Fairchild Semiconductor (NYSE: FCS): -- Distribution Inventories
Decrease More Than 2 Weeks on Stronger Re-Sales -- Record Bookings
for Analog Switches -- Cash from Operations Improves to $56.7
million Fairchild Semiconductor (NYSE: FCS), the leading global
supplier of power semiconductors, today announced results for the
second quarter ended June 26, 2005. Fairchild reported second
quarter sales of $346.0 million, a 4.6% decrease from the prior
quarter and 16.5% lower than the second quarter of 2004. Fairchild
reported a second quarter net loss of $205.3 million or $1.71 per
share compared to a net loss of $10.4 million or $0.09 per share in
the prior quarter and net income of $17.0 million or $0.14 per
diluted share in the second quarter of 2004. Included in the loss
was a $195.3 million non-cash charge related to the reserve of
deferred tax assets required under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes,"
which is discussed in more detail below. Also included in the loss
were $3.9 million of restructuring expenses in the second quarter
related to employee severance and certain asset impairments. Gross
margin was 19.9%, 320 basis points lower sequentially and 940 basis
points lower than the second quarter of 2004. Fairchild reported a
second quarter pro forma net loss of $2.2 million or $0.02 per
share, compared to pro forma net income of $12.5 million or $0.10
per diluted share in the prior quarter and $31.7 million or $0.26
per diluted share in the second quarter of 2004. The pro forma net
income (loss) excludes amortization of acquisition-related
intangibles, restructuring and impairments, expenses associated
with debt reduction, the non-cash charge to reserve the deferred
tax asset, and other items. "Despite the short term financial
results, we made excellent progress during the second quarter as we
strengthened the management team, increased our focus on the analog
business, improved our mix management process and moved to a
sell-through management approach for distribution," said Mark
Thompson, Fairchild's president and CEO. "We've made a number of
changes to our management team including bringing in four senior
managers to bolster our efforts in analog product development as
well as strengthening our marketing and sales efforts in Korea. Our
product lines are engaged in a thorough analysis of our business to
identify products that do not currently meet our margin targets and
to develop plans to either improve margins or exit/divest these
products. The results this quarter of our increased focus on
distribution are very encouraging as re-sales were up an estimated
12% sequentially. Stronger re-sales coupled with lower sales into
distribution drove more than a two week reduction in channel
inventory. I'm confident that the changes we're making to
accelerate our analog business, get closer to our end customers,
especially in the distribution channel, and rationalize our product
mix to focus on higher quality business will allow us to strongly
improve margins and profitability in the future." End Markets and
New Products "Order rates were strongest in the consumer and
handset markets," explained Thompson. "We saw particular strength
for products supporting the television end market as well as much
stronger demand in the white goods segment where our Smart Power
Module (SPM(TM)) business continues to win new designs. Demand for
products supporting the handset market was up more than 50% over
the last two quarters in part driven by our strength in low power
switches and our fast growing analog switch business, which
recorded record bookings, up more than 100% from the prior quarter.
