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| FCS > SEC Filings for FCS > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
Except as otherwise indicated in this Quarterly Report on Form 10-Q, the terms "we," "our," the "company," "Fairchild" and "Fairchild International" refer to Fairchild Semiconductor International, Inc. and its consolidated subsidiaries, including Fairchild Semiconductor Corporation, our principal operating subsidiary. We refer to individual subsidiaries where appropriate.
Overview
Entering 2009, the semiconductor industry faced difficult and uncertain times as a result of the global recession. While the recession presented great challenges, it also presented opportunity as we were required to make tough decisions to adjust our costs and manufacturing capabilities to the current market conditions. We have been determined to use this down cycle as a catalyst to accelerate our transition to a leaner, more focused and more profitable company.
Throughout the first nine months of 2009, we have taken aggressive cost reduction actions in order to stay ahead of the economic environment. We significantly reduced our staffing levels with an emphasis on overhead costs, refocused spending on research and development and reduced capital spending. We expect our structural improvements and fixed cost reductions to enable us to leverage future earnings increases as we emerge from the recession. These actions include plans to streamline and consolidate wafer manufacturing by closing our eight-inch wafer manufacturing facility in Pennsylvania and closing our four-inch manufacturing line in South Korea. Most of the products currently manufactured in Pennsylvania will be transferred to other internal sites. Manufacturing performed in the Korean four-inch line will be transferred to five and six-inch wafer fabs in Korea. We expect that these changes will simplify operations, improve productivity and reduce costs. As a result of increased demand, we have extended the closure date of these sites through the end of 2010. However, we expect the favorable financial impact of higher sales will more than offset the delayed costs savings in the second half of 2010.
While the current business environment is improving, we continue to proactively take actions 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. We continue to manage our production output to bring internal and channel inventories within our target range. We reduced internal inventories by $48.4 million and reduced distributor inventory by approximately $86 million in first nine months of 2009.
Effective the first quarter of 2009, we realigned our operating segments and management structure and, accordingly, our segment reporting. The realignment corresponds with the way we manage the business and was designed to reduce costs and facilitate greater customer intimacy by moving from a product oriented structure to an application based structure. The majority of our activities have been realigned into two focus areas; Mobile, Computing, Consumer and Communications (MCCC) which focuses on handset computing and multimedia applications, and Power Conversion, Industrial and Automotive (PCIA) which focuses on power supply and motor control solutions. Each of these segments has a relatively small set of leading customers, common technology requirements, and similar design cycles. The Standard Discrete and Standard Linear (SDT) business will continue to be managed separately as a third segment. All segment reporting within management's discussion and analysis has been restated to reflect this change.
In addition, as a result of a company-wide simplification effort, the allocation of selling, general and administrative (SG&A) expenses to the reporting segments was changed beginning in the first quarter of 2009. Starting in fiscal year 2009, we only include dedicated, direct SG&A spending by the segments in the calculation of their operating income. All other corporate level SG&A spending is now included in the corporate category. Prior periods have been restated to reflect this change.
MCCC'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 MOSFETs, Power Management 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 and smaller footprint than is commonly available. We expect a steady acceleration of new product sales especially for solutions targeted to the handset and ultraportable market.
PCIA's focus is to capitalize on the growing demand for greater energy efficiency in power supplies, battery chargers and automobiles. We are a leader in power factor correction, low standby power consumption designs and innovative switching techniques that enable greater efficiency under load. Improving the efficiency of our customers' products is vital to meeting new energy efficiency regulations. Effectively managing the power conversion and initial voltage regulation 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 line.
SDT products are core building block components for many electronic applications. This segment is moving to a more simplified and focused operating model to make the selling and support of these products easier and more profitable. The right operational structure and part portfolio will enable SDT to capture market share and increase profits.
Results of Operations
The following table summarizes certain information relating to our operating
results as derived from our unaudited consolidated financial statements.
