ON Semiconductor Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter ended July 2, 2021; comparisons are with the quarter ended July 3, 2020. Six-month results compare periods ended July 2, 2021 and July 3, 2020. Amounts are in millions of dollars except per-share data.
Business context and reporting period
ON Semiconductor supplies power, analog, connectivity, sensing and other semiconductor products to automotive, industrial, communications, computing and consumer markets. Its reportable segments are Power Solutions Group (PSG), Advanced Solutions Group (ASG) and Intelligent Sensing Group (ISG). Management’s stated priorities include growing focused end markets, improving gross margins, streamlining operations and shifting toward a lighter internal-fabrication model.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $1,669.9 | $1,213.5 | $3,151.6 | $2,491.4 |
| Gross profit | $640.1 | $374.3 | $1,161.3 | $777.0 |
| Gross margin | 38.3% | 30.8% | 36.8% | 31.2% |
| Operating income | $282.2 | $43.1 | $408.1 | $61.7 |
| Net income attributable to ON Semiconductor | $184.1 | $(1.4) | $274.0 | $(15.4) |
| Diluted EPS | $0.42 | $0.00 | $0.62 | $(0.04) |
| Operating cash flow | Not separately provided | Not separately provided | $706.5 | $320.5 |
| Capital expenditures | Not separately provided | Not separately provided | $181.8 | $205.6 |
Q2 revenue rose 38% year over year and gross profit increased 71%. For the first half, revenue increased 26.5% and gross profit increased 49%. Management attributed higher revenue to stronger demand, including automotive, improved selling prices and the absence of prior-year pandemic-related factory constraints. Higher sales volume, utilization and product mix, along with approximately $13 million of prior-year under-absorbed factory costs, contributed to Q2 gross-margin expansion.
Q2 segment revenue was PSG $846.6, ASG $607.6 and ISG $215.7. A distributor accounted for approximately 14% of Q2 revenue and 12% of first-half revenue.
Liquidity, debt and balance sheet
- At July 2, 2021, cash and cash equivalents were $1,091.1; total current assets were $3,229.9 and current liabilities were $1,455.1.
- Gross debt, including current maturities, was $3,313.9; net carrying debt was $3,108.4. The company reported approximately $1.97 billion available under its revolving credit facility and said it was in compliance with debt covenants.
- During Q2, ON Semiconductor issued $805.0 of 0% convertible notes due 2027, repurchased or exchanged $372.4 of 1.625% notes, and repaid the remaining $550.0 revolving-credit balance. The transactions resulted in a $26.2 loss on debt refinancing and prepayment.
- First-half operating cash flow was $706.5, up from $320.5, primarily reflecting higher net income and working-capital management. Cash used in financing activities was $516.7, including debt repayments and the cost of note hedges; cash used in investing activities was $178.0.
- Inventory was $1,309.3, up from $1,251.4 at year-end. First-half working capital, including cash and the current portion of debt, was $1,774.8.
Outlook, commentary and risks
- The filing provides no specific revenue or earnings guidance. Management expected second-half 2021 capital expenditures to equal 10%–11% of revenue for that period, corresponding to 8%–9% on an annualized basis for 2021, and expected to pay a significant portion of remaining severance obligations in the second half.
- The company said substantially all global manufacturing sites were operating, but warned that COVID-19 outbreaks or government restrictions could disrupt or curtail production. Management also identified demand shifts, supply-chain constraints, pricing pressure, manufacturing utilization and execution of restructuring as factors that could affect results and cash flows.
- The 2021 involuntary separation program covered approximately 720 employees and generated about $55.0 of severance and related charges in the first half; $31.5 remained accrued at July 2. Management did not anticipate further terminations under that program but noted additional efficiencies could lead to future charges.
- The 0% notes and associated warrants create potential dilution; the filing estimates up to 21.7 million shares related to note conversion and up to 30.4 million shares related to warrants, subject to their terms. The company expects adoption of a convertible-instrument accounting standard in 2022 to lower fiscal 2022 interest expense by approximately $29.0 million while increasing diluted shares by an estimated 9.8 million versus fiscal 2021.
- Other exposures include foreign-exchange movements, interest-rate changes, customer concentration, tax examinations and uncertain tax positions, intellectual-property claims, product-liability matters and conflict-minerals compliance. Management reported no pending or threatened legal proceeding it believed would likely have a material adverse effect.
Most important facts for investors to verify
- Whether strong demand, pricing and gross-margin gains persisted beyond the reported quarter, particularly given supply-chain and pandemic-related uncertainties.
- How much of the revenue and cash-flow improvement reflects durable demand and operating performance versus the comparison with pandemic-affected 2020 results.
- The remaining convertible-note and warrant dilution exposure, conversion conditions and effects of the debt transactions on future interest expense and cash requirements.
- Whether inventory growth, planned capital spending and remaining restructuring payments affect liquidity or operating cash generation.
- Any subsequent changes in major-customer concentration, tax matters, litigation or other contingencies.