Fairchild Semiconductor's (FCS) CEO Mark Thompson on Q2 2014 Results - Earnings Call Transcript

| About: Fairchild Semiconductor (FCS)

Fairchild Semiconductor International, Inc. (NYSE:FCS)

Q2 2014 Conference Call

July 17, 2014 9:00 AM ET

Executives

Dan Janson – Vice President of Investor Relations

Mark S. Thompson – Chairman and Chief Executive Officer

Mark S. Frey – Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Ross Seymore – Deutsche Bank AG

Christopher Caso – Susquehanna Financial Group

Craig Hettenbach – Morgan Stanley

Christopher Rolland – FBR Capital Markets & Co.

Tristan Gerra – Robert W. Baird & Co.

John Pitzer – Credit Suisse AG

Steve Smigie – Raymond James & Associates

Shawn Harrison – Longbow Research

Operator

Good day everyone, and welcome to the Fairchild Semiconductor’s Second Quarter 2014 Earnings Conference Call. Just a reminder that today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Dan Janson. Please go ahead, sir.

Dan Janson

Good morning, and thank you for dialing in to Fairchild Semiconductor's second quarter 2014 financial results conference call. With me today is Mark Thompson, Fairchild's Chairman and CEO; and Mark Frey, our Executive Vice President and CFO.

Let me begin by mentioning that we'll be attending the Citi Global Technology Conference in New York City on September 3, I also want to remind everyone about our upcoming Investor Day event on the afternoon of September 4 in New York City at the New York Shelton, Midtown. This is the same venue as the Citi Global Technology Conference to make it easier for investors and analysts to join us. We’ll be sending invitation out later this summer and look forward to an interesting dialogue about the future of Fairchild.

We'll start today's call with Mark Frey, who will review our second quarter financial results and discuss the current status of third quarter business. Mark Thompson will then discuss our product line results, end markets and operational performance in more detail. Finally, we'll reserve time for questions and answers. This call is scheduled to last approximately 60 minutes and is being simultaneously webcast from the Investor Relations section of our website at fairchildsemi.com. A replay for this call will be publicly available for approximately 30 days.

Fairchild management will be making forward-looking statements in this conference call. These statements, including all statements about future results and performance, are made based on assumptions and estimates that involve risks and uncertainties. Many factors could cause actual results to differ materially from those expressed in forward-looking statements. A discussion of these risk factors is provided in quarterly and annual reports we file with the SEC.

In addition, during this call, we may refer to adjusted or other financial measures that are not prepared according to generally accepted accounting principles. We use non-GAAP measures, because we believe they provide useful information about the operating performance of our businesses that should be considered by investors in conjunction with the GAAP measures that we also provide.

You could find a reconciliation of non-GAAP to comparable GAAP measures at the Investor Relations section of our website at investor.fairchildsemi.com. The website also contains a variety of useful information for investors, including an extensive financial section to facilitate your investment analysis.

Now, I'll turn the discussion over to Mark Frey.

Mark S. Frey

Thanks, Dan. Good morning and thank you for joining us. I'm sure most of you had a chance to review our earnings press release, so I'll focus on just the key points in my comments. We made steady financial progress in the second quarter and expect further improvement in Q3. The numbers speak for themselves, so let’s review some of the details starting with the income statement.

For the second quarter of 2014, Fairchild reported sales of $372 million up 8% sequentially, and 4% higher than the second quarter of 2013. This was at the high end of our guidance range. Adjusted gross margin was up more than three points to 33.4%, recall that we expected gross margin to be between 31% and 32% due primarily to higher sales utilization and improved product mix. This better than expected performance was driven by these same factors plus improved manufacturing execution which shows more than a point of gross margin upside.

R&D and SG&A expenses were $98 million which was in line with expectation. Spending was up less than 2% from the prior quarter as the impact of our annual merit increase, equity vesting and higher variable compensation was partially offset by sequentially lower legal expenses, a one-time reduction in benefit cost and other spending controls.

Second quarter adjusted net income was $25 million and adjusted EPS was $0.20. The adjusted tax expense was a credit of $1.1 million due primarily to shifts of income and loss among jurisdictions with differing tax rates, as well as the effect of a non–cash revaluation of deferred tax assets due to the strengthening of Korean won.

