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TMCNet:  FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[November 09, 2012]

FAIRCHILD SEMICONDUCTOR INTERNATIONAL INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Except as otherwise indicated in this Quarterly Report on Form 10-Q, the terms "we," "our," the "company," "Fairchild" and "Fairchild International" refer to Fairchild Semiconductor International, Inc. and its consolidated subsidiaries, including Fairchild Semiconductor Corporation, our principal operating subsidiary. We refer to individual subsidiaries where appropriate.



20-------------------------------------------------------------------------------- Table of Contents Overview Fairchild is positioned to capitalize on the growth potential in mobile wireless technologies and the transition to more efficient applications in the industrial, appliance, automotive and solar end markets. We have invested heavily in our mobile business over the last five years and have introduced a wide range of fast growing new products and a number of innovative application specific solutions that solve unique customer requirements. We believe our broad portfolio of innovative products coupled with our world class supply chain will continue to drive growth. We entered 2012 with the best pipeline of new products in our history. We have numerous design wins in our mobile business and we are also gaining traction in the mid-voltage market.

We strive to keep inventory as lean as possible while maintaining customer service. We prefer to maintain maximum flexibility by adjusting internal inventories in response to higher demand before adding more inventory to our distribution channels. While our goal is to manage our production output to maintain channel inventories within a target range of 7.5 to 8.5 weeks, at the end of the third quarter, our channel inventories were at 10.2 weeks excluding certain end of life inventory, which was a decrease of over one week from the end of 2011. Internal inventories at the end of the third quarter of 2012 were at $242.3 million, an increase of $8.1 million over the end of 2011.

Our fiscal calendar, in which each quarter ends on a Sunday, contains 53 weeks every seven years. This additional week is included is the first quarter of the year. Our results for the nine months ended September 30, 2012 and September 25, 2011 consist of 40 weeks and 39 weeks, respectively.

The Mobile, Computing, Consumer and Communication (MCCC) group's main focus is to supply the mobile, computing, consumer and communication end market segments with innovative power and signal path solutions including our low voltage metal oxide semiconductor field effect transistors (MOSFETs), Power Management integrated circuits (IC's), Mixed Signal Analog and Logic products. We seek to deliver exceptional product performance by optimizing silicon processes and application specific design to satisfy specific requirements for our customers.

This enables us to deliver solutions with greater energy efficiency and in a smaller footprint than is commonly available. We expect a steady acceleration of new product sales especially for solutions addressing the smart phone and ultraportable market.

The Power Conversion, Industrial, and Automotive (PCIA) group's focus is to capitalize on the growing demand for greater energy efficiency and higher power density for space savings in power supplies, consumer electronics, battery chargers, electric motors, industrial electronics and automobiles. We are a leader in power semiconductor devices, low standby power consumption designs, and power module technology that enable greater efficiency, greater power density, and better performance. Improving the efficiency of our customers' products is vital to meeting new energy efficiency regulations. Effectively managing the power conversion and distribution in power supplies is one of the greatest opportunities we have to improve overall system efficiency. We believe the growing global focus on energy efficiency will continue to drive growth in this product line.

Standard Discrete and Standard Linear (SDT) products are core building block components for many electronic applications. This segment uses a simplified and focused operating model to make the selling and support of these products easier and more profitable. The right operational structure and part portfolio should enable our standard products group to continue to generate solid cash flow with minimal investment.

21 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table summarizes certain information relating to our operating results as derived from our unaudited consolidated financial statements.

