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Bryan Hsu

FCS AT A GLANCE

P/E ► -3.56   EV/EBITDA ► -13.6   ROA ► -14% AVG ROE ► -25.7% AVG Debt to Equity ► 0.752 AVG Current Ratio ► 4.32 AVG Interest Coverage Ratio ► -15.2 AVG

 

 

 

 

 

 

Fairchild Semiconductor International Inc. (NYSE: FCS) manufactures power analog, power discrete and non-power semiconductor products to end market customers. ^[1] Power analog and power discrete semiconductor parts regulate the power that runs through the different components in an electronic device. As electronic devices become smaller and smaller and consumers continue to desire longer battery life, power regulators which efficiently allocate power are in high demand. Fairchild's products are used in networking equipment, automobiles, computer displays, and measurement equipment.^[2] In 2007, 74% of sales were from power discrete and power analog semiconductor products.^[2] Fairchild is the number one supplier in the world of power analog products, power discrete products and energy efficient products according to iSuppli.^[1]

Though Fairchild is the number one producer of power analog products in the world, all of its products are undifferentiated.^[3] Since their products are commodities, Fairchild has very slim margins often only about 5% or less of their revenues actually is income. Two thirds of Fairchild's sales are to distributors. ^[4] This heavy reliance hurts Fairchild when economic pressures cause distributors to stock up on products early. Fairchild is often the last to know about this inventory stockpiling by distributors, causing the company to produce chips even when the market is saturated with chips.^[4] Fairchild is aware of its lack of differentiation in its product line and has sought to fix this by pouring money into its research and development to develop new products. It often spends nearly double of what its competitors, such as Vishay Intertechnology (VSH) , are spending on R&D. ^[5][6]

Company Overview

Business and Financial Metrics

Revenue and Earnings

Revenue by Product Segment 2007^[11]

Revenue by Geographic Region 2007 ^[12]

Full year revenues for 2008 were $1.574 billion, a decrease of 5.7 percent compared to $1.670 billion in 2007. ^[15] According to recently published 2008 4th quarter results, Fairchild lost $218.1 million or $1.76 a share. ^[16] Revenues for Fairchild are split 20.7% analog products, 55.8% functional power products, and 23.5% standard products. Fairchild had been seeing growth with 16% growth in revenues from 2005 to 2006 and 1.2% from 2006-2007 until the credit crisis of 2008 brought growth to a halt. ^[17] Due to high costs incurred through product development and pressure from buyers for ultra-low prices, net earnings (money left over after all costs that were possibly incurred are subtracted) were consistently low, never exceeding the $100 million mark. The loss in 2005 is due to the restructuring of the goals and product segments of Fairchild. In 2005, FCS management decided to focus upon power products and thus incurred tremendous costs in the effort to restructure and unload unneeded capacity (factories, workers, etc.). ^[18]

Business Segments

Analog Products(20.7% of Revenue ^[19])

The analog products segment designs, manufactures and markets high-performance analog and mixed signal integrated circuits. These analog products monitor, interpret and control continuously variable functions such as light, color, sound and energy. They perform tasks such as power conversion, voltage regulation and high voltage lighting. Within this line of products the most notable are their GreenFPS products because they offer environmentally friendly low power consumption. ^[22] These analog products are use in computing, communications, industrial and consumer applications.^[22] They also offer signal path products including analog and digital switches, video encoders and deocders, video filters and high performance amplifiers. ^[23] These signal path products are most commonly found in cellular handsets and other ultra-portable applications. ^[22]

Functional Power(55.8% of Revenue ^[19])

Functional power, Fairchild's largest segment, netting more than half of its revenue is responsible for providing power switches including the IntelliMax, MOSFET, and IGBT(insulated gate bipolar transistors) and rectifiers. ^[23] The IntelliMax is a load switch, which lets it replace multiple power switches with just one chip. The chip is responsible for power management within the 1.2V to 20V, which means that it can be used in everything from smaller electronic devices such as cellphones and PDA's to large electronic devices such as portable enterprise equipment. ^[24] MOSFET or Metal-oxide semiconductor field-effect transistor is the industry standard for power management, replacing traditional bipolar power junction transistors (BJT), because power consumption is much lower and MOSFETs are better able to allocate power than BJTs.^[25] Most of the MOSFETs that Fairchild produces are in the low power range, designed for devices that wish to enhance battery life. ^[23] Fairchild is the No. 1 supplier of discrete power transistors such as the MOSFET, according to the Gartner Group. ^[26]. IGBT's are high-voltage discrete devices. They are used primarily in motor control and automotive ignition systems. Fairchild has modified traditional IGBT's into a more power efficient and cost effective form to also work with "green" home appliances such as air conditioners and refrigerators that save energy.^[27]. Rectifiers serve to work in unison with IGBT's and MOSFETs to further enhance the power output of the IGBT's and MOSFET's.