Now I would like to review our second quarter sales and gross margin performance for our two major products groups. Sales were up 10% from the prior quarter for our MC Cubed business driven by higher demand from the mobile and computing end market. MC Cubed adjusted gross margin was up significantly from the prior quarter at 43%, due to higher sales, better manufacturing execution and improved product mix. In our PCIA business, sales were up 6% sequentially due to broad-based seasonal demand strength. Adjusted gross margin was up approximately four points sequentially to 31% due primarily to higher sales and better manufacturing execution.

Turning to our balance sheet, we increased internal inventory by approximately $13 million or 6% sequentially in the second quarter. This increased our days of inventory to 87-days, while we are still comfortable below 90-days of inventory, we expect to reduce factory loadings modestly in the third quarter to tightly control inventory. Days of sales outstanding or DSOs decreased to 36-days and payables increased to 46-days.

Free cash flow was a positive $70 million for the second quarter. We ended the second quarter with total cash and securities exceeding our debt by a $120 million, which was up slightly from the prior quarter despite repurchasing $69 million in stock. This was due to higher net income, lower capital spending and favorable changes in working capital.

Turning now to forward guidance, we expect sales to be in the range of $370 million to $385 million for the third quarter. We expect adjusted gross margin to be 34% to 35% due primarily to higher sales and factory loadings as well as improved product mix. We anticipate R&D and SG&A spending to be $97 million to $99 million due to higher variable compensation expense and lack of the one-time benefit in the prior quarter offset by seasonal spending reductions.

The adjusted tax rate is forecast at 15% plus or minus three percentage points for the quarter. Consistent with our usual practices, we are not assuming any obligation to update this information although we may choose to do so before we announce third quarter results.

Now, I'll turn the call over to Mark Thompson.

Mark S. Thompson

Thanks, Mark and good morning everyone. We grew sales nicely in the second quarter, and POS has increased for six quarters in a row. In my prepared remarks, I will highlight some of the improvements responsible for this progress. I’ll also review the end-market and discuss the broad-based demand strength behind our growth. Finally, I will review some current quarter results and operations metrics.

We've made many improvements on our operations, supply chain, marketing and sales to enable the steady improvement in revenue and financial performance. In operations, we have reduced cycle times in our factories, significantly improved our management of the supply chain and increased flexibility within our internal and external manufacturing. This has enabled us to maintain short lead times and be more responsive to our customers, it’s now common for us to be filling new orders even in the last week of a quarter. Short cycle times also support faster cycles of learning which help us generated more new products, more rapidly. Customers increasingly shift business to Fairchild, because we can deliver the solutions they need before our competition.

Our quality performance has improved as well, which greatly reduced headache for our customers and distraction for our engineers, sales and supply chain. We improved cost of quality by 10% in the last year, which is clearly benefiting gross margins with low reserves for product return as well as less staff and yield loss. In our supply chain we've significantly improved our support of catalogue customers through faster fulfillment of sample request, more expensive product selection and better product availability. This catalogue business often leads to higher volume new designs and be very profitable.

Our new brand and extensive upgrade of our marketing and sales team has also created more excitement about Fairchild among at our customers. Whether it’s our responsive supply chain, rapid fulfillment of samples, fastened product development or no obsolescence policy, customers are increasingly viewing Fairchild as a go to technology partner.

Turning to demand by end markets, sales into the automotive sector were up 9% sequentially in the second quarter and 14% higher than a year-ago. Demand remains strong for all our powertrain solutions, including ignition and fuel injection power management as well as Electronic Power Steering modules. We expect continued sales growth in the third quarter and have great pipeline of business opportunity for a variety of existing and new powertrain applications to support future growth.

Demand for our products supporting the industrial and appliance end markets was higher again in the second quarter. We gained share at a number of leading appliance manufacturers with our highly integrated Smart Power Modules. In the solar end markets, we benefited from growing demand for our advanced IGBT power switches which are used in the power invertors. We expect demand to be seasonally lower in the third quarter driven mostly by the normal fall off of air-conditioning [growth] [ph] in summer.

