FCS: Fairchild Semiconductor Reports Results for the Fourth Quarter and Full Year of 2006

Fairchild Semiconductor (NYSE: FCS), the leading global supplier of power semiconductors, today announced results for the fourth quarter and full year ended December 31, 2006. Fairchild reported fourth quarter sales of $418.3 million, flat from the prior quarter and 13 percent higher than the fourth quarter of 2005.

Fairchild reported fourth quarter net income of $8.7 million or $0.07 per diluted share compared to net income of $25.1 million or $0.20 per diluted share in the prior quarter, and a net loss of $4.7 million or $0.04 per share in the fourth quarter of 2005. Gross margin was 29.0 percent, 170 basis points lower sequentially and 480 basis points higher than in the fourth quarter of 2005. Included in the fourth quarter 2006 results were $6.7 million in total equity based compensation in accordance with Statement of Financial Accounting Standards (SFAS) No. 123(R), Share Based Payment. Also included in fourth quarter 2006 results was a restructuring charge of $3.2 million for costs related to the consolidation and simplification of certain supply chain planning processes and the streamlining and transfer of certain information systems support activities, as well as a reserve for potential losses of $8.2 million related to the previously announced unfavorable judgment in the legal proceeding with Zhongxing Telecom Ltd. (ZTE), which Fairchild intends to appeal.

Fairchild reported fourth quarter adjusted net income of $26.7 million or $0.21 per diluted share, compared to adjusted net income of $30.6 million or $0.25 per diluted share in the prior quarter and adjusted net income of $13.6 million or $0.11 per diluted share in the fourth quarter of 2005. Adjusted net income excludes amortization of acquisition-related intangibles, restructuring and impairments, lawsuit settlement gains or reserves for potential losses, net gain on the sale of the LED lamps and displays product line, and associated net tax benefits of these items and other acquisition-related intangibles. Adjusted results include equity based compensation expense in 2006.

Full year revenues for 2006 were $1.65 billion, an increase of 16 percent compared to $1.43 billion in 2005. Fairchild reported net income of $83.4 million or $0.67 per diluted share in 2006, compared to a net loss of $241.2 million or $2.01 per share in 2005. On an adjusted basis, the company reported 2006 net income of $111.7 million or $0.90 per diluted share, compared to $20.9 million or $0.17 per diluted share in 2005.

“Fairchild delivered excellent 2006 results while taking a number of important steps towards our goal of building a highly valued company,” said Mark Thompson, Fairchild’s president and CEO. “Financially, we delivered a 434 percent increase in adjusted net income on a 16 percent increase in sales for 2006 compared to 2005. We grew our Analog Products Group (APG) sales 20 percent in 2006 compared to the prior year on the strength of a greater than 55 percent annual increase in analog switches and a 26 percent increase in video filter sales. We also recorded robust µSerDes™ sales and bookings in the fourth quarter, and we believe this trend will continue in 2007, driving a significant increase in year-over-year sales for these products. Our Functional Power Group (FPG) also grew about 20 percent year over year paced by a 27 percent increase in low voltage MOSFET sales. Our Standard Products Group (SPG) reported less than a 5 percent increase in annual sales and substantially higher margins during 2006 as we continue to manage this business to maximize cash flow and earnings contribution. Operationally, we managed our internal and channel inventories within our target range during what has proven to be a dynamic year for most of the industry. We also tightly controlled 2006 capital spending to be approximately 7 percent of sales for the year as per our business model. We made good progress in 2006 and have set the stage for further improvement in 2007.”

Update on the Tender Offer for System General

“I’m pleased to announce that as of January 24, 2007, approximately 71 percent of System General shares have been tendered in response to our offer to purchase all System General stock,” stated Thompson. “Therefore, subject to regulatory approvals which we expect to obtain, we anticipate successfully completing the tender offer in early February and then begin the steps toward completing the share swap and final merger transaction. We expect to complete this acquisition during the third quarter of 2007.”

End Markets and Channel Activity

“Our trade sales were roughly in-line with expectations across the various end markets but we observed a deceleration in distributor sell-through in the last few weeks of December, leaving channel inventories at the upper end of our target range,” said Thompson. “Sales of our products supporting the computing end market were lower than seasonal, which we expected prior to the launch of Microsoft’s Vista operating system.”

Utilization and Lead Times

“Blended utilization rates were sequentially lower in the fourth quarter, especially in our South Portland fab, as we successfully reduced our internal inventories,” stated Thompson. “Average lead times decreased slightly to 9 to 10 weeks, with the longest lead times on our analog power conversion and leading-edge functional power products that continue to generate strong demand.”

Fourth Quarter Financials

“Fourth quarter gross margins decreased 170 basis points due to lower factory utilization as we reduced inventories during the quarter,” said Mark Frey, Fairchild’s executive vice president and CFO. “We reduced internal inventories $3.8 million, or 1 day, in the fourth quarter. R&D and SG&A expenses were at the low end of our forecast range as a result of previously announced streamlining actions, spending controls, and adjustments to the bonus accrual.

“We increased cash and marketable securities by $30.4 million to $586.4 million in the fourth quarter,” stated Frey. “Our net interest and other expenses were $3.3 million in the quarter and benefited from our shift to investments with higher interest rates and overall higher cash balances invested.”

First Quarter Guidance

“Excluding the impact from the expected System General acquisition, we anticipate that first quarter revenues will be 3 to 6 percent lower and gross margins to be down 50 to 100 basis points sequentially due to lower sales volume during our typically soft first quarter,” said Frey. “At the start of the quarter, we had nearly 90 percent of this first quarter sales guidance booked and scheduled to ship. We expect R&D and SG&A spending, including equity based compensation, to be approximately $87 to $90 million for the first quarter. Equity based compensation expense is forecast to be between $6.5 million and $7.5 million in the first quarter.

“We expect to successfully complete the tender offer for System General in the first quarter and consolidate their financial results with ours, with a deduction for the minority interest subtracted from net income,” said Frey. “Given that 71 percent of System General’s shares have been tendered, we would expect to report at least this percentage ownership for most of February and all of March and possibly more as additional shares are tendered in the next week. This accounting treatment will continue to be used until the expected share swap is completed this summer, with exact timing dependent on regulatory approval.

“I also want to update some general guidance for the full year of 2007,” stated Frey. “Assuming that first quarter is the trough in sales and gross margins and normal seasonality for the rest of 2007, we expect gross margins to exit the year at 32.5 percent to 33.5 percent. This target incorporates expectations for new product revenues at higher margins, certain manufacturing cost reductions we are targeting in the second half, and the impact of operating leverage from second half sales growth. We forecast operating expenses to be in the range of $87 to $91 million per quarter which should drive solid net income improvement as sales growth resumes in 2007. We estimate the 2007 GAAP effective tax rate to be approximately 17 percent, plus or minus 3 percent.”

This press release includes references to adjusted net income (loss) (which excludes amortization of acquisition-related intangibles, restructuring and impairments, lawsuit settlement gains or reserves for potential losses, net gain on the sale of the LED lamps and displays product line, and associated net tax benefits of these items and other acquisition-related intangibles), statements of operations prepared in accordance with generally accepted accounting principles (GAAP) (which include these expenses and other items), and a reconciliation from adjusted net income (loss) to GAAP net income (loss). 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 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.

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