Three Months Ended Nine Months Ended September 30, September 25, September 30, September 25, 2012 2011 2012 2011 (Dollars in millions) Total revenue $ 358.8 100.0 % $ 403.2 100.0 % $ 1,072.5 100.0 % $ 1,249.4 100.0 % Gross margin 120.1 33.5 % 144.8 35.9 % 342.7 32.0 % 457.5 36.6 % Operating expenses: Research and development 37.8 10.5 % 37.8 9.4 % 119.0 11.1 % 114.6 9.2 % Selling, general and administrative 48.0 13.4 % 54.4 13.5 % 157.8 14.7 % 167.8 13.4 % Amortization of acquisition-related intangibles 4.5 1.3 % 4.7 1.2 % 13.7 1.3 % 15.0 1.2 % Restructuring and impairments 3.4 0.9 % 4.1 1.0 % 6.3 0.6 % 9.5 0.8 % Charge for litigation - 0.0 % - 0.0 % 1.3 0.1 % - 0.0 % Total operating expenses 93.7 26.1 % 101.0 25.0 % 298.1 27.8 % 306.9 24.6 % Operating income 26.4 7.4 % 43.8 10.9 % 44.6 4.2 % 150.6 12.1 % Other expense, net 1.2 0.3 % 1.4 0.3 % 4.2 0.4 % 5.8 0.5 % Income before income taxes 25.2 7.0 % 42.4 10.5 % 40.4 3.8 % 144.8 11.6 % Provision (benefit) for income taxes 0.5 0.1 % 6.6 1.6 % 2.2 0.2 % 20.6 1.6 % Net income $ 24.7 6.9 % $ 35.8 8.9 % $ 38.2 3.6 % $ 124.2 9.9 % Adjusted net income, adjusted gross margin, and free cash flow are also included in the table below. These are non-GAAP financial measures and should not be considered a replacement for GAAP results. We present adjusted results because we use them as additional measures of our operating performance. We believe the adjusted information is useful to investors because it illuminates underlying operational trends by excluding certain significant non-recurring or otherwise unusual transactions. Our criteria for adjusted results may differ from methods used by other companies and may not be comparable and should not be considered as alternatives to net income or loss, gross margin, or other measures of consolidated operations and cash flow data prepared in accordance with US GAAP as indicators of our operating performance or as alternatives to cash flow as a measure of liquidity.

22 -------------------------------------------------------------------------------- Table of Contents Three Months Ended Nine Months Ended September 30, September 25, September 30, September 25, 2012 2011 2012 2011 (Dollars in millions) Non GAAP measures Adjusted net income $ 32.3 $ 44.5 $ 58.2 $ 150.4 Adjusted gross margin 120.1 33.5 % 145.0 36.0 % 342.7 32.0 % 458.2 36.7 % Free cash flow (17.5 ) 19.4 (18.1 ) 81.1 Reconciliation of Net Income to Adjusted Net Income Net income $ 24.7 $ 35.8 $ 38.2 $ 124.2 Adjustments to reconcile net income to adjusted net income: Restructuring and impairments 3.4 4.1 6.3 9.5 Accelerated depreciation on assets related to fab closure - 0.2 - 0.7 Write-off of deferred financing fees - - - 2.1 Charge for litigation - - 1.3 - Amortization of acquisition-related intangibles 4.5 4.7 13.7 15.0 Associated net tax effects of the above and other acquisition-related intangibles (0.3 ) (0.3 ) (1.3 ) (1.1 ) Adjusted net income $ 32.3 $ 44.5 $ 58.2 $ 150.4 Reconciliation of Gross Margin to Adjusted Gross Margin Gross margin $ 120.1 $ 144.8 $ 342.7 $ 457.5 Adjustments to reconcile gross margin to adjusted gross margin: Accelerated depreciation on assets related to fab closure - 0.2 - 0.7 Adjusted gross margin $ 120.1 $ 145.0 $ 342.7 $ 458.2 Reconciliation of Operating Cash Flow to Free Cash Flow Cash provided by operating activities $ 24.8 $ 72.9 $ 104.3 $ 222.7 Capital expenditures (42.3 ) (53.5 ) (122.4 ) (141.6 ) Free cash flow $ (17.5 ) $ 19.4 $ (18.1 ) $ 81.1 Total Revenues Three Months Ended Nine Months Ended September 30, September 25, $ Change % Change September 30, September 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) 2012 2011 Inc (Dec) Inc (Dec) Revenue $ 358.8 $ 403.2 $ (44.4 ) -11.0 % $ 1,072.5 $ 1,249.4 $ (176.9 ) -14.2 % Revenue in the third quarter and first nine months of 2012 included $3.0 million and $7.0 million of insurance proceeds related to business interruption claims for the company's optoelectronics supply issues resulting from the Thailand floods in the fourth quarter of 2011. Despite an extra week in the first nine months of 2012 compared to the first nine months of 2011, revenue decreased in 2012. For the first nine months of 2012 compared to the same period in 2011, lower unit sales volume sold drove 5% of the decrease in revenue while the remaining 9% decline was driven by lower average selling prices. For the third quarter of 2012 compared to the third quarter of 2011, revenue decreased 11%, driven by a decline in average selling prices which was offset partially by an increase in unit sales in the PCIA segment.

