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FCS > SEC Filings for FCS > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC

Form 10-Q for FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC


9-Aug-2013

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.

Overview

We began 2013 with solid demand momentum that enabled us to deliver greater than seasonal sales growth in the first quarter. Entering the second quarter, bookings were strong and we guided sales to grow 3 to 9 percent sequentially. Late in the quarter we encountered significant reductions in backlog for our mobile products driven primarily by one large customer and to a lesser extent another key account. We were selective in taking orders from the notebook PC market resulting in continued erosion of sales into this sector to less than 3 percent of our total revenue. Our other product lines performed inline or better than expectations. We reported sequential sales growth of 4 percent for the second quarter.


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We strive to keep inventory as lean as possible while maintaining customer service. We prefer to maintain maximum flexibility by adjusting our 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 8 to 9 weeks, at the end of the second quarter, our channel inventories were approximately 10.5 weeks, which was a slight increase from the prior quarter. Our internal inventories at the end of the second quarter of 2013 were $238 million, an increase of $11.7 million sequentially.

Our fiscal calendar, in which each quarter ends on a Sunday, contains 53 weeks every seven years. This additional week was included in the first quarter of 2012. Our results for the six months ended June 30, 2013 and July 1, 2012 consist of 26 weeks and 27 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 handset 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 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 should enable our standard products group to continue to generate solid cash flow with minimal investment.


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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                                  Six Months Ended
                                              June 30,                  July 1,                  June 30,                  July 1,
                                                2013                     2012                      2013                     2012
                                                                             (Dollars in millions)

Total revenue                           $ 356.5        100.0 %    $ 361.5       100.0 %    $ 699.7        100.0 %    $ 713.7       100.0 %
Gross margin                              103.7         29.1 %      117.7        32.6 %      196.1         28.0 %      222.6        31.2 %

Operating expenses:
Research and development                   46.0         12.9 %       41.1        11.4 %       88.6         12.7 %       81.2        11.4 %
Selling, general and administrative        52.2         14.6 %       55.1        15.2 %      103.8         14.8 %      109.8        15.4 %
Amortization of acquisition-related
intangibles                                 3.9          1.1 %        4.4         1.2 %        7.7          1.1 %        9.2         1.3 %
Restructuring and impairments               3.4          1.0 %        0.5         0.1 %        4.6          0.7 %        2.9         0.4 %
Release of litigation charge                 -           0.0 %        1.3         0.4 %      (12.6 )       -1.8 %        1.3         0.2 %

Total operating expenses                  105.5         29.6 %      102.4        28.3 %      192.1         27.5 %      204.4        28.6 %

Operating income                           (1.8 )       -0.5 %       15.3         4.2 %        4.0          0.6 %       18.2         2.6 %

Other expense, net                          1.6          0.4 %        1.5         0.4 %        6.2          0.9 %        3.0         0.4 %

Income before income taxes                 (3.4 )       -1.0 %       13.8         3.8 %       (2.2 )       -0.3 %       15.2         2.1 %

Provision (benefit) for income taxes        4.1          1.2 %        1.9         0.5 %        5.8          0.8 %        1.7         0.2 %

Net income (loss)                       $  (7.5 )       -2.1 %    $  11.9         3.3 %    $  (8.0 )       -1.1 %    $  13.5         1.9 %

Adjusted net income (loss), 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 these measures, together with GAAP measures, for internal managerial purposes and as a means to evaluate period-to-period comparisons. However, we do not, and you should not, rely on non-GAAP financial measures alone as measures of our performance. We believe that non-GAAP financial measures reflect an additional way of viewing aspects of our operations that - when taken together with GAAP results and the reconciliations to corresponding GAAP financial measures that we also provide in our press releases - provide a more complete understanding of factors and trends affecting our business. We strongly encourage you to review all of our financial statements and publicly-filed reports in their entirety and to not rely on any single financial measure. 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.


