ON Semiconductor Corporation (onsemi) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited. Comparisons are to the quarter and six months ended July 1, 2022, unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
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 describes priorities including growth in automotive and industrial infrastructure, long-term customer supply agreements, manufacturing efficiency, and portfolio rationalization.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $2,094.4m | $2,085.0m | $4,054.1m | $4,030.0m |
| Gross profit / margin | $993.4m / 47.4% | $1,037.1m / 49.7% | $1,910.9m / 47.1% | $1,998.4m / 49.6% |
| Operating income | $674.7m | $584.0m | $1,239.6m | $1,231.2m |
| Net income attributable to onsemi | $576.6m | $455.8m | $1,038.3m | $986.0m |
| Diluted EPS | $1.29 | $1.02 | $2.32 | $2.20 |
| Operating cash flow | Not separately provided | Not separately provided | $799.7m | $899.4m |
| Capital expenditures | Not separately provided | Not separately provided | $752.1m | $391.9m |
Financial position and liquidity
- At June 30, cash and cash equivalents were $2.62bn; total assets were $12.76bn and total stockholders’ equity was $7.00bn. Inventories were $1.96bn, up from $1.62bn at year-end 2022.
- Net debt, including current maturities, was $3.45bn; $912.1m was classified as current. The filing says the 1.625% Notes mature in October 2023 and that conversion conditions also affected the current classification of convertible notes.
- The company entered a new $1.5bn revolving credit facility due 2028, drew $375m, and repaid the prior revolver. Approximately $1.125bn remained available, subject to letters of credit. Debt covenants were in compliance at quarter-end.
- Six-month operating cash flow was $799.7m, down from $899.4m, primarily reflecting higher working-capital needs tied to SiC investment and long-term supply commitments. Cash used in investing was $945.5m, including $752.1m of capital expenditures and the $236.3m final EFK acquisition payment.
- Cash, cash equivalents and restricted cash ended the six months at $2.63bn, down $299.8m from the beginning of the period. The filing states cash, operating cash generation and available revolver capacity are expected to cover requirements for at least 12 months.
Material changes versus prior comparable periods
- Q2 revenue was nearly flat year over year. PSG grew 6% and ISG grew 4%, while ASG declined 9%. Growth drivers included SiC and other automotive power products, and automotive sensing; declines reflected planned product exits and weaker demand in certain product lines.
- Gross margin fell 2.3 percentage points in Q2 and 2.5 points for the first half. Management attributed the decline primarily to start-up and ramp-up costs at the EFK facility and for new products. ASG segment gross margin fell to 46.4% from 53.1% in Q2.
- Q2 operating income increased despite lower gross profit, mainly because the prior-year quarter included a $115m goodwill impairment charge. Q2 2023 had no such charge. First-half operating income was broadly stable.
- First-half net income rose $51.7m. Lower tax provision and higher interest income contributed, while 2023 included a $13.3m debt-prepayment loss and $54.1m of restructuring, asset impairment and other charges.
- Cash capital expenditures nearly doubled year over year in the first half as onsemi invested in SiC manufacturing capacity. Share repurchases totaled $164.1m in the first half; $2.8bn remained under the $3.0bn authorization.
Outlook, management commentary, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects second-half 2023 capital expenditures to remain approximately 19% of revenue.
- Remaining performance obligations under qualifying customer contracts were approximately $20.0bn at June 30; onsemi expects to recognize about 32% as revenue over the next 12 months upon shipment. These estimates may vary with supply constraints, customer agreement changes, product mix and timing.
- Approximately 460 employees were notified of termination under a 2023 business realignment. First-half charges were $44.5m; $27.7m was accrued at June 30, with remaining terminations and payments expected over the next nine months. Further efficiency-related charges may occur.
- Financing activity included issuing $1.5bn of 0.50% convertible notes due 2029 and using proceeds in part to repay the $1.086bn Term Loan B balance. The company also purchased convertible-note hedges and sold warrants; these instruments can affect future dilution and cash obligations.
- Key risks noted include product demand and pricing, supply-chain and manufacturing execution, capital-market access and interest rates, debt-covenant compliance, foreign exchange exposure, and the ability to meet long-term supply commitments. The filing reports no material change in risk factors from the 2022 Form 10-K.
- Management reported no pending or threatened legal proceeding it believes would reasonably be expected to have a material adverse effect, while noting litigation outcomes are uncertain. Tax audits are ongoing; $67m of uncertain tax positions could be reduced within 12 months, but audit outcomes are not assured.
Most important facts for investors to verify
- Whether the EFK and new-product ramp costs ease enough to stabilize or restore gross margins, particularly in ASG.
- SiC capacity investment, capital spending and working-capital requirements relative to cash generation and customer commitments.
- Demand trends in automotive and industrial markets, planned product exits, and concentration: one distributor represented 10.9% of Q2 revenue.
- Near-term convertible-note classification, conversion or settlement outcomes, including the $119.5m 1.625% Notes due October 2023 and the share-price-trigger provisions on convertible notes.
- Execution and cash costs of the restructuring, potential additional charges, and progress toward the stated 12-month liquidity coverage.