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
2009 2008 2009 2008
(Dollars in millions)
Total revenue $ 331.8 100.0 % $ 428.3 100.0 % $ 833.0 100.0 % $ 1,253.3 100.0 %
Gross margin 86.3 26.0 % 128.2 29.9 % 184.9 22.2 % 370.3 29.5 %
Operating expenses:
Research and development 24.9 7.5 % 29.1 6.8 % 74.3 8.9 % 89.2 7.1 %
Selling, general and administrative 43.4 13.1 % 54.7 12.8 % 131.8 15.8 % 173.4 13.8 %
Amortization of acquisition-related
intangibles 5.6 1.7 % 5.5 1.3 % 16.7 2.0 % 16.6 1.3 %
Restructuring and impairments 4.1 1.2 % 1.8 0.4 % 22.1 2.7 % 13.3 1.1 %
Total operating expenses 78.0 23.5 % 91.1 21.3 % 244.9 29.4 % 292.5 23.3 %
Operating income (loss) 8.3 2.5 % 37.1 8.7 % (60.0 ) -7.2 % 77.8 6.2 %
Other expense, net 4.4 1.3 % 5.4 1.3 % 15.4 1.8 % 16.9 1.3 %
Income (loss) before income taxes 3.9 1.2 % 31.7 7.4 % (75.4 ) -9.1 % 60.9 4.9 %
Provision (benefit) for income
taxes 1.2 0.4 % 5.0 1.2 % (2.1 ) -0.3 % 10.2 0.8 %
Net income (loss) $ 2.7 0.8 % $ 26.7 6.2 % $ (73.3 ) -8.8 % $ 50.7 4.0 %
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Total Revenue. Total revenue in the third quarter and first nine months of 2009 decreased $96.5 million and $420.3 million or approximately 23% and 34%, respectively, compared to the same periods in 2008. The decline in revenue was predominately driven by a decrease in unit volumes due to reduced market demand as a result of the worldwide economic downturn. For the first nine months of 2009, decreases in average selling price also contributed approximately 6% of the decrease as a result of changes in product mix and price.
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 U.S., Other Americas, Europe, China, Taiwan, Korea and Other Asia/Pacific (which for our geographic reporting purposes includes Japan and Singapore) for the three and nine months ended September 27, 2009 and September 28, 2008. The decrease in the percentage of revenue in Taiwan resulted from a reduction in demand for desktop and notebook computers. The percentage of revenue in China increased as a result of new design wins and stronger demand for our smart power module products and high performance MOSFETS. This increase in demand was driven by a government sponsored household appliance subsidy program for the rural Chinese population.
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
2009 2008 2009 2008
U.S. 8 % 8 % 8 % 8 %
Other Americas 3 3 4 3
Europe 11 12 12 13
China 36 33 35 30
Taiwan 18 20 16 21
Korea 13 12 14 13
Other Asia/Pacific 11 12 11 12
Total 100 % 100 % 100 % 100 %
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Gross Margin. In the third quarter and first nine months of 2009 gross margin decreased approximately $41.9 million and $185.4 million or approximately 33% and 50%, respectively, as compared to the same periods in 2008. The decrease in gross margin is due to decreased revenue, lower unit volumes and higher manufacturing unit costs as a result of lower factory utilization due to lower demand as well as efforts to reduce internal and distribution inventory. In addition, gross margin in 2009 was impacted by accelerated depreciation due to the closure of the Mountaintop facility.
Operating Expenses. Research and development (R&D) and SG&A expenses decreased due to cost reduction efforts implemented in 2008 and the first half of 2009. Our employee base was reduced, discretionary spending was cut and a number of temporary benefit reductions were implemented. Several of these benefit reductions were reinstated in the third quarter of 2009. In addition, equity and variable compensation expense was reduced in 2009.
Restructuring and Impairments. During the three and nine months ended September 27, 2009, we recorded restructuring and impairment charges, net of releases, of $4.1 million and $22.1 million, respectively. In the third quarter of 2009, the charges include $2.4 million of employee separation costs and $1.7 million of fab closure costs associated with the 2009 Infrastructure Realignment Program as well $0.1 million in employee separation costs associated with the 2008 Infrastructure Realignment Program and $0.1 million in releases associated with the 2007 Infrastructure Realignment Program. The charges in the first six months of 2009 included $6.8 million of employee separation costs, $0.7 million in lease impairment costs and $0.6 million in releases associated with the 2008 Infrastructure Realignment Program as well as $0.8 million in asset impairment costs, $9.1 million in employee separation costs and $1.2 million in fab closure costs associated with the 2009 Infrastructure Realignment Program.
The closure of the Mountaintop, Pennsylvania manufacturing facility and the four-inch manufacturing line in Bucheon, South Korea was announced in the first quarter of 2009 and the charges associated with those programs are included in the 2009 Infrastructure Realignment Program. The 2009 Infrastructure Realignment Program also includes charges for a smaller worldwide cost reduction plan to further right-size our company and remain financially healthy.
During the three and nine months ended September 28, 2008, we recorded restructuring and impairment charges, net of releases, of $1.8 million and $13.3 million, respectively. In the third quarter of 2008, the charges include $0.2 million of employee separation costs and $1.7 million in lease impairment costs for the streamlining of warehouse operations associated with the 2008 Infrastructure Realignment Program and $0.1 million in releases associated with the 2007 Infrastructure Realignment Program. Charges for the nine months ended September 28, 2008 also include $2.3 million of employee separation costs, $8.0 million in asset impairment costs and $0.1 million in office closure costs all associated with the 2008 Infrastructure Realignment Program and $1.3 million of employee separation costs and $0.2 million in reserve releases both associated with the 2007 Infrastructure Realignment Program.