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                                                         Three Months Ended                                 Six Months Ended
                                                 June 30,                  July 1,                 June 30,                  July 1,
                                                   2013                     2012                     2013                     2012
                                                                                (Dollars in millions)

Non GAAP measures
Adjusted net income (loss)                  $   1.7                  $  17.6                  $  (0.3 )                $  25.9
Adjusted gross margin                         106.2        29.8 %      117.7        32.6 %      201.5        28.8 %      222.6        31.2 %
Free cash flow                                 30.0                     32.4                      6.1                     (0.6 )

Reconciliation of Net Income (Loss) to
Adjusted Net Income (Loss)
Net income (loss)                           $  (7.5 )                $  11.9                     (8.0 )                   13.5
Adjustments to reconcile net income
(loss) to adjusted net income (loss):
Restructuring and impairments                   3.4                      0.5                      4.6                      2.9
Accelerated depreciation on assets
related to fab closure                          2.5                       -                       5.4                       -
Write-off of equity investments                  -                        -                       3.0                       -
Release of litigation charge                     -                       1.3                    (12.6 )                    1.3
Amortization of acquisition-related
intangibles                                     3.9                      4.4                      7.7                      9.2
Associated net tax effects of the above
and other acquisition-related intangibles      (0.6 )                   (0.5 )                   (0.4 )                   (1.0 )

Adjusted net income (loss)                  $   1.7                  $  17.6                  $  (0.3 )                $  25.9


Reconciliation of Gross Margin to
Adjusted Gross Margin
Gross margin                                $ 103.7                  $ 117.7                  $ 196.1                  $ 222.6
Adjustments to reconcile gross margin to
adjusted gross margin:
Accelerated depreciation on assets
related to fab closure                          2.5                       -                       5.4                       -

Adjusted gross margin                       $ 106.2                  $ 117.7                  $ 201.5                  $ 222.6


Reconciliation of Operating Cash Flow to
Free Cash Flow
Cash provided by (used in) operating
activities                                  $  50.2                  $  62.7                  $  46.2                  $  79.5
Capital expenditures                          (20.2 )                  (30.3 )                  (40.1 )                  (80.1 )

Free cash flow                              $  30.0                  $  32.4                  $   6.1                  $  (0.6 )

Total Revenues



                                                        Three Months Ended                                             Six Months Ended
                                      June 30,      July 1,       $ Change         % Change         June 30,      July 1,       $ Change         % Change
                                        2013          2012        Inc (Dec)        Inc (Dec)          2013          2012        Inc (Dec)        Inc (Dec)

Revenue                              $    356.5     $  361.5     $      (5.0 )           -1.4 %    $    699.7     $  713.7     $     (14.0 )           -2.0 %

A slight decrease in unit sales during the three months ended June 30, 2013 drove a 2% decrease in revenue compared to the same period for 2012. For the first six months of 2013 revenue was lower due to the combination of one less week in the first quarter of 2013 when compared to 2012 and lower average selling prices.

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 six months ended June 30, 2013 and July 1, 2012. The increase in other Asia/Pacific revenue for both the three and six


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months ended June 30, 2013 was primarily due to a shift in customer sales from Korea to other Asia/Pacific. The decrease in Taiwan revenue is mainly due to reduced sales in computing during the first six months and lower mobile sales for the three months ended June 30, 2013.

                               Three Months Ended                Six Months Ended
                           June 30,           July 1,       June 30,          July 1,
                             2013              2012           2013             2012

      U.S.                         9 %               9 %            9 %             10 %
      Other Americas               2                 2              2                2
      Europe                      14                13             14               13
      China                       36                34             34               33
      Taiwan                      11                15             12               14
      Korea                        7                 9              8               10
      Other Asia/Pacific          21                18             21               18

      Total                      100 %             100 %          100 %            100 %

Gross Margin



                                                          Three Months Ended                                               Six Months Ended
                                       June 30,       July 1,        $ Change         % Change         June 30,       July 1,        $ Change         % Change
                                         2013           2012         Inc (Dec)        Inc (Dec)          2013           2012         Inc (Dec)        Inc (Dec)
Gross Margin $                        $    103.7      $  117.7      $     (14.0 )          -11.9 %    $    196.1      $  222.6      $     (26.5 )          -11.9 %
Gross Margin %                              29.1 %        32.6 %                            -3.5 %          28.0 %        31.2 %                            -3.2 %

The decrease in gross margin for the three and six months ended June 30, 2103 as compared to the same periods in 2012 was driven by decreased revenue, inventory write-offs and accelerated depreciation related to the closure of the 8 inch line at our Salt Lake manufacturing facility. The equipment will be transferred to other Fairchild locations. The accelerated depreciation relates to the initial installation cost of this equipment as these costs are specific to its installation in Salt Lake. The depreciation is being accelerated over an 11 month time period.

