 2013 is generated through sales to distributors. Distributor payments are due under agreed terms and are not contingent upon resale or any other matter other than the passage of time. We have agreements with some distributors and customers for various programs, including prompt payment discounts, pricing protection, scrap allowances and stock rotation. Sales to these distributors and customers, as well as the existence of sales incentive programs, are in accordance with terms set forth in written agreements with these distributors and customers. In general, credits allowed under these programs are capped based upon individual distributor agreements. We record charges associated with these programs as a reduction of revenue based upon historical activity and our expectation of future activity. We also have volume based incentives with certain distributors to encourage stronger resales of our products. Reserves are recorded as a reduction to revenue as they are earned by the distributor. Our policy is to use both a three to six month rolling historical experience rate as well as a prospective view of products in the distributor channel for distributors who participate in an incentive program in order to estimate the necessary allowance to be recorded. In addition, the products sold by us are subject to a limited product quality warranty. We accrue for estimated incurred but unidentified quality issues based upon historical activity and known quality issues if a loss is probable and can be reasonably estimated. The standard limited warranty period is one year. Quality returns are accounted for as a reduction of revenue. Historically, we have not experienced material differences between our estimated sales reserves and actual results. 51



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Inventory Valuation In determining the net realizable value of our inventories, we review the valuations of inventory considered excessively old, and therefore subject to, obsolescence and inventory in excess of customer backlog and historical rates of demand. We also value inventory at the lower of cost or market. Once established, write-downs of inventory are considered permanent adjustments to the cost basis of inventory. Fair Value of Financial Instrument Securities and derivatives are financial instruments that are recorded at fair value on a recurring basis. The Fair Value Measurements and Disclosures Topic of the FASB ASC, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with the requirements of the Fair Value Measurements and Disclosures Topic of the FASB ASC, we group our financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:



Level 1-Valuation is based upon quoted market price for identical

instruments traded in active markets.



Level 2-Valuation is based on quoted market prices for similar instruments

in active markets, quoted prices for identical or similar instruments in

markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3-Valuation is generated from model-based techniques that use



significant assumptions not observable in the market. Valuation techniques

include use of discounted cash flow models and similar techniques.

It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, we use quoted market prices to measure fair value. If market prices are not available, fair value measurements are based on models that use primarily market based parameters including interest rate yield curves, option volatilities, and currency rates. In certain cases where market rate assumptions are not available, we are required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument. The only financial instruments which have not been classified as either Level 1 or Level 2 are auction rate securities. All auction rate securities were sold in the fourth quarter of 2012. In the past, there was insufficient demand for these types of investments and as a result the investments were not considered liquid. Since observable market prices and parameters were not available in previous years for the auction rate securities, judgment was required to estimate fair value. A discounted cash flow (DCF) calculation was used to determine the estimated fair value. The assumptions used in preparing the DCF model included estimates for the amount and timing of future interest and principal payments and the rate of return required by investors to own these securities in the current environment. In making these assumptions, relevant factors that were considered included: the formula applicable to each security which defines the interest rate paid to investors in the event of a failed auction; forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering guarantees by third parties and additional credit enhancements provided through other means. The estimate of the rate of return required by investors to own these securities also considered the reduced liquidity for auction rate securities. The primary unobservable input to the valuation was the maturity assumption which ranged from six to twelve years depending on the individual auction rate security. The maturity assumptions were based on the terms of the underlying instrument and the potential for restructuring the auction rate security. The results of these fair value calculations were imprecise. The actual sale was for 90% of the third quarter of 2012 fair value estimate. In the valuation of our derivative instruments, we consider our credit risk and the credit risk of our counterparties. Based on our current credit standing and the credit standing of our counterparties credit risk has not had a material impact in the valuation of our derivatives. 52



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See Item 8, Note 3 for a complete discussion on our use of fair valuation of financial instruments, our related measurement techniques, and its impact to our financial statements.



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

Goodwill is also subject to an annual impairment test, or more frequently, if indicators of potential impairment arise. During 2011, we adopted Accounting Standards Update (ASU) 2011-08, Intangibles-Goodwill and Other-Testing Goodwill for Impairment. ASU 2011-08 intends to simplify goodwill impairment testing by permitting assessment of qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the two-step goodwill impairment test currently required under ASU 350, Intangibles Goodwill and Other. We performed the qualitative analysis in 2012 and concluded that our reporting units would not be subject to the two-step goodwill impairment test. In 2013, we conducted step I of the quantitative goodwill impairment test, and concluded that there was no goodwill impairment and that the performance of the step II testing was not necessary. When the two-step impairment test is performed, the fair value of our reporting units is determined using a combination of the income approach, which estimates the fair value of our reporting units based on a discounted cash flow approach, and the market approach which estimates the fair value of our reporting units based on comparable market multiples. The comparable companies are primarily the major competitors listed in Item 1 of this report. The discount rates utilized in the discounted cash flows ranged from approximately 9.9% to 12.7%, reflecting market based estimates of capital costs and discount rates adjusted for a market participants view with respect to execution, concentration, and other risks associated with the projected cash flows of the individual segments. The average fair value is reconciled to our market capitalization with an appropriate control premium. Moreover, management performed various sensitivity analysis based on several key input variables, which further supported the conclusion that there was no goodwill impairment. The determination of the fair value of the reporting units requires us to make significant estimates and assumptions. These estimates and assumptions primarily include but are not limited to; the selection of appropriate peer group companies, control premiums appropriate for acquisitions in the industries in which we compete, the discount rate, terminal growth rates, forecasts of revenue and expense growth rates, changes in working capital, depreciation and amortization, and capital expenditures. Due to the inherent uncertainty involved in making these estimates, actual financial results could differ from those estimates. Changes in assumptions concerning future financial results or other underlying assumptions would have a significant impact on either the fair value of the reporting unit or the amount of the goodwill impairment charge. We use judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as unexpected adverse business conditions, economic factors, unanticipated technological change or competitive activities, loss of key personnel and acts by governments and courts, may signal that an asset has become impaired.



