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FCS > SEC Filings for FCS > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC

Form 10-Q for FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC


9-Nov-2012

Quarterly Report


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

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.


Table of Contents

Overview

Fairchild is positioned to capitalize on the growth potential in mobile wireless technologies and the transition to more efficient applications in the industrial, appliance, automotive and solar end markets. We have invested heavily in our mobile business over the last five years and have introduced a wide range of fast growing new products and a number of innovative application specific solutions that solve unique customer requirements. We believe our broad portfolio of innovative products coupled with our world class supply chain will continue to drive growth. We entered 2012 with the best pipeline of new products in our history. We have numerous design wins in our mobile business and we are also gaining traction in the mid-voltage market.

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. While our goal is to manage our production output to maintain channel inventories within a target range of 7.5 to 8.5 weeks, at the end of the third quarter, our channel inventories were at 10.2 weeks excluding certain end of life inventory, which was a decrease of over one week from the end of 2011. Internal inventories at the end of the third quarter of 2012 were at $242.3 million, an increase of $8.1 million over the end of 2011.

Our fiscal calendar, in which each quarter ends on a Sunday, contains 53 weeks every seven years. This additional week is included is the first quarter of the year. Our results for the nine months ended September 30, 2012 and September 25, 2011 consist of 40 weeks and 39 weeks, respectively.

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 and 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, greater power density, and better performance. Improving the efficiency of our customers' products is vital to meeting new energy efficiency regulations. Effectively managing the 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 line.

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 right operational structure and part portfolio should enable our standard products group to continue to generate solid cash flow with minimal investment.


Table of Contents

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 30,            September 25,             September 30,              September 25,
                                               2012                     2011                      2012                       2011
                                                                              (Dollars in millions)

Total revenue                           $ 358.8       100.0 %    $ 403.2       100.0 %    $ 1,072.5       100.0 %    $ 1,249.4       100.0 %
Gross margin                              120.1        33.5 %      144.8        35.9 %        342.7        32.0 %        457.5        36.6 %

Operating expenses:
Research and development                   37.8        10.5 %       37.8         9.4 %        119.0        11.1 %        114.6         9.2 %
Selling, general and administrative        48.0        13.4 %       54.4        13.5 %        157.8        14.7 %        167.8        13.4 %
Amortization of acquisition-related
intangibles                                 4.5         1.3 %        4.7         1.2 %         13.7         1.3 %         15.0         1.2 %
Restructuring and impairments               3.4         0.9 %        4.1         1.0 %          6.3         0.6 %          9.5         0.8 %
Charge for litigation                        -          0.0 %         -          0.0 %          1.3         0.1 %           -          0.0 %

Total operating expenses                   93.7        26.1 %      101.0        25.0 %        298.1        27.8 %        306.9        24.6 %

Operating income                           26.4         7.4 %       43.8        10.9 %         44.6         4.2 %        150.6        12.1 %

Other expense, net                          1.2         0.3 %        1.4         0.3 %          4.2         0.4 %          5.8         0.5 %

Income before income taxes                 25.2         7.0 %       42.4        10.5 %         40.4         3.8 %        144.8        11.6 %

Provision (benefit) for income taxes        0.5         0.1 %        6.6         1.6 %          2.2         0.2 %         20.6         1.6 %

Net income                              $  24.7         6.9 %    $  35.8         8.9 %    $    38.2         3.6 %    $   124.2         9.9 %

Adjusted net income, adjusted gross margin, and free cash flow are also included in the table below. These are non-GAAP financial measures and should not be considered a replacement for GAAP results. We present adjusted results because we use them as additional measures of our operating performance. We believe the adjusted information is useful to investors because it illuminates underlying operational trends by excluding certain significant non-recurring or otherwise unusual transactions. Our criteria for adjusted results may differ from methods used by other companies and may not be comparable and should not be considered as alternatives to net income or loss, gross margin, or other measures of consolidated operations and cash flow data prepared in accordance with US GAAP as indicators of our operating performance or as alternatives to cash flow as a measure of liquidity.


