ON Semiconductor Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2012; comparisons are to the quarter and six months ended July 1, 2011. Amounts are in millions except per-share data. The filing is unaudited. ON Semiconductor supplies silicon components for energy-efficient electronics across automotive, industrial, computing, consumer and other markets.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $744.8 | $905.8 | $1,489.2 | $1,776.4 |
| Gross profit | $258.3 | $266.1 | $503.5 | $508.5 |
| Gross margin | 34.7% | 29.4% | 33.8% | 28.6% |
| Operating income | $26.9 | $56.9 | $70.5 | $89.6 |
| Net income attributable to ON Semiconductor | $6.9 | $34.3 | $35.1 | $69.8 |
| Diluted EPS | $0.02 | $0.07 | $0.08 | $0.15 |
| Operating cash flow | Not separately stated | Not separately stated | $127.5 | $261.6 |
Liquidity, debt and balance sheet
- At June 29, cash and cash equivalents were $517.8 and short-term investments were $238.6, totaling $756.4; approximately $491.6 was available in the United States. Management expected cash, investments and operating cash flows to fund operating and capital needs for at least 12 months.
- Total debt, including current maturities and capital leases, was $1,070.3, down from $1,207.0 at December 31, 2011. Current maturities were $265.3; long-term debt was $805.0. The company repaid $96.2 of principal on its 2024 zero-coupon convertible notes in April.
- Current assets were $1,954.7 and current liabilities $1,154.7. Inventory was $659.7, up from $637.4 at year-end. Cash declined $135.1 during the first half.
- First-half capital expenditures were $114.7, versus $173.5 a year earlier. Management projected full-year 2012 capital expenditures of $90–$110, with a stated minimum commitment of $65.2.
Changes and operating trends
- Revenue fell about 18% year over year in Q2 and 16% for the first half. Management attributed the declines to weaker demand across segments; Q2 volume and mix declined about 16% and average selling prices fell 3%. First-half volume and mix declined 14%, with average selling prices down 3%.
- All four reporting segments had lower Q2 revenue. SANYO Semiconductor revenue fell 25.1%, primarily reflecting Thailand flood effects and softer Japanese consumer, appliance and air-conditioner demand. Its segment remained loss-making at the operating level.
- Gross margin increased year over year, but the comparison benefited from prior-year SANYO acquisition-related inventory step-up and non-cash manufacturing costs: Q2 2011 included $22.1 and $30.4, respectively; first-half 2011 included $42.4 and $80.4.
- Operating income and net income declined despite lower selling, marketing and general and administrative expenses. Restructuring, asset impairments and other charges rose to $34.6 in Q2 and $46.1 in the first half, including $30.8 for the SANYO voluntary retirement program.
- Operating cash flow declined to $127.5 from $261.6 in the first half. The filing highlights higher inventory cash use and lower deferred distributor income, among other working-capital movements.
Outlook, unusual items and risks
- Q3 2012 outlook: Revenue estimated at $725–$765; backlog represented about 80%–85% of anticipated revenue. Average selling prices were expected to decline 1%–2% sequentially, and gross margin was estimated at 33.5%–34.5%.
- Management cited economic uncertainty and softening demand in the United States, Europe and Asia, and said it did not expect the usual second-half seasonal pattern. It began reviewing legacy ON Semiconductor costs and capital investments and planned cost reductions to align with slower growth.
- In Q2, 540 employees accepted SANYO voluntary retirement packages; the company recorded $42.5 of severance charges, partly offset by an $11.7 pension-related benefit. Aizu and Thailand facility closures and other integration actions also remained underway.
- After quarter-end, the board approved a share repurchase program of up to $300 over three years, subject to stated conditions; the program does not require purchases and may be suspended or discontinued.
- Material unresolved matters include a customer request for approximately $20.0 related to alleged pre-acquisition SANYO product failures, and Thai labor lawsuits seeking approximately $25.4 from the subsidiary following flood-related closures. Management said outcomes were uncertain and stated its belief that neither matter would have a material effect; adverse outcomes could nevertheless be consequential.
- Other risks include semiconductor cyclicality, pricing and demand pressure, Thailand flood impacts, restructuring execution, substantial leverage and debt covenants, foreign exchange exposure, product liability, and litigation. The company reported compliance with debt covenants as of June 29, 2012. A 50-basis-point rate increase was estimated to add about $2.3 to annual interest expense; a hypothetical 10% currency move could affect pretax income by about $21.7 before hedge offsets.
- The 2011 comparative financial statements were retrospectively revised, notably reducing the first-half 2011 SANYO acquisition gain from $69.1 to $24.3 and revising related foreign-exchange items. The filing reported effective disclosure controls and no material change to its previously disclosed risk-factor assessment.
Investor verification priorities
- Check subsequent revenue, margins, bookings and pricing against Q3 guidance and the stated backlog coverage.
- Track restructuring costs, completion dates, expected savings and the operating performance of SANYO Semiconductor.
- Assess operating cash conversion, inventory levels, capital spending and liquidity against debt maturities and covenants.
- Monitor developments and potential exposure in the SANYO product claim and Thai labor lawsuits.
- Verify actual repurchases, if any, under the approved $300 program and their effect on liquidity and leverage.
- Review the retrospectively revised 2011 results when comparing periods, especially the acquisition gain and associated foreign-exchange adjustments.