The majority of charges in 2008 related to several asset impairments for non-industry standard packaging capacity and simplification of our supply chain planning systems. We also adjusted the workforce mix in our Maine fab as we converted to a more automated and technologically advanced eight-inch wafer production process. In addition, we reduced headcount in certain sales and marketing activities to further streamline selling, general and administration costs.
We have substantially completed payment of the remaining employee severance accruals related to the 2008 Infrastructure Realignment Program, with the exception of several employees in Europe and Japan. This action impacted approximately 1,051 manufacturing and non-manufacturing personnel. We achieved annualized cost savings associated with the employee separation costs of approximately $30.7 million. Payouts associated with the 2008 lease impairment will be made on a regular basis and will be complete by the fourth quarter of 2011.
The 2009 worldwide restructuring action, excluding facility closures, impacted 264 employees. We achieved annual savings associated with these employee separation costs of $13.7 million by the end of the third quarter of 2009. We previously announced that the consolidation of the South Korea fabrication processes and the closure of the Mountaintop facility would be completed by June 2010. However, as a result of increased demand for the products manufactured at these facilities, we now expect to complete these actions during the fourth quarter of 2010. We do not anticipate that this extension will have any significant impact on the cash and non-cash charges we originally planned or upon the annualized rate of cost savings that we expect to achieve once these closures are complete. Once the closures are complete we expect to achieve annualized cost savings ranging from $20 to $25 million.
Other Expense, net.
The following table presents a summary of other expense, net for the three and
nine months ended September 27, 2009 and September 28, 2008.
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
2009 2008 2009 2008
(In millions)
Interest expense $ 5.0 $ 7.6 $ 16.6 $ 25.5
Interest income (0.7 ) (2.4 ) (2.7 ) (9.4 )
Other (income) expense, net 0.1 0.2 1.5 0.8
Other expense, net $ 4.4 $ 5.4 $ 15.4 $ 16.9
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Interest expense. Interest expense in the third quarter and first nine months of 2009 decreased $2.6 million and $8.9 million, respectively, as compared to the same periods in 2008, primarily due to lower interest rates on outstanding debt and lower debt balances.
Interest income. Interest income in the third quarter and first nine months of 2009 decreased $1.7 million and $6.7 million, respectively, as compared to the same periods in 2008 as a result of lower rates of return.
Other (income) expense, net. The first nine months of 2009 includes a $2.3 million impairment of a strategic investment, offset by a $0.2 million gain on the sale of a strategic investment and a $0.8 million net gain on the debt buyback transaction all booked in the second quarter of 2009.
Income Taxes. Income tax provision (benefit) in the third quarter and first nine months of 2009 was $1.2 million and $(2.1) million on income (loss) before taxes of $3.9 million and $(75.4) million, respectively, as compared to income tax provision of $5.0 million and $10.2 million on income before taxes of $31.7 million and $60.9 million, respectively, for the same periods of 2008. The effective tax rate for the third quarter and first nine months of 2009 was 30.8% and (2.8)% compared to 15.8% and 16.7% respectively, for the comparable periods of 2008. The change in effective tax rate is primarily due to shifts of income and loss among jurisdictions with differing tax rates, foreign currency revaluations of tax liabilities and discrete tax expenses as a result of finalization of certain tax filings. In the first nine months of 2009, the valuation allowance on our deferred tax assets increased by $9.2 million. The overall increase did not impact our results of operations.
In accordance with the Income Taxes Topic in the Financial Accounting Standards Board (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 September 27, 2009, we have recorded a deferred tax liability of $0.1 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.
Reportable Segments.
The following tables present comparative disclosures of revenue and gross margin of our reportable segments.