Table of Contents
                                                      Three Months Ended                                 Nine Months Ended
                                            September 30,            September 25,            September 30,             September 25,
                                                2012                     2011                      2012                      2011
                                                                              (Dollars in millions)

Non GAAP measures
Adjusted net income                      $  32.3                  $  44.5                  $   58.2                  $  150.4
Adjusted gross margin                      120.1        33.5 %      145.0        36.0 %       342.7        32.0 %       458.2        36.7 %
Free cash flow                             (17.5 )                   19.4                     (18.1 )                    81.1

Reconciliation of Net Income to
Adjusted Net Income
Net income                               $  24.7                  $  35.8                  $   38.2                  $  124.2
Adjustments to reconcile net income to
adjusted net income:
Restructuring and impairments                3.4                      4.1                       6.3                       9.5
Accelerated depreciation on assets
related to fab closure                        -                       0.2                        -                        0.7
Write-off of deferred financing fees          -                        -                         -                        2.1
Charge for litigation                         -                        -                        1.3                        -
Amortization of acquisition-related
intangibles                                  4.5                      4.7                      13.7                      15.0
Associated net tax effects of the
above and other acquisition-related
intangibles                                 (0.3 )                   (0.3 )                    (1.3 )                    (1.1 )

Adjusted net income                      $  32.3                  $  44.5                  $   58.2                  $  150.4


Reconciliation of Gross Margin to
Adjusted Gross Margin
Gross margin                             $ 120.1                  $ 144.8                  $  342.7                  $  457.5
Adjustments to reconcile gross margin
to adjusted gross margin:
Accelerated depreciation on assets
related to fab closure                        -                       0.2                        -                        0.7

Adjusted gross margin                    $ 120.1                  $ 145.0                  $  342.7                  $  458.2


Reconciliation of Operating Cash Flow
to Free Cash Flow
Cash provided by operating activities    $  24.8                  $  72.9                  $  104.3                  $  222.7
Capital expenditures                       (42.3 )                  (53.5 )                  (122.4 )                  (141.6 )

Free cash flow                           $ (17.5 )                $  19.4                  $  (18.1 )                $   81.1

Total Revenues



                                                         Three Months Ended                                                              Nine Months Ended
                               September 30,         September 25,         $ Change          % Change          September 30,         September 25,         $ Change          % Change
                                   2012                  2011             Inc (Dec)         Inc (Dec)              2012                  2011             Inc (Dec)         Inc (Dec)

Revenue                       $         358.8       $         403.2       $    (44.4 )           -11.0 %      $       1,072.5       $       1,249.4       $   (176.9 )           -14.2 %

Revenue in the third quarter and first nine months of 2012 included $3.0 million and $7.0 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. Despite an extra week in the first nine months of 2012 compared to the first nine months of 2011, revenue decreased in 2012. For the first nine months of 2012 compared to the same period in 2011, lower unit sales volume sold drove 5% of the decrease in revenue while the remaining 9% decline was driven by lower average selling prices. For the third quarter of 2012 compared to the third quarter of 2011, revenue decreased 11%, driven by a decline in average selling prices which was offset partially by an increase in unit sales in the PCIA segment.

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 months and nine months ended September 30, 2012. The increase in Other Asia/Pacific revenue was due to continued strong demand for mobile products including smart phones and tablets as well as a shift in sales to a major customers from their Korea location to Other Asia/Pacific.


