ON Semiconductor Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter ended September 26, 2014; comparable quarter ended September 27, 2013. Nine-month comparisons are for the periods ended on those dates. Amounts are in millions of dollars except per-share data.
Business context
ON Semiconductor supplies power and signal-management, logic, discrete, image-sensor and custom semiconductor products to automotive, industrial, communications, computing, consumer and other markets. In 2014 it acquired Truesense Imaging and Aptina, and established Image Sensor Group as a fourth reporting segment. Reported quarterly results include Aptina from August 15, 2014.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $833.5 | $715.4 | $2,297.6 | $2,064.7 |
| Gross profit | $284.1 | $249.2 | $807.9 | $685.5 |
| Gross margin | 34.1% | 34.8% | 35.2% | 33.2% |
| Operating income | $57.6 | $67.3 | $212.6 | $155.9 |
| Net income attributable to ON Semiconductor | $41.6 | $51.8 | $188.0 | $122.1 |
| Diluted EPS | $0.09 | $0.11 | $0.42 | $0.27 |
| Operating cash flow | Not separately provided | Not separately provided | $318.8 | $200.3 |
- Quarterly revenue rose about 17%, mainly from the Aptina and Truesense acquisitions and improved demand in Application Products and Standard Products. Average selling prices declined about 4.7% year over year; higher volume, mix and acquisitions more than offset the decline.
- Quarterly gross profit increased, but gross margin declined year over year. Management cited the lower margins of the expanded Image Sensor Group and acquisition inventory step-up costs; capacity utilization and prior cost savings provided offsets. Nine-month gross margin improved, reflecting volume and mix and a greater contribution from higher-margin groups.
- Quarterly operating income and attributable net income fell year over year as operating expenses rose, including acquisition-related amortization, higher personnel costs and acquisition expenses. Nine-month operating income and net income increased.
- Nine-month capital expenditures were $163.0; operating cash flow less capital expenditures was approximately $155.8. Investing cash use was $510.4, including $423.1 for business acquisitions and $40.0 placed in escrow. Financing cash provided $175.4. Cash and cash equivalents declined $17.4 to $492.1; cash, cash equivalents and short-term investments totaled $494.9.
- At September 26, 2014, total debt including current maturities was $1,183.6, up from $942.2 at year-end 2013. Current debt was $203.3 and long-term debt $980.3. The company drew about $230.0 on its revolving facility to help fund Aptina; facility borrowings ended the quarter at $350.0. Variable-rate debt was $730.6; management estimated a 50-basis-point rate increase would add about $3.7 to annual interest expense.
- Current assets were $1,813.2 and current liabilities $1,013.0; working capital including cash and short-term investments was $800.2. Inventory increased to $724.3 from $611.8 at year-end. Management said cash, operating cash flow and available facilities should cover operating and capital needs for at least 12 months, while noting that much foreign-held cash is not readily available for U.S. needs.
Material changes, outlook and risks
- Aptina was acquired for approximately $402.5 cash. From acquisition through quarter-end, it contributed $71.6 revenue and a $25.3 net loss, including purchase-accounting and restructuring charges. Truesense was acquired for approximately $95.7 cash and contributed $34.9 revenue and $2.0 net income for the nine months.
- Management forecast Q4 2014 revenue of $835–$875, gross margin of 31.8%–33.6%, and average selling prices down approximately 1%–2% sequentially. It cited a slowdown in orders in certain geographies and end-markets, alongside an early-Q4 recovery in orders for first-half 2015 shipments and continued design-win momentum in automotive, industrial and smartphone markets. Q4 backlog represented approximately 80%–85% of anticipated revenue.
- Management cited semiconductor cyclicality, soft consumer demand, pricing pressure, customer order changes, foreign-exchange exposure, manufacturing and supply risks, acquisition integration and substantial leverage among risks. Aptina and Truesense integration was ongoing; Aptina’s systems and controls were expected to be integrated by the end of 2015.
- Restructuring and other net charges were $20.0 for the nine months. The KSS facility closure and Japan voluntary-retirement programs remained in progress; management expected additional KSS severance and exit costs and approximately $0.2 of further charges for a retirement program through year-end.
- Collabo Innovations sued ON Semiconductor and subsidiaries in August 2014, alleging that certain image-sensor products infringe three U.S. patents and seeking unspecified damages. The company said it had not been served as of the filing and believed the claims lacked merit; outcome remains uncertain. Management said other legal matters were not expected to have a material effect, while acknowledging litigation uncertainty.
- The nine-month tax benefit included a $21.7 reversal of a U.S. deferred-tax valuation allowance associated with the Truesense acquisition and other tax adjustments. Management warned that tax expense can be volatile; it maintained valuation allowances on domestic and substantially all Japan-related deferred tax assets.
Important facts for investors to verify
- Whether Q4 revenue and margin guidance was achieved, and whether the reported early recovery in orders continued.
- Acquisition integration progress, Aptina’s continuing contribution and Image Sensor Group profitability; the group reported a Q3 operating loss of $17.8.
- Inventory levels, average selling prices, demand and margins, particularly in System Solutions and consumer-related markets.
- Debt repayment capacity, variable-rate exposure, U.S. liquidity availability and remaining acquisition-related cash commitments.
- Developments in the Collabo Innovations patent case, restructuring costs and potential tax-valuation-allowance changes.