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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.
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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.
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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.
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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.
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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 %
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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.
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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.
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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.
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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.
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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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