Table of Contents
                                             Three Months Ended                                   Nine Months Ended
                                 September 30,               September 25,             September 30,              September 25,
                                     2012                        2011                      2012                       2011

U.S.                                          9 %                         10 %                      9 %                       10 %
Other Americas                                2                            2                        2                          2
Europe                                       13                           13                       13                         14
China                                        35                           33                       34                         33
Taiwan                                       13                           13                       14                         14
Korea                                         9                           10                       10                         11
Other Asia/Pacific                           19                           19                       18                         16

Total                                       100 %                        100 %                    100 %                      100 %

Gross Margin



                                                                     Three Months Ended                                                        Nine Months Ended
                                             September 30,        September 25,        $ Change        % Change        September 30,        September 25,        $ Change        % Change
                                                 2012                 2011            Inc (Dec)       Inc (Dec)            2012                 2011            Inc (Dec)       Inc (Dec)
Gross Margin $                              $         120.1      $         144.8      $    (24.7 )         -17.1 %    $         342.7      $         457.5      $   (114.8 )         -25.1 %
Gross Margin %                                         33.5 %               35.9 %                          -2.4 %               32.0 %               36.6 %                          -4.7 %

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 $4.2 million and $13.7 million in the third quarter and first nine months of 2012, respectively, 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 first nine months of 2012 when compared to depreciation expense under the previous useful life policies.

The net favorable depreciation impact to gross margin was offset by decreased revenue and higher unit costs of inventory due to lower production rates in the third quarter and first nine months of 2012 as well as increased expenses from 8-inch conversion costs and higher inventory write downs in the first half of 2012 resulting in an overall decrease in gross margin for the third quarter and first nine months of 2012 as compared to the same periods in 2011.

Adjusted Gross Margin



                                                                                 Three Months Ended                                                        Nine Months Ended
                                                         September 30,        September 25,        $ Change        % Change        September 30,        September 25,        $ Change        % Change
                                                             2012                 2011            Inc (Dec)       Inc (Dec)            2012                 2011            Inc (Dec)       Inc (Dec)
Adjusted Gross Margin $                                 $         120.1      $         145.0      $    (24.9 )         -17.2 %    $         342.7      $         458.2      $   (115.5 )         -25.2 %
Adjusted Gross Margin %                                            33.5 %               36.0 %                          -2.5 %               32.0 %               36.7 %                          -4.7 %

There were no items adjusted out of gross margin in the third quarter and first nine months of 2012. Adjusted gross margin in the third quarter and first nine months of 2011 did not include accelerated depreciation related to the previously planned closure of the Mountain Top facility. See above reconciliation for detail.

Operating Expenses



                                                                    Three Months Ended                                                           Nine Months Ended
                                            September 30,        September 25,        $ Change         % Change         September 30,        September 25,        $ Change         % Change
                                                2012                 2011            Inc (Dec)        Inc (Dec)             2012                 2011            Inc (Dec)        Inc (Dec)
Research and development                   $          37.8      $          37.8      $       -               0.0 %     $         119.0      $         114.6      $      4.4              3.8 %
Selling, general and administrative        $          48.0      $          54.4      $     (6.4 )          -11.8 %     $         157.8      $         167.8      $    (10.0 )           -6.0 %


Table of Contents

Operating expenses included an additional week of costs in the first nine months of 2012 as compared to the first nine months of 2011. Overall R&D expenses were flat for the third quarter of 2012 compared to the same period of 2011. Increases in R&D project spending were offset by decreases in variable compensation as we reversed expenses accrued in prior quarters. R&D expenses for the first nine months of 2012 increased as compared to the same periods in 2011 as we continue to invest in R&D programs and resources. Increased R&D was offset by the reversal of variable compensation expense. Selling and general and administration expenses (SG&A) expense decreased for the third quarter and first nine months of 2012 when compared to the same periods of 2011 driven primarily by a decrease in variable compensation and equity compensation as we do not believe we will meet our bonus or performance targets for 2012.

Restructuring and Impairment. During the three and nine months ended September 30, 2012, we recorded restructuring and impairment charges, net of releases, of $3.4 million and $6.3 million, respectively. The third quarter charges consist of $2.8 million of employee separation costs and $0.6 million of lease termination costs associated with the 2012 Infrastructure Realignment Program. In addition to the charges in the third quarter of 2012 there were charges in the first and second quarter of 2012 which included $1.0 million of employee separation costs associated with the 2011 Infrastructure Realignment Program as well as $1.7 million in employee separation costs and $0.4 million in facility closure costs associated with the 2012 Infrastructure Realignment Program.

