Fairchild Semiconductor Reports Results for the Second Quarter of 2005

SOUTH PORTLAND, Maine—(BUSINESS WIRE)—July 14, 2005— Fairchild Semiconductor (NYSE: FCS):

-- Distribution Inventories Decrease More Than 2 Weeks on Stronger Re-Sales

-- Record Bookings for Analog Switches

-- Cash from Operations Improves to $56.7 million

Fairchild Semiconductor (NYSE: FCS), the leading global supplier of power semiconductors, today announced results for the second quarter ended June 26, 2005. Fairchild reported second quarter sales of $346.0 million, a 4.6% decrease from the prior quarter and 16.5% lower than the second quarter of 2004.

Fairchild reported a second quarter net loss of $205.3 million or $1.71 per share compared to a net loss of $10.4 million or $0.09 per share in the prior quarter and net income of $17.0 million or $0.14 per diluted share in the second quarter of 2004. Included in the loss was a $195.3 million non-cash charge related to the reserve of deferred tax assets required under Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which is discussed in more detail below. Also included in the loss were $3.9 million of restructuring expenses in the second quarter related to employee severance and certain asset impairments. Gross margin was 19.9%, 320 basis points lower sequentially and 940 basis points lower than the second quarter of 2004.

Fairchild reported a second quarter pro forma net loss of $2.2 million or $0.02 per share, compared to pro forma net income of $12.5 million or $0.10 per diluted share in the prior quarter and $31.7 million or $0.26 per diluted share in the second quarter of 2004. The pro forma net income (loss) excludes amortization of acquisition-related intangibles, restructuring and impairments, expenses associated with debt reduction, the non-cash charge to reserve the deferred tax asset, and other items.

"Despite the short term financial results, we made excellent progress during the second quarter as we strengthened the management team, increased our focus on the analog business, improved our mix management process and moved to a sell-through management approach for distribution," said Mark Thompson, Fairchild's president and CEO. "We've made a number of changes to our management team including bringing in four senior managers to bolster our efforts in analog product development as well as strengthening our marketing and sales efforts in Korea. Our product lines are engaged in a thorough analysis of our business to identify products that do not currently meet our margin targets and to develop plans to either improve margins or exit/divest these products. The results this quarter of our increased focus on distribution are very encouraging as re-sales were up an estimated 12% sequentially. Stronger re-sales coupled with lower sales into distribution drove more than a two week reduction in channel inventory. I'm confident that the changes we're making to accelerate our analog business, get closer to our end customers, especially in the distribution channel, and rationalize our product mix to focus on higher quality business will allow us to strongly improve margins and profitability in the future."

End Markets and New Products

"Order rates were strongest in the consumer and handset markets," explained Thompson. "We saw particular strength for products supporting the television end market as well as much stronger demand in the white goods segment where our Smart Power Module (SPM(TM)) business continues to win new designs. Demand for products supporting the handset market was up more than 50% over the last two quarters in part driven by our strength in low power switches and our fast growing analog switch business, which recorded record bookings, up more than 100% from the prior quarter. We're also seeing significant design-in activity for our new, proprietary uSerDes(TM) products enabling handset manufacturers to better manage the signal flow in clamshell phones while reducing component count and costs. Our most significant design win to date came this quarter when one of our largest customers selected our uSerDes(TM) solution for use in their latest generation of handsets."

Second Quarter Financials

"We believe we've turned the corner on distribution inventories and the channel is now better positioned to take advantage of the typically stronger seasonal demand in the late summer and fall," said Matt Towse, Fairchild's senior vice president and chief financial officer. "The volume incentives to increase re-sales and to reduce slow moving inventory are in place, and we expect to see the results of these programs in the second half of this year.

"Gross margins were 19.9% in the second quarter," stated Towse. "Margins were impacted primarily by our efforts to reduce channel and internal inventories, which resulted in lower factory loadings and on-going pricing pressure on standard products and low power switches as well as certain analog products.

"We solidly improved our balance sheet and cash flow from the prior quarter," said Towse. "We reduced our internal inventories more than 5% resulting in higher turns, improved our days of sales outstanding and grew our cash and marketable securities nearly $30 million from the first quarter. We also increased our cash flow from operations to $56.7 million in the second quarter.

"During our recent analyst's day, we presented our new capital expenditure model of 6 - 8 % of sales, down from our historical average of about 11%," stated Towse. "Our capital spending in the second quarter was $26.2 million and we forecast this amount to decrease significantly in the second half of this year resulting in our annual capital spending being well within our new model."

Third Quarter Guidance

"In the third quarter, we expect revenue to be approximately flat and gross margins to be flat to slightly higher sequentially," said Towse. "Our backlog and lead times entering the seasonally slower summer months were lower than a quarter ago. Our lead times are now in the 5 - 7 week range, allowing us to fill a higher amount of turns business, which are orders booked and shipped within the third quarter. We plan to continue our efforts to tightly manage factory loadings as inventories in the channel are further reduced.

"During the second quarter we completed an analysis of asset depreciable lives and, effective in the third quarter, we're adjusting the useful life assumptions for many types of equipment to better align our depreciation schedules to the actual longer life we have experienced in recent years and to be more consistent with industry norms," explained Towse. "We expect the gross margin impact of this increase in useful lives will be small in the third quarter, and then starting in the fourth quarter we anticipate the lower depreciation expenses will have a very positive impact on gross margins. In addition, we anticipate our reduced capital expenditure model of 6 - 8% of sales will allow us to maintain lower depreciation expenses over the long term.

"I'm pleased with the results of our efforts so far to reduce inventories and lower capital spending going forward, but there is still much work ahead of us," said Towse. "We're doing in-depth reviews of our manufacturing capabilities and our product portfolio in order to increase return on capital, optimize product mix and improve the overall quality of our business. As we identify and execute on plans to exit certain products, we may be required to take charges over the next couple of quarters for potential returns or to adjust the carrying value of our inventory for these products. Ultimately, we expect these product management and operational actions will improve our on-going gross margins. We are committed to meeting the goals we set during our recent analyst's day, to hit 30% gross margins at the current sell-through sales levels and to achieve mid-30% gross margins within two years."

Note on the Non-Cash Charge Related to SFAS 109

In accordance with the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", Fairchild recorded a non-cash charge of $195.3 million to reserve its deferred tax asset (DTA). This standard requires companies to weigh positive and negative evidence when determining the necessity for a valuation allowance on its DTA and in particular, requires that "...greater weight be given to previous cumulative losses than the outlook for future profitability when determining whether deferred tax assets can be used." Fairchild has had cumulative losses in the U.S. in recent years primarily due to previously higher interest expenses from its U.S. debt and is now expecting an additional year of U.S. losses in 2005. Under Fairchild's evaluation of SFAS 109 requirements, the evidence of these cumulative losses outweighs any expectations of future profits when valuing the DTA. As a result, the deferred tax assets are required to be reserved.

It is important to note that reserving the DTA was a non-cash charge taken to conform to GAAP, and in no way reflects reduced confidence in Fairchild's future prospects. The company expects it is likely that it will use all of its U.S. deferred tax assets before their expiration dates that range from 2018 to 2025. Should Fairchild record sufficient profits in the U.S. in the future, it can reverse, partially or totally, this reserve against its DTA and use this asset to offset all or part of the future income tax expenses on these profits. Until that time, Fairchild will continue to provide pro forma financial results with a normalized tax rate.

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