Freescale Semiconductor Announces Third Quarter 2012 Results

Freescale Semiconductor Announces Third Quarter 2012 Results

AUSTIN, Texas--(BUSINESS WIRE)-- Freescale Semiconductor, Ltd. (NYSE: FSL  ) today announced financial results for the third quarter ended September 28, 2012. Highlights include:

GAAP Results

     

Non-GAAP Results*

• Net sales of $1.01 billion

• Adjusted operating earnings of $127 million

• Gross margin of 42.0%

• Adjusted net earnings per share of $.04

• Operating earnings of $127 million

• Loss per share of $.10

“Despite challenging market conditions, we made progress in key areas during the third quarter,” said Gregg Lowe, president and CEO. “Revenues and gross margins were well ahead of the performance we experienced in previous semiconductor market downturns, we used $100 million in cash to reduce debt and we began implementing a new strategic framework that we believe will enable us to grow our business and regain market share.”

Third Quarter Highlights

Net sales for the third quarter of 2012 were $1.01 billion, compared to $1.03 billion in the second quarter of 2012 and $1.14 billion in the third quarter of last year.

Operating earnings for the three months ended September 28, 2012 were $127 million, compared to $112 million in the second quarter of 2012 and $110 million in the third quarter of 2011.

The net loss for the third quarter of 2012 was $24 million, or $.10 per share, compared to a loss of $34 million, or $.14 per share, in the second quarter of 2012 and a loss of $88 million, or $.36 per share, in the third quarter last year.

Adjusted operating earnings (defined in Note 1 to the Notes to the Consolidated Financial Information attached to this press release) for the three months ended September 28, 2012 were $127 million, compared to $136 million in the second quarter of 2012 and $200 million in the third quarter of 2011.

Adjusted net earnings (defined in Note 1 to the Notes to the Consolidated Financial Information attached to this press release) for the three months ended September 28, 2012 were $10 million, or $.04 per share, compared to $17 million, or $.07 per share, in the second quarter of 2012 and $72 million, or $.29 per share, in the third quarter of 2011.

Descriptions of EBITDA, Adjusted EBITDA, adjusted operating earnings (loss), adjusted net earnings (loss) and the reconciliations to our GAAP results are included in the tables and notes attached to this press release.

Product Revenues

The company’s net sales figures for the third quarter were as follows:

  • AISG (which includes our microcontroller, analog and sensor products) net sales were $555 million, compared to $568 million in the second quarter of 2012 and $589 million in the third quarter of 2011.
  • NMSG (which includes our networking processors, applications processors and radio frequency products) net sales were $368 million, compared to $335 million in the second quarter of 2012 and $404 million in the third quarter of 2011.
  • Cellular net sales were $27 million, compared to $50 million in the second quarter of 2012 and $97 million in the third quarter of 2011.
  • Other net sales (which includes intellectual property and foundry revenue) were $59 million, compared to $76 million in the second quarter of 2012 and $52 million in the third quarter of 2011.

Other Financial Information

  • Capital Expenditures were $30 million;
  • Cash and Cash Equivalents were $763 million;
  • EBITDA* was $186 million; and
  • Adjusted EBITDA* for the latest twelve months ending September 28, 2012 was $922 million.

Fourth Quarter 2012 Outlook

For the fourth quarter of 2012, the company expects:

  • Net sales to be between $920 million and $960 million;
  • Gross margins to decrease approximately 300 basis points on a sequential basis.

*(Adjusted for various items as indicated and defined in Note 1 to the Notes to the Consolidated Financial Information attached to this press release.)

Strategic Direction

Following the appointment of Gregg Lowe as president and CEO of Freescale, the company began a detailed review of its strategic direction with the overall objective of identifying opportunities that would accelerate revenue growth and improve profitability.

“We conducted a thorough and extensive review of all our businesses, markets and regions during my first three months,” said Lowe. “We gathered input from a number of internal and external sources with the objective of identifying our true differentiators and the markets where they would make us a leading force.”