Our sales into the mobile market were up seasonally in the second quarter. We continue to see increase sales into the Asian market as new reference designs ramp into production. In adaptive charging applications, our initial customer remains on track to adopt flexible adaptive power charging solution using Fairchild's innovative Wall to Battery portfolio of power management solutions. We are also working closely with other leading Asian customers to adopt this technology in the future.

Demand from the computing end market was up in the second quarter. We saw a steady growth in performance computing, cloud applications and server segment of this market. Sales in the consumer market remained seasonally weak in the second quarter, but we expect demand to improve in the third quarter. Sales were up 9% since the end of last year and we expect this steady and broad-based growth to continue in the third quarter.

Turning now to Q2 results for our sales channels and other operational performance. Distribution sell-through was up 8% sequential and 11% for the year-ago quarter. Inventory in the channel decreased by nearly a week from the prior quarter to roughly nine weeks. This is at the lower end of our typical nine to 10-week range. Sales into the OEM and EMS channels were up about 2% due primarily to higher demands from automotive and mobile end markets. Factory utilization increased in Q2 in response to higher demand while lead times remained short for virtually all of our businesses.

In closing, Fairchild reported another quarter of steady improvement in sales and earnings driven by better execution and broad-based demand strength. We expect this trend to continue in the third quarter resulting in another increase in margins and earnings. We remain on track with our footprints in [inaudible] project and expect a significantly increased margin in the second half of next year.

I’m particularly pleased with our strong cash flow and that we were able to return roughly $100 million to shareholders in the first half of this year. We expect to repurchase another $100 million stocks during the next two to four quarters. Fairchild is committed to sharing our improved financial performance and cash flow with our shareholders.

Thank you and I'll turn the call back to Dan.

Dan Janson

Thanks Mark. We'll now open the call to questions. I would ask that in order to allow more of you to ask questions, we limit each person to one question and one follow-up. Thanks, and let's take the first question, please.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) and we'll go first to Ross Seymore with Deutsche Bank.

Ross Seymore – Deutsche Bank AG

Hi guys congrats on the strong quarter and guide. I guess my first question, Mark could you talk a little bit about the linearity of bookings in the quarter, the last couple of years the second quarter has been a little bit challenging in the balk half and just wondered what sort of trajectory you saw in the second quarter this year?

Mark S. Thompson

So, Ross it was very steady, so again the order rates in Q2 was quite linear and up by some tens of millions of dollars from the first quarter.

Ross Seymore – Deutsche Bank AG

Great, and I guess as my follow on question, a little bit longer term question. Can you talk us through a little bit of the timing of the restructuring and how much of the benefits that you are going to get in the second half of next year, I guess or if you want to be more specific around which quarter, how much of that is cash, non-cash, is it 2016 where we are going to get the full-year befit. Any sort of color you can give on that will be helpful.

Mark S. Frey

Yes, Ross. I think – I don’t know if we can go into any more granularity than the second half next year, these are complicated projects and that would take a lot of work, but we are making a lot of progress, you know we actually been seeing some of the early results in the improved gross margin results this year. And we’ll update you obviously at the Investor Day in September to the specific breakdown of cash and non-cash, but we haven’t shown that breakdown yet.

Ross Seymore - Deutsche Bank AG

Okay, great. Congrats again. Thanks.

Mark S. Frey

Thanks Ross.

Operator

And we will take our next question from Chris Caso with Susquehanna.

Christopher Caso – Susquehanna Financial Group

Yes, thank you. I guess to start perhaps you could talk about the decision to reduce the factory loading in Q3 with the channel inventory so lean at this point maybe you can go through some of your rationale for why you decided to do that and what margin implications that may have going forward?

Mark S. Frey

First of all, our first priority in setting inventory capacity et cetera is customer service and we’re giving great customer service, we’re actually getting some business opportunities form – as a result of other companies not being able to show. So that’s our top priority. Well within that priority if we can see an opportunity to operate the business with fewer assets, we do it, because it generates cash and it reduces the cyclicality when we do experience that. If we see upside in sales then we’ll change the build plan.

Christopher Caso – Susquehanna Financial Group

And with respect to margin implications of fourth quarter with loadings down…?

Mark S. Frey

It would be up to a point.

