ON SEMICONDUCTOR CORP quarterly report, Q2 FY2013

ON Semiconductor Corporation — Q2 2013 Form 10-Q

Reporting period: Quarter and six months ended June 28, 2013. The company designs, manufactures, and markets power and signal-management, logic, discrete, and custom semiconductor products across automotive, industrial, communications, computing, consumer, and other end markets. Financial figures below are in millions of dollars except per-share data.

Financial performance and liquidity

Metric	Q2 2013	Q2 2012	Six months 2013	Six months 2012
Revenue	$688.3	$744.8	$1,349.3	$1,489.2
Gross profit / margin	$231.8 / 33.7%	$258.3 / 34.7%	$436.3 / 32.3%	$503.5 / 33.8%
Operating income	$50.9	$26.9	$88.6	$70.5
Net income attributable to ON Semiconductor	$47.7	$6.9	$70.3	$35.1
Diluted EPS	$0.11	$0.02	$0.16	$0.08

For the six months, operating cash flow was $140.4 versus $127.5 a year earlier. Capital expenditures were $84.7 versus $114.7; operating cash flow less these expenditures was $55.7 versus $12.8.
Cash and cash equivalents were $396.1 at June 28, with $182.9 in short-term investments, for combined liquidity of $579.0. Current assets were $1,621.8 and current liabilities $876.6; working capital was $745.2.
Total debt, including current maturities, was $917.6; current maturities were $231.3. Cash and short-term investments less reported debt implies net debt of approximately $338.6. The company had no balance drawn on its $325 million revolving credit facility.
Total assets were $3,241.4 and stockholders’ equity, including non-controlling interest, was $1,465.3. Inventory was $559.7; the six-month provision for excess inventory was $39.9.

Material changes versus comparable periods

Q2 revenue fell $56.5, or about 8%, year over year; six-month revenue declined $139.9, or about 9%. Management attributed the decline to weaker demand and lower average selling prices, with the largest segment decrease in SANYO Semiconductor Products Group.
Average selling prices declined about 7% year over year in both Q2 and the first half; volume and mix decreased about 1% in Q2 and 2% for the first half.
Q2 gross margin declined one percentage point, while operating income rose to $50.9 from $26.9, reflecting lower operating expenses, particularly restructuring charges. Q2 restructuring, impairment, and other expense was $6.1 versus $34.6 a year earlier.
Six-month operating income improved despite lower revenue, partly because restructuring expense was only $0.1 versus $46.1 in the prior-year period. Net income also benefited from lower interest expense and a $0.2 tax benefit versus an $11.3 tax provision.
SANYO segment revenue fell 22% in Q2 and 24% for the first half. Its gross margin declined to 12.8% in Q2 from 16.5%, and to 9.4% for the first half from 17.9%; the segment reported operating losses in both periods.

Outlook, management commentary, and risks

For Q3 2013, management expected revenue of $700–$730, gross margin of 33.8%–35.8%, and average selling prices down approximately 1%–2% from Q2. Q3 backlog represented about 80%–85% of anticipated revenue.
Management said cash from operations, cash on hand, and short-term investments should fund operating and capital needs for at least 12 months. Approximately $362.4 of cash and short-term investments was available in the United States; certain foreign earnings were intended to remain indefinitely reinvested and may not be readily available for U.S. needs.
Remaining-2013 capital expenditures were projected at approximately $85. Management expected 2013 pension contributions of about $27.4 and approximately $21.7 in payments related to the SANYO voluntary retirement program.
About 500 employees accepted the SANYO voluntary retirement offer; approximately 460 had retired by quarter-end, with the balance expected to retire by year-end. The Aizu facility closure was substantially completed. A $21.0 cumulative foreign-currency translation gain related to Aizu was recognized as a restructuring benefit during the first half.
Q2 included $8.5 of business-interruption insurance income related to the 2011 Thailand floods, recorded as a reduction of cost of revenues; $13.5 was recognized in the first half. The first-half tax benefit also included reversal of $6.0 of foreign-subsidiary deferred-tax valuation allowances.
The company exchanged $60.0 principal of 2.625% Notes for $58.5 principal of Series B notes, extending the earliest put date for the exchanged amount from December 2013 to December 2016; it recorded a $3.1 loss. It also paid $77.5 to settle conversion of the 1.875% Notes and repurchased approximately 1.5 million shares for $12.1 in Q2.
Key risks include semiconductor cyclicality, weak demand and pricing pressure, customer inventory and order changes, foreign-exchange exposure, manufacturing and supply constraints, restructuring execution, substantial leverage and debt covenants, and product, litigation, and environmental liabilities. Management reported no material change to previously disclosed risk factors and said ordinary-course legal matters were not expected to have a material effect, while noting adverse litigation outcomes could be material.

Most important facts for investors to verify

Whether Q3 revenue and gross-margin guidance was achieved, and how actual pricing and backlog converted into sales.
Whether SANYO’s revenue and margins stabilized after the substantial year-over-year declines, and whether restructuring produces sustainable savings.
Inventory quality and reserve levels, including the $39.9 first-half excess-inventory provision, and the sustainability of cash generation after capital spending.
Debt maturities and refinancing or put-option exposure, including the notes’ expected maturity schedule and the company’s U.S.-accessible liquidity.
The recurring contribution of Thailand flood insurance proceeds, the Aizu translation gain, tax-allowance reversals, and other unusual items to reported earnings.
Progress and final costs of the SANYO retirement program and Aizu closure, along with pension funding needs and any developments in legal or environmental contingencies.