ON Semiconductor Corporation — Q1 2012 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 30, 2012. ON Semiconductor supplies power, signal-management, logic, discrete and custom semiconductor products to markets including automotive, industrial, communications, computing and consumer electronics. It reported four segments: Computing and Consumer; Automotive, Industrial, Medical and Mil-Aero; Standard Products; and SANYO Semiconductor.
Key financial results
| Metric | Q1 2012 | Comparable Q1 2011 |
|---|---|---|
| Revenue | $744.4 million | $870.6 million |
| Gross profit / margin | $245.2 million / 32.9% | $242.4 million / 27.8% |
| Operating income | $43.6 million | $32.7 million |
| Net income attributable to ON Semiconductor | $28.2 million | $35.5 million |
| Diluted earnings per share | $0.06 | $0.08 |
| Net cash provided by operating activities | $68.4 million | $125.6 million |
Gross margin and operating income improved despite lower revenue. The gross-margin comparison was materially affected by Q1 2011 SANYO acquisition accounting and related costs. Operating expenses were $201.6 million, down from $209.7 million; restructuring and other charges were $11.5 million.
At March 30, cash and cash equivalents were $580.1 million and short-term investments were $312.2 million. Total debt, including current maturities, was $1.189 billion; $377.1 million was current. Working capital, including cash and short-term investments, was $824.1 million. Cash declined $72.8 million during the quarter. Capital expenditures paid in cash were $50.4 million, making operating cash flow less cash capex approximately $18.0 million.
Changes versus the prior comparable period
- Revenue fell $126.2 million, or about 14.5%. Management cited lower volume and mix, average selling prices down 3%, and a $72.2 million decrease in SANYO Semiconductor sales, associated with weaker demand, Thailand flood effects and yen strength.
- Gross profit increased $2.8 million and gross margin rose 5.1 percentage points. Management attributed much of the margin comparison to the absence in 2012 of Q1 2011 SANYO inventory fair-value step-up expense and $50.0 million of non-cash manufacturing expense under a favorable supply agreement. Inventory reserves increased in 2012.
- Net income attributable to the company declined $7.3 million. The 2011 comparison includes a $24.3 million SANYO acquisition gain; the company retrospectively revised that gain from $61.3 million, reducing previously reported 2011 net income and EPS.
- Operating cash flow decreased $57.2 million. Q1 2012 included a $15.8 million provision for excess inventory, compared with $1.7 million in Q1 2011.
Outlook, commentary and risks
- For Q2 2012, management forecast revenue of $745 million to $785 million, gross margin of 34% to 35%, and average selling prices down approximately 1% to 2% sequentially. Backlog covered about 80% to 85% of anticipated Q2 revenue.
- Management estimated 2012 capital expenditures of $200 million to $250 million, with a minimum commitment of $71.5 million, and said available cash, investments and operating cash flow should fund operating and capital needs for at least 12 months.
- On April 13, 2012, the company initiated a voluntary retirement program at certain SANYO subsidiaries, targeting up to approximately 500 employees. It estimated a Q2 charge of $40 million to $50 million, excluding any later pension adjustment.
- On April 16, 2012, the company exercised its call option and paid approximately $96.2 million to retire its zero-coupon convertible notes due 2024.
- Restructuring continued, including Thailand facility closures and the planned Aizu, Japan facility closure. Management expected additional Aizu separation and exit costs of approximately $5.7 million during the remainder of 2012.
- Risks include semiconductor cyclicality, weak demand and pricing pressure, disruption from Thailand flooding and other supply-chain events, foreign-exchange movements, manufacturing and restructuring execution, leverage and debt covenants, and acquisition integration. The company disclosed a customer request for approximately $20 million relating to alleged pre-acquisition SANYO product failures and Thai labor lawsuits seeking approximately $25.4 million; it disputed the allegations and said outcomes were uncertain.
Most important facts for investors to verify
- Whether Q2 revenue and gross-margin guidance was achieved, and whether backlog converted as expected.
- Whether the margin improvement persists after accounting for the unusual 2011 SANYO comparison effects and current inventory provisions.
- Cash generation, inventory levels and capital spending relative to the stated $200 million to $250 million annual capex plan.
- Debt maturities, refinancing or repayment needs, and compliance with debt covenants following the 2024 notes retirement.
- The realized cost and pension effects of the SANYO voluntary retirement program, and the outcomes or any recorded liabilities related to the disclosed customer claim and Thai employee litigation.