Mark S. Thompson

So Chris, maybe to add one more thing to Mark’s comment is we pay attention to a number of different things when we build our model and normally POS is down a little bit seasonally at the end of the fourth quarter and the beginning of the first and so our model anticipates that and with this design to leave it in a position where we don’t have adjust it at the time. And so as Mark said, if as we get closer to the event to get more data we think that pattern will be different, then we’ll adjust the build plan in the other direction.

Mark S. Frey

Yes. We just think it’s prudent to highlight the fact that we’re going to tightly control inventory. And, right now, we’re probably going to throttle back a little bit this quarter which would impact gross margin next quarter and we just want to highlight that for you, but as Mark said, as bookings progress through the summer if that change and we feel like we need [inaudible] one factory at a higher level, we will.

Christopher Caso – Susquehanna Financial Group

Okay. That’s helpful. As a follow-up, I think in prepared commentary, you talked about handsets for the second quarter. What’s your expectation into the second half of the year for your mobile business, obviously there are some new product launches coming, is your expectation in that market fairly seasonal?

Mark S. Thompson

Yes, so we would expect normal seasonality. We've certainly broadened our customer exposure in that space including some pretty aggressive penetration programs in some of the faster growing Chinese portion of it, but also total volume growth in handsets it is moderated, so we expect some seasonal benefits, some content gains, but we’re not counting on any kind of huge ramps in mobile in order to make our numbers.

Christopher Caso – Susquehanna Financial Group

Okay. Thank you.

Operator

And we’ll take our next question from Craig Hettenbach with Morgan Stanley.

Craig Hettenbach – Morgan Stanley

Yes. Thank you. I had a question on the automotive business and what can be sometimes a seasonally slower quarter in Q3, you are guiding for continued growth there. So can you talk about just the demand environment you are seeing in autos and then also maybe Fairchild specific just new platforms or content that may be allowing you to kind of continue to grow in that market?

Mark S. Thompson

Sure. So in a [inaudible] mobile, automotive is one where you actually get a fair bit of visibility into the future, in the fall of demand and so what we see is really a combination of offering very compelling solutions to the OEMs and the OEMs all have aggressive fuel economy and CO2 emission standards they need to meet. 100% of our automotive solution helps them to do that and it concentrated really in just a few areas, in ignition, in direct injection and in electrification of [indiscernible] like power steering.

We also are penetrated in the place that are growing and so it’s a combination both of increased penetration of the solutions that we have and also growing platforms by being aligned with some green power companies and some Chinese power companies and some of the growing sectors in U.S. and Europe. So it’s a broad-based kind of strength.

Craig Hettenbach – Morgan Stanley

Got it. Thanks for that. And my follow-up question on OpEx, good job of controlling OpEx by some revenue upside in the quarter and OpEx kind of generally flattish here in the next quarter. Can you just talk about how you are managing OpEx and really going forward the type of leverage you see in the model on the OpEx line?

Mark S. Frey

Sure. I don’t know how much more I can tell you about managing, we are managing very actively, we are doing a lot of restructuring, you can see that we posted some restructuring expenses, they were about half related to the manufacturing projects, but about the other half was SG&A type activities. There is a lot of churn underneath the surface of our OpEx, so we’re taking it down dramatically in some areas, but we are investing dramatically in some other areas and obviously just trying to keep it at an even keel and growing less than that. So in terms of future leverage I think what we said is whatever revenue growth we are going to grow OpEx less than that when we reach sort of a financial target of about 25% of revenue then we will probably look at growing absolute dollars. I believe this quarter ended up with about 25.8% for total OpEx. So we are happy with the progress that that represents.

Mark S. Thompson

Yes, and we showed really good fall through too, I was really pleased with that. We had 70% fall through essentially in Q2, we hit the midpoint of Q3 guidance, we’re going to drop 100% of incremental sales to EBIT. So that’s a pretty strong leverage.

Craig Hettenbach – Morgan Stanley

Got it. Thanks for that.

Operator

And we’ll go for next question from Christopher Rolland with FBR Capital Markets.

Christopher Rolland – FBR Capital Markets & Co.

Hey guys. Thanks for taking the question and great quarter. So when we look at gross margin at least your guidance for next quarter here and loadings are going down, gross margin is up 100 basis points here. So is this all mix shift here, is that how we should think about it and is that all growth and MC Cubed relative?

