Fairchild Semiconductor's CEO Discusses Q4, 2011 Results - Earnings Call Transcript

Fairchild Semiconductor Corporation ( FCS)

Q4, 2011 Earnings Results Conference

January 19, 2012 9:00 am ET

Executives

Mark Thompson – President, Chief Executive Officer

Mark Frey – Executive Vice President, Chief Financial Officer

Dan Janson – Investor Relations

Analysts

Terence Whalen – Citigroup

Parag Agarwal – UBS

Craig Berger – Friedman Billings and Ramsey

Venk Nathamuni – JP Morgan

Suji de Silva – ThinkEquity

John Pitzer – Credit Suisse

Steve Smigie – Raymond James

Kevin Cassidy – Stifel Nicolaus

Brendan Furlong – Miller Tabak

Bill Ong - Ticonderoga Securities

Mike McConnell - Pacific Crest

Presentation

Operator

Good day everyone and welcome to the Fairchild Semiconductor Fourth Quarter and Year-End 2011 Earnings Conference Call. Just a reminder, today’s call is being recorded. Now for opening remarks and introduction I’ll turn the conference over to Mr. Dan Janson. Dan please go ahead.

Dan Janson

Thanks. Good morning and thank you for dialing into Fairchild Semiconductor’s fourth quarter and full-year 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. We will start today’s call with Mark Frey, who will review our fourth quarter financial results and discuss the current status of first quarter business. Mark Thompson will then discuss our product line results, end markets and operational performance in more detail.

Finally we will 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 for 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 other 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 investors in conjunction within GAAP measures that we also provide. You can find a reconciliation of non-GAAP to the comparable GAAP measures at the Fairchild – at the investor Relations section of our website at investor.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 had a chance to review our earnings release, so I’ll focus on just the key points in my comments.

Overall demand was lower than expected in the fourth quarter with distribution sell-through down 20% sequentially and sales into our direct OEM customers about 6% lower than the prior quarter.

As we discussed in our earnings call last quarter, our primary focus in this time of demand uncertainty is managing our distribution channel tightly by reducing inventories and expenses. We made progress in all of these areas and plan to maintain a discipline in the first quarter.

Let’s review some of the details, starting with the income statement. For the fourth quarter of 2011, Fairchild reported sales of $339 million, down 16% sequentially and 15% from the fourth quarter of 2010. Adjusted gross margin, which excludes the restructuring of Asian retirement plans accelerated depreciation inventory reserve releases and write-offs related to fab closures was 30.4%, down 560 basis points from the prior quarter. Gross margin was impacted by lower factory utilization roughly a negative 140 basis points impact from 8-inch fabs start-up cost and normal price reductions.

R&D and SG&A expenses were $88 million in the fourth quarter, down $4 million sequentially due to reductions in spending and lower variable compensation expense. We continued to invest in R&D and applications engineering to support our future growth, but all other spending is being tightly controlled. Our fourth quarter results illustrate this point, with R&D spending up around 2%, while SG&A was down 8% sequentially.

Fourth quarter adjusted net income was $90 million and adjusted EPS was $0.15. Our adjusted tax expense was a credit of $6 million as we recognized a number of discrete tax benefits during the quarter. Our adjusted EPS would have been $0.09 at a normalized 15% tax rate. Diluted share count was down more than 1 million shares in the fourth quarter. We bought back nearly a million shares as we capitalized on the lower stock prices during the quarter.

Now, I’d like to review fourth quarter highlights of our sales and gross margin performance for our two major product groups.

PCIA sales were down 21% sequentially, 17% from the year-ago quarter due to weaker demand and further inventory reductions in the appliance, industrial consumer, and solar end markets. This is also a seasonally weaker period for most of the PCIA end markets. Gross margin decreased 950 basis points to 28.5% due primarily to lower factory loadings and start-up costs for the transition to 8-inch wafers. Factory utilization is well below the company average for PCIA and expect – and we expect margins to recover quickly once demand improves.

In our MCCC business, sales were down 10% sequentially and 7% from the year-ago quarter, as strong mobile analog sales were offset by weak demand from consumer and computing customers. We also took pricing actions to reduce our mix of low margin mature logic products, which impacted MCCC sales by about 5 percentage points in the fourth quarter. MCCC’s gross margin was down two points from the prior quarter at 35% as lower factory loadings supporting consumer and computing products offset the richer mobile analog mix.

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