Geographic revenue information is based on the customer location within the indicated geographic region. The following table presents, as a percentage of sales, geographic sales for the U.S., Other Americas, Europe, China, Taiwan, Korea and Other Asia/Pacific (which for our geographic reporting purposes includes Japan and Singapore) for the three months and nine months ended September 30, 2012. The increase in Other Asia/Pacific revenue was due to continued strong demand for mobile products including smart phones and tablets as well as a shift in sales to a major customers from their Korea location to Other Asia/Pacific.

23 -------------------------------------------------------------------------------- Table of Contents Three Months Ended Nine Months Ended September 30, September 25, September 30, September 25, 2012 2011 2012 2011 U.S. 9 % 10 % 9 % 10 % Other Americas 2 2 2 2 Europe 13 13 13 14 China 35 33 34 33 Taiwan 13 13 14 14 Korea 9 10 10 11 Other Asia/Pacific 19 19 18 16 Total 100 % 100 % 100 % 100 % Gross Margin Three Months Ended Nine Months Ended September 30, September 25, $ Change % Change September 30, September 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) 2012 2011 Inc (Dec) Inc (Dec) Gross Margin $ $ 120.1 $ 144.8 $ (24.7 ) -17.1 % $ 342.7 $ 457.5 $ (114.8 ) -25.1 % Gross Margin % 33.5 % 35.9 % -2.4 % 32.0 % 36.6 % -4.7 % Effective the first day of 2012, expected asset lives and amortization schedules for certain factory equipment was adjusted to better reflect actual performance of the tools, favorably impacting gross margin by approximately $4.2 million and $13.7 million in the third quarter and first nine months of 2012, respectively, when compared to depreciation expense under the previous useful life policy. In addition, we reassessed the lives of our molds and tooling equipment which caused an increase in depreciation expense of $0.7 million in first nine months of 2012 when compared to depreciation expense under the previous useful life policies.

The net favorable depreciation impact to gross margin was offset by decreased revenue and higher unit costs of inventory due to lower production rates in the third quarter and first nine months of 2012 as well as increased expenses from 8-inch conversion costs and higher inventory write downs in the first half of 2012 resulting in an overall decrease in gross margin for the third quarter and first nine months of 2012 as compared to the same periods in 2011.

Adjusted Gross Margin Three Months Ended Nine Months Ended September 30, September 25, $ Change % Change September 30, September 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) 2012 2011 Inc (Dec) Inc (Dec) Adjusted Gross Margin $ $ 120.1 $ 145.0 $ (24.9 ) -17.2 % $ 342.7 $ 458.2 $ (115.5 ) -25.2 % Adjusted Gross Margin % 33.5 % 36.0 % -2.5 % 32.0 % 36.7 % -4.7 % There were no items adjusted out of gross margin in the third quarter and first nine months of 2012. Adjusted gross margin in the third quarter and first nine months of 2011 did not include accelerated depreciation related to the previously planned closure of the Mountain Top facility. See above reconciliation for detail.

Operating Expenses Three Months Ended Nine Months Ended September 30, September 25, $ Change % Change September 30, September 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) 2012 2011 Inc (Dec) Inc (Dec) Research and development $ 37.8 $ 37.8 $ - 0.0 % $ 119.0 $ 114.6 $ 4.4 3.8 %Selling, general and administrative $ 48.0 $ 54.4 $ (6.4 ) -11.8 % $ 157.8 $ 167.8 $ (10.0 ) -6.0 % 24 -------------------------------------------------------------------------------- Table of Contents Operating expenses included an additional week of costs in the first nine months of 2012 as compared to the first nine months of 2011. Overall R&D expenses were flat for the third quarter of 2012 compared to the same period of 2011.