Three Months Ended
September 27, September 28,
2009 2008
Gross Operating Gross Operating
Revenue % of total Margin % Income (loss) Revenue % of total Margin % Income (loss)
(Dollars in millions)
MCCC $ 144.8 43.6 % 30.2 % $ 23.9 $ 206.1 48.1 % 33.9 % $ 48.1
PCIA 151.0 45.5 % 28.1 % 26.7 177.6 41.5 % 30.3 % 33.6
SDT 36.0 10.9 % 15.6 % 4.2 44.6 10.4 % 13.0 % 3.3
Corporate (1) - - - (46.5 ) - - - (47.9 )
Total $ 331.8 100.0 % 26.0 % $ 8.3 $ 428.3 100.0 % 29.9 % $ 37.1
Nine Months Ended
September 27, September 28,
2009 2008
Gross Operating Gross Operating
Revenue % of total Margin % Income (loss) Revenue % of total Margin % Income (loss)
(Dollars in millions)
MCCC $ 373.4 44.8 % 26.8 % $ 41.5 $ 596.5 47.6 % 34.0 % $ 137.2
PCIA 370.9 44.5 % 23.3 % 37.8 524.6 41.9 % 29.7 % 91.5
SDT 88.7 10.7 % 9.2 % 4.1 132.2 10.5 % 11.7 % 9.1
Corporate (1) - - - (143.4 ) - - - (160.0 )
Total $ 833.0 100.0 % 22.2 % $ (60.0 ) $ 1,253.3 100.0 % 29.5 % $ 77.8
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(1) The three and nine months ended September 27, 2009 includes $5.2 million and $11.7 million of stock-based compensation expense, $4.1 million and $22.1 million of restructuring and impairments expense and $37.2 million and $109.6 million of SG&A expenses, respectively. The three and nine months ended September 28, 2008 includes $4.0 million and $16.8 million of stock-based compensation expense, $1.8 million and $13.3 million of restructuring and impairments expense and $42.1 million and $129.9 million of SG&A expenses, respectively.
MCCC. MCCC revenue decreased approximately 30% and 37% in the third quarter and first nine months of 2009, respectively, as compared to the same periods in 2008. During the first nine months of 2009, decreases in unit volumes contributed approximately 27% of the revenue decrease due to overall market decline for semiconductors, specifically in the MOSFET markets, as well as a reduction in distribution channel inventory. Demand for power analog products has remained stable despite market conditions due to market share gains and less inventory drain for mobile products. The remainder of the decrease in revenue was driven by changes in product mix and decreases in pricing. Gross margin dollars declined due to decreased revenue as a result of lower overall market demand as well as higher manufacturing unit costs due to lower factory utilization.
MCCC had operating income of $23.9 million and $41.5 million in the third quarter and first nine months of 2009, compared to $48.1 million and $137.2 million for the same periods in 2008, respectively. The decrease in operating income was due to lower gross margin as discussed above. R&D and SG&A expenses decreased due to reductions in our employee base, discretionary spending, and variable compensation as well as other temporary benefit reductions. Several of these benefit reductions were reinstated in the third quarter of 2009 as a result of improved market conditions. In addition, certain R&D functions were moved to lower cost regions.
PCIA. PCIA revenue decreased approximately 15% and 29% in the third quarter and first nine months of 2009, respectively, as compared to the same periods in 2008. The decline in revenue was driven primarily by decreases in unit volumes as a result of weaker demand for high voltage and power conversion products as well as general weakening in the automotive industry in North America and Europe. Unit volumes were also impacted by a reduction in distribution channel inventory. In addition, changes in mix and decreases in average selling prices due to continued pricing pressure contributed approximately 3% to the decline in revenue. Gross margin dollars declined due to lower revenue and unit volumes and higher manufacturing unit costs as the result of lower factory utilization.
PCIA had operating income of $26.7 million and $37.8 million in the third quarter and first nine months of 2009 compared to $33.6 million and $91.5 million for the same periods in 2008, respectively. The decrease in operating income was due to lower gross margin as discussed above. R&D and SG&A expenses decreased due to reductions in our employee base, discretionary spending, and variable compensation as well as other temporary benefit reductions. Several of these benefit reductions were reinstated in the third quarter of 2009 as a result of improved market conditions. In addition, there was a favorable impact from the weakening of the Korean Won.
SDT. SDT revenue decreased approximately 19% and 33% in the third quarter and first nine months of 2009, respectively, as compared to the same periods in 2008. The decline in revenue was primarily driven by decreases in unit volumes due to reduced demand as a result of the worldwide economic downturn. Gross margin dollars declined due to lower revenue and unit volumes, increased competition and higher manufacturing unit costs as the result of lower factory utilization.
SDT had operating income of $4.2 million and $4.1 million in the third quarter and first nine months of 2009 compared to $3.3 million and $9.1 million for the same periods in 2008, respectively. The decrease in operating income in the first nine months of 2009 was due to lower gross margin, as discussed above, as well as reduced R&D and SG&A expenses. R&D and SG&A expenses decreased due to reductions in our employee base, discretionary spending, and variable compensation as well as other temporary benefit reductions. Several of these benefit reductions were reinstated in the third quarter of 2009 as a result of improved market conditions. The increase in operating income in the third quarter of 2009 was due to reduced R&D and SG&A expenses as discussed above.
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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