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Inventory Worries Wilt Fairchild Semi

Shares fall despite a swing to profit.

Fairchild Semiconductor


swung to a profit in the third quarter, but the chipmaker's shares plunged on fears of rising inventory and lower profit margins.

The South Portland, Maine-based company delivered better-than-expected financial results for its third quarter, with revenue rising 21% to $417 million and net income of $251.1 million, or 20 cents a share.

Excluding certain items, Fairchild said EPS was 25 cents, above the average analysts' expectation, which called for 20 cents EPS on sales of $410.8 million.

At this time last year, Fairchild had a loss of $20.8 million.

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CEO Mark Thompson said demand in consumer and computing end markets drove the company's sales in the quarter, with revenue from analog switch products up 45% year over year.

But the company said internal inventories "increased slightly more than the level required to support our higher shipping rate, growing by about three days of inventory."

As Fairchild takes steps to reduce the inventory, it said that gross margins could decline as much as 2 percentage points sequentially in the fourth quarter.

Fairchild projected that fourth-quarter sales will be flat to up 2% sequentially.

Analysts polled by Thomson Financial were looking for $426.1 million in fourth-quarter sales with EPS of 27 cents.

Shares of Fairchild were off 8.3%, or $1.56, at $17.20 in recent trading Thursday.