ON Semiconductor Corporation (onsemi) — Q3 2022 Form 10-Q
Business context and period: The company designs and manufactures intelligent power and sensing solutions, with operations reported in Power Solutions Group (PSG), Advanced Solutions Group (ASG), and Intelligent Sensing Group (ISG). This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $2,192.6 million | $1,742.1 million | $6,222.6 million | $4,893.7 million |
| Gross profit | $1,058.3 million | $720.8 million | $3,056.7 million | $1,882.1 million |
| Gross margin | 48.3% | 41.4% | 49.1% | 38.5% |
| Operating income | $424.5 million | $399.2 million | $1,655.7 million | $807.3 million |
| Net income attributable to onsemi | $311.9 million | $309.7 million | $1,297.9 million | $583.7 million |
| Diluted EPS | $0.70 | $0.70 | $2.90 | $1.32 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $1,901.8 million | $1,155.4 million |
| Capital expenditures | Not presented separately for the quarter | Not presented separately for the quarter | $663.0 million | $275.0 million |
- Q3 revenue rose approximately 26% year over year; gross profit increased approximately 47%. Management attributed margin expansion to higher sales, especially in automotive and industrial markets, favorable product mix, and pricing actions.
- Q3 revenue by segment: PSG $1,116.1 million, ASG $734.3 million, and ISG $342.2 million. ISG revenue grew approximately 45% year over year; PSG and ASG grew approximately 25% and 20%, respectively.
- Q3 operating expenses included $271.8 million of goodwill and intangible-asset impairment and $40.3 million of restructuring, asset impairments and other costs. Despite higher operating income, Q3 net income was nearly unchanged year over year; the filing cites impairment-related tax effects and a higher effective tax rate of 23.3%, versus 16.6%.
- For the first nine months, revenue increased approximately 27%, operating income more than doubled, and net income attributable to onsemi increased to $1,297.9 million. Nine-month impairment charges were $386.8 million.
- At September 30, cash and cash equivalents were $2,450.2 million; current assets were $5,309.4 million and current liabilities $1,761.0 million. Total debt, net of discounts and issuance costs, was $3,211.8 million, including $165.3 million current. The company reported approximately $1.5 billion available on its revolving credit facility and compliance with debt covenants.
- Nine-month operating cash flow less reported capital expenditures was approximately $1,238.8 million, a simple calculation from the filing figures. Inventory was $1,575.4 million, up from $1,379.5 million at year-end 2021.
Material changes and notable items
- The QCS division, associated with legacy Quantenna and less than 3% of 2021 consolidated revenue, was approved for wind-down in September. The company recorded $271.8 million of Q3 goodwill and intangible impairments, plus restructuring and exit-related charges; approximately 330 employees were notified of termination.
- Onsemi divested manufacturing facilities in Belgium and South Portland, Maine, and its non-strategic GTAT Sapphire business. It agreed to sell the Pocatello, Idaho facility for approximately $80 million; the sale closed October 14, 2022. The planned sale of the Niigata, Japan facility remained subject to regulatory approvals and closing conditions. The company said supply agreements with buyers of the Belgium and Maine facilities help maintain customer supply.
- The company reported $14.1 billion of remaining performance obligations under multi-year supply agreements, excluding contracts with durations of one year or less; approximately 31% was expected to be recognized as revenue over the next 12 months, subject to shipment and other conditions. One distributor contributed approximately 12% of Q3 revenue.
- Share repurchases totaled $80.1 million in Q3 and $169.8 million for the first nine months. Approximately $1.126 billion remained authorized under the repurchase program at quarter-end, which was scheduled to run through December 31, 2022.
Outlook, risks and contingencies
- Management provided no specific revenue or earnings guidance in the supplied filing text. It said cash, operating cash generation, and revolving-credit availability should meet working-capital and other needs for at least the next 12 months.
- Management’s strategy emphasizes margin expansion and growth in automotive and industrial markets, investment in higher-margin products, longer-term customer supply arrangements, and a transition toward a lighter internal-fabrication model. It cautioned that strategy execution may result in additional accounting charges.
- Risk factors include economic downturns, inflation and higher interest rates, semiconductor demand and pricing volatility, supply-chain or manufacturing disruptions, and COVID-19-related impacts. Management also noted potential effects from the CHIPS Act and Inflation Reduction Act were still under evaluation.
- The company disclosed ordinary-course litigation and intellectual-property claims, but said it did not believe pending or threatened legal proceedings were reasonably expected to materially adversely affect its financial condition, results, or liquidity. It cannot assure favorable outcomes. The company also noted an IRS examination of 2017 and 2018 tax years and that $62.5 million of uncertain tax positions could be reduced within 12 months.
Investor verification priorities
- Check the drivers and durability of the unusually strong revenue and gross-margin growth, including automotive and industrial demand, pricing, product mix, and customer order commitments.
- Assess QCS wind-down execution, impairment assumptions, remaining exit costs, and any further restructuring or portfolio-related charges.
- Track inventory growth, capital spending, cash conversion, and the effect of planned facility divestitures on manufacturing capacity and supply arrangements.
- Review debt maturities and interest-rate exposure, including the $155.1 million principal balance of 1.625% convertible notes classified as current and eligible for conversion during Q4 2022.
- Monitor tax effects, pending facility-sale approvals and closing conditions, and the expiration of the share-repurchase authorization.