Increases in R&D project spending were offset by decreases in variable compensation as we reversed expenses accrued in prior quarters. R&D expenses for the first nine months of 2012 increased as compared to the same periods in 2011 as we continue to invest in R&D programs and resources. Increased R&D was offset by the reversal of variable compensation expense. Selling and general and administration expenses (SG&A) expense decreased for the third quarter and first nine months of 2012 when compared to the same periods of 2011 driven primarily by a decrease in variable compensation and equity compensation as we do not believe we will meet our bonus or performance targets for 2012.

Restructuring and Impairment. During the three and nine months ended September 30, 2012, we recorded restructuring and impairment charges, net of releases, of $3.4 million and $6.3 million, respectively. The third quarter charges consist of $2.8 million of employee separation costs and $0.6 million of lease termination costs associated with the 2012 Infrastructure Realignment Program. In addition to the charges in the third quarter of 2012 there were charges in the first and second quarter of 2012 which included $1.0 million of employee separation costs associated with the 2011 Infrastructure Realignment Program as well as $1.7 million in employee separation costs and $0.4 million in facility closure costs associated with the 2012 Infrastructure Realignment Program.

During the three and nine months ended September 25, 2011, we recorded restructuring and impairment charges, net of releases, of $4.1 million and $9.5 million, respectively. The third quarter charges include $0.6 million of employee separation costs and $0.1 million of fab closure costs associated with the 2009 Infrastructure Realignment Program as well as $1.7 million in employee separation costs associated with the 2010 Infrastructure Realignment Program and $1.7 million in employee separation costs associated with the 2011 Infrastructure Realignment Program. In addition to the charges in the third quarter of 2011 there were charges in the first and second quarter of 2011 which included $1.1 million of employee separation costs, $0.5 million of fab closure costs, and $0.1 million in reserve releases associated with the 2009 Infrastructure Realignment Program as well as $1.9 million in employee separation costs associated with the 2010 Infrastructure Realignment Program and $2.0 million in employee separations costs associated with the 2011 Infrastructure Realignment Program.

The 2012 Infrastructure Realignment Program includes costs for organizational changes in the company's sales organization, manufacturing sites and manufacturing support organizations, the human resources function, executive management levels, and the MCCC and PCIA product lines as well as the termination of an IT systems lease and the final closure of a warehouse in Korea. The 2011 Infrastructure Realignment Program includes costs for organizational changes in our supply chain management group, website technology group, quality organization, and other administrative groups. The 2011 program also includes costs to further improve our manufacturing strategy and changes in both the PCIA and MCCC groups as well as a primarily voluntary retirement program at our Mountaintop, Pennsylvania location. The 2010 Infrastructure Realignment Program includes costs to simplify and realign some activities within the MCCC segment, costs for the continued refinement of the company's manufacturing strategy, and costs associated with centralizing our accounting functions.

The previously planned closure of the Mountaintop, Pennsylvania manufacturing facility and the closure of the four-inch manufacturing line in Bucheon, South Korea was announced in the first quarter of 2009 and the charges associated with those programs are included in the 2009 Infrastructure Realignment Program. The consolidation of the South Korea fabrication lines was completed in 2011. Also during the fourth quarter of 2011, the company decided to keep open the Mountain Top facility.

Charge for Litigation. In the second quarter of 2012, we increased our reserves for potential litigation outcomes by $1.0 million as a result of the ongoing developments in the POWI 2 litigation. In addition, we accrued $0.3 million in the second quarter of 2012 for an unrelated legal settlement.

25-------------------------------------------------------------------------------- Table of Contents Other Expense, net.

The following table presents a summary of other expense, net for the three months and nine months ended September 30, 2012 and September 25, 2011.

Three Months Ended Nine Months Ended September 30, September 25, September 30, September 25, 2012 2011 2012 2011 (In millions) Other expense, net Interest expense $ 1.7 $ 1.9 $ 5.7 $ 5.3 Interest income (0.6 ) (0.7 ) (1.8 ) (2.0 ) Other (income) expense, net 0.1 0.2 0.3 2.5 Other expense, net $ 1.2 $ 1.4 $ 4.2 $ 5.8 Interest expense. Interest expense in the third quarter decreased $0.2 million when compared to the same period in 2011, primarily due to lower interest rates.

Interest expense for the first nine months of 2012 increased $0.5 million when compared to the same period in 2011, primarily due to higher interest rates offset by higher debt in the first quarter of 2011.

