ON Semiconductor Corporation — Form 10-Q Summary
Business context and reporting period
ON Semiconductor designs and manufactures semiconductor components for automotive, industrial, communications, computing, consumer and other markets. It reports three segments: Power Solutions Group (PSG), Analog Solutions Group (ASG) and Intelligent Sensing Group (ISG). This unaudited quarterly report covers the 13 weeks ended September 27, 2019, and the nine months then ended; comparisons are with the periods ended September 28, 2018.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,381.8 million | $1,541.7 million | $4,116.1 million | $4,375.2 million |
| Gross profit | $475.2 million | $596.6 million | $1,487.9 million | $1,669.0 million |
| Gross margin | 34.4% | 38.7% | 36.1% | 38.1% |
| Operating income (loss) | $(43.9) million | $241.6 million | $293.8 million | $624.5 million |
| Net income (loss) attributable to ON Semiconductor | $(60.7) million | $166.9 million | $155.2 million | $461.8 million |
| Diluted EPS | $(0.15) | $0.38 | $0.37 | $1.05 |
| Cash from operating activities | Not separately stated | Not separately stated | $603.0 million | $853.2 million |
Q3 revenue fell approximately 10% year over year, and nine-month revenue fell approximately 5.9%. Segment revenue in Q3 was PSG $687.9 million, ASG $508.9 million and ISG $185.0 million. Management attributed the lower gross margin primarily to reduced sales volume, lower average selling prices and $19.0 million of Quantenna acquired-inventory fair-value step-up expense in the quarter. Nine-month gross margin also reflected lower volume and product mix and $19.6 million of Quantenna inventory step-up expense.
For the nine months, capital expenditures were $422.2 million, compared with $382.8 million a year earlier. Cash and cash equivalents were $928.7 million at September 27, 2019, down from $1,069.6 million at December 31, 2018. Total debt carrying value, including current maturities, was $3,615.4 million (gross debt $3,764.6 million); current maturities were $736.6 million and long-term debt was $2,878.8 million. The company classified the net $660.4 million balance of its 1.00% Notes as current because holders may submit them for conversion on or after September 1, 2020. It reported compliance with debt covenants.
Current assets were $3,073.0 million and current liabilities were $2,001.6 million. Management reported working capital of $1,071.4 million including cash and current debt, and said cash, operating cash flows and available revolving credit were expected to cover operating and capital needs for at least 12 months, including the PI settlement payment.
Material changes and unusual items
- On June 19, 2019, ON Semiconductor acquired Quantenna for $1,039.3 million, funded with a $900.0 million revolving-credit draw and cash. Quantenna contributed approximately $44.7 million of revenue and $51.3 million of net loss from acquisition through September 27, including purchase-accounting and restructuring effects. The provisional allocation included $726.7 million of goodwill.
- Q3 operating expenses included a $169.5 million litigation settlement charge. After quarter end, ON Semiconductor and Power Integrations (PI) agreed to settle their outstanding disputes; the company paid PI $175.0 million on October 22, 2019, of which $5.5 million had already been accrued.
- Interest expense rose to $40.7 million in Q3 from $31.2 million, primarily due to higher debt associated with the Quantenna acquisition. Q3 also included a $5.8 million debt-refinancing loss.
- Nine-month restructuring, asset impairment and other charges were $28.1 million, including $15.6 million of post-Quantenna restructuring and $8.4 million of workforce-reduction costs. Management said further Quantenna-related restructuring charges may occur.
- The company recorded a $24.6 million Q3 income tax benefit, including benefits from releases of reserves and interest for uncertain foreign tax positions. The nine-month tax provision was $36.9 million.
Outlook, commentary and risks
Management said geopolitical and macroeconomic factors continued to weigh on semiconductor demand and expected short-term demand for its products could remain adversely affected. It cited automotive, industrial and cloud-power trends as longer-term growth drivers and described efforts to align costs and investment with demand. The filing gives no specific revenue or earnings guidance for the next quarter.
Management expected capital expenditures of approximately 10% to 11% of annual revenue for the remainder of 2019 and 2020, aimed at improving manufacturing cost structure. It also disclosed a pending $400.0 million acquisition of GLOBALFOUNDRIES’ East Fishkill, New York site and related assets, expected to close around December 31, 2022, subject to conditions; $70.0 million had been paid as a deposit and a $30.0 million technology license fee had been recorded as an intangible asset.
Key stated exposures include cyclical and weaker end-market demand, pricing pressure, customer and distributor inventory changes, substantial leverage and debt service, acquisition integration and expected synergies, litigation and IP claims, foreign exchange and interest-rate movements, and supply-chain and manufacturing risks. A 50-basis-point increase in rates was estimated to increase annual interest expense by approximately $7.5 million after swaps. Management reported no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- Whether demand, revenue and margins stabilize after the reported declines, and how results develop across PSG, ASG and ISG.
- The ongoing cash, integration and earnings effects of the Quantenna acquisition, including final purchase-price allocation and potential restructuring costs.
- The cash-flow and balance-sheet effects of the $175.0 million PI settlement and the timing and treatment of related charges.
- Debt maturities, convertible-note conversion or repayment requirements, interest-rate exposure and continued covenant compliance.
- Execution, funding and conditions for the East Fishkill asset purchase, along with the company’s stated capital-expenditure plans.
- Whether tax benefits from uncertain tax positions recur; the Q3 tax benefit included discrete items.