Fourth quarter net sales of $549 million were down 24% sequentially from the third quarter and declined 27% from the fourth quarter of 2007. The fourth quarter net loss, which included a goodwill impairment charge, was $623 million, or $3.40 loss per share, compared to $0.15 income per diluted share in the prior quarter and $0.46 income per diluted share in the fourth quarter of 2007.
The net loss for the fourth quarter and full year 2008 included a $671 million goodwill impairment charge, or $3.67 per share, to write off the entire carrying value of the company’s goodwill. This non-cash charge does not affect the company’s liquidity or cash flows from operating activities. Fourth quarter results also included a $36 million gain on extinguishment of debt and a $17 million net foreign currency gain primarily attributable to the depreciation of the Korean won and the resulting revaluation of the company’s Korean employee benefit plan liability.
Commenting on fourth quarter performance, James Kim, chairman and chief executive officer, said, “Difficult business conditions continue to challenge our industry, our customers and our company. Since early 2008 we have been proactively managing our cost structure while continuing to deliver high quality services and our fourth quarter operating results reflect labor and other cost savings of about $18 million from previously implemented cost reduction programs.”
“In view of the continued downturn in global consumer demand, we implemented further cost reduction measures in the first quarter of 2009 that include lowering executive and other employee compensation, additional reductions in employee and contractor headcount, and shortened work weeks. Our cost reduction initiatives and lower volume are expected to reduce our costs by an additional $22 million in the first quarter,” Kim said.
“Fourth quarter gross margin of 18% was unchanged from the prior quarter,” said Joanne Solomon, chief financial officer. “Gross margin benefited by an estimated $20 million from the strengthening of the U.S. dollar against foreign currencies and a reduction in labor and other costs of $16 million. These benefits were partially offset by the accrual of an additional $12 million for unpaid royalties relating to the final award in the Tessera arbitration issued by the ICC in January 2009.”
Unit shipments in the fourth quarter declined 30% from the prior quarter while sales declined 24% in the same period, reflecting a shift in our mix from traditional leadframe packages to more advanced packages.
Interest expense for the period was $28 million or flat sequentially, after excluding $4 million of interest accrued in the prior quarter for the Tessera arbitration, and was down $2 million from the fourth quarter of 2007. In the fourth quarter of 2008, the company recorded a $36 million gain from the repurchase of $118 million aggregate principal amount of debt due in 2011. To date in 2009, the company repurchased an additional $33 million principal amount of debt due in 2011 and expects to record a related $9 million gain in the first quarter. The aggregate repurchase of $151 million of debt is expected to reduce net interest expense by about $12 million through maturity. The company may from time to time continue to purchase its outstanding notes for cash.
“Capital additions were $32 million for the fourth quarter and $342 million for the full year 2008. Capital additions in the fourth quarter were lower than planned due in part to the deferment of purchases into the first quarter of 2009. After taking into account the deferrals from the fourth quarter, we expect our capital additions for the first quarter of 2009 to be about $40 million. Because of the significantly reduced level of customer demand we are estimating total capital additions for the full year 2009 of about $100 million,” said Solomon.
“While the near term outlook for the semiconductor industry has continued to weaken, our financial position and liquidity remain sound,” added Solomon. “We generated $80 million in free cash flow in the fourth quarter and ended the year with a cash balance of $424 million and total debt of just under $1.5 billion. However, we do not expect to be free cash flow positive in the first quarter of 2009 primarily as a result of $64 million in payments to Tessera and certain employee benefit and separation payments. Other than annual amortizing debt of about $55 million, we have no significant debt due until 2011 when the remaining $289 million of our 2.5% convertible and 7.125% senior notes become due.”
Business Outlook:
Increasing volatility in customer forecasts and limited visibility due to uncertainties in the US and global economies have increased the risk that our actual results may differ from our expectations. Based upon the latest available information, the company has the following expectations for the 2009 first quarter:
Sales down 30% to 38% from the fourth quarter of 2008;
Gross Margin between 5% and negative 2%;
Net Loss in the range of $0.34 to $0.49 per share.
The outlook for gross margin and net loss includes the impact of anticipated charges in the first quarter of 2009 related to employee workforce reductions. The charges to cost of sales for these reductions are expected to be about $6 million. The company’s guidance for first quarter net loss also includes an estimated $9 million gain from debt repurchases to date and the related interest savings.
