ON Semiconductor Corporation (NASDAQ: ONNN) — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Although the request references 2013 Q4, this filing is an annual report; selected fourth-quarter results are included below. Amounts are in U.S. dollars.
Business context
ON Semiconductor designs and manufactures power and signal-management, analog, discrete, logic, image-sensor, memory and custom semiconductor products. It serves automotive, consumer, industrial, computing, communications, medical and other markets through three reporting segments: Application Products Group (APG), Standard Products Group (SPG) and System Solutions Group (SSG). Automotive was approximately 27% of 2013 revenue, the largest end-market share.
Financial results and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $2,782.7 million | $2,894.9 million |
| Gross profit / margin | $938.4 million / 33.7% | $951.9 million / 32.9% |
| Operating income (loss) | $218.2 million | $(16.3) million |
| Net income (loss) attributable to ON Semiconductor | $150.8 million; diluted EPS $0.33 | $(90.6) million; diluted EPS $(0.20) |
| Cash provided by operating activities | $327.3 million | $276.0 million |
| Capital expenditures | $155.2 million | $256.3 million |
| Cash, cash equivalents and short-term investments | $625.7 million | $631.7 million |
| Total debt, including current maturities and capital leases | $942.2 million | $1,011.9 million |
| Working capital | $891.0 million | Not stated here |
At year-end, current assets were $1,710.2 million and current liabilities were $819.2 million. The company reported $888.8 million of debt excluding capital leases. It had drawn $120 million on its new $800 million revolving facility. Management said cash, investments and operating cash flow were expected to cover operating and capital needs for at least 12 months.
2013 segment revenue was $1,036.3 million for APG, $1,121.2 million for SPG and $625.2 million for SSG. Segment operating income was $110.6 million, $228.2 million and a loss of $66.3 million, respectively.
Changes versus comparable periods
- Revenue declined 4% year over year. Average selling prices fell approximately 7%, partly offset by favorable volume and mix.
- SSG revenue fell 19%, attributed to softer Japanese consumer demand, a weaker yen and, to a lesser extent, Japan-China political tensions. APG and SPG revenue each rose slightly.
- Gross margin improved 80 basis points to 33.7%, despite lower revenue; gross profit declined $13.5 million.
- Attributable net income returned to profit from a 2012 loss, when substantial asset and goodwill impairments were recorded. Operating expenses also fell, including restructuring charges of $33.2 million versus $165.3 million in 2012.
- Operating cash flow increased to $327.3 million, while capital expenditures decreased to $155.2 million. Inventory increased to $611.8 million from $581.7 million.
- Interest expense declined to $38.6 million from $56.1 million, and the weighted-average rate on long-term debt fell to approximately 3.9% from 5.1%.
In Q4 2013, revenue was $718.0 million, gross profit was $252.9 million, net income attributable to ON Semiconductor was $28.7 million and diluted EPS was $0.06. The quarter included $22.1 million of restructuring, asset-impairment and other charges.
Outlook, management commentary and notable items
- For Q1 2014, management forecast revenue of $695 million to $725 million, gross margin of 33% to 35%, and average selling prices down approximately 2% sequentially. Q1 backlog represented approximately 80% to 85% of expected revenue.
- 2013 restructuring focused mainly on SSG. Two voluntary retirement programs were initiated in Japan; approximately 850 employees accepted retirement packages. Management expected $36 million to $45 million in first-year savings from the second program after the anticipated headcount reductions.
- The company planned to close its KSS back-end facility by the end of Q2 2014 and transfer most production to other company facilities. It recorded $10.0 million of related net charges in 2013 and expected further costs, partly offset by pension curtailment gains.
- ON Semiconductor completed repurchases of approximately 13.9 million shares during 2013 for about $101.3 million. It also retired $72.6 million of 2.625% Notes and settled conversion of $73.4 million principal of 1.875% Notes for approximately $77.5 million in cash. The filing reported a $3.1 million loss on debt exchange.
- A $10.7 million deferred-tax accounting error was corrected in Q4 2013 through increased deferred tax assets, liabilities and tax provision. Management stated it was not material to prior periods or the 2013 financial statements.
- 2013 cost of revenues benefited from $13.5 million of business-interruption insurance proceeds related to the 2011 Thailand flood. A $21.0 million foreign-currency translation gain related to the Aizu closure also reduced reported restructuring expense.
Risks and contingencies
- The semiconductor sector is cyclical and exposed to demand shifts, price erosion, inventory changes, order cancellations and manufacturing-capacity utilization. The company also cited strong competition and fixed manufacturing costs.
- SSG remained loss-making at the segment operating level despite restructuring. The expected cost savings and margin improvements may not be achieved.
- Debt and refinancing risks remain: $181.6 million of debt maturities were scheduled for 2014 and $424.9 million for 2016 under the filing’s maturity schedule. Approximately $510.2 million of debt was variable-rate; a 50-basis-point increase was estimated to add about $2.6 million to annual interest expense.
- Cash held overseas may not be readily available for U.S. needs; repatriation of approximately $1,378.5 million of indefinitely reinvested foreign earnings could trigger additional taxes.
- Other disclosed exposures include global supply-chain and natural-disaster disruption, foreign-exchange movements, pension funding, product warranty/liability claims, environmental matters, intellectual-property disputes and litigation. Management did not expect known legal or environmental matters to have a material effect, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- Whether SSG’s revenue decline and operating losses stabilized, and whether restructuring savings materialized without disrupting production.
- Whether Q1 2014 revenue, margin and pricing guidance was achieved, given the forecast of lower sequential average selling prices.
- Debt maturities, revolving-facility availability, covenant compliance and the location and accessibility of cash and investments.
- Inventory levels and cash conversion, including the effect of distributor sell-through accounting and customer order changes.
- The repeatability of reported profitability after adjusting for restructuring, insurance proceeds, the Aizu translation gain and the deferred-tax correction.
- Progress on the KSS closure and production transfers, pension contributions, and any material developments in tax, legal, environmental or product-liability contingencies.