ON Semiconductor Corporation — 2010 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2010; fourth-quarter figures are also provided. ON Semiconductor designs, manufactures and sells power-management, signal-management, logic, discrete and custom semiconductor products across automotive, computing, consumer, industrial, communications, medical and other markets. The 2010 results exclude SANYO Semiconductor, acquired on January 1, 2011.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $2,313.4 million | $1,768.9 million |
| Gross profit / margin | $956.0 million / 41.3% | $620.7 million / 35.1% |
| Operating income | $374.2 million | $142.6 million |
| Net income attributable to ON Semiconductor | $290.5 million | $61.0 million |
| Diluted earnings per share | $0.65 | $0.14 |
| Cash provided by operations | $551.8 million | $276.9 million |
| Capital expenditures | $188.9 million | $55.3 million |
- Fourth-quarter revenue was $579.2 million, gross profit was $237.6 million (41.0% margin), attributable net income was $61.0 million and diluted EPS was $0.14.
- Cash and cash equivalents at year-end were $623.3 million; restricted cash was a separate $142.1 million escrow for the SANYO transaction. Current assets were $1,358.0 million and current liabilities $710.9 million. Working capital was $647.1 million, or $23.8 million excluding cash and cash equivalents.
- Total debt was $888.8 million, including $136.0 million current maturities; long-term debt less current portion was $752.8 million. Stockholders’ equity was $1,388.0 million. The company reported $61.4 million of interest expense.
- Operating cash flow less capital expenditures was approximately $362.9 million. Net cash increased $97.6 million during the year.
Material changes versus prior periods
- Annual revenue rose 30.8% from 2009, mainly on higher volume and product mix; volume and mix increased 33.7%, partly offset by a 4.4% decline in average selling prices. Revenue had fallen 13.9% in 2009.
- Gross margin improved 620 basis points year over year. Management cited stronger factory utilization, cost savings and lower acquisition inventory step-up expense, partly offset by price declines.
- All four reporting segments increased revenue in 2010 versus 2009. Standard Products was the largest segment at $773.3 million, followed by Automotive and Power at $546.6 million, Computing and Consumer at $525.6 million, and Digital and Mixed-Signal at $467.9 million.
- Operating cash flow roughly doubled, while capital spending rose substantially. Inventory increased $90.9 million year over year to $360.8 million, which the company attributed to production for expected first-quarter 2011 demand.
- Debt declined from $933.5 million to $888.8 million. The company prepaid $169.8 million of senior bank facilities in May 2010 and ended those facilities, including the undrawn revolver. It retained convertible notes and other borrowings, including notes with holder put dates beginning in 2012.
Outlook, notable items and risks
- First-quarter 2011 guidance, excluding SANYO: revenue of $570–590 million; gross margin of 40.0%–41.0%; operating expenses of $137–141 million; and cash capital expenditures of $70–80 million. Management expected average selling prices to decline 1%–2% sequentially.
- SANYO acquisition: closed January 1, 2011. Stated purchase price was approximately $663 million; consideration, after assumed liabilities and adjustments, was approximately $520 million, including about $142 million cash and a $377.5 million seven-year note payable to SANYO Electric. SANYO was expected to add $260–285 million of first-quarter revenue but generate operating losses, including purchase-accounting and acquisition costs. ON expected restructuring charges of ¥6–7 billion ($74–86 million), largely in first-quarter 2011, and planned Japanese manufacturing consolidation.
- A January 2011 agreement to acquire Cypress Semiconductor’s CMOS Image Sensor Business Unit for $31.4 million was expected to close by the end of the first quarter, subject to customary conditions.
- In 2010, ON recorded $16.1 million of goodwill and intangible-asset impairment related to PulseCore. Goodwill at year-end was $191.2 million. Restructuring, asset impairment and other net charges were $10.5 million.
- Key risks include semiconductor cyclicality, price pressure, fluctuating customer orders and cancellable backlog, manufacturing utilization and yields, raw-material and third-party manufacturing supply, customer concentration, acquisition integration and synergy delivery, leverage and debt repayment, foreign operations, intellectual-property disputes and regulatory matters. Avnet accounted for 13% of 2010 revenue.
- Pending matters include appeals in the IPO securities class-action settlement, for which the company said its allocated share would be paid by insurers; an appeal in the Ricoh patent matter, with Synopsys providing the defense and claimed indemnity; and a stockholder lawsuit concerning the 2010 stock incentive plan. Management stated it did not expect these matters to have a material financial effect, while noting litigation outcomes remain uncertain.
- Management reported effective disclosure controls and internal control over financial reporting at December 31, 2010; the independent auditor gave an unqualified opinion. ON noted that SANYO’s controls would need to be incorporated by December 31, 2012.
Important facts for investors to verify
- Whether the reported 2010 volume-driven revenue and margin recovery can continue despite ongoing average selling price declines and semiconductor-cycle risk.
- Whether SANYO integration, planned site consolidation and restructuring deliver the expected savings, and how its operating losses, financing and cash needs affect consolidated results.
- The company’s post-acquisition debt, cash availability and maturity profile, particularly convertible-note put dates beginning in 2012; the 2010 contractual-obligations table excludes SANYO obligations.
- Whether inventory growth and distributor inventories convert into end-customer sell-through; ON recognizes distributor revenue only when the distributor resells products.
- How much of the first-quarter 2011 outlook is achieved, including SANYO’s incremental contribution, planned capital spending and expected restructuring charges.