Interest income. Interest income in the third quarter and first nine months of 2012 remained fairly flat when compared to the same periods in 2011.

Other (income) expense, net. Other expense in the third quarter and first nine months of 2012 was down $2.3 million and $0.1 million when compared to the same periods of 2011. The higher level of expense in the first nine month of 2011 was caused by a $2.1 million write off of deferred financing fees associated with the pay down of our term loan in the second quarter of 2011.

Income Taxes. Income tax provision in the third quarter and first nine months of 2012 was $0.5 million and $2.2 million on income before taxes of $25.2 million and $40.4 million, respectively, as compared to income tax provisions of $6.6 million and $20.6 million on income before taxes of $42.4 million and $144.8 million, respectively, for the same time periods of 2011. The effective tax rate for the third quarter and first nine months of 2012 was 2.0% and 5.5% compared to 15.6% and 14.2% respectively, for the comparable periods of 2011. The change in effective tax rate is primarily due to shifts of income and loss among jurisdictions with differing tax rates and foreign currency revaluations of tax assets and liabilities. In the first nine months of 2012, the valuation allowance on our deferred tax assets decreased by $3.7 million. The overall decrease did not impact our results of operations.

In accordance with the Income Taxes Topic in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), deferred taxes have not been provided on undistributed earnings of foreign subsidiaries which are reinvested indefinitely. Certain non-U.S. earnings, which have been taxed in the U.S. but earned offshore, have and continue to be part of our repatriation plan.

As of September 30, 2012, we have recorded a deferred tax liability of $1.9 million, with no impact to the consolidated statement of operations as we have a full valuation allowance against our net U.S. deferred tax assets.

Free Cash Flow Three Months Ended Nine Months Ended September 30, September 25, $ Change % Change September 30, September 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) 2012 2011 Inc (Dec) Inc (Dec) Free Cash Flow $ (17.5 ) $ 19.4 $ (36.9 ) -190.2 % $ (18.1 ) $ 81.1 $ (99.2 ) -122.3 % Free cash flow is a non-GAAP financial measure. To determine free cash flow, we subtract capital expenditures from cash provided by operating activities. Free cash flow decreased in the third quarter and first nine months of 2012 as compared to the same period in 2011 as a result of lower net income partially offset in part by a decrease in capital expenditures. See Free Cash Flow reconciliation in results of operations section above.

26-------------------------------------------------------------------------------- Table of Contents Reportable Segments.

The following tables present comparative disclosures of revenue, gross margin, and operating income of our reportable segments.

Three Months Ended September 30, September 25, 2012 2011 Gross Operating Gross Operating Revenue % of total Margin % Income (loss) Revenue % of total Margin % Income (loss) (Dollars in millions) MCCC 142.2 39.6 % 40.5 % 30.1 148.4 36.8 % 36.8 % 26.7 PCIA 180.2 50.2 % 31.0 % 36.6 204.6 50.7 % 38.0 % 56.9 SDT 36.4 10.1 % 20.9 % 5.6 50.2 12.5 % 27.9 % 12.0 Corporate (1) 0.0 0.0 % 0.0 % (45.9 ) 0.0 0.0 % 0.0 % (51.8 ) Total 358.8 100.0 % 33.5 % 26.4 403.2 100.0 % 35.9 % 43.8 Nine Months Ended September 30, September 25, 2012 2011 Gross Operating Gross Operating Revenue % of total Margin % Income (loss) Revenue % of total Margin % Income (loss) (Dollars in millions) MCCC $ 432.9 40.4 % 38.6 % $ 82.1 $ 440.2 35.2 % 37.8 % $ 79.2 PCIA 530.8 49.5 % 29.7 % 95.5 643.9 51.5 % 38.7 % 184.9 SDT 108.8 10.1 % 19.7 % 15.2 165.3 13.2 % 28.2 % 40.8 Corporate (1) 0.0 0.0 % 0.0 % (148.2 ) 0.0 0.0 % 0.0 % (154.3 ) Total $ 1,072.5 100.0 % 32.0 % $ 44.6 $ 1,249.4 100.0 % 36.6 % $ 150.6 (1) The three and nine months ended September 30, 2012 includes $4.2 million and $18.4 million of stock-based compensation expense, $3.4 million and $6.3 million of restructuring and impairments expense, $0.1 million and $1.0 million of other costs which primarily consist of charges for litigation, and $38.4 million and $122.5 million of SG&A expenses, respectively. The three and nine months ended September 25, 2011 includes $6.0 million and $19.0 million of stock-based compensation expense, $4.1 million and $9.5 million of restructuring and impairments expense, $0.3 million and $1.0 million of other costs which primarily consist of accelerated depreciation related to the closure of the Mountaintop facility, and $41.4 million and $124.8 million of SG&A expenses, respectively.

