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FCS > SEC Filings for FCS > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC


8-Nov-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 delivered sequentially higher third quarter 2013 sales and margins while spending less on operating expenses. Our sales growth in the third quarter was due primarily to strength from one large mobile customer. Sales in our high voltage business that serves the industrial, appliance and automotive end markets were also solid. Demand from the computing, TV and some portions of the tier two mobile market in Asia was incrementally weaker which impacted third quarter results. Bookings from one of our other top mobile customers reflect some reduction in demand largely driven by the typical year-end inventory reduction. Gross margin and earnings were up substantially in the third quarter.

Given the current modest sales growth rate for the semiconductor industry, we are focused on increasing margins and earnings through greater operational efficiency and lower overhead spending. We are reviewing options to streamline and consolidate our manufacturing footprint which we expect will begin benefiting our financial results in 2015. Operating expenses were reduced more than $3 million in the third quarter and we expect further reductions in the fourth quarter.

Distribution sell through was up more than 1% sequentially. Our weeks of supply in the channel were roughly flat in weeks. Sales into the OEM and EMS channels were up about 7% due primarily to higher sales at one large mobile customer. Factory utilization decreased in the third quarter as we brought the new 8 inch fab in Korea on line. Lead times remain short for virtually all our businesses. Overall product pricing in Q3 was down about 1.5% from the prior quarter and we expect similar performance in the fourth quarter.

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. 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 product 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 29,             September 30,             September 29,               September 30,
                                                2013                     2012                       2013                       2012
                                                                               (Dollars in millions)

Total revenue                           $ 364.6        100.0 %    $ 358.8       100.0 %    $ 1,064.3        100.0 %    $ 1,072.5       100.0 %
Gross margin                              114.9         31.5 %      120.1        33.5 %        311.0         29.2 %        342.7        32.0 %

Operating expenses:
Research and development                   42.8         11.7 %       37.8        10.5 %        131.4         12.3 %        119.0        11.1 %
Selling, general and administrative        52.0         14.3 %       48.0        13.4 %        155.8         14.6 %        157.8        14.7 %
Amortization of acquisition-related
intangibles                                 3.9          1.1 %        4.5         1.3 %         11.6          1.1 %         13.7         1.3 %
Restructuring and impairments               3.5          1.0 %        3.4         0.9 %          8.1          0.8 %          6.3         0.6 %
Release of litigation charge                 -           0.0 %         -          0.0 %        (12.6 )       -1.2 %          1.3         0.1 %

Total operating expenses                  102.2         28.0 %       93.7        26.1 %        294.3         27.7 %        298.1        27.8 %

Operating income                           12.7          3.5 %       26.4         7.4 %         16.7          1.6 %         44.6         4.2 %

Other expense, net                          1.4          0.4 %        1.2         0.3 %          7.6          0.7 %          4.2         0.4 %

Income before income taxes                 11.3          3.1 %       25.2         7.0 %          9.1          0.9 %         40.4         3.8 %

Provision (benefit) for income taxes       (0.8 )       -0.2 %        0.5         0.1 %          5.0          0.5 %          2.2         0.2 %

Net income                              $  12.1          3.3 %    $  24.7         6.9 %    $     4.1          0.4 %    $    38.2         3.6 %

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.


Table of Contents
                                                          Three Months Ended                                 Nine Months Ended
                                                September 29,            September 30,            September 29,            September 30,
                                                    2013                     2012                     2013                      2012
                                                                                  (Dollars in millions)

Non GAAP measures
Adjusted net income                          $  21.4                  $  32.3                  $  21.1                  $   58.2
Adjusted gross margin                          117.0        32.1 %      120.1        33.5 %      318.5        29.9 %       342.7        32.0 %
Free cash flow                                  14.0                    (17.5 )                   20.1                     (18.1 )

Reconciliation of Net Income to Adjusted
Net Income
Net income                                   $  12.1                  $  24.7                      4.1                      38.2
Adjustments to reconcile net income to
adjusted net income:
Restructuring and impairments                    3.5                      3.4                      8.1                       6.3
Accelerated depreciation on assets related
to fab closure                                   2.1                       -                       7.5                        -
Write-off of equity investments                   -                        -                       3.0                        -
Release of litigation charge                      -                        -                     (12.6 )                     1.3
Amortization of acquisition-related
intangibles                                      3.9                      4.5                     11.6                      13.7
Associated net tax effects of the above
and other acquisition-related intangibles       (0.2 )                   (0.3 )                   (0.6 )                    (1.3 )

Adjusted net income                          $  21.4                  $  32.3                  $  21.1                  $   58.2


