Fairchild Semiconductor's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Fairchild Semiconductor (FCS)

Q1 2012 Earnings Conference Call

April 19, 2012 9:00 AM ET

Executives

Dan Janson – VP, IR

Mark Frey – EVP and CFO

Mark Thompson – President and CEO

Analysts

Ross Seymore – Deutsche Bank

Terence Whalen – Citi

Parag Agarwal – UBS

Craig Berger – FBR Capital Markets

Tristan Gerra – Robert W. Baird

Suji de Silva – ThinkEquity

John Pitzer – Credit Suisse

Steve Smigie – Raymond James

Brendan Furlong – Miller Tabak

Kevin Cassidy – Stifel Nicolaus

Shawn Harrison – Longbow Research

Mike McConnell – Pacific Crest Securities

Presentation

Operator

Good day and welcome to the Fairchild Semiconductor First Quarter 2012 Earnings Conference Call.

Just a reminder, today’s conference is being recorded.

At this time, I’d like to turn the conference over to Mr. Dan Janson. Please go ahead, sir.

Dan Janson

Thanks. Good morning and thank you for dialing into Fairchild Semiconductor’s first quarter 2012 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 will be attending the Robert W. Baird’s Growth Stock Conference on May 8 th in Chicago; the Deutsche Bank One-on-One Semiconductor Conference in San Francisco on May 9 th; and the JPMorgan Global Technology Conference in Boston on May 16 th.

We will start today’s call with Mark Frey, who will review our first quarter financial results and discuss the current status of second 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 Principles. 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 with GAAP measures that we also provide. You can find a reconciliation of non-GAAP to comparable GAAP measures at the Investor Relations section 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.

And, I’ll turn the call 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 press release, so I will focus on just the key points in my comments.

Overall sales were in line with expectations, while bookings rebounded strongly in the first quarter. Our inventory position improved again during the quarter and we are well positioned to accelerate out of this current cycle. So let’s review some of the details starting with the income statement.

For the first quarter of 2011, Fairchild reported sales of $352 million, up 4% sequentially and down 15% from the first quarter of 2011. Recall that there are 14 weeks in our 2012 fiscal first quarter. Adjusted gross margin which excludes the charge change in retirement plans, accelerated depreciation, inventory reserve releases and write-offs related to fab closures was 29.8%, down 60 basis points from the prior quarter.

Gross margin was impacted by lower factory loadings from the holiday shutdowns at the end of Q4 and the start of Q1, roughly a negative 150 basis points impact from 8-inch fab startup costs, price reductions and higher excess inventory write-downs. Effective day one of 2012, we adjusted the expected asset lives and amortization schedule for certain factory equipment to better reflect the actual performance of the tools. The net effect of these changes was roughly a one point favorable impact to gross margin in the first quarter.

R&D and SG&A expenses were $94.8 million in the first quarter, roughly flat sequentially on the 13-week basis, due primarily to higher payroll tax withholding and equity compensation expenses, offset by lower discretionary spending. First quarter adjusted net income was $8 million and adjusted EPS was $0.06. Our adjusted tax expense was $300,000.

Now, I’d like to review the first quarter highlights of our sales and gross margin performance for our two major product groups. Sales were up 3% from the prior quarter for our MCCC business in what is typically the weakest demand quarter in the year. MCCC’s gross margin was up 2 points from the prior quarter to 37%, due primarily to better product mix.

In our PCIA business, sales were up 7% sequentially, driven primarily by solid recovery in our optoelectronics business and 11% sequential growth in the power conversion product line, offset by continued weakness in our high-voltage business.

Gross margin decreased 2 points to 27%, due primarily to lower factory loadings in our Korean fab and startup costs for the transition to 8-inch wafers. Factory utilization is below the company average for PCIA and we expect margins to recover quickly once demand improves. I also want to note that we shifted some product lines between the divisions to better align our actual customer and application management. We adjusted the historic data we report will reflect the change. In the first quarter, the shift resulted in a net reduction of about $8 million in sales for MCCC and an increase of $3 million for PCIA and $5 million for FBG.

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