MCCC Three Months Ended Nine Months Ended September 30, September25, $ Change % Change September 30, September 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) 2012 2011 Inc (Dec) Inc (Dec) Revenue $ 142.2 $ 148.4 $ (6.2 ) -4.2 % $ 432.9 $ 440.2 $ (7.3 ) -1.7 % Gross Margin $ $ 57.6 $ 54.6 $ 3.0 5.5 % $ 167.2 $ 166.2 $ 1.0 0.6 % Gross Margin % 40.5 % 36.8 % 3.7 % 38.6 % 37.8 % 0.9 % Operating Income $ 30.1 $ 26.7 $ 3.4 12.7 % $ 82.1 $ 79.2 $ 2.9 3.7 % MCCC revenue in the third quarter of 2012 was lower as compared to the same period in 2011 due to a decline in average selling prices due to competitive pricing pressure on existing products which was offset slightly by increased prices on newly introduced products. The decline in overall average selling prices was offset in part by increased unit sales on mobile products in the third quarter of 2012. Revenue for the first nine months of 2012 was also lower as compared to the same period in 2011 due to reduced sales of our low voltage MOSFET products, offset by continued strong sales of our mobile switch products.

Overall average selling prices in first nine months of 2012 were also down slightly as compared to the same periods in 2011 as pricing pressure for our low voltage and mobile products was offset in part by the introduction of new mobile products. Gross margin improved in the third quarter and first nine months of 2012 as compared to 2011 was a result of continued shift toward mobile products that yield better margins as well as reduced variable compensation.

27-------------------------------------------------------------------------------- Table of Contents MCCC operating income increased in the third quarter and first nine months of 2012 as compared to 2011 as a result of higher gross margin, reduced variable compensation expense, and lower general and administrative expense (G&A) even with an additional week of costs during 2012. These decreases were offset in part by additional R&D investment in our mobile and MEMs businesses.

PCIA Three Months Ended Nine Months Ended September 30, September 25, $ Change % Change September 30, September 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) 2012 2011 Inc (Dec) Inc (Dec) Revenue $ 180.2 $ 204.6 $ (24.4 ) -11.9 % $ 530.8 $ 643.9 $ (113.1 ) -17.6 % Gross Margin $ $ 55.8 $ 77.7 $ (21.9 ) -28.2 % $ 157.5 $ 248.9 $ (91.4 ) -36.7 % Gross Margin % 31.0 % 38.0 % -7.0 % 29.7 % 38.7 % -9.0 % Operating Income $ 36.6 $ 56.9 $ (20.3 ) -35.7 % $ 95.5 $ 184.9 $ (89.4 ) -48.4 % PCIA revenue in the third quarter and first nine months of 2012 included $3.0 million and $7.0 million of insurance proceeds related to the business interruption claims for the company's optoelectronics supply issues resulting from flooding in Thailand in the fourth quarter of 2011. The revenue decrease in the third quarter and first nine months of 2012 as compared to the same periods of 2011 was primarily attributable to reduced market demand for our high voltage products and efforts to reduce channel inventory. The decreased revenue from high voltage products was mitigated in part by strong sales for our automotive and power conversion products. Lower gross margin was mainly a result of decreased revenue and increased 8 inch conversion costs in the first half of 2012.

Lower operating income was mainly due to decreased gross margin as well as increased R&D expense in high voltage and auto product lines. In addition, operating expenses included an additional week of costs in the first nine months of 2012 as compared to 2011. These increases were offset in part by lower selling, general and administrative expenses (SG&A) and reduced variable compensation expenses.