Reconciliation of Gross Margin to Adjusted
Gross Margin
Gross margin                                 $ 114.9                  $ 120.1                  $ 311.0                  $  342.7
Adjustments to reconcile gross margin to
adjusted gross margin:
Accelerated depreciation on assets related
to fab closure                                   2.1                       -                       7.5                        -

Adjusted gross margin                        $ 117.0                  $ 120.1                  $ 318.5                  $  342.7


Reconciliation of Operating Cash Flow to
Free Cash Flow
Cash provided by (used in) operating
activities                                   $  33.1                  $  24.8                  $  79.3                  $  104.3
Capital expenditures                           (19.1 )                  (42.3 )                  (59.2 )                  (122.4 )

Free cash flow                               $  14.0                  $ (17.5 )                $  20.1                  $  (18.1 )

Total Revenues



                                                           Three Months Ended                                                                Nine Months Ended
                                 September 29,         September 30,         $ Change          % Change           September 29,         September 30,         $ Change           % Change
                                     2013                  2012              Inc (Dec)         Inc (Dec)              2013                  2012              Inc (Dec)          Inc (Dec)

Revenue $ 364.6 $ 358.8 $ 5.8 1.6 % $ 1,064.3 $ 1,072.5 $ (8.2 ) -0.8 %

The 2% increase in revenue during the three months ended September 29, 2013 compared to the same period for 2012 was primarily driven by a stronger demand from High Voltage, Auto and Mobile customers. Revenue during the first nine months of 2013 was slightly lower as compared to the same period in 2012 due to a combination of one less week in the first quarter of 2013 and lower average selling prices. Excluding the extra week in the first quarter of 2012, sales for the first nine months of 2013 would be up 2%.

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 29, 2013 and September 30, 2012. The increase in other Asia/Pacific revenue for both the three and nine months ended September 29, 2013 was primarily due to a shift in customer sales from Korea to other Asia/Pacific customers, particularly in Singapore. The decrease in Taiwan revenue is mainly due to reduced sales in computing.


Table of Contents
                                             Three Months Ended                                   Nine Months Ended
                                 September 29,               September 30,             September 29,              September 30,
                                     2013                        2012                      2013                       2012

U.S.                                          9 %                          9 %                      9 %                        9 %
Other Americas                                2                            2                        2                          2
Europe                                       14                           13                       14                         13
China                                        37                           35                       35                         34
Taiwan                                       11                           13                       12                         14
Korea                                         6                            9                        7                         10
Other Asia/Pacific                           21                           19                       21                         18

Total                                       100 %                        100 %                    100 %                      100 %

Gross Margin



                                                                        Three Months Ended                                                          Nine Months Ended
                                               September 29,        September 30,        $ Change         % Change         September 29,        September 30,        $ Change         % Change
                                                   2013                 2012             Inc (Dec)        Inc (Dec)            2013                 2012             Inc (Dec)        Inc (Dec)
Gross Margin $                                $         114.9      $         120.1      $      (5.2 )           -4.3 %    $         311.0      $         342.7      $     (31.7 )           -9.3 %
Gross Margin %                                           31.5 %               33.5 %                            -2.0 %               29.2 %               32.0 %                            -2.7 %

The decrease in gross margin for the three months ended September 29, 2013 as compared to the same period in 2012 was driven by less favorable product mix. Under-utilization related to our new 8 inch line in Korea which just started to ramp-up during the current quarter also contributed to the decrease in gross margin, Moreover, variable compensation was lower during the third quarter of 2012.

Gross margin was lower during the nine months ended September 29, 2013 as compared to the same period in 2012 due to higher inventory write-offs, start-up costs and under-utilization related to our new 8 inch line in Korea, and accelerated depreciation related to the closure of the 8 inch line at our Salt Lake manufacturing facility. The accelerated depreciation, which is recorded over an 11-month period, relates to the initial installation costs of equipment in Salt Lake. We anticipate that this equipment will eventually be transferred to other Fairchild locations. Moreover, variable compensation was lower during the nine months ended September 30, 2012.

Adjusted Gross Margin



                                                                          Three Months Ended                                                          Nine Months Ended
                                                 September 29,        September 30,        $ Change         % Change         September 29,        September 30,        $ Change         % Change
                                                     2013                 2012             Inc (Dec)        Inc (Dec)            2013                 2012             Inc (Dec)        Inc (Dec)
Adjusted Gross Margin $                         $         117.0      $         120.1      $      (3.1 )           -2.6 %    $         318.5      $         342.7      $     (24.2 )           -7.1 %
Adjusted Gross Margin %                                    32.1 %               33.5 %                            -1.4 %               29.9 %               32.0 %                            -2.0 %

Adjusted gross margin for the three months and nine months ended September 29, 2013 did not include $2.1 million and $7.5 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 nine months ended September 30, 2012. See above reconciliation for detail.

