Fairchild reported second quarter net income of $6.9 million or $0.05 per diluted share compared to net income of $17.1 million or $0.14 per diluted share in the prior quarter and net income of $3.4 million or $0.03 per diluted share in the second quarter of 2007. Included in these results is an $11.3 million charge related to asset impairments and restructuring actions to streamline the company’s cost structure and a discrete $1.7 million net tax benefit. Gross margin was 28.6 percent, 160 basis points lower sequentially and 60 basis points higher than in the second quarter of 2007.
Fairchild reported second quarter adjusted net income of $21.5 million or $0.17 per diluted share, compared to adjusted net income of $23.2 million or $0.19 per diluted share in the prior quarter and adjusted net income of $17.7 million or $0.14 per diluted share in the second quarter of 2007. Adjusted net income excludes amortization of acquisition-related intangibles, restructuring and impairments, purchased in-process research and development, reserves for potential litigation outcomes, System General purchase accounting charges, costs associated with the redemption of convertible debt, associated net tax benefits of these items and other acquisition-related intangibles and tax benefits from finalized tax filings and positions.
“Our second quarter sales were at the high end of our expectations,” said Mark Thompson, Fairchild’s president and CEO. “Orders for the second half were also strong and we enter the third quarter with a very healthy level of backlog. We benefited from record sales of our Smart Power Modules into the appliance end market, high frequency voltage regulators for handset applications and our new logic translators. We expect to accelerate new product sales in the second half of 2008 as more design wins ramp into production.”
End Markets and Channel Activity
“End market demand was consistently strong during the quarter,” said Thompson. “Our highest order rates for the quarter were for our products supporting the computing, handset and power supply end markets. Our sales into the OEM channel were up 18 percent from a year ago, driven primarily by new product sales and we expect this trend to continue in the second half of 2008. Distributor sell-through increased more than 3 percent from the prior quarter which resulted in nearly a one week reduction in channel inventory. Overall product pricing was down between 1 to 2 percent sequentially and within our normal range. We maintained lead times within a stable range of 7 to 8 weeks during the quarter.”
Second Quarter Financials
“We posted strong sales growth even as we reduced both channel and internal inventories,” said Mark Frey, Fairchild’s executive vice president and CFO. “We reduced internal inventory nearly $9 million sequentially as sales growth outpaced our factory loadings. Gross margin was 28.6 percent which was impacted by the greater-than-expected inventory reduction as well as higher energy related expenses. R&D and SG&A expenses were slightly better than expected due to continued cost discipline. Cash and marketable securities decreased $28.8 million to $436.3 million in the second quarter which reflected cash flow from operations of $83.4 million, capital spending of $57.9 million and the use of $50 million to reduce overall debt. During the quarter we successfully refinanced our $200 million in convertible debt by borrowing an additional $150 million under our existing senior credit facility and using $50 million in cash.”
Third Quarter Guidance
“We expect third quarter revenue to be up 2 to 5 percent,” said Frey. “At the start of the quarter, we had more than 90 percent of this sales guidance booked and scheduled to ship. We expect gross margin to increase 150 to 225 basis points sequentially as we benefit from higher factory loadings, better product mix and more assembly and test in-sourcing. We expect R&D and SG&A expenses to be approximately $89 to $92 million and net interest and other expenses to be about $5.5 million for the third quarter.”
This press release includes references to adjusted net income (which
excludes amortization of acquisition-related intangibles, restructuring
and impairments, purchased in-process research and development, reserves
for potential litigation outcomes, System General purchase accounting
charges, costs associated with the redemption of convertible debt,
associated net tax benefits of these items and other acquisition-related
intangibles, and tax benefits from finalized tax filings and positions),
statements of operations prepared in accordance with generally accepted
accounting principles (GAAP) (which include these items), and a
reconciliation from adjusted net income to GAAP net income and adjusted
gross margin to GAAP gross margin. GAAP and adjusted results both
include equity based compensation expense. Adjusted results are not
meant as a substitute for GAAP, but are included solely for
informational and comparative purposes. 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.