SDT Three Months Ended Nine Months Ended September 30, September 25, $ Change % Change September 30, September 25, $ Change % Change 2012 2011 Inc (Dec) Inc (Dec) 2012 2011 Inc (Dec) Inc (Dec) Revenue $ 36.4 $ 50.2 $ (13.8 ) -27.5 % $ 108.8 $ 165.3 $ (56.5 ) -34.2 % Gross Margin $ $ 7.6 $ 14.0 $ (6.4 ) -45.7 % $ 21.4 $ 46.6 $ (25.2 ) -54.1 % Gross Margin % 20.9 % 27.9 % -6.9 % 19.7 % 28.2 % -8.4 % Operating Income $ 5.6 $ 12.0 $ (6.4 ) -53.3 % $ 15.2 $ 40.8 $ (25.6 ) -62.7 % SDT revenue in the third quarter and first nine months of 2012 decreased as compared to the same periods in 2011 as a result of strategic efforts to eliminate lower margin products and also reduced overall market demand. Lower average selling prices also contributed to the decrease in SDT revenue as compared to the third quarter and first nine months of 2011. Lower gross margin was due to lower revenue and higher overhead costs.

The decrease in operating income was primarily due to lower gross margin. R&D and sales and marketing expenses were also higher in the first nine months of 2012 as a result of increased investment in R&D and sales and marketing. In addition operating expenses included an additional week of costs in the first nine months of 2012 as compared to 2011. This increase was offset in part by reduced variable compensation costs.

Liquidity and Capital Resources Our main sources of liquidity are our cash flows from operations, cash and cash equivalents and our revolving credit facility. As of September 30, 2012, $243.1 million of our $414.1 million cash and marketable securities balance is located in the United States. We believe that funds generated from operations, together with existing cash and funds from our revolving credit facility will be sufficient to meet our cash needs over the next twelve months.

Our Credit Facility consists of a $400.0 million revolving loan agreement of which $300.0 million was drawn as of September 30, 2012. After adjusting for outstanding letters of credit, we had $98.4 million available under the Credit Facility. This revolving borrowing capacity is available for working capital and general corporate purposes, including acquisitions. We had additional outstanding letters of credit of $1.9 million that do not fall under the senior credit facility. We also had $4.2 million of undrawn credit facilities at certain of our foreign subsidiaries. These outstanding amounts do not impact available borrowings under the senior credit facility.

28-------------------------------------------------------------------------------- Table of Contents The Credit Facility includes restrictive covenants that place limitations on our ability to consolidate, merge, or enter into acquisitions, create liens or pay dividends, or make similar restricted payments, sell assets, invest in capital expenditures, and incur indebtedness. It also places limitations on our ability to modify our certificate of incorporation and bylaws, or enter into shareholder agreements, voting trusts or similar arrangements. In addition, the affirmative covenants in the Credit Facility also require our financial performance to comply with certain financial measures, as defined by the credit agreement.

These financial covenants require us to maintain a minimum interest coverage ratio of 3.0 to 1.0 and a maximum leverage ratio of 3.25 to 1.0. It defines the interest coverage ratio as the ratio of the cumulative four quarter trailing consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated cash interest expense and defines the maximum leverage ratio as the ratio of total consolidated debt to the cumulative four quarter trailing consolidated EBITDA. Consolidated EBITDA, as defined by the credit agreement excludes restructuring, non-cash equity compensation and other certain adjustments.

At September 30, 2012, we were in compliance with these covenants and we expect to remain in compliance with the covenants. This expectation is subject to various risks and uncertainties discussed more thoroughly in Item 1A, and include, among others, the risk that our assumptions and expectations about business conditions, expenses and cash flows for the remainder of the year may be inaccurate.

While our senior credit facility places restrictions on the payment of dividends, it does not restrict the subsidiaries of Fairchild Semiconductor Corporation, except to a limited extent, from paying dividends or making advances to Fairchild Semiconductor Corporation. As a result, we believe that funds generated from operations, together with existing cash and funds from our senior credit facility will be sufficient to meet our debt obligations, operating requirements, capital expenditures and research and development funding needs over the next twelve months. In the first nine months 2012, our capital expenditures totaled $122.4 million.

We frequently evaluate opportunities to sell additional equity or debt securities, obtain credit facilities from lenders or restructure our long-term debt to further strengthen our financial position. The sale of additional equity securities would cause dilution to our existing stockholders. Additional borrowing or equity investment may be required to fund future acquisitions.

