ON Semiconductor Corporation (onsemi) — Q3 2023 Form 10-Q
Reporting period: Fiscal quarter ended September 29, 2023; comparisons are with the quarter ended September 30, 2022. Nine-month figures cover the periods ended September 29, 2023 and September 30, 2022. Amounts are in U.S. dollars.
Business context
onsemi supplies intelligent power and sensing products, with a strategic focus on automotive and industrial markets. It reports three segments: Power Solutions Group (PSG), Advanced Solutions Group (ASG), and Intelligent Sensing Group (ISG). Management emphasizes profitable growth, SiC and other automotive solutions, long-term supply agreements, and manufacturing efficiencies.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $2,180.8 million | $2,192.6 million | $6,234.9 million | $6,222.6 million |
| Gross profit | $1,030.7 million | $1,058.3 million | $2,941.6 million | $3,056.7 million |
| Gross margin | 47.3% | 48.3% | 47.2% | 49.1% |
| Operating income | $687.0 million | $424.5 million | $1,926.6 million | $1,655.7 million |
| Net income attributable to onsemi | $582.7 million | $311.9 million | $1,621.0 million | $1,297.9 million |
| Diluted EPS | $1.29 | $0.70 | $3.61 | $2.90 |
| Operating cash flow | Not separately provided | Not separately provided | $1,366.3 million | $1,901.8 million |
| Capital expenditures | Not separately provided | Not separately provided | $1,185.1 million | $663.0 million |
Q3 revenue was nearly flat, while gross margin fell 1.0 percentage point. Operating income and net income increased substantially, in part because the prior-year quarter included $271.8 million of goodwill and intangible-asset impairment charges. Nine-month net income also benefited from the absence of prior-year impairment charges. Nine-month operating cash flow declined $535.5 million, primarily from increased working-capital requirements tied to SiC investment and long-term supply commitments.
- Segment trends: Q3 PSG revenue rose about 10% to $1,230.6 million, supported by SiC and other automotive power products. ASG revenue fell about 15% to $621.6 million, and ISG fell about 4% to $328.6 million. ASG gross margin decreased to 45.6% from 52.0%, reflecting lower sales and EFK/foundry costs; PSG margin increased to 48.0% from 45.6%.
- End markets: Q3 automotive revenue was $1,157.8 million versus $873.6 million a year earlier; industrial revenue was nearly unchanged at $615.8 million; other markets declined to $407.2 million from $705.8 million.
- Balance sheet at September 29: Cash and cash equivalents were $2,679.2 million; current assets $6,085.4 million; current liabilities $2,494.8 million. Inventory increased to $2,084.8 million from $1,616.8 million at year-end 2022. Net debt, including current maturities, was $3,454.0 million.
- Debt and liquidity: The company had $3,499.5 million of gross debt, including $912.9 million classified as current, and $1.125 billion of available capacity under its $1.5 billion revolving facility. The 0% Notes were classified as current because of a stock-price conversion trigger; this classification gives holders a conversion right during the quarter ending December 31, 2023. The company repaid the $119.6 million 1.625% Notes on October 16, 2023.
Material changes, outlook and risks
- Q3 gross profit was pressured by lower existing-product revenue and about $30 million of higher EFK manufacturing costs, including startup/ramp and foundry impacts. New-product sales partly offset these pressures. For the first nine months, management cited about $110 million of higher EFK costs and lower gross profit despite growth in new-product sales.
- Nine-month capital spending was $1,185.1 million, about 19% of revenue, primarily for SiC manufacturing capacity. Management expected capital expenditures to remain at approximately 19% of revenue for the remainder of 2023; the filing provides no specific revenue or earnings guidance.
- Operating cash flow was affected by working-capital investment: inventory rose substantially, and nine-month cash used in investing activities was $1,352.7 million. The company said cash, operating cash generation, and revolving-credit availability should meet working-capital and business needs for at least 12 months.
- Long-term supply agreements represented approximately $18.4 billion of estimated remaining performance obligations, excluding contracts originally lasting one year or less. The company expected to recognize about 31% over the next 12 months upon shipment; actual timing and amounts may vary with supply constraints, contract changes, product mix, and other factors.
- In 2023, onsemi announced workforce reductions of about 460 positions in the first half and about 900 positions in Q3. It recorded $54.5 million of charges for the actions; additional terminations and related payments were expected over the following nine months, and further restructuring costs remained possible.
- Other notable items include $25.8 million of higher Q3 general and administrative expense, partly due to IT initiatives and a bad-debt provision on a business-partner receivable; and $13.3 million of nine-month loss on debt prepayment. One distributor contributed approximately 11% of Q3 revenue and 10% of nine-month revenue.
- The company reported compliance with debt covenants and no material changes to the risk factors in its 2022 Form 10-K. It said pending or threatened legal proceedings were not expected to have a material adverse effect, while noting litigation outcomes are uncertain. Tax examinations and uncertain tax positions remain potential sources of adjustments.
Key facts for investors to verify
- Whether demand, product mix, and planned product exits continue to weigh on ASG and ISG, and whether automotive/SiC growth can sustain PSG performance.
- Whether EFK startup, ramp, and foundry costs moderate, and whether expected SiC capacity investment yields targeted growth and returns.
- Inventory levels, working-capital needs, and operating cash generation relative to elevated capital expenditures.
- Conversion and settlement outcomes for the 0% Notes and the completed repayment of the 1.625% Notes, including potential effects on cash, shares, and dilution.
- Execution and costs of workforce reductions, long-term supply agreement shipments, customer concentration, and the business-partner receivable exposure.