ON Semiconductor Corporation — Q3 2011 Form 10-Q
Business context and reporting period. Unaudited quarter and nine months ended September 30, 2011. ON Semiconductor supplies semiconductor products for automotive, industrial, computing, consumer, communications and other markets. Results include SANYO Semiconductor from January 1, 2011 and Cypress’s CMOS Image Sensor Business Unit from February 27, 2011, so year-over-year revenue comparisons are not on a like-for-like basis.
Key financial results
| Metric | Q3 2011 | Comparable period | Nine months 2011 | Comparable period |
|---|---|---|---|---|
| Revenue | $898.0 million | $600.7 million | $2,674.4 million | $1,734.2 million |
| Gross profit | $261.1 million | $246.5 million | $769.6 million | $718.4 million |
| Gross margin | 29.1% | 41.0% | 28.8% | 41.4% |
| Operating income (loss) | $(6.7) million | $107.7 million | $82.9 million | $293.4 million |
| Net income attributable to ON Semiconductor | $(49.4) million | $87.8 million | $54.1 million | $229.5 million |
| Diluted earnings per share | $(0.11) | $0.20 | $0.12 | $0.52 |
Cash flow and liquidity. For the first nine months, operating cash flow was $380.8 million versus $392.0 million; capital expenditures were $259.3 million versus $145.9 million. Cash and cash equivalents ended the period at $659.3 million, with $178.4 million in short-term investments, or $837.7 million combined. Cash increased $36.0 million from year-end 2010. Working capital was $932.9 million.
Debt and balance sheet. Total debt, including current maturities, was $1,237.0 million; $288.2 million was current and $948.8 million long-term. Total assets were $4,011.9 million and total equity $1,525.7 million. Management stated it expected operating cash flow and available cash to fund operating and capital needs and support debt covenant compliance for at least the next 12 months. The $92.4 million zero-coupon notes due 2024 were classified as current, with a holder put option in April 2012.
Changes and principal drivers
- Revenue rose 49% year over year, primarily reflecting $303.3 million of revenue from acquisitions in the quarter; management also cited 2% higher volume and mix, partly offset by approximately 3% lower average selling prices. Nine-month revenue growth likewise reflected acquisitions, with reported acquisition contribution of $884.0 million.
- Gross margin contracted materially. Management attributed pressure to acquired SANYO operations and acquisition-related inventory step-up and manufacturing costs. Nine-month cost of sales included $53.0 million of acquisition inventory step-up and $80.4 million of non-cash manufacturing expense associated with SANYO.
- Q3 operating expenses included $65.4 million of restructuring, impairment and other charges, including a $61.2 million impairment of the Aizu, Japan wafer facility. The SANYO product group reported a Q3 operating loss of $41.9 million.
- Nine-month earnings included a $58.0 million bargain-purchase gain on SANYO. Accordingly, reported net income was substantially below the prior-year period despite higher revenue.
- The company corrected foreign-exchange accounting errors for Q1 and Q2 2011, revising pre-tax and net income downward by $2.3 million and $6.7 million, respectively. Management concluded the errors were not material; cash flows were unaffected.
Outlook, risks and contingencies
- Q4 2011 guidance: Revenue of $740–$780 million; average selling prices expected to decline approximately 3% from Q3; gross margin of 26%–28%; operating expenses of $195–$205 million, including about $15 million of restructuring and related charges. Guidance includes estimated Thailand flood revenue impacts but excludes unusual or incremental flood-related charges and effects on suppliers, subcontractors and customers.
- Thailand flooding: Subsequent to quarter-end, flooding severely damaged or suspended operations at the Rojana Industrial Park and Bang Pa In facilities. Management estimated approximately $60 million of Q4 revenue impact and a negative effect lasting at least three to four quarters. A preliminary $50–$65 million asset impairment was expected in Q4, and approximately $50 million of incremental capital spending was anticipated. Insurance coverage was stated as up to $50 million for each site, but damage, recovery timing and ultimate proceeds remained uncertain. The company had not yet accessed the principal site and warned that lost records could affect future financial reporting if they could not be recovered or reconstructed.
- Aizu closure: The company planned to close the Aizu wafer facility by the end of Q2 2012 and transfer most production elsewhere. It expected $20–$25 million of cash charges, including severance and other exit costs, beginning in Q4 2011.
- Other risks include semiconductor cyclicality, demand and pricing pressure, integration and restructuring execution, substantial debt and refinancing needs, pension liabilities, supply-chain disruption and foreign-exchange exposure. The company reported $148.3 million of estimated SANYO multiemployer pension withdrawal liabilities and $80.4 million of underfunded pension liabilities in other long-term liabilities.
- Management described ordinary-course litigation as not expected to have a material financial effect based on information available, while acknowledging litigation uncertainty. In the IPO class action, insurers were expected to cover the company’s allocated settlement share; a final objector appeal remained pending.
Most important facts for investors to verify
- Actual Q4 revenue, margins, cash flow and total costs attributable to Thailand flooding, including recovery schedule and insurance collections.
- Whether production transfers offset lost Thai capacity without significant customer cancellations, lost share or further supply disruptions.
- Final impairment, severance and consolidation costs for Thailand and Aizu, and progress on expected operational savings.
- Underlying SANYO profitability after acquisition accounting and integration costs, and the final purchase-price allocation and pension liabilities.
- Debt refinancing or repayment capacity around the 2012 convertible-note put dates, covenant compliance and liquidity after increased capital spending.
- Whether the Q1–Q2 foreign-exchange revisions or the inaccessible Thai operating records require further financial reporting or control changes.