“Our goal was to identify areas where we can reinforce our strengths to drive top line growth and margin expansion, then reallocate our R&D resources toward those areas of high-value and high-growth,” said Lowe.

Realigning Businesses. As a result of this analysis, the company is realigning its product groups as follows:

  • Microcontrollers include microcontrollers for the company’s Industrial and Multi-Market (IMM) and Metering, Medical and Connectivity (MMC) product groups as well as Multimedia Applications (MAD) processors. Microcontrollers will also be the primary platform driver for our overall microcontroller portfolio, creating products and platforms that will eventually be deployed to our automotive MCU product group. Geoff Lees will run Microcontrollers.Lees joined Freescale in 2011 from NXP Semiconductor and previously served as Freescale’s Vice President of the IMM product group.
  • Digital Networking includes networking processors previously part of our Networking Products and Wireless Access product groups. The team’s sharpened focus will include significant resource increases in both chip design and software resources for standard processors aimed at the networking and communications markets. Tom Deitrich will run Digital Networking. Deitrich has been with the company since 2006 and previously managed Networking and Multimedia Solutions.
  • Automotive MCU includes the company’s microcontrollers sold to the automotive market. Our focus will be to regain market share in automotive MCUs, capture new growth opportunities in Asia and Japan and expand our gross margin. Bob Conrad will run Automotive MCU. Conrad recently joined Freescale from Fairchild Semiconductor where he ran the company’s analog and low voltage discrete business along with technology development and strategy. Prior to that, he managed the Analog Devices DSP group and was the Automotive Microcontroller Manager at Texas Instruments.
  • Analog & Sensors includes automotive analog, mixed-signal analog and sensor products. The focus of Analog & Sensors will change from being primarily automotive focused to be more balanced between automotive and mixed signal analog, with an emphasis on developing analog products that complement our Microcontroller product group. We believe this will enable Analog & Sensors to both grow top line revenue and improve gross margins. James Bates will run Analog & Sensors. Bates recently joined the company, having previously held a similar position at Maxim Integrated Products.
  • RF will include the company’s RF power amplifiers. The focus of RF will be to utilize an increased resourcing pool to drive into new markets and accelerate top line growth. Ritu Favre will run RF. Favre joined Freescale as an engineer in 1988, and she has been the General Manager of RF since October 2010.

Manufacturing Operations. Along with these changes, we will be combining all of our manufacturing operations under a single leader to drive a sharper focus on execution, efficiency and reduced manufacturing costs. David Reed is joining Freescale as the head of Manufacturing Operations, which includes the company’s internal and external front-end and final manufacturing operations, planning, procurement, quality and technology organizations. Reed joins Freescale from GLOBALFOUNDRIES, where he spent the last two years leading Global’s 28nm production in Dresden, Germany. Prior to that, he spent more than 20 years at Texas Instruments managing fabrication facilities, assembly and test and other operations supporting the analog, digital and MEMS businesses.

Reallocating R&D. Moving forward, the company is shifting its research and development investment to reflect its strategic focus on the product groups highlighted above. Our focus on these product groups will drive the company’s investment and will account for nearly 90 percent of total research and development spending by 2015.

Redistributing Sales Resources. The company will begin shifting sales resources to align with industry growth in China and select opportunities in Korea, Taiwan and Japan. As a result, the company expects to increase the number of accounts covered and expand its presence in distribution.

“By reallocating our investments and focusing our efforts on high growth markets, we intend to expand on our leadership positions and accelerate our market share gain,” said Lowe. “Combine that with our talented team of dedicated professionals and I am confident we can grow Freescale to be a truly great company.”

Charges Associated with Strategic Direction. In connection with re-allocating research and development expenses and re-distributing sales resources, the company estimates cash charges of approximately $35 million to $40 million. The charges relate to severance costs and the company expects the timing of the cash charges to occur primarily through the third quarter of 2013. The company expects annualized savings of $35 million to $40 million associated with these actions.

