Fairchild Semiconductor Corporation (FCS)

Q3 2011 Earnings Call

October 13, 2011 9:00 am ET

Executives

Mark Thompson – President, Chief Executive Officer

Mark Frey – Executive Vice President, Chief Financial Officer

Dan Janson – Investor Relations

Analysts

Ross Seymore – Deutsche Bank

Terence Whalen – Citigroup

Parag Agarwal – UBS

Craig Berger – Friedman Billings and Ramsey

Tristan Gerra – Robert W. Baird

Venk Nathamuni – JP Morgan

Suji de Silva – ThinkEquity

John Pitzer – Credit Suisse

Steve Smigie – Raymond James

Kevin Cassidy – Stifel Nicolaus

Brendan Furlong – Miller Tabak

Presentation

Operator

Good day everyone and welcome to today’s Fairchild Semiconductor Third Quarter 2011 Earnings conference call. This call is being recorded. At this time, it is my pleasure to turn the call over to Mr. Dan Janson. Please go ahead, sir.

Dan Janson

Thanks. Good morning and thank you for dialing into Fairchild Semiconductor’s Third Quarter 2011 Financial Results conference call. With me today is Mark Thompson, Fairchild’s President and CEO, and Mark Frey, our Executive Vice President and CFO. Let me begin by mentioning that we’ll be attending the UBS Global Tech and Services Conference on November 16 in New York and the Credit Suisse Technology Conference in Scottsdale later in November.

We’ll start today’s call with Mark Frey, who will review our third quarter financial results and discuss the current status of fourth quarter business. Mark Thompson will then discuss our product line results and markets and operational performance in more detail. Finally, we’ll reserve time for questions and answers. This call is scheduled to last approximately 60 minutes and is being simultaneously webcast from the Investor Relations section of our website at fairchildsemi.com. The replay of this call will be publicly available for approximately 30 days.

Fairchild management will be making forward-looking statements on this conference call. These statements, including all statements about future results and performance, are made based on assumptions and estimates that involve risk and uncertainty. Many factors could cause actual results to differ materially from those expressed in forward-looking statements. A discussion of these risk factors is provided in the quarterly and annual reports we file with the SEC.

In addition, during this call we may refer to adjusted or financial measures that are not prepared according to generally accepted accounting principals. We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses that should be considered by our investors in conjunction with GAAP measures that we also provide. You can find a reconciliation of non-GAAP to comparable GAAP measures at the Investor Relations of our website at fairchildsemi.com. The website also contains a variety of useful information for investors including an extensive financial section to facilitate your investment analysis.

Now I’ll turn the discussion over to Mark Frey.

Mark Frey

Thanks Dan. Good morning and thank you for joining us. I’m sure most of you have had a chance to review our earnings press release, so I’ll focus on just the key points in my comments.

In the third quarter, our distribution sell-through was down 9% sequentially, which was well below our original expectations, while sales into our direct OEM customers were modestly higher. Accordingly, we reduced shipments and factory loadings during the quarter, which impacted margins but will allow us to maintain a lean supply chain as we manage through the current cycle. We are controlling costs very aggressively and will keep the reins tight until we are able to start growing sales and margins again.

Let’s review some of the details, starting with the income statement. For the third quarter of 2011, Fairchild reported sales of $403 million, down 7% sequentially and down 3% from the third quarter of 2010. Adjusted gross margin, which excludes accelerated depreciation and write-offs related to fab closures, was 36%, down 120 basis points from the prior quarter. Gross margin was impacted by lower factory utilization and roughly a full point now of 8 inch fab start-up costs.

R&D and SG&A expenses were $92 million in the third quarter, down 6 million sequentially as we aggressively manage OPEX. We continued to invest in R&D and applications engineering to support our future growth, but all other spending is being tightly controlled.

Third quarter adjusted net income was $45 million and adjusted EPS was $0.34. Diluted share count was down nearly 2 million shares in the third quarter. We bought back 1.4 million shares as we capitalized on the lower stock prices during the quarter.

Now I’d like to review third quarter highlights of our sales and gross margin performance by our two major product groups. PCIA sales were up 5% from the year-ago quarter but down 10% sequentially due to weaker demand from appliance, consumer and solar end markets as customers continue to reduce inventories. This is also a seasonally weaker period for most of the PCIA end markets. Gross margin decreased two points to 38% due primarily to lower factory loadings and increased start-up costs for the transition to 8-inch wafers, which was partially offset by favorable foreign exchange trends.

In our MCCC business, sales were flat sequentially as strong mobile analog sales were offset by weak demand from consumer and computing customers. MCCC gross margin was flat with the prior quarter at 37% as a richer mobile analog mix offset lower factory loadings supporting consumer and computing products.

Turning to our balance sheet, we grew internal inventory dollars by about 2%, which resulted in an 8-day increase to 91 days at the end of Q3. We like to maintain internal inventories closer to 80 days, so we plan to work this down over the next one to two quarters. Days of sales outstanding, or DSOs, were flat at 34 days while payables decreased to 49 days.

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