Fairchild Semiconductor International, Inc CEO Discusses Q2 2012 Results - Earnings Conference Call

Fairchild Semiconductor International, Inc (FCS)

Q2 2012 Earnings Call Transcript

July 19, 2012, 9:00 am ET

Executives

Dan Janson – IR

Mark Frey – EVP, CFO, Treasurer

Mark Thompson – Chairman, President, CEO

Analysts

Ross Seymore – Deutsche Bank

Terence Whalen – Citigroup

Parag Agarwal – UBS

Craig Berger – FBR Capital Markets

Tristan Gerra – Robert W Baird

Christopher Danely – JPMorgan
(Suzie Giselda – St. Equity)

Steve Smigie – Raymond James

Brenda Furlong – Miller Tabak

Shawn Harrison – Longbow Research

Mike McConnell – Pacific Crest Securities

Presentation

Operator

Good day and welcome to the Fairchild Semiconductor second quarter 2012 earnings conference call. Just a reminder that today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Dan Janson. Please go ahead, sir.

Dan Janson

Good morning and thank you for dialing in to Fairchild Semiconductor's second 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'll be attending the Citi Technology Conference on September 6th in New York. We'll start today's call with Mark Frey, who will review our second quarter financial results and discuss the current status of third quarter business.

Mark Thompson will then discuss our product line results, end markets and operational performance in more detail. Finally, we'll reserve time for questions and answers.

This call is scheduled to allow us approximately 60 minutes and is being simultaneously webcast from the Investor Relations section of our website at fairchildsemi.com. This replay for this call will be publicly available for approximately 30 days.

Fairchild's management will be making forward-looking statements in 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 are provided in the quarterly and annual reports to be filed with the SEC. In addition, during this call, we may refer to adjusted or other financial measures that are not prepared in accordance with generally accepted accounting principals.

We use non-GAAP measures because we believe they provide useful information about the operating performance of our businesses and should be considered by investors in conjunction with GAAP measures that we also provide.

You can find the reconciliation of non-GAAP to comparable GAAP measures 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 have had a chance to review our earnings press release, so I'll focus on just the key points in my comments.

Adjusting for the extra (weeks) in Q1, we grew sales 11% sequentially in the second quarter. Revenue included a $4 million insurance recovery related to the flooding in Thailand partially offset by some larger than normal sales reserves related to the ongoing demand weakness in China.

Distribution sell through posted a strong increase enabling us to further reduce our weeks of inventory in the channel. We also increased gross margin nearly three percentage points.

Our solid (in this) performance is we were still impacted by the weaker economy and some chip shortages in the mobile end market. Let's review some of the details starting with the income statement.

For the second quarter of 2012, Fairchild reported sales of $362 million, up 11% sequentially after adjusting for the extra week in Q1 and down 17% from the second quarter of 2011.

Adjusted gross margin was 32.6%, up 280 basis points from the prior quarter. Gross margin benefited from higher factory loadings and the favorable impact of our insurance recovery.

Given the weaker demand for high voltage products over the last three to four quarters, we have pushed out the ramp of our eight inch wafer manufacturing in our (Bushon) fab. This will result in spreading the eight inch startup cost over a few more quarters which decreases the impact of any one quarter.

In Q2, these costs negatively impacted gross margin by about 100 basis points and we expect to maintain this level of spending of the rest of the year.

R&D and SG&A expenses were $96.2 million in the second quarter, up 9% sequentially due primarily to selective increases in R&D for our mobile business, the annual merit increase and a higher variable compensation accrual that is tied to EBIT dollar generated.

Second quarter adjusted net income was $18 million and adjusted EPS was $0.14. Our adjusted tax expense was $2.4 million for a tax rate of 12%. Now I'd like to review second quarter highlights of our sales adjusted for the extra week in Q1 and gross margin performance for our two major product groups.

Sales were up 12% from the prior quarter for our MCQ business driven by solid growth in our product supporting the mobile and computing end markets. MCQ gross margin was up one point from the prior quarter at 38% due primarily to higher factory loadings.

In our PCIA business, sales were up 9% sequentially driven primarily by continued strength in our power conversion and (opto electronics) product lines offset by ongoing weakness in our high voltage business.

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