Adjusted Gross Margin



                                                          Three Months Ended                                               Six Months Ended
                                       June 30,       July 1,        $ Change         % Change         June 30,       July 1,        $ Change         % Change
                                         2013           2012         Inc (Dec)        Inc (Dec)          2013           2012         Inc (Dec)        Inc (Dec)
Adjusted Gross Margin $               $    106.2      $  117.7      $     (11.5 )           -9.8 %    $    201.5      $  222.6      $     (21.1 )           -9.5 %
Adjusted Gross Margin %                     29.8 %        32.6 %                            -2.8 %          28.8 %        31.2 %                            -2.4 %

Adjusted gross margin for the three months and six months ended June 30, 2013 did not include $2.5 million and $5.4 million of accelerated depreciation related to the planned closure of the 8-inch line at our Salt Lake facility. See additional explanation above. There were no items adjusted out of gross margin in the three and six months ended July 1, 2012. See above reconciliation for detail.

Operating Expenses



                                                            Three Months Ended                                              Six Months Ended
                                          June 30,       July 1,       $ Change         % Change         June 30,      July 1,       $ Change         % Change
                                            2013          2012         Inc (Dec)        Inc (Dec)          2013          2012        Inc (Dec)        Inc (Dec)
Research and development                 $     46.0     $    41.1     $       4.9             11.9 %    $     88.6     $   81.2     $       7.4              9.1 %
Selling, general and administrative      $     52.2     $    55.1     $      (2.9 )           -5.3 %    $    103.8     $  109.8     $      (6.0 )           -5.5 %

Operating expenses in the first six months of 2013 consisted of one less week as compared to 2012. Despite this, research and development (R&D) expenses for the second quarter and first six months of 2013 was higher as compared to the


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same periods in 2012 primarily due to higher R&D expenses as we continue to invest in R&D programs and resources. Selling, general and administrative expenses decreased due to lower variable compensation, reduced legal expenses, and a decrease in other discretionary spending.

Restructuring and Impairment. During the three and six months ended June 30, 2013, we recorded restructuring and impairment charges, net of releases, of $3.4 million and $4.6 million, respectively. The second quarter charges include $2.4 million of employee separation costs, $1.0 million of line closure costs, and $0.1 million of lease termination costs associated with the 2013 Infrastructure Realignment Program as well as a $0.1 million reserve release of employee separation costs associated with the 2012 Infrastructure Realignment Program. The first quarter charges include $0.6 million of employee separation costs and $0.5 million of line closure costs as well as $0.1 million of employee separation costs associated with the 2012 Infrastructure Realignment Program.

During the three and six months ended July 1, 2012, we recorded restructuring and impairment charges, net of releases, of $0.5 million and $2.9 million, respectively. The second quarter charges consist of $0.6 million of employee separation costs associated with the 2012 Infrastructure Realignment Program and $0.1 reserve release associated with the 2011 Infrastructure Realignment Program. The first quarter charges include $1.0 million of employee separation costs associated with the 2011 Infrastructure Realignment Program as well as $1.1 million in employee separation costs and $0.4 million in facility closure costs associated with the 2012 Infrastructure Realignment Program.

The 2013 Infrastructure Realignment Program includes costs to close the 8-inch line at our Salt Lake wafer fab facility and the transfer of manufacturing to our 8-inch lines in Korea and Mountaintop, as well as various other organizational changes. The 2012 Infrastructure Realignment Program includes costs for organization changes in our sales organization and MCCC and PCIA product lines as well as 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.

