ON Semiconductor Corporation — Q3 2020 Form 10-Q
Reporting period: Thirteen-week quarter ended October 2, 2020; nine months ended October 2, 2020. Comparative 2019 nine-month period was six days shorter (270 versus 276 days). Financial amounts below are in millions, except per-share data.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,317.3 | $1,381.8 | $3,808.7 | $4,116.1 |
| Gross profit | $441.2 | $475.2 | $1,218.2 | $1,487.9 |
| Gross margin | 33.5% | 34.4% | 32.0% | 36.1% |
| Operating income (loss) | $119.0 | $(43.9) | $180.7 | $293.8 |
| Net income attributable to ON Semiconductor | $160.6 | $(60.7) | $145.2 | $155.2 |
| Diluted EPS | $0.38 | $(0.15) | $0.35 | $0.37 |
| Cash from operations | Not separately provided | Not separately provided | $483.9 | $603.0 |
| Capital expenditures | Not separately provided | Not separately provided | $267.2 | $422.2 |
Balance sheet and liquidity
- At October 2, cash and cash equivalents were $1,654.0; current assets were $3,812.6 and current liabilities $1,803.1.
- Net long-term debt, including current maturities, was $4,239.2, versus $3,612.5 at year-end 2019; cash less this net debt implies net debt of approximately $2,585.2.
- The $690.0 million 1.00% Notes mature December 1, 2020 and are classified as current debt. The company intends to pay principal on converted notes in cash and settle any excess with net shares; only an insignificant amount had been tendered for conversion as of the filing.
- Approximately $1,200 million was available under the revolving credit facility as of the filing date. The company reported compliance with debt covenants and stated that cash, operating cash flow and available financing should fund operations and obligations for at least the next 12 months.
- Nine-month operating cash flow less cash capital expenditures was approximately $216.7 million in 2020, compared with $180.8 million in 2019; this is a simple calculation, not a company-reported free-cash-flow measure.
Material changes versus prior comparable periods
- Q3 revenue fell $64.5 million, or about 5%; nine-month revenue declined $307.4 million, or 7.5%. All three segments reported lower Q3 and year-to-date revenue. PSG was the largest nine-month segment decline, down about 10%.
- Q3 gross profit fell about 7%, and gross margin was down 0.9 percentage points. For the first nine months, gross profit fell about 18% and margin declined 4.1 percentage points. Management cited weaker volume and pricing, under-absorbed factory overhead, and pandemic-related production disruptions; approximately $33 million of under-absorbed fixed overhead was charged to cost of revenue in the first half.
- Operating income improved from a Q3 2019 loss, largely because the prior-year quarter included a $169.5 million Power Integrations litigation settlement. Nine-month operating income nevertheless declined $113.1 million.
- Q3 attributable net income included substantial discrete tax benefits: $60.4 million from the July 2020 corporate-structure domestication and $49.9 million from releasing state deferred-tax valuation allowances. Accordingly, reported earnings were materially aided by tax items. Nine-month operating cash flow declined $119.1 million, primarily reflecting lower pre-tax income, partly offset by working-capital management and lower variable-compensation payments.
- Cash increased from $894.2 million at December 31, 2019. Long-term debt rose following pandemic-related revolver borrowing and the issuance of $700 million of 3.875% Notes due 2028. The note proceeds and cash were used to repay $1.2 billion of revolver borrowings.
Outlook, management commentary and risks
- Management reported improving demand across products in Q3, particularly automotive, but said demand remained below pre-pandemic levels. It described the business as stabilized while warning that demand volatility and supply-chain and logistics constraints could persist; a further COVID-19 wave could reverse improvement.
- No specific revenue or earnings guidance for the next quarter is provided in the supplied filing text. Management expected 2020 capital expenditures of approximately 7%–8% of revenue; nine-month cash capital expenditures were $267.2 million.
- Management cited COVID-19-related demand weakness, factory interruptions and added operating costs; semiconductor cyclicality, pricing pressure, customer concentration, trade restrictions and tariffs, export controls affecting Huawei and other customers, and manufacturing-facility concentration are material risks.
- The company continued workforce and cost-reduction actions. Nine-month restructuring, asset impairment and other charges were $58.0 million; management also expected approximately $4.0 million of additional severance expense in Q4 2020 for planned Japan workforce reductions.
- The company agreed to acquire the East Fishkill, New York manufacturing site for $400 million, subject to conditions, with closing expected around December 31, 2022. It paid an additional non-refundable $100 million deposit on October 5, after quarter-end; $230 million remains due around closing. It was exploring sales of its Belgium and Niigata, Japan six-inch fabs and said future charges could result.
- Other notable items: the company settled AcBel/Synnex litigation for $6.0 million in August; EPA negotiations over remediated RCRA violations at its Maine facility were ongoing, with an anticipated penalty of $0.10–$0.15 million. A stockholder rights plan may be triggered if a person or group crosses a 15% ownership threshold, subject to exceptions, and expires no later than June 7, 2021.
Most important facts for investors to verify
- Whether revenue and gross-margin recovery continued after Q3, and whether automotive demand and manufacturing utilization returned toward pre-pandemic levels.
- How much Q3 and year-to-date earnings depended on the $110.3 million combined discrete tax benefits, and what sustainable tax rate and earnings level may follow.
- The December 2020 maturity and settlement of the $690 million 1.00% Notes, and the company’s debt repayment, refinancing and covenant capacity.
- Whether operating cash flow can recover while funding capital expenditures, restructuring, debt service and the East Fishkill acquisition.
- Potential ongoing effects of COVID-19, factory or supplier disruption, trade/export restrictions, and customer concentration; one distributor represented approximately 11% of Q3 revenue.
- Progress and remaining conditions for the East Fishkill acquisition and contemplated fab sales, including any resulting costs or impairments.