ON Semiconductor Corporation — Q1 2015 Form 10-Q
Reporting period: Thirteen weeks ended April 3, 2015; comparative quarter ended March 28, 2014. The periods contained 93 and 87 days, respectively. Financial statements are unaudited. Dollar amounts are in millions except per-share data.
Business context
ON Semiconductor supplies analog, digital and mixed-signal integrated circuits, standard products, image sensors and custom devices to automotive, communications, computing, consumer, industrial and other markets. It reported four segments: Application Products, Standard Products, Image Sensor and System Solutions. Q1 2015 results include Aptina and Truesense, acquired in 2014.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $870.8 | $706.5 |
| Gross profit / margin | $300.4 / 34.5% | $248.2 / 35.1% |
| Operating income / margin | $68.4 / 7.9% | $70.7 / 10.0% |
| Net income attributable to ON Semiconductor | $55.1 | $55.7 |
| Diluted EPS | $0.13 | $0.13 |
| Operating cash flow | $83.5 | $74.9 |
| Capital expenditures | $64.8 | $47.7 |
Revenue increased 23% year over year, principally reflecting approximately $154.8 million of additional Image Sensor Group revenue from Aptina and Truesense, alongside improved demand and favorable volume and mix. Management also reported a 7% decline in average selling prices. The longer current-year quarter affects comparability.
Gross profit grew 21%, but gross margin declined 0.6 percentage points, mainly because image sensors represented a larger share of sales and had lower margins. Operating income fell despite higher revenue, as operating expenses rose to $232.0 million from $177.5 million. The increase included higher acquisition-related amortization ($33.9 million versus $8.2 million) and acquired-business costs. Net income attributable to the company was nearly flat.
Operating cash flow less cash capital expenditures was approximately $18.7 million, compared with $27.2 million a year earlier. Cash and cash equivalents were $428.1 million at quarter-end, down from $511.7 million at year-end; short-term investments were $1.3 million. Working capital was $745.2 million. Total debt, including current maturities, was $1,162.8 million, comprising $212.6 million current and $950.2 million long-term. The reported cash and short-term investments balance was $429.4 million; simple net debt was approximately $733.4 million.
Material changes and capital allocation
- Image Sensor Group revenue was $170.5 million versus $11.9 million, reflecting the acquisitions. Standard Products revenue rose about 4%; Application Products and System Solutions each declined about 1%.
- The company repurchased 8.6 million shares for approximately $97.0 million, at a weighted-average $11.20 per share. Approximately $879.2 million remained authorized under the program.
- Capital expenditures increased year over year. Management projected $190–$200 million of capital expenditures for the remainder of 2015.
- On May 1, 2015, the company entered into an expanded $1.0 billion, five-year senior revolving credit facility, replacing the existing $800 million facility.
Outlook, risks and unusual items
For Q2 2015, management forecast revenue of approximately $876–$916 million and gross margin of 34%–36%. Backlog represented approximately 80%–85% of expected Q2 revenue. WSTS projected approximately 3% compound annual growth in the company’s serviceable addressable market for 2015–2017; the filing notes this is a third-party estimate, not company guidance.
Management said cash, operating cash flow and available financing should fund operating and capital needs for at least 12 months. However, only approximately $148.8 million of cash and short-term investments was available within the United States; certain foreign earnings were intended to remain invested abroad. The company cited semiconductor cyclicality, demand and pricing pressure, customer and distributor inventory changes, manufacturing costs and yields, supply-chain risks, acquisition integration, leverage and currency movements among factors that could affect results. A 50-basis-point increase in rates was estimated to add about $3.6 million to annual interest expense; a hypothetical 10% currency-rate change could affect quarterly pretax income by approximately $16.4 million before hedges or correlated activities.
The company disclosed a patent-infringement lawsuit concerning CMOS image sensor products acquired with Aptina; it disputes the allegations and could not estimate a possible loss range. Management did not believe ordinary-course legal matters or listed environmental matters would have a material effect, while noting litigation outcomes remain uncertain. Q1 restructuring and other items produced a net $2.3 million benefit, including a $3.4 million gain related to the KSS facility that partly offset restructuring charges. The company also disclosed that prior-period financial statements had been revised for identified errors, which it determined were not material to prior periods. Aptina’s systems and controls were still being integrated, with completion expected by December 31, 2015; disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of reported revenue growth and future performance is attributable to acquisitions, and how organic demand, product mix and declining average selling prices develop.
- Whether the forecast margin range is achieved, given the lower-margin Image Sensor mix and higher operating expenses and amortization.
- Cash conversion, inventory levels and capital spending, including the effect of working-capital demands on liquidity and share repurchases.
- Debt maturities, covenant compliance and access to cash held outside the United States; confirm the expanded revolving facility’s terms and availability.
- Developments in the Collabo patent litigation, restructuring plans, acquisition integration and the previously disclosed financial-statement revisions.