ON SEMICONDUCTOR CORP quarterly report, Q3 FY2013

ON Semiconductor Corporation — Q3 2013 Form 10-Q

Reporting period: Quarter ended September 27, 2013; nine-month results are compared with the periods ended September 28, 2012. Figures are in millions of dollars except per-share data. The filing describes ON Semiconductor’s semiconductor products and three reporting segments: Application Products, Standard Products, and SANYO Semiconductor Products.

Financial results and liquidity

Metric	Q3 2013	Q3 2012	Nine months 2013	Nine months 2012
Revenue	$715.4	$725.5	$2,064.7	$2,214.7
Gross profit / margin	$249.2 / 34.8%	$238.0 / 32.8%	$685.5 / 33.2%	$741.5 / 33.5%
Operating income	$67.3	$44.6	$155.9	$115.1
Net income attributable to ON Semiconductor	$51.8	$12.5	$122.1	$47.6
Diluted earnings per share	$0.11	$0.03	$0.27	$0.10

Quarterly revenue declined 1.4% year over year, while gross profit rose about 5%; operating income and attributable net income increased substantially. Nine-month revenue fell about 6.8%, but operating income rose about 35% and attributable net income more than doubled.
Quarterly gross margin improved from 32.8% to 34.8%, attributed mainly to better capacity utilization, restructuring savings, currency effects, and product volume and mix. Nine-month gross margin edged down from 33.5% to 33.2%, with weaker SANYO margins and higher inventory reserves among the causes.
Operating cash flow was $200.3 for the first nine months, versus $139.4 a year earlier. Capital expenditures were $135.1, versus $198.8; operating cash flow less capital expenditures was approximately $65.2, compared with negative $59.4 in the prior period.
Cash and cash equivalents were $369.5 and short-term investments $184.1 at quarter-end, totaling $553.6. Total debt, including current maturities and capital leases, was $908.4; current debt was $249.0. The company reported working capital of $767.6 and said available cash, investments, and operating cash flows should cover operating and capital needs for at least 12 months.
Cash declined $117.4 from year-end 2012. Financing uses included $130.3 of long-term debt repayments, $31.3 of capital-lease payments, and $35.8 of stock repurchases.
Interest expense decreased to $9.2 for the quarter and $28.6 for nine months, from $13.6 and $43.4, respectively. The filing attributes the decline to lower average debt and interest rates.

Material changes and operating drivers

Q3 Application Products revenue increased 6% to $269.0 and Standard Products revenue increased 4% to $289.6. SANYO revenue fell 19% to $156.8, reflecting weaker Japanese consumer demand and a weaker yen.
For the first nine months, revenue declined in all segments; SANYO fell 23% to $468.0. Management cited weaker global demand, the Japanese consumer market, yen weakness, and, to a lesser extent, Japan-China political tensions. Average selling prices declined approximately 7% year over year in both the quarter and nine-month period.
Operating expenses for the first nine months decreased to $529.6 from $626.4, helped by lower restructuring charges and cost reductions. Restructuring, impairment, and other charges were $11.1 versus $57.3 in the prior-year period.
First-nine-month results included a $13.5 business-interruption insurance recovery related to the 2011 Thailand floods and a $21.0 foreign-currency translation gain released to income following the Aizu facility closure. The low 3.1% effective tax rate reflected deferred-tax valuation-allowance and foreign tax-reserve reversals; management cautioned that tax rates can be volatile.

Outlook, actions, and risks

For Q4 2013, management estimated revenue of $675–$705, gross margin of 33.8%–34.8%, and average selling prices down approximately 1% sequentially. Backlog represented about 80%–85% of anticipated quarterly revenue. These are estimates, not guarantees.
On October 6, 2013, the company announced closure of the KSS facility by the end of Q2 2014, with production largely transferred to other facilities. Expected cash charges were $11–$16 and anticipated first-year savings about $16 annually thereafter. A $3.9 pension withdrawal liability and $2.9 asset impairment were recorded in Q3.
An additional SANYO voluntary retirement program announced October 7 was expected to reduce employment by approximately 600–700, with cash charges of $40–$48, mostly in Q4 2013, and projected first-year savings of $36–$45.
On October 10, after quarter-end, the company entered an $800 five-year revolving credit facility and borrowed $120; the filing said no specific use had been identified. It also reported borrowing the full $15 available under a Canadian demand line during Q3.
Risks identified include semiconductor cyclicality and demand/pricing pressure, customer and distributor inventory changes, currency movements, production yields and supply continuity, restructuring execution and savings, substantial leverage and debt covenants, litigation, and the possibility that cash held abroad may not be readily available for U.S. needs. Management reported compliance with debt covenants at September 27 and effective disclosure controls.

Important facts for investors to verify

Whether Q4 revenue, gross-margin, and pricing estimates were achieved, and how backlog converted to shipments.
Whether SANYO restructuring and facility closures delivered the stated savings, and whether actual cash charges differed from estimates.
Inventory quality and reserve needs, given the $45.7 excess-inventory provision in the first nine months and SANYO margin pressure.
Cash generation, working-capital movements, and the availability of overseas cash for U.S. obligations.
Debt maturities, revolver usage and covenant headroom; the filing lists $424.6 of expected 2016 maturities, with convertible notes assumed due at their earliest put dates.
Exposure to foreign exchange and interest rates: management estimated a 50-basis-point rate increase would add about $2.0 to annual interest expense, and a hypothetical 10% currency movement could affect pretax income by about $10.3 before hedging offsets.