Mark S. Frey

Most of the growth is MC Cubed, there is a modest favorable mix shift, but the higher loadings in Q2 are what drives most of the improvement in Q3, as we said the impact of utilization is usually delayed by one quarter.

Christopher Rolland – FBR Capital Markets & Co.

Got it. Okay, yes I do see that okay. And then on the gross margin side just thinking longer term here, I know you are going to talk a lot more about this at your Analyst Day, but previously I think at the end of last year you talked about 200 basis points headwind from the 8-inch fab consolidation, I think you said 100 basis points in the first half of 2014 that headwind would dissipate and then another 100 next year. I guess my first question was is that still on track here, is that what we’re seeing here?

And then secondly longer term I think when we talked way back in the day about some changes in the Korean fab, it was a range of anywhere between 600 basis points for the consolidation here so if we have that 100 basis point wined down of the tailwind in the back of this year plus this Korean fab exiting late 2015 that would put us from 34% to 35% where we are today to probably 40% or above and that’s not even including anything from higher loadings and the accelerating part for the cycle where we are at now. So would you say that of 40% gross margin target leaving 2015 is a fairly reasonable number?

Mark S. Frey

So there is a lot of moving parts and a lot of quarters between now and then, I mean so the comments that we've made are still correct in that what we – the last – second time we estimated this, we said if you took our second half gross margin performance and then added the improvements whenever they wholly manifest themselves, which we range $55 million to $65 million you could add those two and so that will – all other things being equal that will leave a number with somewhere in the high 30s.

Now again, there is a lot of other things around that that could make it better or worse, obviously we could begin for example the estimate demand and some other things like that right, but yes, some numbers are significant higher than our current report, an estimate for the third quarter is correct, but I would be a little cautious in 2015 to have a number that started with a four [ph].

Christopher Rolland – FBR Capital Markets & Co.

Thanks so much.

Operator

And we will take our next question from Tristan Gerra with Robert W. Baird.

Tristan Gerra – Robert W. Baird & Co.

Hi good morning. Could you concise the tight control of inventory that you are describing and the stable lead times, typically I don’t know companies raise internal inventories if they want to control lead times. So the question is, is 85-days a level of internal inventory that you think is appropriate to pursue this strategy of keeping lead times short and do you expect industry lead times to continue expanding in Q3?

Mark S. Frey

So two parts to you. As Mark commented earlier, our first guiding principle around inventory levels is customer services, so we are always running an iterative loop about what our service levels or how much inventory do we have. And so we think some of the most stable lead times in the industry and that leaves us comfortable with our overall inventory levels and so but again we will always be in a continuous improvement mode and we’ll update you if we think the numbers will start to shift one way or another. Right now, we like the levels that they are at and plan to manage them at that level.

I really – its very difficult to call what other company’s lead times are likely to do in the present environment, certainly the things that we hear and that we read from some analysts reports is that lead times are extending and ours are not. So we’ve done a lot of work on our supply chain to keep our lead time short and in period of better customer service opportunities to pick share and having a stable in income statement as possible.

Tristan Gerra – Robert W. Baird & Co.

Okay that is good. And then could you give us an estimate of your percentage exposure to the China cell phone market that you expecting the second half as you ramp some of the design wins that you have mentioned on the call?

Mark S. Frey

So, we haven’t really quantified that but I don’t think it’s far-off as you said the big two are a third – 20% to 30% each and then the balances is with China.

Tristan Gerra – Robert W. Baird & Co.

Okay. Thank you very much.

Operator

And we will take our next question from John Pitzer with Credit Suisse.

John Pitzer – Credit Suisse AG

Yes guys, maybe congratulations on the strong results and thanks for letting me ask the question, maybe just follow on to Tristan’s second question, relative to you’re relative makeup in the handset business. How do you think that’s going to trend kind of over the next 12-months to 24-months? And I would be curious Mark Thompson how you view kind of the longer term growth rate of the handset market for Fairchild?

