ON Semiconductor Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited results for the quarter ended December 31, 2020. Amounts below are U.S. dollars unless stated otherwise.
Business context and reporting period
ON Semiconductor designs and manufactures semiconductor products through three reportable segments: Power Solutions Group (PSG), Advanced Solutions Group (ASG) and Intelligent Sensing Group (ISG). Its principal end markets include automotive, industrial, communications, consumer and computing. FY2020 results were affected by the COVID-19 pandemic, including weaker customer demand, temporary facility shutdowns, supply shortages and logistics constraints.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $5,255.0 million | $5,517.9 million |
| Gross profit | $1,715.8 million | $1,973.6 million |
| Gross margin | 32.7% | 35.8% |
| Operating income | $348.7 million | $432.7 million |
| Net income attributable to ON Semiconductor | $234.2 million | $211.7 million |
| Diluted earnings per share | $0.56 | $0.51 |
| Cash provided by operating activities | $884.3 million | $694.7 million |
| Capital expenditures | $383.6 million | $534.6 million |
Operating cash flow less capital expenditures was approximately $500.7 million in FY2020. At December 31, 2020, cash and cash equivalents were $1,080.7 million; gross debt was $3,589.5 million and net long-term debt, including current maturities, was $3,491.3 million. The company reported $1,269.0 million available under its revolving credit facility. Total assets were $8,668.0 million and stockholders’ equity was $3,558.1 million.
Fourth-quarter results and material changes
| Quarter ended December 31 | 2020 | 2019 |
|---|---|---|
| Revenue | $1,446.3 million | $1,401.8 million |
| Gross profit, excluding acquisition-related intangible amortization | $497.6 million | $485.7 million |
| Net income attributable to ON Semiconductor | $89.0 million | $56.5 million |
| Diluted EPS | $0.21 | $0.14 |
Quarterly revenue increased about 3.2% year over year. FY2020 revenue fell 4.8%, and gross margin declined 310 basis points, reflecting lower sales volume and average selling prices. Revenue decreased across all three segments: PSG by approximately 7%, ASG by 3% and ISG by 2.5%. Operating income declined year over year, while attributable net income rose, principally because FY2020 included a $59.8 million income tax benefit versus a $62.7 million tax provision in FY2019.
Outlook, management commentary, risks and unusual items
- Management reported a meaningful demand improvement toward year-end, particularly in automotive, but demand remained below pre-pandemic levels. It expected demand volatility to continue while the pandemic and its economic effects persisted; no specific revenue or earnings guidance was provided.
- Management’s strategy emphasizes gross-margin expansion and growth in automotive, industrial and communications infrastructure, with investment directed toward higher-margin, differentiated products. The company is evaluating portfolio and manufacturing changes, including a lighter internal fabrication model and potential sales of facilities in Belgium and Japan.
- Management expected FY2021 capital expenditures of approximately 7%–8% of revenue. The company also expected its cash, operating cash flows and available credit to fund operations, debt repayment and capital needs for at least the next 12 months.
- The FY2020 tax benefit included discrete benefits related to the domestication of certain foreign subsidiaries and a partial release of state deferred-tax valuation allowance. These items materially affected the comparison between net income and operating income.
- Restructuring, asset impairment and other charges were $65.2 million in FY2020, including $17.5 million of asset impairments and costs for employee separation programs. The 2019 comparison included a $169.5 million litigation settlement expense related to Power Integrations; the company paid $175.0 million under the settlement.
- In August 2020, the company issued $700.0 million of 3.875% senior notes due 2028 and used the proceeds to repay revolving-credit borrowings. The 1.00% notes matured in December 2020, requiring $690.0 million cash repayment of principal. The 1.625% convertible notes became eligible for conversion in the first quarter of 2021 under the stated conditions; conversion could require cash or dilute shareholders.
- Material risks include ongoing COVID-19 effects, supply-chain and manufacturing disruption, cyclical end-market demand, customer and distributor concentration, trade restrictions, inventory valuation, competition, foreign-exchange exposure, debt and interest-rate risk, and environmental, tax and intellectual-property contingencies.
Important facts for investors to verify
- Whether demand recovery and gross-margin improvement continued after year-end, and how COVID-19-related supply constraints affected shipments.
- The drivers and durability of FY2020’s tax benefit, including deferred-tax asset realizability and valuation allowances.
- Debt maturities, covenant compliance, revolving-credit availability and the potential cash or dilution effects of convertible-note conversion and outstanding warrants.
- Progress, costs and timing for the planned East Fishkill facility acquisition, and any sale or restructuring of existing fabrication facilities.
- Customer and distributor concentration: one distributor represented approximately 11% of FY2020 revenue, and the five largest customers represented substantial shares of each segment’s revenue.