Fairchild reported a second quarter net loss of $24.9 million or $0.20 per share compared to a net loss of $51.1 million or $0.41 per share in the prior quarter and net income of $6.9 million or $0.05 per diluted share in the second quarter of 2008. Gross margin was 23.2 percent compared to 15.2 percent in the prior quarter and 28.6 percent in the year ago quarter. Included in these results is an $11.3 million charge for restructuring and impairments, a net $2.1 million impairment of equity investments, a $0.8 million gain associated with debt buyback as well as $3.7 million of accelerated depreciation and a $0.6 million inventory write-off related to previously announced fab closures.
Fairchild reported a second quarter adjusted net loss of $3.5 million or $0.03 per share, compared to an adjusted net loss of $40.1 million or $0.32 per share in the prior quarter and adjusted net income of $21.5 million or $0.17 per diluted share in the second quarter of 2008. Adjusted gross margin was 24.8 percent, up nearly 10 percentage points sequentially and 4 percentage points lower than in the second quarter of 2008. Adjusted gross margin excludes accelerated depreciation and inventory write-offs related to fab closures. Adjusted net income and loss excludes amortization of acquisition-related intangibles, restructuring and impairments, gain on the sale of equity investments, impairment of equity investments, gain associated with debt buyback, costs associated with the redemption of convertible debt, accelerated depreciation and inventory write-offs related to fab closures, associated net tax effects of these items and other acquisition-related intangibles, and tax effects from finalized tax filings and positions.
“We delivered strong sequential sales and margin growth even as we further improved our inventory position in the second quarter,” said Mark Thompson, Fairchild’s president and CEO. “Distribution sell-through was better than expected which helped us to again reduce channel inventory while still posting sales higher than our original expectations entering the quarter. We estimate consumption demand, which consists of distributor sell through plus direct sales, was approximately $300 million in the second quarter and believe the stronger order rates and higher starting backlog position for Q3 indicates that end market demand will increase again this quarter. Fairchild is focused on disciplined cost management to deliver solid earnings leverage and greater cash flow on incremental sales. Our lower capital spending needs and effective inventory and working capital management enabled us to deliver $46.9 million in free cash flow. Despite the difficult macro-economic environment, we delivered the highest first-half free cash flow since 2000.”
End Markets and Channel Activity
“As planned, we under-shipped consumption demand again in the second quarter resulting in an approximately $24 million reduction in channel inventory,” said Thompson. “Order rates improved throughout the quarter across a broad range of end markets enabling us to significantly increase our backlog position from a quarter ago. Overall product pricing was down about three percent sequentially which is slightly weaker than prior quarters, but we believe the trend is now moderating as order rates improve. We maintained lead times within a stable range of five to six weeks during the quarter.”
Second Quarter Financials
“We generated solid financial performance while reducing internal inventory by more than $8 million,” said Mark Frey, Fairchild’s executive vice president and CFO. “We increased factory loadings in response to improving demand throughout the quarter which, coupled with aggressive cost controls, enabled us to increase adjusted gross margin nearly 10 percentage points sequentially to 24.8 percent in Q2. R&D and SG&A expenses were in line with expectations at $69.3 million. Cash and securities increased $36.1 million from the prior quarter to $423.4 million which reflects cash flow from operations of $53.4 million, capital spending of $6.5 million and a $16 million reduction in debt.”
Current Status of Third Quarter Business
“Our scheduled backlog for third quarter shipments is currently about
$300 million which is roughly $50 million higher than this point a
quarter ago,” said Frey. “Included in this amount is approximately $25
million of backlog that we booked in the first two and a half weeks of
this quarter. Assuming we continue to record positive backlog fill
consistent with the current order patterns, we believe sales in the
range of $300 to $325 million are possible for the third quarter. For
this range of revenue, we anticipate adjusted gross margin to be between
25 and 27 percent. We expect R&D and SG&A spending to be roughly $70
million in Q3. Interest expense for the third quarter is expected to be
between $4.5 and $5.0 million while our tax expense should be
approximately zero. We anticipate recording approximately $4 million in
restructuring charges and $3.6 million of accelerated depreciation in Q3
associated with previously announced cost reduction actions. As with
last quarter, we are not assuming any obligation to update this
information, although we may choose to do so before we announce third
quarter results.”