Mark S. Thompson

So, there is a couple of pieces to it. So our expectation is that unit volume growth in handset will continue to moderate, it was very high for while and it usually happens when the market that’s large and relatively higher penetrated, the growth rates go down. So, we don’t see it going flat any time in foreseeable future, but the overall handset volume will go down. And, we have for long-time moving the directions of trying to be sensitive as possible, to the inevitable huge mix shift effect curve between various handset makers.

And so there is a couple of reasons behind putting a lot of energy into China. A, that’s where a lot of growth is going to come, and there are some very compelling solutions, some very innovative companies now emerging in China that are doing some real great designs and I expect we’ll take share in the China market and probably also take some share in other places, it’s very difficult to call exactly when that will occur and how and so forth, so we really try to position ourselves to be insensitive to however it plays out.

From a commitment to the big two, we remain highly committed to the big two. And have lots of active development work with them for future handset. And finally we expect our overall content per handset on average to go up in places likely adaptive charging and such; there is a lot more silicon going in from the adapter to the batteries to allow larger batteries to be charged faster and our position in that is excellent and so we expect in aggregate our content to increase overtime.

John Pitzer – Credit Suisse AG

Mark that’s helpful and then maybe there is a follow-up for Mark Frey, just going back to the utilization and factory loading question, I’m just kind of curious it sounds like you are characterizing your factory loading moves in the September quarter as kind of normal reaction to kind of the seasonal trends in your business. Can you just remind us how you think about seasonality in to the December quarter and given the strength that we are seeing on the handset side in China and with the guy in Cupertino on new phone builds in the September quarter? Do you think seasonality is exaggerated this year or how you are thinking about it?

Mark S. Frey

I don’t know if seasonality has exaggerated, for our business we used to have a pretty robust Q3, because of computing now as we've reduced our computing content that’s mitigated a little bit, but in terms of our philosophy about the channel in seasonality, we would rather and the robust quarters with really lean inventory, so if we are going to add to the channel, we do it in Q4 and Q1 where end demand tends to take off..

Last year actually we did the opposite and created sort of that boll in fact that you saw in our first quarter and we don’t want those kinds of results. So we are being cautious about keeping the channel sort of on the low end of our normal range, but if we are going to supplement that I would rather do it in the fourth quarter. In terms of internal inventory, we grew it in Q2, because we are responding to the increased demand picture, we closed Q1 a bit leaner than we wanted to be honestly in internal inventory. So we are just tapering in Q3 because we've caught up and we feel that we can respond to the range of revenue opportunities that we are seeing now, but we make that decision every other week as we look and change our build plan. So we are very flexible about being able to adapt that to whatever we see in the market.

John Pitzer – Credit Suisse AG

Helpful. Thanks and congratulations again.

Mark S. Frey

Thanks John.

Operator

(Operator Instructions) And we will go next to Steve Smigie with Raymond James.

Steve Smigie – Raymond James & Associates

Great. Thanks a lot guys. I’ll have my congratulations; I know you are working hard to get the margins up there. Just Mark Thompson, I hope you could comment a little bit on adaptive charging. Can you give a little bit of color? Any feedback from OEMs, in terms of they played with it a little while, they really like it or seen technical challenges or what sort of the impression thus far?

Mark S. Thompson

So Steve, I would say it's a little bit of all of the above. Without a doubt, handset architectures will more or less massively convert to adaptive charging over the next two years let's say, but, there are definitely challenges as any new architecture goes out, there are different issues that arise and different rates of implementation, depending on appetite for risk and so forth. So what we see is everyone is looking at it and a few are about to begin to actually deploy it in the market, but, it will be done in a cautious way and so the ramp is a little bit hard to call, but as I said I expect the market to be primarily converted two years from now and I think commercially it is just about starting now. And so, exactly what the shape of the join between those two is a little hard to call, but I expect a bit more caution in the beginning, once people get confidence in the robustness of the solution, then I think it will grow rapidly.

Steve Smigie – Raymond James & Associates

Great. That's very helpful. And then just a follow-up on handsets, I think people asked this in different ways, but I think there obviously been some color about weakness, major Korean customer out there in the handset side and also some of the big China mobile talking about fewer activations than expected. Are you seeing that in terms of what orders you guys are getting and do typically have initial forecast anyway so that takes a little bit of upside but doesn't really change how you present the opportunity to us?