In 2013, 2012 and 2011, there were no goodwill impairments and the fair values of the reporting units with goodwill were substantially in excess of book values.

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

significant underperformance relative to expected historical or projected

future operating results,



significant changes in the manner of our use of the acquired assets or the

strategy for our overall business, 53



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Table of Contents significant negative industry or economic trends, and significant technological changes, which would render equipment and manufacturing processes obsolete. Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying value to the future net undiscounted cash flows expected to be generated by the asset or asset group. Future undiscounted cash flows include estimates of future revenues, driven by market growth rates, and estimated future costs. There were no trigger events in 2013, 2012 or 2011 that caused us to evaluate our other long lived assets for impairment. Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred taxes are not provided for the undistributed earnings of our foreign subsidiaries that are considered to be indefinitely reinvested outside of the U.S. We plan to repatriate certain non-U.S. earnings which have been taxed in the U.S. but earned offshore as well as any non-U.S. earnings that are not considered to be indefinitely invested outside the U.S. We make judgments regarding the realizability of our deferred tax assets. In accordance with the Income Tax topic of the ASC, the carrying value of the net deferred tax assets is based on the belief that it is more likely than not that we will generate sufficient future taxable income in certain jurisdictions to realize these deferred tax assets after consideration of all available positive and negative evidence. Future realization of the tax benefit of existing deductible temporary differences or carryforwards ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback and carryforward period available under the tax law. Future reversals of existing taxable temporary differences, projections of future taxable income excluding reversing temporary differences and carryforwards, taxable income in prior carryback years, and prudent and feasible tax planning strategies that would, if necessary, be implemented to preserve the deferred tax asset may be considered to identify possible sources of taxable income. Valuation allowances have been established for deferred tax assets, which we believe do not meet the "more likely than not" criteria established by the Income Tax topic of the ASC. In 2005, we established a full valuation allowance against our net U.S. deferred tax assets excluding certain deferred tax liabilities related to indefinite-lived goodwill. We recorded a valuation allowance in 2005 and continue to carry the valuation allowance in 2013 as our trend of positive evidence does not currently support such a release. In 2008, a deferred tax asset and full valuation allowance was recorded in the amount of $24.8 million relating to our Malaysian cumulative reinvestment allowance and manufacturing incentives. Based on an update of the jurisdictional financial history and current forecast, it was management's belief that we did meet the standard of "more likely than not" that is required for measuring the likelihood of a realization of net deferred tax assets, and was reflected in the partial release. In 2013, the Malaysian deferred tax asset decreased to $32.2 million while the ending valuation allowance decreased to $26.3 million. The partial valuation release decreased by $0.2 million. We will continue to evaluate book and taxable income trends, and their impact on the amount and timing of valuation allowance adjustments. If we are able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been established, the related portion of the valuation allowance is released to income from continuing operations, additional paid-in capital or to other comprehensive income.



The calculation of our tax liabilities includes addressing uncertainties in the application of complex tax regulations in a multitude of jurisdictions. The Income Tax topic of the ASC clarifies the accounting for

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uncertainty in income taxes recognized in an enterprise's financial statements. The topic prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our recognition threshold and measurement attribute of whether it is more likely than not that the positions we have taken in tax filings will be sustained upon tax audit, and the extent to which, additional taxes would be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period in which it is determined the liabilities are no longer necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. Loss Contingencies The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. The Contingency topic of the ASC requires that an estimated loss from a loss contingency such as a legal proceeding or claim should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. We regularly evaluate current information available to us to determine whether such accruals should be adjusted. Changes in our evaluation could materially impact our financial position or our results of operations.



Forward Looking Statements

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



Policy on Business Outlook Disclosure

Financial information relating to any current quarter should be considered to be speaking as of the date of the press release or other announcement only. Following the date of the press release or other announcement, the information should be considered to be historical and not subject to update. We undertake no obligation to update 55



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any such information, although we may choose to do so by press release, SEC filing or other public announcement. Consistent with this policy, Fairchild Semiconductor representatives will not comment about the business outlook or our financial results or expectations for the quarter in question.

Status of First Quarter Business

We expect sales to be in the range of $340 to $355 million for the first quarter. We expect adjusted gross margin to be in the range of 28.0 to 29.0% plus due primarily to lower factory loadings from the prior quarter. We have increased factory loadings this quarter and expect to recover the underutilization impact to gross margin in the second quarter. We anticipate R&D and SG&A spending to be in the range of $93 to $95 million due to resumption of FICA and other payroll-related taxes and the lack of non-recurring favorable items from the prior quarter. The adjusted tax rate is forecast at 15 percent plus or minus 3 percentage points for the quarter. In accordance with our policy on disclosure described above, we are not assuming any obligation to update this information, although we may choose to do so before we announce first quarter results.



Recently Issued Financial Accounting Standards

There were no new standards issued in 2013 that had an impact on our financials or disclosures.


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