Conference Call and Webcast

Freescale's quarterly earnings call is scheduled to begin at 4:00 p.m. Central Daylight Time on Oct. 25, 2012. The company will offer a live webcast of the conference call over the Internet at www.freescale.com/investor.

Caution Regarding Forward-Looking Statements

This press release includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our business strategy, goals and expectations concerning our strategic direction, key personnel, future operations, margins, profitability, liquidity and capital resources. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. Our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-looking statements ultimately prove to be correct. Actual results and trends in the future may differ materially from those suggested or implied by the forward-looking statements depending on a variety of factors. Some of the factors that we believe could affect our results include our substantial indebtedness; our ability to service our outstanding indebtedness and the impact such indebtedness may have on the way we operate our business; the loss of one or more of our significant customers or strategic relationships; general economic and business conditions and any downturns in the cyclical industry in which we operate; our competitive environment and our ability to make technological advances; interruptions in our production or manufacturing capacity and our ability to obtain supplies; economic conditions in the industries in which our products are sold; maintenance and protection of our intellectual property; political and economic conditions in the countries where we conduct business; geological conditions in some of the earthquake-prone countries where certain of our customers and suppliers are based; the costs of environmental compliance and/or the imposition of liabilities under environmental laws and regulations; potential product liability or personal injury claims; inability to make necessary capital expenditures; loss of key personnel; the financial viability of our customers, distributors or suppliers; and our ability to achieve cost savings as well as other matters described under "Risk Factors" in our Annual Report on Form 10-K and other filings with the SEC. We undertake no obligation to update any information contained in this press release.

Non-GAAP Financial Measures

Included within this press release and the accompanying tables and notes are non-GAAP financial measures that supplement the company's consolidated financial information prepared under GAAP. The company describes these non-GAAP financial measures and reconciles them to the most directly comparable GAAP measures in the tables and notes attached to this press release. The company's management believes that these non-GAAP measures provide a more meaningful representation of the company’s ongoing financial performance than GAAP measures alone. In addition, the company uses Adjusted EBITDA to measure compliance with certain of its debt covenants. These non-GAAP measures are included solely for informational and comparative purposes and are not meant as a substitute for GAAP. You should consider them together with the consolidated financial information located in the tables attached to this press release.

About Freescale Semiconductor

Freescale Semiconductor is a global leader in embedded processing solutions, providing industry leading products that are advancing the automotive, consumer, industrial and networking markets. From microprocessors and microcontrollers to sensors, analog integrated circuits and connectivity - our technologies are the foundation for the innovations that make our world greener, safer, healthier and more connected. Some of our key applications and end-markets include automotive safety, hybrid and all-electric vehicles, next generation wireless infrastructure, smart energy management, portable medical devices, consumer appliances and smart mobile devices.

The company is based in Austin, Texas, and has design, research and development, manufacturing and sales operations around the world. http://www.freescale.com

Freescale and the Freescale logo are trademarks of Freescale Semiconductor, Inc. All other product or service names are the property of their respective owners. © Freescale Semiconductor, Inc. 2012.

                 
Freescale Semiconductor, Ltd.
Condensed Consolidated Statements of Operations
(Unaudited)
 
 

Three months ended

(in millions, except per share amounts) Sept 28, June 29, Sept 30,
2012 2012 2011
 
Net sales $ 1,009 $ 1,029 $ 1,142
Cost of sales   585     589     661  
Gross margin 424 440 481
Selling, general and administrative 110 116 129
Research and development 187 188 200
Amortization expense for acquired intangible assets 3 4 62
Reorganization of business and other   (3 )   20     (20 )
Operating earnings 127 112 110
Loss on extinguishment or modification of long-term debt, net (3 ) - (55 )
Other expense, net   (134 )   (135 )   (129 )
Loss before income taxes (10 ) (23 ) (74 )
Income tax expense   14     11     14  
Net loss $ (24 ) $ (34 ) $ (88 )
 