Mark S. Frey

So, it's a little bit of a different answer for different customers and so I can't really provide a customer specific answer to that. But certainly, we have our own interpretive filter for the demand schedules that we were given typically as forecast by our customers and then we update them rapidly as actual orders come in. So, what I would say is everything that you've read about in some of the big players in terms of finding the things and strength or softness, is reflected in our estimates, already.

Steve Smigie – Raymond James & Associates

Okay. I have to take one last one. Just could you give an update on handset opportunity over 18-months, actually 12-months, but what's going on with MEMS and you talked about dollar content change what other innovations should we expect to see you from guys for the next 18-months to two years?

Mark S. Frey

Steve I’m sorry, your question broke up. Could you please repeat it?

Steve Smigie – Raymond James & Associates

Yes. I was just asking what's your opportunity on the handset over the next couple of years both in terms of MEMS and what other innovations might we see coming from you guys in the handset side?

Mark S. Frey

Sure a couple of those, so I have already commented on the adaptive charging of course and that’s a substantial opportunity for us in terms of content. Everyone keeps going for bigger batteries and everyone wants to reduce the charge time. So that’s a single biggest driver for content growth for us in the coming years. As we commented we aren’t initially going headlong into handset with our MEMS solutions, we see that there are some opportunities in IOT in wearable and other places where we can get basically our – very lower power implementation is rewarded more with good value pricing and so forth. So we are going to be cautious about whether we crash headlong into the actual handset space or basically go into everything else. And so we will provide some more color on that at our Investor Day, but we will see whether we really try to go headlong into a very [indiscernible] space like that.

Steve Smigie – Raymond James & Associates

Okay, great. Thank you very much.

Operator

And we will take our next question from Shawn Harrison with Longbow Research.

Shawn Harrison – Longbow Research

Hi, I echo congratulations as well. two questions this very topics, just if you could comment on the appliance market particularly in China, there has been some negative commentary out of there, I know you highlighted seasonal weakness, but underlying weakness beyond that and then second just looking at the buyback you know you finished up the first $100 million so congratulations there, but thinking about the timing on the second $100 million, I know you said two to four quarters, but what would hold you back given the strong free cash flow this year?

Mark S. Frey

So first the China, so we haven’t seen weakness in the China appliance market, we are pretty broadly penetrated there, you know the designs still continues to favor high efficiency solutions [indiscernible] motors, so it’s not a booming market, but it’s not a retrieving market either and so it’s going to actually turn into an attractive segment there for us and we expect that to continue. So, in terms of the buyback we’re trying to call it $100 million at a time. If you look back at the first half we obviously need some things about our business or had some confidence that we’re going to be producing some really good numbers in the second half. So, we moved aggressively to buy a lot of stocks and that’s paid back essentially for everyone. So, we’ll continue to be adaptive in terms of what we do, so balancing how much we feel we can comfortably afford to return without starting to create incremental risk that’s always the balance.

And so, we think that $100 million with a two to four quarter window to extend it is a good balance based on what we know today, clearly as we've articulated to our buyers we used to return all of our excess cash to shareholders. And so, we want to do that in a measured way and avoid of any incremental risk associated with that. So the numbers in estimates that we putout our reflective of those – that balance of thinking.

Shawn Harrison – Longbow Research

I guess to that just is there minimum level of net cash you would like to maintain going forward or just your net cash anything of that line would help?

Mark S. Frey

So that definitely feeds into the decision as to where – how much to return, because it isn’t – the amount of cash that’s really the – relevant question it’s the location of the amount of cash that’s the relevant question and so as you look out in years you could – if you generate all our cash in the U.S. somehow then we could relatively do more and operate at less cash and if its other places then its harder. So that also is reflected, so middle case is reflected in our estimate and so I think its one of those things that as time goes by we’ll make sure that we provide at least annual estimates for how we are planning to adjust, but clearly we have a lot of confidence in our ability to increase our cash generation in the future and all of our sort of strategic models support that and then anything that is excess we will give back to the shareholders in either share repurchase or dividend.

Shawn Harrison – Longbow Research

Gotcha. Thanks so much, and congratulations again.

Operator

And, we have a follow-up question from Christopher Rolland with FBR Capital Markets.

Christopher Rolland – FBR Capital Markets & Co.