We're also seeing significant design-in activity for our new,
proprietary uSerDes(TM) products enabling handset manufacturers to
better manage the signal flow in clamshell phones while reducing
component count and costs. Our most significant design win to date
came this quarter when one of our largest customers selected our
uSerDes(TM) solution for use in their latest generation of
handsets." Second Quarter Financials "We believe we've turned the
corner on distribution inventories and the channel is now better
positioned to take advantage of the typically stronger seasonal
demand in the late summer and fall," said Matt Towse, Fairchild's
senior vice president and chief financial officer. "The volume
incentives to increase re-sales and to reduce slow moving inventory
are in place, and we expect to see the results of these programs in
the second half of this year. "Gross margins were 19.9% in the
second quarter," stated Towse. "Margins were impacted primarily by
our efforts to reduce channel and internal inventories, which
resulted in lower factory loadings and on-going pricing pressure on
standard products and low power switches as well as certain analog
products. "We solidly improved our balance sheet and cash flow from
the prior quarter," said Towse. "We reduced our internal
inventories more than 5% resulting in higher turns, improved our
days of sales outstanding and grew our cash and marketable
securities nearly $30 million from the first quarter. We also
increased our cash flow from operations to $56.7 million in the
second quarter. "During our recent analyst's day, we presented our
new capital expenditure model of 6 - 8 % of sales, down from our
historical average of about 11%," stated Towse. "Our capital
spending in the second quarter was $26.2 million and we forecast
this amount to decrease significantly in the second half of this
year resulting in our annual capital spending being well within our
new model." Third Quarter Guidance "In the third quarter, we expect
revenue to be approximately flat and gross margins to be flat to
slightly higher sequentially," said Towse. "Our backlog and lead
times entering the seasonally slower summer months were lower than
a quarter ago. Our lead times are now in the 5 - 7 week range,
allowing us to fill a higher amount of turns business, which are
orders booked and shipped within the third quarter. We plan to
continue our efforts to tightly manage factory loadings as
inventories in the channel are further reduced. "During the second
quarter we completed an analysis of asset depreciable lives and,
effective in the third quarter, we're adjusting the useful life
assumptions for many types of equipment to better align our
depreciation schedules to the actual longer life we have
experienced in recent years and to be more consistent with industry
norms," explained Towse. "We expect the gross margin impact of this
increase in useful lives will be small in the third quarter, and
then starting in the fourth quarter we anticipate the lower
depreciation expenses will have a very positive impact on gross
margins. In addition, we anticipate our reduced capital expenditure
model of 6 - 8% of sales will allow us to maintain lower
depreciation expenses over the long term. "I'm pleased with the
results of our efforts so far to reduce inventories and lower
capital spending going forward, but there is still much work ahead
of us," said Towse. "We're doing in-depth reviews of our
manufacturing capabilities and our product portfolio in order to
increase return on capital, optimize product mix and improve the
overall quality of our business. As we identify and execute on
plans to exit certain products, we may be required to take charges
over the next couple of quarters for potential returns or to adjust
the carrying value of our inventory for these products. Ultimately,
we expect these product management and operational actions will
improve our on-going gross margins. We are committed to meeting the
goals we set during our recent analyst's day, to hit 30% gross
margins at the current sell-through sales levels and to achieve
mid-30% gross margins within two years." Note on the Non-Cash
Charge Related to SFAS 109 In accordance with the Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes", Fairchild recorded a non-cash charge of $195.3 million to
reserve its deferred tax asset (DTA). This standard requires
companies to weigh positive and negative evidence when determining
the necessity for a valuation allowance on its DTA and in
particular, requires that "...greater weight be given to previous
cumulative losses than the outlook for future profitability when
determining whether deferred tax assets can be used." Fairchild has
had cumulative losses in the U.S. in recent years primarily due to
previously higher interest expenses from its U.S. debt and is now
expecting an additional year of U.S. losses in 2005. Under
Fairchild's evaluation of SFAS 109 requirements, the evidence of
these cumulative losses outweighs any expectations of future
profits when valuing the DTA. As a result, the deferred tax assets
are required to be reserved. It is important to note that reserving
the DTA was a non-cash charge taken to conform to GAAP, and in no
way reflects reduced confidence in Fairchild's future prospects.
The company expects it is likely that it will use all of its U.S.
deferred tax assets before their expiration dates that range from
2018 to 2025. Should Fairchild record sufficient profits in the
U.S. in the future, it can reverse, partially or totally, this
reserve against its DTA and use this asset to offset all or part of
the future income tax expenses on these profits. Until that time,
Fairchild will continue to provide pro forma financial results with
a normalized tax rate. Special Note on Pro Forma Statements This
press release is accompanied by statements of operations prepared
in accordance with generally accepted accounting principles (GAAP),
pro forma statements of operations (which exclude expenses for
amortization of acquisition-related intangibles, restructuring and
impairments, expenses associated with debt reduction, the non-cash
charge to reserve the deferred tax asset, and other items), and a
reconciliation from GAAP to pro forma results. Pro forma results
are not meant as a substitute for GAAP, but are included solely for
informational and comparative purposes. Fairchild presents the pro
forma consolidated statement of operations because its management
uses it as an additional measure of the company's operating
performance, and management believes pro forma financial
information is useful to investors because it illuminates
underlying operational trends by excluding significant
non-recurring or otherwise unusual transactions. Fairchild's
criteria for determining pro forma results may differ from methods
used by other companies, and should not be regarded as a
replacement for corresponding GAAP measures. Special Note on
Forward Looking Statements: Some of the paragraphs above contain
forward-looking statements that are based on management's
assumptions and expectations and that involve risk and uncertainty.