Standard Products(23.5% of Revenue^[19])

The standard products group comprises of four smaller product groups: logic products, standard diode and transistor products, optoelectronic products, and standard linear products. Logic products are the microchips that we generally visualize in our minds when we talk about computer components. They are the integrated circuits, microprocessors, memory components and connectors that make up a system of chips. They are categorized into two segments, mature and advanced. Mature logic components are those that are generally more than 5 years old. ^[28] The advanced components tend to be newer; however, since customers are slow to move from mature to advanced components due to the cost of having to reintegrate a new component into their design, revenue from mature components is steady. ^[28] Standard diodes and transistor products are the small individual components that make up a larger integrated chip such as the resistors and diodes. They are the most basic electronic components, the building blocks so to speak. Optoelectronic products covers a wide range of semiconductors that emit and sense both visible and infrared light. ^[28] These components are used in media sensing, such as printers and copiers along with light control for mobile applications. ^[29] Standard linear products are in essence voltage regulators which try to keep voltage at a constant level or bring voltage up or down in a step wise fashion. They are used for example in notebook speakers to adjust voltage levels, which in turn adjust volume levels in speakers. ^[29]

Key Trends and Forces

Rising Consumer Demand for Energy Efficient Products Benefit FCS

The overarching theme and emphasis of the 2007 annual report that Fairchild published focused upon energy conservation and energy efficiency. As energy prices skyrocketed over the past few years ^[30], more and more consumers are looking for products that save on their energy bill. Fairchild has made it a point in their 2007 annual report that their products are geared exactly toward this trend. For example, the annual report states that if a quarter of Chinese households changed to energy efficient refrigerators using Fairchild components, enough energy would be saved to power an additional 9.9 million households. ^[31] Fairchild stands to gain much from producing components that are energy efficient. Sales data from Energy Star states that sales for dish washers with the energy saving criteria have risen from 56.87% in 2003 to 82.02% in 2005 to 92.26% in 2006. ^[32] Because the company's primary sales come from power controllers, which are an essential part to power management and energy saving in end-user appliances, the "green" direction that Fairchild is taking stands to give it a relative competitive advantage relative to its peers. Fairchild has already begun placing many of its newest "green" chips, such as the GreenFPS^[22], onto the market to ride the "green" wave.

Heavy Reliance on Distributors Hinders Fairchild's Ability To Compensate For Downturns In Market Consumption

Distributors account for 66% of Fairchild's net sales in 2007.^[4] Of the 66%, the top five distributors commanded 20% of net sales. ^[4] Fairchild does not have long term agreements with these distributors, placing it in a precarious situation if any or all of those top five distributors cease to do business with them.^[4] However, this statement must be qualified by the fact that Fairchild IS the No. 1 producer of Power MOSFETS^[26], and any distributor wanting to terminate business relations with Fairchild would have to have compelling monetary reasons to do so. Aside from the threat of unexpected termination, Fairchild is put at a great disadvantage on the market information chain. Distributors tend to stock a large inventory to meet customer demand quickly; however, in downturns, Fairchild is often the last to know and manufactures chips for weeks before realizing the market is over saturated with chips. ^[33] Management has made an attempt to alleviate this problem by lowering sales to distributors to fix the problem in the short term, but this assumes that distributors will cooperate even though they have no incentive to do so. ^[33] Overall, Fairchild faces many potential problems because it relies so heavily on distributors to get its products onto the market.

Expansion Into Chinese Markets in Both Retail and Manufacturing Serves to Benefit Fairchild

In 2003, Fairchild began construction of a new plant in Suzhou, China; it was began production in July 2003 and has steadily increased output since then.^[34] The expanded production is geared directly towards sales outside of China. Fairchild hopes that with time the products manufactured at this plant will be sold to the Chinese market and included in products sold on the Chinese market. To further strengthen its position in China, Fairchild recently acquired a Taiwanese semiconductor company, System General, in January of 2008 ^[33] System General is a power analog integrated circuit designer with strong ties to clients in Taiwan and China. ^[33] This acquisition will help Fairchild gain both market share and recognition in the emerging Asian markets, including Korea. This acquisition provides a strategic fit in the long term because System General's power chips are complementary to Fairchild's own power controllers and regulators, letting Fairchild to create integrated products. ^[33]

Competition

In the market for electronics components, Fairchild Semiconductor International faces fierce competition. Fairchild is a niche company in this market, targeting specifically power management. It seeks to provide increasingly smaller and energy efficient power management chips for the energy concerned world of today. Since Fairchild produces a component used in every single electronics device, it faces enormous competition from other semiconductor companies which produce similar components. The fact that it produces nothing incredibly different from other semiconductor companies weakens its competitive edge in which products from research and development are the life source of companies. It faces competition from large chip makers which have resources and money Fairchild does not have such as Intel (INTC), Texas Instruments (TXN) , and Vishay Intertechnology (VSH). However, competition is particularly fierce from ON Semiconductor (ONNN), Analog Devices (ADI), and Vishay Intertechnology (VSH) due to the product focuses of these three companies.