Hey guys, thanks for the follow-up. So, on lead times you guys do have some of the shortest in the business in fact from what I hear and from cases that its less than half of some of your closest competitors out there, but of course this is also an indication of probably your over capacity right now. So when you change your footprint, when you do consolidate will lead times change here, are you targeting a new lead time in terms weeks?

Mark S. Frey

No. The consistent – starting point for all of our sourcing strategies is to take care of our customers and so we would not make our footprint change that eroded our ability to maintain short lead funds, because we know that we’re in cyclical and a volatile business, our customers are in cyclical and volatile business, the architecture of model have to be responsiveness, so we wouldn’t do anything that would detract from that.

And I guess wouldn’t necessarily agree with the suggestion that excess capacity with behind our ability to meet. I think we’ve done some very, very high quality work in terms of how we stage die bank, we have some very good models but we work with our customers down to the part number, we collect point of sale data daily down to the part number. So we have a very highly quality data feed that shows us what is selling and what isn’t and allows us to adjust our production accordingly.

Christopher Rolland – FBR Capital Markets & Co.

Great. Thanks guys.

Operator

And we have a follow-up from Ross Seymore with Deutsche Bank.

Ross Seymore – Deutsche Bank AG

Hi guys. Thanks to letting me ask a follow-up as well. Really quickly Mark you did mentioned about the percentage of cash and where it’s located is being important. Can you remind us what percentage of your cash that you currently hold is onshore versus offshore and then what percentage of cash that you generate generally speaking is onshore versus offshore?

Mark S. Thompson

We’re still about 50% of cash is in the U.S., so we’ve had actually more than about half of our ongoing cash generated is in the U.S. as well that was particularly through last quarter and we’re kind of structured that right, I think as we get in the next year and beyond so that will taper and will begin to generate more overseas and less in U.S. as well, we have strategies to address that and to make sure that we will have the liquidity in the U.S. to continue returning our excess cash.

Ross Seymore – Deutsche Bank AG

And I guess a follow-up to that general topic, just given what you have repurchased this far and not saying anything about what you may or may not do in the third quarter. Given that in any dilution from employ exercising stock option et cetera, any rough estimate on what you think the share count would be in the third quarter?

Mark S. Thompson

A rough estimate would be around another two million shares, one to two million shares that we would pickup. We took about five million out last quarter, so we ended the quarter just 123 million shares.

Christopher Rolland – FBR Capital Markets & Co.

Great, thank you.

Mark S. Frey

Thanks.

Operator

And we also have a follow up from Steve Smigie with Raymond James.

Steve Smigie – Raymond James & Associates

Great, thanks for the opportunity. Just real quickly, can you talk little bit more about your manufacturing, you talked recently about starting to do more outsourcing and just curious how the conversation go with customers on that in terms of qualification so obviously you are ramping new products in factories in Korea, selling some stuff down and then you are also trying to transition to more outsourcing. And so I was just trying to get a sense of how conversation go with the customers in terms of trying to setup timing and say hey well it would take us a year to do this and just how minimal (0:45:43.8) the changes? Thanks.

Mark S. Frey

So we’ve been working on that for a long time and we’re trying to do it in a way that is completely non-disruptive to the customer. So many of our – in fact all of our small customers don’t really have configuration management requirement on things, so if we make a part in one place or another, if it meets the datasheet then its fine. Obviously, our larger customers, the big OEMs all have very strict configuration requirement and part of the reason it can take a long time is that we really avoid crashing into them with request to prequalify and resource.

So as platforms shift, we take that opportunity to introduce new sources as a result of that. Once we qualified multiple sources, none of them have any opinions about whether how we balance production between the qualified sources. So we’ve been doing this in a way that we align our big customer volumes with their own product shifts and they are essentially prequalified as they go into production and so we are doing that to try to absolutely minimize both transition risk and pain to our key customers.

Steve Smigie – Raymond James & Associates

Okay, great thank you.

Operator

And we have no further questions at this time. Mr. Janson, I’ll turn the call back to you for any additional or closing remarks.

Dan Janson

Great well thank you all for joining us and your interest in Fairchild. That concludes our call.

Operator

Thank you and that does conclude today's conference. Thank you for your participation.

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