National Semiconductor’s Mixed Message
We reported yesterday on National Semiconductor’s (NSM) earnings miss, which was largely driven by the inventory glut we have been Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Second Edition“>warning about. On their conference call, management sent a mixed message on how they are dealing with it.
Now speaking of inventories, during Q2 we did also bring down our own in-house inventories by about $18 million, and we did this by lowering our fab utilization to slightly below 60% for the quarter. And although our gross margin also dipped down to about 59% in Q2, which includes by the way, $6.6 million of stock compensation expense, it is worth noting that this gross margin performance is nearly nine points better than it was the last time our fab utilization dropped 63% back in the fall quarter of calendar 2004.
In Q3, we will continue to run our fabs below 60% utilization in light of the near-term demand environment. We are planning to reduce on-hand inventories again, but not as much as the $18 million reduction that we did in Q2.
Running below capacity will at least mean the inventory does not continue to build right now. But unless end demand picks up, they will have to run below capacity for some time before they reach desirable utilization levels. The thing is, though, they continue to add more capacity.
In Q2, capital expenditures were about $30 million. We are projecting Q3 capital spending to range from $40 million to $45 million, and one of the key projects we are continuing to work on, is converting some of our capacity into Texas fab from 6-inch wafer equipment to 8-inch wafer capacity.
With the company running below 60% capacity utilization, there is hardly a hurry to convert to larger wafers. If anything they should be delaying the capex until… well… they need capacity. Given what has happened during the normally-strong Q3 holiday lead-up, we’re guessing that will be a while.
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