During the first nine months of 2012, our cash provided by operating activities was $104.3 million compared to $222.7 million in the same period of 2011. The following table presents a summary of net cash provided by operating activities during the first nine months of 2012 and 2011.

Nine Months Ended September 30, September 25, 2012 2011 (In millions) Net income $ 38.2 $ 124.2 Depreciation and amortization 100.5 113.5 Non-cash stock-based compensation 18.4 19.0 Deferred income taxes, net (6.7 ) (7.6 ) Other, net 1.6 3.6 Change in other working capital accounts (47.7 ) (30.0 ) Net cash provided by operating activities $ 104.3 $ 222.7 Cash provided by operating activities decreased $118.4 million during the first nine months of 2012 as compared to the same period of 2011 driven primarily by the decrease in net income and changes is other working capital accounts.

Cash used in investing activities during the first nine months of 2012 totaled $124.3 million compared to $160.1 million for the same period of 2011. The higher level of cash used in 2011 was driven by higher capital expenditures and the TranSiC acquisition of $16.5 million. There were no corresponding acquisitions in 2012. Capital expenditures were $122.4 million in the first nine months of 2012 compared to 141.6 million in the same time period of 2011, as there were higher capital expenditures related to 8 inch conversion projects in 2011 for our Salt Lake and Korean wafer manufacturing facilities.

29-------------------------------------------------------------------------------- Table of Contents Cash used in financing activities totaled $17.7 million in the first nine months of 2012 compared to $33.8 million in the same period of 2011. In 2011, we purchased $21.1 million more in treasury stock and paid down $20.6 million in debt. These uses of cash were partially offset by $35.4 million in proceeds from the exercise of stock options. In 2012, we did not pay down debt and received proceeds of $4.4 million from the exercise of stock options. See details in the table below.

Nine Months Ended September 30, September 25, 2012 2011 (In millions) Cash Flows from financing activities Net repayment of long term debt $ - $ (20.6 ) Proceeds from exercise of stock options 4.4 35.4 Purchase of treasury stock (12.0 ) (33.1 ) Shares withheld for employee taxes (10.1 ) (10.3 ) Debt financing costs - (5.2 ) Net cash provided by financing activities $ (17.7 ) $ (33.8 ) As of September 30, 2012, we had $2.9 million of unrecognized tax benefits, compared to approximately $2.8 million at December 25, 2011. The timing of the expected cash outflow relating to the balance is not reliably determinable at this time.

Forward Looking Statements This quarterly report contains "forward-looking statements" as that term is defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking statements can be identified by the use of forward-looking terminology such as "we believe," "we expect," "we intend," "may," "will," "should," "seeks," "approximately," "plans," "estimates," "anticipates," or "hopeful," or the negative of those terms or other comparable terms, or by discussions of our strategy, plans or future performance. All forward-looking statements in this report are made based on management's current expectations and estimates, which involve risks and uncertainties, including those described below and more specifically in the Risk Factors section. Among these factors are the following: current economic uncertainty, including disruptions in the credit markets, as well as future economic conditions; changes in demand for our products; changes in inventories at our customers and distributors; changes in regional or global economic or political conditions (including as a result of terrorist attacks and responses to them); technological and product development risks, including the risks of failing to maintain the right to use some technologies or failing to adequately protect our own intellectual property against misappropriation or infringement; availability of manufacturing capacity; the risk of production delays; the inability to attract and retain key management and other employees; risks related to warranty and product liability claims; risks inherent in doing business internationally; changes in tax regulations or the migration of profits from low tax jurisdictions to higher tax jurisdictions; availability and cost of raw materials; competitors' actions; loss of key customers, including but not limited to distributors; order cancellations or reduced bookings; changes in manufacturing yields or output; and significant litigation. Factors that may affect our operating results are described in the Risk Factors section in the quarterly and annual reports we file with the Securities and Exchange Commission. Such risks and uncertainties could cause actual results to be materially different from those in the forward-looking statements. Readers are cautioned not to place undue reliance on the forward-looking statements.

Recently Issued Financial Accounting Standards There were no new standards issued in the first nine months of 2012 that had an impact on our financials or disclosures.

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