Other forward-looking statements may also be found in this news
release. Forward-looking statements usually, but do not always,
contain forward-looking terminology such as "we believe," "we
expect," or "we anticipate," or refer to management's expectations
about Fairchild's future performance. Many factors could cause
actual results to differ materially from those expressed in
forward-looking statements. Among these factors are the following:
changes in overall global or regional economic conditions; changes
in demand for our products; changes in inventories at our customers
and distributors; technological and product development risks,
including the risks of failing to maintain the right to use some
technologies or failing to adequately protect our own intellectual
property against misappropriation or infringement; availability of
manufacturing capacity; the risk of production delays; availability
of raw materials; competitors' actions; loss of key customers,
including but not limited to distributors; the inability to attract
and retain key management and other employees; order cancellations
or reduced bookings; changes in manufacturing yields or output;
risks related to warranty and product liability claims; risks
inherent in doing business internationally; regulatory risks and
significant litigation. These and other risk factors are discussed
in the company's quarterly and annual reports filed with the
Securities and Exchange Commission (SEC) and available at the
Investor Relations section of Fairchild Semiconductor's web site at
investor.fairchildsemi.com or the SEC's web site at www.sec.gov.
About Fairchild Semiconductor: Fairchild Semiconductor (NYSE: FCS)
is the leading global supplier of high performance power products
critical to today's leading electronic applications in the
computing, communications, consumer, industrial and automotive
segments. As The Power Franchise(R), Fairchild offers the
industry's broadest portfolio of components that optimize system
power through minimization, conversion, management and distribution
functions. Fairchild's 9,000 employees design, manufacture and
market power, analog & mixed signal, interface, logic, and
optoelectronics products from its headquarters in South Portland,
Maine, USA and numerous locations around the world. Please contact
us on the web at www.fairchildsemi.com. -0- *T Fairchild
Semiconductor International, Inc. Consolidated Statements of
Operations (In millions, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended --------------------------
----------------- June 26, March 27, June 27, June 26, June 27,
2005 2005 2004 2005 2004 -------- -------- -------- --------
-------- Total revenue $ 346.0 $ 362.8 $ 414.3 $ 708.8 $ 814.0 Cost
of sales 277.1 279.0 292.9 556.1 587.3 -------- -------- --------
-------- -------- Gross profit 68.9 83.8 121.4 152.7 226.7 --------
-------- -------- -------- -------- Operating expenses: Research
and development 19.5 19.0 21.0 38.5 41.7 Selling, general and
administrative 47.5 47.4 44.1 94.9 85.8 Amortization of
acquisition-related intangibles 6.1 6.1 6.2 12.2 13.8 Restructuring
and impairments 3.9 4.1 4.4 8.0 8.2 Reserve for potential
settlement losses - - 11.0 - 11.0 -------- -------- --------
-------- -------- Total operating expenses 77.0 76.6 86.7 153.6
160.5 -------- -------- -------- -------- -------- Operating income
(loss) (8.1) 7.2 34.7 (0.9) 66.2 Interest expense, net 5.9 10.1
14.1 16.0 27.3 Other expense - 23.9 - 23.9 - -------- --------
-------- -------- -------- Income (loss) before income taxes (14.0)
(26.8) 20.6 (40.8) 38.9 Provision (benefit) for income taxes 191.3
(16.4) 3.6 174.9 8.9 -------- -------- -------- -------- --------
Net income (loss) $ (205.3)$ (10.4)$ 17.0 $ (215.7)$ 30.0 ========
======== ======== ======== ======== Net income (loss) per common
share: Basic $ (1.71)$ (0.09)$ 0.14 $ (1.80) $ 0.25 ========
======== ======== ======== ======== Diluted $ (1.71)$ (0.09)$ 0.14
$ (1.80) $ 0.24 ======== ======== ======== ======== ========
