ON Semiconductor Corporation — Q1 2021 Form 10-Q
Reporting period: 13-week quarter ended April 2, 2021; comparison is with the quarter ended April 3, 2020, which contained 94 days. ON Semiconductor designs and manufactures semiconductor products across Power Solutions Group (PSG), Advanced Solutions Group (ASG), and Intelligent Sensing Group (ISG), serving automotive, industrial, communications, computing, and consumer markets.
Financial performance
- Revenue: $1.482 billion, up 16% from $1.278 billion. Shipments were approximately 17.5 billion units, up about 14% year over year.
- Segments: PSG revenue was $747.0 million (+20%); ASG $531.5 million (+14%); ISG $203.2 million (+9%). Segment gross margins were 33.0%, 38.9%, and 33.4%, respectively.
- Gross profit and margin: $521.2 million, up 29%; gross margin increased to 35.2% from 31.5%.
- Operating income: $125.9 million versus $18.6 million. Operating expenses were $395.3 million versus $384.1 million.
- Net income attributable to ON Semiconductor: $89.9 million, or $0.22 basic and $0.20 diluted per share, compared with a $14.0 million loss, or $0.03 loss per share, a year earlier.
- Cash flow: Operating cash flow was $218.5 million versus $166.0 million. Capital expenditures were $77.0 million versus $132.3 million; operating cash flow less capital expenditures was $141.5 million (calculated). Cash and cash equivalents were $1.043 billion at April 2, 2021, down from $1.081 billion at year-end 2020. Cash, cash equivalents, and restricted cash reported in the cash flow statement totaled $1.044 billion.
- Liquidity: Current assets were $3.188 billion and current liabilities $1.730 billion. The company reported $1.419 billion available under its revolving credit facility.
- Debt: Gross debt, including current maturities, was $3.435 billion; net carrying debt was $3.344 billion. The company repaid $150 million on its revolver during the quarter and reported compliance with debt covenants.
- Balance sheet: Total assets were $8.630 billion and stockholders’ equity was $3.650 billion at April 2, 2021.
Material changes and notable items
- Revenue increased across all three segments. Management cited stronger demand and improved economic conditions, including recovery in automotive, as well as fewer COVID-related factory-capacity and supply-chain disruptions than in Q1 2020.
- Higher sales volume, utilization, and product mix supported margin expansion. The prior-year quarter included approximately $20 million of under-absorbed fixed manufacturing overhead costs related primarily to the pandemic.
- Restructuring, asset impairment, and other charges were $42.5 million, including $33.0 million for a new involuntary separation program. The company expects to terminate approximately 740 employees and incur total severance and related costs of $58–$62 million; remaining notifications and charges were expected in Q2 2021.
- There were no repurchases under the announced share repurchase program in Q1 2021. Approximately half of warrants related to the 1.00% Notes were exercised during the quarter, settled by issuing 6.3 million shares; the remaining warrants were exercised after quarter-end.
- The $575 million principal amount of 1.625% convertible notes was classified as current debt. Holders had a conversion right during the calendar quarter ending June 30, 2021, subject to the indenture terms.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided in the supplied filing text. Management said it expected capital expenditures of approximately 7%–8% of annual revenue for the remainder of 2021.
- Strategy priorities include expanding gross margin, focusing investment on higher-growth and higher-margin products and end markets, moving toward a lighter internal fabrication model, and rationalizing the manufacturing footprint.
- COVID-19 remained a source of uncertainty for demand, supply chains, and factory operations. All global manufacturing sites were operating at the reporting date, but future curtailments or closures were possible.
- Risks include demand and pricing changes, manufacturing capacity and execution, restructuring impacts, access to financing, and foreign-exchange and interest-rate movements. The filing estimated that a 50-basis-point rate increase could raise annual interest expense by about $4.3 million; a hypothetical 10% currency-rate change could affect pretax income by approximately $34.3 million before offsets.
- One distributor accounted for approximately 10.6% of Q1 revenue. The company reported ordinary-course legal and IP matters but said it did not believe pending or threatened proceedings would reasonably be expected to materially adversely affect its financial condition, results, or liquidity. It cautioned that litigation outcomes are uncertain.
- The company planned to adopt ASU 2020-06 on January 1, 2022 and expected lower interest expense but greater dilution from convertible notes in diluted EPS.
Key facts for investors to verify
- Whether Q1 revenue and margin improvement persist, particularly as the prior-year comparison included pandemic-related factory disruption and approximately $20 million of under-absorbed overhead.
- Progress and final costs of the employee separation program, including the expected Q2 cash payments.
- Working-capital needs and inventory growth: inventories rose to $1.296 billion from $1.251 billion at year-end 2020.
- Debt repayment capacity, the current classification and conversion terms of the 1.625% Notes, and continued covenant compliance.
- Customer concentration, COVID-19 and supply-chain exposure, and the effects of currency and interest-rate movements.