Operating Expenses



                                                                         Three Months Ended                                                            Nine Months Ended
                                                September 29,        September 30,        $ Change         % Change          September 29,        September 30,        $ Change          % Change
                                                    2013                 2012             Inc (Dec)        Inc (Dec)             2013                 2012             Inc (Dec)         Inc (Dec)
Research and development                       $          42.8      $          37.8      $       5.0             13.2 %     $         131.4      $         119.0      $      12.4              10.4 %
Selling, general and administrative            $          52.0      $          48.0      $       4.0              8.3 %     $         155.8      $         157.8      $      (2.0 )            -1.3 %


Table of Contents

Operating expenses in the first nine months of 2013 consisted of one less week as compared to 2012. Despite this, research and development (R&D) expenses for the third quarter and first nine months of 2013 was higher as compared to the same periods in 2012 primarily due to higher R&D expenses as we continue to invest in R&D programs and resources. Moreover, R&D variable compensation was lower during the third quarter and the first nine months of 2012. Selling, general and administrative expenses (SG&A) for the third quarter of 2013 was higher as compared to the same period in 2012 primarily due to lower variable compensation and equity compensation in 2012. SG&A expenses decreased during the first nine months of 2013 as compared to the same period in 2012 due to structural cost reductions, reduced legal expenses, and a decrease in other discretionary spending.

Restructuring and Impairment. During the three and nine months ended September 29, 2013, we recorded restructuring and impairment charges, net of releases, of $3.5 million and $8.1 million, respectively. The third quarter charges include $2.8 million of employee separation costs, $0.8 million of line closure costs, and $0.1 million of lease termination costs associated with the 2013 Infrastructure Realignment Program as well as $0.2 million in reserve releases for employee separation costs associated with the 2013/2012 Infrastructure Realignment Programs. Charges for the first six months include $3.0 million of employee separation costs, $1.5 million of line closure costs, and $0.1 million of lease termination costs associated with the 2013 Infrastructure Realignment Program, as well as $0.1 million of employee separation costs off-set by a $0.1 million reserve release for employee separation costs both associated with the 2012 Infrastructure Realignment Program.

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. Charges for the first six months of 2012 include a $0.1 million reserve release of employee separation costs associated with the 2010 Infrastructure Realignment Program, $0.9 million of employee separation costs associated with the 2011 Infrastructure Realignment Program as well as $1.7 million of 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
nine months ended September 29, 2013 and September 30, 2012.



                                            Three Months Ended                                 Nine Months Ended
                                  September 29,             September 30,           September 29,             September 30,
                                       2013                     2012                     2013                     2012
                                                                        (In millions)
Other expense, net
Interest expense                 $            1.5          $           1.7         $            4.8          $           5.7
Interest income                              (0.2 )                   (0.6 )                   (0.5 )                   (1.8 )
Other (income) expense, net                   0.1                      0.1                      3.3                      0.3

Other expense, net               $            1.4          $           1.2         $            7.6          $           4.2

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


Table of Contents

Interest income. Interest income in the third quarter and first nine 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 nine 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 third quarter and first nine months of 2013 was $(0.8) million and $5.0 million on income before taxes of $11.3 million and $9.1 million, respectively, as compared to income tax provisions of $0.5 and $2.2 on income before taxes of $25.2 million and $40.4 million, respectively, for the same periods of 2012. The effective tax rate for the third quarter and first nine months of 2013 was (7.1%) and 54.9% compared to 2.0% and 5.5%, respectively, for the comparable periods of 2012. The change in the third quarter effective tax rate is primarily due to the effect of a non-cash revaluation of deferred tax assets due to the strengthening of the South Korean Won. The change in the first nine month's effective tax rate while impacted by foreign exchange rates, was primarily driven by changes in the distribution of profits among legal jurisdictions with differing tax rates. In the first nine months of 2013, the valuation allowance on our deferred tax assets decreased by $6.5 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 September 29, 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                                                                Nine Months Ended
                                  September 29,         September 30,          $ Change          % Change           September 29,         September 30,          $ Change          % Change
                                      2013                  2012               Inc (Dec)         Inc (Dec)              2013                  2012               Inc (Dec)         Inc (Dec)

Free Cash Flow $ 14.0 $ (17.5 ) $ 31.5 180.0 % $ 20.1 $ (18.1 ) $ 38.2 211.0 %

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 and nine months ended September 30, 2013 increased as compared to the same periods in 2012 mainly due to reduced capital expenditures, off-set in part by lower operating cash flow. See Free Cash Flow reconciliation in results of operations section above.

. . .

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