ON Semiconductor Corporation — Q3 2010 Form 10-Q
Business context and reporting period. The unaudited quarter ended October 1, 2010; comparative quarter ended October 2, 2009. ON Semiconductor supplies power, signal-management, logic, discrete and custom semiconductor products across automotive, computing, communications, industrial, consumer and other markets. Reporting segments are Automotive and Power, Computing and Consumer, Digital and Mixed-Signal, and Standard Products. Results include CMD from January 27 and SDT from June 9, 2010. All amounts below are U.S. dollars unless noted.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $600.7 million | $472.9 million | $1,734.2 million | $1,271.8 million |
| Gross profit / margin | $246.5 million / 41.0% | $175.8 million / 37.2% | $718.4 million / 41.4% | $426.1 million / 33.5% |
| Operating income / margin | $107.7 million / 17.9% | $49.7 million / 10.5% | $293.4 million / 16.9% | $58.8 million / 4.6% |
| Net income attributable to ON Semiconductor | $87.8 million; $0.20 diluted EPS | $29.9 million; $0.07 diluted EPS | $229.5 million; $0.52 diluted EPS | $(7.0) million; $(0.02) diluted EPS |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $392.0 million | $174.6 million |
| Capital expenditures | Not presented quarterly | Not presented quarterly | $145.9 million | $46.3 million |
Cash flow and liquidity. Nine-month investing cash outflow was $190.3 million, including $145.9 million of capital expenditures and $91.1 million for acquisitions, partly offset by $45.5 million of securities proceeds. Financing cash outflow was $165.5 million, including $222.5 million of debt repayment. Cash increased $37.2 million to $562.9 million from year-end 2009. At October 1, current assets were $1,295.7 million and current liabilities $677.2 million; working capital was $618.5 million.
Debt and balance sheet. Total debt, including current maturities and capital leases, was $786.0 million ($135.8 million current; $650.2 million long-term), down from $933.5 million at December 31, 2009. Cash less total debt was approximately $223 million net debt, consistent with management’s reported record-low net debt position. Total assets were $2,694.5 million and total equity $1,302.6 million.
Material changes versus comparable periods
- Q3 revenue rose 27% year over year; nine-month revenue increased 36%. Management attributed growth mainly to higher volume and mix, with acquisitions also contributing. Average selling prices declined about 3% in Q3 and 5% for the nine-month period.
- Q3 gross margin improved 3.8 percentage points year over year; nine-month gross margin improved 7.9 points. Management cited better factory utilization, cost savings and lower acquisition inventory step-up expense, partly offset by pricing pressure.
- All four segments grew in Q3 year over year. Standard Products had the largest Q3 revenue increase by dollars, up $52.6 million; Automotive and Power grew 34%.
- Operating expenses increased $12.7 million in Q3 and $57.7 million for the first nine months, mainly reflecting acquired businesses, ongoing R&D and higher compensation after work furloughs ended. Restructuring and other charges declined to $0.9 million in Q3 from $7.9 million and to $7.0 million for nine months from $25.6 million.
- Nine-month results turned from a $7.0 million attributable loss to $229.5 million of attributable income. Lower interest expense and restructuring charges also supported the comparison.
Outlook, commentary and risks
- Q4 2010 outlook: Revenue of $565–$585 million; gross margin of 40.0%–41.0%; operating expenses of $137–$141 million, including $10 million of amortization, restructuring and other charges. Management expected average selling prices roughly flat sequentially, cash capital expenditures of about $54 million, net interest and other expense of about $18 million, and income tax provision of about $4 million. Beginning-quarter backlog was slightly below Q3’s and covered more than 90% of anticipated Q4 revenue.
- Pending SANYO acquisition: Purchase price is approximately ¥33.0 billion, initially estimated at $366 million; at the October 1 exchange rate it would have been about $394 million. Closing was expected in early Q1 2011, later than previously anticipated, subject to regulatory approvals and other conditions. Management did not expect to need capital markets financing or issue shares, but the dollar cost is exposed to yen appreciation.
- Capital structure: The company reported compliance with debt covenants at October 1 and believed it could remain compliant through October 1, 2011. Convertible notes have holder put dates beginning in 2012, 2012 and 2013, respectively. Management said cash, operating cash flow and existing cash should cover operating and capital needs, including the expected SANYO transaction, for at least 12 months; outcomes could differ from plans.
- Operating and market risks: Management emphasized semiconductor cyclicality, volatile economic conditions, demand and booking changes, pricing and margin pressure, manufacturing yields, raw-material availability, customer concentration and acquisition execution. One customer represented 14% of Q3 revenue and 12% of nine-month revenue. Inventory rose to $350.8 million from $269.9 million at year-end, which management attributed to production needs as demand increased.
- Contingencies and unusual items: The company recorded $0.8 million for settlement of Czech subsidiary litigation and restructuring charges associated with integrating CMD and SDT. The IPO class-action settlement remained subject to appeal; insurers were expected to cover the company’s allocated share. CMD-related shareholder suits were dismissed. Ricoh patent litigation remained on appeal; management expected Synopsys indemnification if damages were assessed. The filing states that other legal and environmental matters were not expected to have a material effect, while acknowledging adverse outcomes could be material.
- Other watch items: Annual goodwill impairment testing was underway for Q4; adverse operating or economic changes could result in non-cash impairment. Domestic deferred tax assets continued to have a full valuation allowance. SDT’s systems and control integration was expected to be completed in the second half of 2011; CMD integration was completed in Q3. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether Q4 revenue and margin guidance was achieved, given slightly lower opening backlog and continued pricing pressure.
- The SANYO closing timetable, final yen-to-dollar purchase cost, approvals, and financing needs.
- Inventory quality and conversion to sales, alongside receivables and distributor inventory/deferred revenue trends.
- Debt maturities and convertible-note put dates, covenant compliance, and the company’s ability to fund the acquisition while maintaining liquidity.
- Q4 goodwill impairment-test results, acquisition integration progress, and the outcomes of pending litigation appeals.
Figures are unaudited. Margins and net debt are calculated from reported amounts where indicated; the filing does not present quarterly cash flow figures.