• Analog Devices (ADI) is a leader in the design and production of high-performance analog, mixed-signal, and digital signal processing integrated circuits (ICs). ^[35] Its revenues for 2008 ending in November was $2.58 billion. Sales from the power management segment amounted to $143.7 million ^[36] Power management and reference products contributed 6% of total revenue in fiscal 2008 for Analog Devices. ^[37]
• ON Semiconductor (ONNN) is another manufacturer of semiconductors. They have a product portfolio of 29,300 products used in end-user electronics such as hybrid cars, computers, GPS devices, and automated testing equipment.^[38] ON Semiconductor specializes in power management and data control semiconductors.^[38] Power management semiconductors control, convert, protect and monitor the power supply to electronic components in an end-user device.^[38] Data control semiconductors regulate data flow for communication systems. ^[38]
• Vishay Intertechnology (VSH) is a $2.8 billion (2007) semiconductor and passive components manufacturer. ^[39] It directly competes with Fairchild in MOSFET and power management chips. Vishay's IC's focus on analog signal switching and routing, power conversion, and power management. ^[40]

References

1. ↑ ^{1.0 1.1} FCS 10-K 2007 Item 1: Business, Pg. 3
2. ↑ ^{2.0 2.1} Fairchild Company Overview Reuters
3. ↑ Morning Star Report FCS 2008 Thesis, Pg 1
4. ↑ ^{4.0 4.1 4.2 4.3 4.4} FCS 2007, 10-K Item 1A: Risk Factors Pg. 18
5. ↑ VSH 10-K 2008 Selected Financial Data F11
6. ↑ FCS 10-K 2008 Pg 32
7. ↑ ^{7.0 7.1} FCS 2008 4th Q Results
8. ↑ FCS 2008 10-Q 1Q, Item 1, Pg. 4
9. ↑ FCS 2008, 10-Q 2Q, Item1, Pg. 4
10. ↑ FCS 2008, 10-Q 3Q, Item 1, Pg. 4
11. ↑ FCS 2007, 10-K MD&A, Pg. 37
12. ↑ FCS 2007, 10-K MD&A, Pg. 35
13. ↑ FCS 2008, Preliminary 2008 Finacial Results
14. ↑ ^{14.0 14.1 14.2} FCS 2007, 10-K Item 8: Consolidated Financial Statements, Pg. 57-58
15. ↑ Morning Star Business Wire: Fairchild Semiconductor Reports Results for the Fourth Quarter and Full Year 2008
16. ↑ FCS 2008 Unaudited Financial Reports
17. ↑ FCS 2007, 10-K Item 6: Selected Financial Data Pg. 32
18. ↑ FCS 10-K 2005, Item 7: MD&A, Pg. 28
19. ↑ ^{19.0 19.1 19.2} FCS 10-K 2007 Item 6: Selected Financial Data Pg. 37
20. ↑ ^{20.0 20.1 20.2} FCS 2007 10-K, Item 7:MD&A Pg. 37
21. ↑ ^{21.0 21.1 21.2 21.3 21.4 21.5 21.6 21.7 21.8} FCS 2006 10-K, Item 7: MD&A Pg. 38&42
22. ↑ ^{22.0 22.1 22.2 22.3} FCS 2007, 10-K Item 1: Business, Pg. 4
23. ↑ ^{23.0 23.1 23.2} DataMonitor FCS Jul 08 Pg. 5
24. ↑ Fairchild Functional Load Switches, IntelliMax
25. ↑ International Rectifier Power MOSFET Basics
26. ↑ ^{26.0 26.1} Gartner Group FCS
27. ↑ FCS 2007, 10-K Item 1: Business Pg. 5
28. ↑ ^{28.0 28.1 28.2} FCS 2007, 10-K, Item 1: Business Pg. 5
29. ↑ ^{29.0 29.1} FCS 2007, 10-K Item 1: Business, Pg. 6
30. ↑ Bloomberg.com Energy Prices
31. ↑ FCS 2007 Annual Report Pg. 3
32. ↑ Energy Star Appliance Sales Data
33. ↑ ^{33.0 33.1 33.2 33.3 33.4} Morning Star Report FCS 2008 Thesis, Pg. 1
34. ↑ FCS 2007, 10-K Item 1A: Risk Factors Pg. 22
35. ↑ ADI 2008, 10-K Item 1: Business Pg. 1
36. ↑ ADI 2008, 10-K, Item 6: Selected Financial Data Pg. 25
37. ↑ ADI 2008, 10-K, Item 1: Business Pg. 3
38. ↑ ^{38.0 38.1 38.2 38.3} ONNN 10-K 2007, Item 1: Business Overview, Pg. 3
39. ↑ VSH 2007, 10-K Item 6: Selected Financial Data Pg. 30
40. ↑ VSH 10-K 2007, Item 1: Business, Pg. 8
41. ↑ FCS 10-K 2007 Selected Financial Data, Pg. 54
42. ↑ VSH 10-K, 2007 Selected Financial Data, F-4
43. ↑ ONNN 10-K 2007 Selected Financial data Pg. 87,104
44. ↑ ADI 10-K, 2007 Selected Financial Data, Pg. 24