Fairchild Semiconductor Reports Results for the Third Quarter 2011

Fairchild reported third quarter net income of $35.8 million or $0.28 per diluted share compared to $44.9 million or $0.34 per diluted share in the prior quarter and $35.8 million or $0.28 per diluted share in the third quarter of 2010. Gross margin was 35.9 percent compared to 37.1 percent in the prior quarter and 36.4 percent in the year ago quarter.

Fairchild reported third quarter adjusted gross margin of 36.0 percent, down 120 basis points sequentially and 50 basis points from the third quarter of 2010. Adjusted gross margin excludes accelerated depreciation and inventory reserve releases/write offs related to fab closures. Adjusted net income was $44.5 million or $0.34 per diluted share, compared to $54.6 million or $0.41 per diluted share in the prior quarter and $52.8 million or $0.42 per diluted share in the third quarter of 2010. Adjusted net income excludes amortization of acquisition-related intangibles, restructuring and impairments, accelerated depreciation and inventory reserve releases/write offs related to fab closures, write off of deferred financing fees, charge for litigation and associated net tax effects of these items and other acquisition-related intangibles.

We delivered double-digit sales growth for our mobile analog products during the quarter, said Mark Thompson, Fairchild's president and CEO. MCCC sales were flat from the prior quarter which reflects this increase in mobile demand offset by weaker sales into the computing and consumer end markets. PCIA sales were down 10 percent sequentially due to customers in the consumer, appliance and solar sectors reducing inventories in addition to the normal seasonal weakness for industrial and automotive markets in the second half.

End Markets and Channel Activity

Mobile and automotive demand was in line with expectations, stated Thompson. Computing demand remained muted and we continue to drive inventory lower in the distribution channel for these products. Consumer and solar demand remains weak. Distribution sell-through decreased 9 percent sequentially which was more than expected and resulted in a modest build of channel inventory. We plan to ship substantially less into the channel than our distribution customers are forecasting for sell through in the fourth quarter. This should enable us to exit this year with a leaner inventory position and be ready to grow sales again in 2012.

Third Quarter Financials

Gross margin decreased due primarily to lower factory loadings, said Mark Frey, Fairchild's executive vice president and CFO. Margins were also reduced due to 8 inch fab start-up costs. R&D and SG&A expenses were favorable to guidance at $92.2 million due to aggressive cost controls and lower variable compensation. We also generated $19.4 million of free cash flow during the quarter. We increased internal inventory dollars by 2 percent as we reduced factory loadings nearly as fast as demand slowed.

Forward Guidance

We expect sales to be in the range of $350 to 370 million for the fourth quarter, said Frey. Our current scheduled backlog is nearly sufficient to achieve the low end of this range. We expect adjusted gross margin to be between 32 to 34 percent as we adjust factory loadings lower in the fourth quarter to reduce inventory. We anticipate R&D and SG&A spending to be approximately flat with third quarter. The adjusted tax rate is forecast at 15 percent plus or minus 3 percent for the quarter. As with last quarter, we are not assuming any obligation to update this information, although we may choose to do so before we announce fourth quarter results.

Adjusted gross margin, adjusted net income and free cash flow are non-GAAP financial measures and should not be considered replacements for GAAP results. We exclude accelerated depreciation and inventory reserve releases/write offs related to fab closures from GAAP gross margins to determine adjusted gross margins. To determine adjusted net income/loss, we exclude amortization of acquisition-related intangibles, restructuring and impairments, accelerated depreciation and inventory reserve releases/write offs related to fab closures, write off of deferred financing fees, charge for litigation and associated net tax effects of these items and other acquisition-related intangibles. To determine free cash flow, we subtract capital expenditures from GAAP cash provided by operating activities. Fairchild presents adjusted results because its management uses them as additional measures of the company's operating performance, and management believes adjusted financial information is useful to investors because it illuminates underlying operational trends by excluding significant non-recurring, non-cash or otherwise unusual transactions. Fairchild's criteria for determining adjusted results may differ from methods used by other companies, and should not be regarded as a replacement for corresponding GAAP measures.