During the three and nine months ended September 25, 2011, we recorded restructuring and impairment charges, net of releases, of $4.1 million and $9.5 million, respectively. The third quarter charges include $0.6 million of employee separation costs and $0.1 million of fab closure costs associated with the 2009 Infrastructure Realignment Program as well as $1.7 million in employee separation costs associated with the 2010 Infrastructure Realignment Program and $1.7 million in employee separation costs associated with the 2011 Infrastructure Realignment Program. In addition to the charges in the third quarter of 2011 there were charges in the first and second quarter of 2011 which included $1.1 million of employee separation costs, $0.5 million of fab closure costs, and $0.1 million in reserve releases associated with the 2009 Infrastructure Realignment Program as well as $1.9 million in employee separation costs associated with the 2010 Infrastructure Realignment Program and $2.0 million in employee separations costs associated with the 2011 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. The 2011 Infrastructure Realignment Program includes costs for organizational changes in our supply chain management group, website technology group, quality organization, and other administrative groups. The 2011 program also includes costs to further improve our manufacturing strategy and changes in both the PCIA and MCCC groups as well as a primarily voluntary retirement program at our Mountaintop, Pennsylvania location. 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 our accounting functions.

The previously planned closure of the Mountaintop, Pennsylvania manufacturing facility and the closure of 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 consolidation of the South Korea fabrication lines was completed in 2011. Also during the fourth quarter of 2011, the company decided to keep open the Mountain Top facility.

Charge for Litigation. In the second quarter of 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 in the second quarter of 2012 for an unrelated legal settlement.


Table of Contents

Other Expense, net.

The following table presents a summary of other expense, net for the three
months and nine months ended September 30, 2012 and September 25, 2011.



                                            Three Months Ended                                 Nine Months Ended
                                  September 30,             September 25,           September 30,             September 25,
                                       2012                     2011                     2012                     2011
                                                                        (In millions)
Other expense, net
Interest expense                 $            1.7          $           1.9         $            5.7          $           5.3
Interest income                              (0.6 )                   (0.7 )                   (1.8 )                   (2.0 )
Other (income) expense, net                   0.1                      0.2                      0.3                      2.5

Other expense, net               $            1.2          $           1.4         $            4.2          $           5.8

Interest expense. Interest expense in the third quarter decreased $0.2 million when compared to the same period in 2011, primarily due to lower interest rates. Interest expense for the first nine months of 2012 increased $0.5 million when compared to the same period in 2011, primarily due to higher interest rates offset by higher debt in the first quarter of 2011.

Interest income. Interest income in the third quarter and first nine months of 2012 remained fairly flat when compared to the same periods in 2011.

Other (income) expense, net. Other expense in the third quarter and first nine months of 2012 was down $2.3 million and $0.1 million when compared to the same periods of 2011. The higher level of expense in the first nine month of 2011 was caused by a $2.1 million write off of deferred financing fees associated with the pay down of our term loan in the second quarter of 2011.

Income Taxes. Income tax provision in the third quarter and first nine months of 2012 was $0.5 million and $2.2 million on income before taxes of $25.2 million and $40.4 million, respectively, as compared to income tax provisions of $6.6 million and $20.6 million on income before taxes of $42.4 million and $144.8 million, respectively, for the same time periods of 2011. The effective tax rate for the third quarter and first nine months of 2012 was 2.0% and 5.5% compared to 15.6% and 14.2% respectively, for the comparable periods of 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 the first nine months of 2012, the valuation allowance on our deferred tax assets decreased by $3.7 million. The overall decrease 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 30, 2012, we have recorded a deferred tax liability of $1.9 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



                                                           Three Months Ended                                                                Nine Months Ended
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