Weighted average common shares: Basic 119.8 119.6 119.3 119.8 119.3
======== ======== ======== ======== ======== Diluted 119.8 119.6
124.0 119.8 124.8 ======== ======== ======== ======== ========
Fairchild Semiconductor International, Inc. Reconciliation of Net
Income (Loss) To Pro Forma Net Income (Loss) (In millions)
(Unaudited) Three Months Ended Six Months Ended
------------------------- ----------------- June 26, March 27, June
27, June 26, June 27, 2005 2005 2004 2005 2004 -------- --------
-------- -------- -------- Net income (loss) $(205.3) $ (10.4) $
17.0 $(215.7) $ 30.0 Adjustments to reconcile net income (loss) to
pro forma net income (loss): Restructuring and impairments 3.9 4.1
4.4 8.0 8.2 Distributor sales reserves associated with
restructuring - - - - (1.9) Inventory charge associated with
restructuring - - - - 0.9 Costs associated with the redemption of
10 1/2% Notes - 23.9 - 23.9 - Reserve for potential settlement
losses - - 11.0 - 11.0 Amortization of acquisition-related
intangibles 6.1 6.1 6.2 12.2 13.8 Associated tax effects (2.2)
(11.2) (6.9) (13.4) (8.9) Reserve for deferred tax asset 195.3 - -
195.3 - -------- -------- -------- -------- -------- Pro forma net
income (loss) $ (2.2) $ 12.5 $ 31.7 $ 10.3 $ 53.1 -------- --------
-------- -------- -------- Fairchild Semiconductor International,
Inc. Pro Forma Consolidated Statements of Operations (In millions,
except per share amounts) (Unaudited) Three Months Ended Six Months
Ended ------------------------- ----------------- June 26, March
27, June 27, June 26, June 27, 2005 2005 2004 2005 2004 --------
-------- -------- -------- -------- Pro forma total revenue $ 346.0
$ 362.8 $ 414.3 $ 708.8 $ 812.1 Pro forma cost of sales 277.1 279.0
292.9 556.1 586.4 -------- -------- -------- -------- -------- Pro
forma gross profit 68.9 83.8 121.4 152.7 225.7 -------- --------
-------- -------- -------- Operating expenses: Research and
development 19.5 19.0 21.0 38.5 41.7 Selling, general and
administrative 47.5 47.4 44.1 94.9 85.8 -------- -------- --------
-------- -------- Total pro forma operating expenses 67.0 66.4 65.1
133.4 127.5 -------- -------- -------- -------- -------- Pro forma
operating income 1.9 17.4 56.3 19.3 98.2 Interest expense, net 5.9
10.1 14.1 16.0 27.3 -------- -------- -------- -------- --------
Pro forma income (loss) before income taxes (4.0) 7.3 42.2 3.3 70.9
Pro forma provision (benefit) for income taxes (1.8) (5.2) 10.5
(7.0) 17.8 -------- -------- -------- -------- -------- Pro forma
net income (loss) $ (2.2) $ 12.5 $ 31.7 $ 10.3 $ 53.1 ========
======== ======== ======== ======== Pro forma net income (loss) per
common share: Basic $ (0.02) $ 0.10 $ 0.27 $ 0.09 $ 0.45 ========
======== ======== ======== ======== Diluted $ (0.02) $ 0.10 $ 0.26
$ 0.08 $ 0.43 ======== ======== ======== ======== ======== Weighted
average common shares: Basic 119.8 119.6 119.3 119.8 119.3 ========
======== ======== ======== ======== Diluted (1) 119.8 122.4 130.7
122.2 131.5 ======== ======== ======== ======== ======== Pro forma
consolidated statement of operations is presented because we use it
as an additional measure of our operating performance. Pro forma
net income (loss) and pro forma net income (loss) per share should
not be considered as alternatives to net income (loss), net income
(loss) per share or other measures of consolidated operations and
cash flow data prepared in accordance with accounting principles
generally accepted in the United States of America, as indicators
of our operating performance, or as alternatives to cash flow as a
measure of liquidity. Pro forma consolidated statements of
operations are intended to present the company's operating results,
excluding items described above, for the periods presented. During
the three and six months ended June 26, 2005 and June 27, 2004 and
the three months ended March 27, 2005, the items included
restructuring and impairment charges and amortization of
acquisition-related intangibles. The six months ended June 27, 2004
