ON Semiconductor Corporation (onsemi) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended July 1, 2022. The quarter comprised 13 weeks. Financial statements are unaudited; amounts below are in U.S. dollars.
Business context and results
onsemi supplies intelligent power and sensing products through its Power Solutions Group (PSG), Advanced Solutions Group (ASG) and Intelligent Sensing Group (ISG). Management emphasized higher-margin automotive and industrial markets, product-mix improvement, margin expansion and a lighter internal-fabrication model.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $2,085.0m | $1,669.9m | $4,030.0m | $3,151.6m |
| Gross profit | $1,037.1m | $640.1m | $1,998.4m | $1,161.3m |
| Gross margin | 49.7% | 38.3% | 49.6% | 36.8% |
| Operating income | $584.0m | $282.2m | $1,231.2m | $408.1m |
| Net income attributable to onsemi | $455.8m | $184.1m | $986.0m | $274.0m |
| Diluted EPS | $1.02 | $0.42 | $2.20 | $0.62 |
Financial position, cash flow and liquidity
- Q2 revenue grew 25% year over year; six-month revenue grew 28%. Segment Q2 revenue was PSG $1,057.0m (+25%), ASG $716.7m (+18%) and ISG $311.3m (+44%). Management attributed growth and margin gains to strong demand, higher average selling prices, favorable mix and manufacturing efficiencies.
- Q2 operating margin was approximately 28.0%, compared with 16.9% a year earlier; net margin was approximately 21.9%, compared with 11.0%. Results include a $115.0m goodwill impairment charge.
- For the first six months, operating cash flow was $899.4m, versus $706.5m. Capital expenditure cash payments were $391.9m, versus $181.8m; operating cash flow less those payments was $507.5m, versus $524.7m. Receivables and inventory used $344.4m and $184.5m of cash, respectively.
- Cash and cash equivalents were $1,791.6m at July 1, 2022, up from $1,352.6m at year-end 2021. Current assets were $4,785.3m and current liabilities $1,713.3m.
- Net long-term debt, including current maturities, was $3,212.6m; cash was $1,791.6m. The company had approximately $1.5bn available under its revolving credit facility and was in compliance with debt covenants. It borrowed $500m on the revolver and used the proceeds to prepay the same amount of Term Loan B debt.
Material changes, outlook and risks
- Q2 goodwill impairment of $115.0m related to an ASG reporting unit representing less than 3% of 2021 consolidated revenue, following a strategic product-mix shift and an expectation the unit may be sold or disposed of. Further impairment is possible if disposal steps proceed or the unit’s outlook deteriorates.
- The company sold its Belgium and South Portland manufacturing facilities for approximately $19.9m and $80.0m, respectively, and divested its GTAT Sapphire business for nominal consideration. Wafer-supply agreements with the facility buyers are intended to support customer supply. Management is exploring other facility sales and cautioned that strategy actions may generate future charges.
- Management expects 2022 capital expenditures to equal 12%–14% of revenue, to expand manufacturing capacity and improve cost structure. It also cited an expected East Fishkill, New York facility acquisition around December 31, 2022. Remaining performance obligations under long-term supply agreements were approximately $8.8bn; about 40% was expected to be recognized as revenue over the next 12 months upon product shipment. These commitments may not translate fully into revenue, including because of supply constraints or contract changes.
- Risks highlighted include economic and semiconductor-market volatility, inflation and higher interest rates, COVID-19 and other disruptions to suppliers, manufacturing and distribution, demand and pricing pressure, and execution of strategy and capacity plans. One distributor contributed about 12% of revenue in Q2 2022.
- Tax provision was $107.4m for Q2, with a 19.0% effective rate; the company said the non-deductible goodwill impairment substantially raised the rate. It noted $64.8m of uncertain tax positions could be reduced within 12 months. Legal matters are described as ordinary-course matters, with no pending or threatened proceedings believed reasonably likely to have a material adverse effect; outcomes remain uncertain.
Most important facts for investors to verify
- Whether demand, pricing, mix and manufacturing efficiencies sustain the large gross-margin improvement, and how results develop across automotive, industrial and other markets.
- Whether the $115.0m impairment is isolated or followed by further impairment or disposal-related charges.
- Whether the $8.8bn of long-term supply-agreement obligations convert to shipments and revenue as expected, given supply-chain and customer-demand risks.
- Execution and funding of the planned 2022 capital spending and East Fishkill acquisition, alongside cash conversion and working-capital requirements.
- Debt maturities and refinancing needs, including the 2023 convertible notes, and the effect of interest rates and any share repurchases on liquidity.