Loss per common share:
Basic ($0.10 ) ($0.14 ) ($0.36 )
Diluted ($0.10 ) ($0.14 ) ($0.36 )
 
Weighted average common shares outstanding:
Basic 249 248 246
Diluted 251 250 248
 

           
Freescale Semiconductor, Ltd.
Reconciliation of Non-GAAP Measures
(Unaudited)
 

Three months ended

(in millions, except per share amounts) Sept 28, June 29, Sept 30,
2012 2012 2011
 
Adjusted gross margin $ 424 $ 440 $ 527
Incremental depreciation expense (a)   -     -     46  
Gross margin $ 424   $ 440   $ 481  
 
 
Adjusted operating earnings $ 127 $ 136 $ 200
Incremental depreciation expense (a) - - 48
Amortization expense for acquired intangible assets (a) 3 4 62
Reorganization of business and other (f)   (3 )   20     (20 )
Operating earnings $ 127   $ 112   $ 110  
 
 
Adjusted net earnings $ 10 $ 17 $ 72
Purchase price accounting impact (a) 3 4 110
Non-cash share-based compensation expense (b) 12 10 6
Fair value adjustment on interest rate and commodity derivatives (c) 7 8 (3 )
Deferred and non-current tax impact (d) 12 9 12
Loss on extinguishment or modification of long-term debt, net (e) 3 - 55
Reorganization of business and other (f)   (3 )   20     (20 )
Net loss $ (24 ) $ (34 ) $ (88 )
 
Adjusted net earnings per common share:
Basic $ 0.04 $ 0.07 $ 0.29
Diluted $ 0.04 $ 0.07 $ 0.29
 
Weighted average common shares outstanding:
Basic 249 248 246
Diluted 251 250 248
 

 
Freescale Semiconductor, Ltd.
Product Group Net Sales Information
(Unaudited)
                   
 
 
(in millions)

Three months ended

Sept 28, June 29, Sept 30,
2012 2012 2011
 
 
Automotive, Industrial & Multi-Market Solutions (1) $ 555 $ 568 $ 589
Networking & Multimedia Solutions (2) 368 335 404
Cellular (3) 27 50 97
Other (4)

 

59

  76   52
$ 1,009 $ 1,029 $ 1,142
 

(1) Automotive, Industrial & Multi-Market Solutions include our microcontroller portfolio for automotive, consumer and industrial applications, as well as Analog & Sensors products.

(2) Networking & Multimedia Solutions include our processor portfolio based on Power Architecture™, StarCore® DSP and i.MX platforms. These technologies support Networking Systems, Digital Home Operation, Multimedia Applications and Radio Frequency products.

(3) Cellular includes baseband, RF transceivers, power management, software and full platform development for the wireless handset market.

(4) Other includes licensing and sales of intellectual property, sales of wafers to other semiconductor companies and other miscellaneous items.

 
Freescale Semiconductor, Ltd.
Condensed Consolidated Balance Sheets
(Unaudited)
                 
 

 

(in millions) Sept 28, June 29, Sept 30,
2012 2012 2011
 
ASSETS
Cash and cash equivalents $ 763 $ 881 $ 744
Accounts receivable, net 440 444 508
Inventory, net 810 820 799
Other current assets   182     192     275  
Total current assets 2,195 2,337 2,326
 
Property, plant and equipment, net 723 736 826
Intangible assets, net 77 82 128
Other assets, net   334     344     316  
Total assets $ 3,329   $ 3,499   $ 3,596  
 
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current portion of long-term debt and capital lease obligations $ 7 $ 6 $ 3
Accounts payable 371 369 405
Accrued liabilities and other   512     588     532  
Total current liabilities 890 963 940
 
Long-term debt 6,476 6,578 6,589
Other liabilities 452 456 555
 
Shareholders' deficit   (4,489 )   (4,498 )   (4,488 )
Total liabilities and shareholders' deficit $ 3,329   $ 3,499   $ 3,596  
 

