ON Semiconductor Corporation (onsemi) — Q1 2023 Form 10-Q
Reporting period: Quarter ended March 31, 2023; unaudited. Comparisons are with the quarter ended April 1, 2022, except balance-sheet comparisons, which are with December 31, 2022. onsemi reports three segments: Power Solutions Group (PSG), Advanced Solutions Group (ASG), and Intelligent Sensing Group (ISG).
Financial performance
| Metric | Q1 2023 | Comparable period | Change |
|---|---|---|---|
| Revenue | $1,959.7 million | $1,945.0 million | Up $14.7 million, approximately 1% |
| Gross profit / margin | $917.5 million / 46.8% | $961.3 million / 49.4% | Down $43.8 million; margin down 2.6 percentage points |
| Operating income | $564.9 million | $647.2 million | Down $82.3 million |
| Net income attributable to onsemi | $461.7 million | $530.2 million | Down $68.5 million |
| Diluted EPS | $1.03 | $1.18 | Down $0.15 |
| Operating cash flow | $408.9 million | $478.6 million | Down $69.7 million |
| Capital expenditures | $321.5 million | $173.8 million | Up $147.7 million |
Management attributed lower gross profit and margin primarily to start-up and ramp-up costs at the EFK facility and for new products. The income tax provision was $83.7 million, with a 15.3% effective tax rate, versus $97.1 million and 15.5% a year earlier.
Segments and material changes
- PSG: Revenue rose 3% to $1,012.8 million, mainly reflecting growth in silicon carbide and other high-power automotive solutions; declines in integrated circuits, protection and signal products partly offset the increase.
- ASG: Revenue fell 14% to $592.8 million, driven by lower mobile, computing and cloud sales, including the Quantenna exit, planned product end-of-life and weaker end-market demand. Automotive and industrial solutions increased.
- ISG: Revenue rose 32% to $354.1 million, largely from automotive sensing demand and higher average selling prices.
- Cash and cash equivalents were $2.702 billion at March 31, 2023, down from $2.919 billion at year-end. Total assets were $12.274 billion and total stockholders’ equity was $6.467 billion.
- Inventories increased to $1.815 billion from $1.617 billion at year-end.
- Net debt carrying value, including current maturities, was $3.464 billion. The company had approximately $1.6 billion available under its revolving credit facility and reported compliance with debt covenants.
Liquidity, capital allocation and outlook
Cash used in investing activities was $562.0 million, reflecting $321.5 million of capital expenditures and the $236.3 million final payment for the EFK acquisition. Management expects 2023 capital expenditures to be approximately 18%–20% of revenue, citing silicon carbide and facility expansion investments. Management stated that cash, operating cash generation and revolver availability should be adequate for working capital and other needs for at least the next 12 months.
Remaining performance obligations were approximately $17.6 billion at March 31, 2023, excluding contracts with an original duration of one year or less; the company expects to recognize approximately 33% as revenue over the next 12 months. These estimates are subject to manufacturing and supply-chain constraints, customer agreement changes and other factors. The filing provides no clear revenue or earnings guidance for the next quarter.
In February, onsemi issued $1.5 billion of 0.50% convertible notes due 2029. Proceeds were used in part to repay the $1.086 billion Term Loan B balance; the financing also involved convertible note hedges and warrant sales. The company repaid $125 million under its revolving credit facility and repurchased $104.0 million of common stock in Q1 under a $3.0 billion authorization extending through December 31, 2025.
Restructuring, risks and contingencies
- The Q1 business realignment included approximately 400 planned job eliminations, primarily in ASG and IT, and $41.4 million of related charges. The company expected another $1.5 million of charges during the remainder of 2023; 137 employees had been terminated by March 31. Management noted that further efficiency actions and related charges remain possible.
- Q1 restructuring, asset impairment and other charges totaled $51.5 million, compared with a $13.0 million credit in the prior-year quarter. The 2023 total included $36.1 million of restructuring charges and $12.7 million of asset impairments.
- The $926.2 million current portion of long-term debt includes convertible notes classified as current because holders had conversion rights during the quarter ending June 30, 2023. The filing describes the relevant stock-price conditions; this classification is not itself a statement that conversion occurred.
- Uncertain tax positions of $68.2 million could be reduced within 12 months through settlements or statute expirations. The company is under IRS examination for tax years 2017 and 2018; audit outcomes are uncertain.
- The company reported ordinary-course legal matters and intellectual-property claims, but did not believe pending or threatened proceedings would have a material adverse effect based on information then available. It cautioned that litigation outcomes cannot be guaranteed.
- Management identified demand changes, pricing pressure, supply-chain constraints, manufacturing capacity, restructuring execution, capital-market access, interest rates and debt-covenant compliance among potential liquidity risks. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether EFK and other capacity investments ramp successfully and whether startup costs ease enough to support gross-margin recovery.
- Whether the Q1 divergence among segments persists, particularly ASG weakness and PSG/ISG growth, and how market demand and customer product exits evolve.
- Progress toward the 18%–20% 2023 capital-expenditure outlook and the resulting effect on cash generation and liquidity.
- Convertible-note conversion and refinancing exposure, including the $926.2 million current debt classification, and the potential dilution or cash impact of notes, hedges and warrants.
- Execution and costs of the realignment, including any additional severance or impairment charges, and developments in tax audits and other contingencies.