Other Expense, net.

The following table presents a summary of other expense, net for the three and
six months ended June 30, 2013 and July 1, 2012.



                                     Three Months Ended              Six Months Ended
                                 June 30,          July 1,       June 30,         July 1,
                                   2013             2012           2013            2012
                                       (In millions)                   (In millions)
   Other expense, net
   Interest expense              $     1.6        $     1.9      $     3.3       $     4.0
   Interest income                    (0.1 )           (0.5 )         (0.3 )          (1.2 )
   Other (income) expense, net         0.1              0.1            3.2             0.2

   Other expense, net            $     1.6        $     1.5      $     6.2       $     3.0

Interest expense. Interest expense in the second quarter and first six months of 2013 decreased when compared to the same period in 2012, primarily due to lower debt balances.

Interest income. Interest income in the second quarter and first six months of 2013 decreased when compared to the same period in 2012, primarily due to the loss of interest earned on our auction rate securities which were sold at the end of 2012.

Other (income) expense, net. Other expense in the first six months of 2013 was higher when compared to the same period of 2012, due to the write-off of a $3.0 million strategic investment during the first quarter of 2013.

Income Taxes. Income tax provision in the second quarter and first six months of 2013 was $4.1 million and $5.8 million on loss before taxes of $(3.4) million and $(2.2) million, respectively, as compared to income tax provisions of $1.9 and


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$1.7 on income before taxes of $13.8 million and $15.1 million, respectively, for the same periods of 2012. The effective tax rate for the second quarter and first six months of 2013 was (122.7%) and (264.8%) compared to 14.0% and 11.2%, respectively, for the comparable periods of 2012. The change in effective tax rate is primarily due to shifts of income and loss among jurisdictions with differing tax rates as well as the effect of a non-cash revaluation of deferred tax assets due to the weakening of the Korean Won in the second quarter of 2013. In the first six months of 2013, the valuation allowance on our deferred tax assets decreased by $2.7 million, which did not impact our results of operations.

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 June 30, 2013, 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



                                                   Three Months Ended                                             Six Months Ended
                                 June 30,       July 1,       $ Change         % Change        June 30,       July 1,        $ Change        % Change
                                   2013          2012         Inc (Dec)        Inc (Dec)         2013          2012          Inc (Dec)      Inc (Dec)

Free Cash Flow                  $     30.0     $    32.4     $      (2.4 )           -7.4 %    $     6.1     $    (0.6 )    $       6.7        -1116.7 %

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 for the three months ended June 30, 2013 decreased as compared to the same period in 2012 primarily from reduced operating cash flow driven by lower net income (loss), offset in part by lower capital expenditures. Free cash flow in the first six months of 2013 increased as compared to the same period in 2012 mainly due to reduced capital expenditures, offset by lower operating cash flow. See Free Cash Flow reconciliation in results of operations section above.

Reportable Segments.

The following tables present comparative disclosures of revenue, gross margin,
and operating income of our reportable segments.



                                                                                                Three Months Ended
                                                                 June 30,                                                                 July 1,
                                                                   2013                                                                    2012
                                                                        Gross             Operating                                             Gross             Operating
                                     Revenue        % of total         Margin %         Income (loss)        Revenue        % of total         Margin %         Income (loss)
                                                                                               (Dollars in millions)
MCCC                                 $  131.4              36.9 %           36.0 %     $          17.3       $  148.1              41.0 %           38.2 %     $          27.1
PCIA                                    188.7              52.9 %           28.7 %                29.7          176.4              48.8 %           31.2 %                33.9
SDT                                      36.4              10.2 %           16.2 %                 4.0           37.0              10.2 %           20.0 %                 5.3
Corporate (1)                              -                0.0 %            0.0 %               (52.8 )           -                0.0 %            0.0 %               (51.0 )

Total                                $  356.5             100.0 %           29.1 %     $          (1.8 )     $  361.5             100.0 %           32.6 %     $          15.3


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                                                                                                 Six Months Ended
                                                                 June 30,                                                                 July 1,
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