                 
Freescale Semiconductor, Ltd.
Cash Flow Summary
(Unaudited)
 
 
Three months ended
(in millions) Sept 28, June 29, Sept 30,
2012 2012 2011
 
Cash flows from operations $ 16 $ 189 $ 25
 
Cash flows from investing activities $ (47 ) $ (57 ) $ (41 )
 
Cash flows from financing activities $ (91 ) $ (2 ) $ (35 )
 
Effect of exchange rate changes on cash and cash equivalents $ 4 $ (9 ) $ (10 )
 

 
Freescale Semiconductor, Ltd.
EBITDA and Adjusted EBITDA Reconciliations
(Unaudited)
             

Three months ended

(in millions) Sept 28, June 29, Sept 30,
2012 2012 2011
 
EBITDA excluding the effects of other items $ 186 $ 192 $ 271
Fair value adjustment on interest rate and commodity derivatives (c) 7 8 (3 )
Loss on extinguishment or modification of long-term debt, net (e) 3 - 55
Reorganization of business and other (f)   (3 )   20     (20 )
EBITDA 179 164 239
Depreciation 44 43 99
Amortization* 20 19 83
Interest expense, net 125 125 131
Income tax expense   14     11     14  
Net loss $ (24 ) $ (34 ) $ (88 )
 
 
 

Twelve months
ended
Sept 28, 2012

(in millions)
 
Net loss (73 )
Interest expense, net 516
Income tax expense 50
Depreciation and amortization expense* 339
Non-cash share-based compensation expense (b) 39
Fair value adjustment on interest rate and commodity derivatives (c) 17
Loss on extinguishment or modification of long-term debt, net (e) 31
Reorganization of business and other (f) (103 )
Cost savings (g) 83
Other terms (h)   23  
Adjusted EBITDA $ 922  
 
*Excludes amortization of debt issuance costs, which are included in interest expense, net.
 

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION
 
Summary of Key Reconciling Items
 
(a) Includes the effects of purchase price accounting relating to our acquisition by a consortium of investors in 2006 and our acquisition of SigmaTel, Inc. in 2008, including, as applicable, depreciation expense associated with the property, plant and equipment step up to fair value and amortization expense for acquired intangible assets related to developed technology and tradenames/trademarks.
 
(b) Reflects non-cash, share-based compensation expense under the provisions of ASC Topic 718, "Compensation - Stock Compensation.”
 
(c) Reflects the change in fair value of our interest rate and commodity derivatives which are not designated as cash flow hedges under the provisions of ASC Topic 815, "Derivatives and Hedging.”
 
(d) Adjustments to reflect cash income tax expense.
 
(e) Reflects losses on extinguishments and modifications of our long-term debt, net.
 
(f) Reflects items related to our reorganization of business programs and other charges.
 
(g) Reflects costs savings that we expect to achieve from initiatives commenced prior to December 31, 2009 under our reorganization of business programs that are in process or have already been completed.
 
(h) Reflects adjustments required by our debt instruments, including business optimization expenses, relocation expenses and other items.
 
 
Note 1
 
Adjusted gross margin and adjusted operating earnings (loss) represent gross margin and operating earnings (loss) adjusted for the following as necessary: incremental depreciation expense for property, plant and equipment fair value step-up and associated with reduction in lives of certain manufacturing assets, amortization of acquired intangible assets, and reorganization of businesses and other charges. Adjusted gross margin and adjusted operating earnings (loss) are not recognized terms under U.S. GAAP. Adjusted gross margin and adjusted operating earnings (loss) do not represent gross margin and operating earnings (loss), as those terms are defined under U.S. GAAP, and should not be considered as alternatives to gross margin or operating earnings (loss) as an indicator of our operating performance. We have included information concerning adjusted gross margin and adjusted operating earnings (loss) because we use such information when evaluating gross margin and operating earnings (loss) to better evaluate the underlying performance of the Company. Adjusted gross margin and adjusted operating earnings (loss) as presented herein are not necessarily comparable to similarly titled measures. A reconciliation of adjusted gross margin to gross margin and adjusted operating earnings (loss) to operating earnings (loss), the most directly comparable U.S. GAAP measures, has been included in the preceding tables.
 