also includes distributor sales reserves associated with
restructuring, inventory charges associated with restructuring and
a reserve for potential settlement losses. The three months ended
March 27, 2005 and the six months ended June 26, 2005 includes
charges associated with the redemption of 10 1/2% notes. The three
and six months ended June 26, 2005 also includes a charge for a
reserve of deferred tax assets. The three and six months ended June
27, 2004 includes a reserve for potential settlement losses. (1)
The diluted proforma net income per common share calculation for
the three and six months ended June 27, 2004 includes a reduction
of $1.7 million and $3.4 million, respectively, in interest
expense, net of tax, as if the company's 5.0% convertible senior
subordinated notes had been converted as of the beginning of the
period presented. Accordingly, the diluted weighted average common
shares for the three and six months ended June 27, 2004 includes
6.7 million of common stock equivalents. Fairchild Semiconductor
International, Inc. Consolidated Balance Sheets (In millions)
(Unaudited) June 26, March 27, December 26, 2005 2005 2004
----------- ----------- ----------- ASSETS Current assets: Cash and
cash equivalents $ 193.8 $ 179.5 $ 146.3 Short-term marketable
securities 172.7 149.3 422.1 Receivables, net 143.2 162.7 154.0
Inventories 243.4 256.9 253.9 Other current assets 28.3 48.2 56.1
----------- ----------- ----------- Total current assets 781.4
796.6 1,032.4 Property, plant and equipment, net 644.3 657.0 664.1
Intangible assets, net 139.4 145.5 151.6 Goodwill 229.9 229.9 229.9
Long-term marketable securities 95.0 103.4 124.0 Other assets 37.2
180.9 174.5 ----------- ----------- ----------- Total assets $
1,927.2 $ 2,113.3 $ 2,376.5 =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current
portion of long-term debt $ 4.8 $ 4.8 $ 3.3 Accounts payable 100.2
105.4 118.2 Accrued expenses and other current liabilities 112.8
113.8 165.1 ----------- ----------- ----------- Total current
liabilities 217.8 224.0 286.6 Long-term debt, less current portion
646.2 647.4 845.2 Other liabilities 40.9 15.7 15.6 -----------
----------- ----------- Total liabilities 904.9 887.1 1,147.4 Total
stockholders' equity 1,022.3 1,226.2 1,229.1 -----------
----------- ----------- Total liabilities and stockholders' equity
$ 1,927.2 $ 2,113.3 $ 2,376.5 =========== =========== ===========
Fairchild Semiconductor International, Inc. Condensed Consolidated
Statements of Cash Flows (In millions) (Unaudited) Six Months Ended
--------------------- June 26, June 27, 2005 2004 ---------
--------- Cash flows from operating activities: Net income (loss) $
(215.7) $ 30.0 Adjustments to reconcile net income (loss) cash
provided by operating activities: Depreciation and amortization
88.6 87.5 Non-cash restructuring and impairments expense 2.1 -
Deferred income taxes, net 175.5 4.0 Other 10.8 1.1 Changes in
operating assets and liabilities, net of acquisitions (37.6) (4.6)
--------- --------- Cash provided by operating activities 23.7
118.0 --------- --------- Cash flows from investing activities:
Capital expenditures (55.7) (90.2) Purchase of marketable
securities (401.4) (540.9) Sale of marketable securities 663.2
406.9 Maturity of marketable securities 15.5 49.2 Other (1.0) 1.0
========= ========= Cash provided by (used in) investing activities
220.6 (174.0) --------- --------- Cash flows from financing
activities: Repayment of long-term debt (352.0) (1.7) Issuance of
long-term debt 154.5 - Proceeds from issuance of common stock and
from exercise of stock options, net 5.7 18.8 Other (5.0) (4.6)
--------- --------- Cash provided by (used in) financing activities
(196.8) 12.5 --------- --------- Net change in cash and cash
equivalents 47.5 (43.5) Cash and cash equivalents at beginning of
period 146.3 169.5 --------- --------- Cash and cash equivalents at
end of period $ 193.8 $ 126.0 ========= ========= *T
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