Adjusted net earnings (loss) is net earnings (loss), adjusted for certain items that we believe are not indicative of the performance of our ongoing operations. We present adjusted net earnings (loss) as a supplemental performance measure. We believe adjusted net earnings (loss) is helpful to an understanding of our business and provides a means of evaluating our performance from period to period on a more consistent basis. This presentation should not be construed as an indication that similar items will not recur or that our future results will be unaffected by other items that we consider to be outside the ordinary course of our business. Because adjusted net earnings (loss) facilitates internal comparisons of our historical financial position and operating performance on a more consistent basis, we also use adjusted net earnings (loss) for business planning purposes, in measuring our performance relative to that of our competitors and in evaluating the effectiveness of our operational strategies. Adjusted net earnings (loss) has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for an analysis of our results as reported under U.S. GAAP. We compensate for these limitations by relying primarily on our U.S. GAAP results and using adjusted net earnings (loss) only supplementally. A reconciliation of adjusted net earnings (loss) to net earnings (loss), the most directly comparable U.S. GAAP performance measure, has been included in the preceding tables.
 
EBITDA (earnings before interest, taxes, depreciation and amortization) excluding the effects of other items is a non-U.S. GAAP financial measure. We have included information concerning EBITDA excluding the effects of other items because we use such information to supplementally evaluate the underlying performance of the Company. EBITDA excluding the effects of other items does not represent, and should not be considered an alternative to, net earnings (loss), operating earnings (loss), or cash flow from operations as those terms are defined by U.S. GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While EBITDA excluding the effects of other items and similar measures are frequently used as measures of operations and the ability to meet debt service requirements by other companies, our use of this financial measure is not necessarily comparable to such other similarly titled captions of other companies.
 
Adjusted EBITDA as shown in the preceding tables is calculated in accordance with the agreement and indentures governing Freescale Semiconductor, Inc.’s existing notes and senior credit facilities. Adjusted EBITDA is net earnings (loss) adjusted for certain non-cash and other items that are included in net earnings (loss). The ability of our subsidiaries to engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied to ratios under the indentures and the senior credit facilities based on Adjusted EBITDA calculated for the most recent four fiscal quarters. Accordingly, we believe it is useful to provide the calculation of Adjusted EBITDA to investors for purposes of determining our ability to engage in these activities. Adjusted EBITDA is a non-U.S. GAAP financial measure. Adjusted EBITDA does not represent, and should not be considered an alternative to, net earnings (loss), operating earnings (loss), or cash flow from operations as those terms are defined by U.S. GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Although Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements by other companies, our calculation of Adjusted EBITDA is not necessarily comparable to such other similarly titled captions of other companies. The calculation of Adjusted EBITDA in the indentures and the senior credit facilities allows us to add back certain charges that are deducted in calculating net earnings (loss). However, some of these expenses may recur, vary greatly and are difficult to predict. Further, our debt instruments require that Adjusted EBITDA be calculated for the most recent four fiscal quarters. We do not report Adjusted EBITDA on a quarterly basis. In addition, the measure can be disproportionately affected by quarterly fluctuations in our operating results, and it may not be comparable to the measure for any subsequent quarter, four-quarter period or any complete fiscal year. A reconciliation of net earnings (loss), which is a U.S. GAAP measure of our operating results, to Adjusted EBITDA, calculated as described above, has been included in the preceding tables.



Freescale Semiconductor, Ltd.
Investors:
Mitch Haws, 512-895-2454
mitch.haws@freescale.com
or
Media:
Rob Hatley, 512-996-5134
robert.hatley@freescale.com

KEYWORDS:   United States  North America  Texas

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