ON Semiconductor Corporation (onsemi) — Q3 2021 Form 10-Q
Reporting period: Fiscal quarter ended October 1, 2021; the quarter comprised 13 weeks. Financial statements are unaudited and prepared under U.S. GAAP.
Business context and performance
onsemi operates through Power Solutions Group (PSG), Advanced Solutions Group (ASG), and Intelligent Sensing Group (ISG), serving automotive, industrial, communications, computing, and consumer markets. Management’s strategy emphasizes growth in automotive, industrial, and communications infrastructure, margin expansion, and moving away from lower-margin, less differentiated products.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,742.1 million | $1,317.3 million | $4,893.7 million | $3,808.7 million |
| Gross profit / margin | $720.8 million / 41.4% | $441.2 million / 33.5% | $1,882.1 million / 38.5% | $1,218.2 million / 32.0% |
| Operating income / margin | $399.2 million / 22.9% | $119.0 million / 9.0% | $807.3 million / 16.5% | $180.7 million / 4.7% |
| Net income attributable to onsemi | $309.7 million | $160.6 million | $583.7 million | $145.2 million |
| Diluted EPS | $0.70 | $0.38 | $1.32 | $0.35 |
| Cash from operations | Not separately stated | Not separately stated | $1,155.4 million | $483.9 million |
| Capital expenditures | Not separately stated | Not separately stated | $275.0 million | $267.2 million |
Quarterly revenue increased approximately 32% year over year; nine-month revenue increased 28.5%. Quarterly gross profit rose approximately 63%, while nine-month gross profit rose approximately 54%. Management attributed growth and margin improvement to stronger demand, higher utilization, product mix, and higher average selling prices. Each segment recorded higher quarterly revenue year over year: PSG $892.1 million, ASG $613.5 million, and ISG $236.5 million.
For the nine months, operating cash flow less reported capital expenditures was approximately $880.4 million, a derived measure. Cash and cash equivalents were $1,389.2 million at October 1, 2021, versus $1,080.7 million at December 31, 2020. Total current assets were $3,641.8 million and current liabilities $1,444.1 million. Net long-term debt, including current portion, was $3,113.5 million; gross debt was $3,309.9 million. The company reported approximately $1.97 billion available under its revolving credit facility and compliance with debt covenants.
Material changes and unusual items
- Quarterly operating income increased to $399.2 million from $119.0 million. Nine-month operating income was $807.3 million versus $180.7 million.
- Income taxes shifted from a $83.1 million benefit in Q3 2020 to a $61.8 million provision in Q3 2021. The prior-year quarter included significant discrete tax benefits, making the comparison less directly comparable.
- Nine-month results included a $26.2 million loss on debt refinancing and prepayment and a $10.2 million gain on divestiture. The divestiture generated approximately $13.6 million in consideration; up to $7.5 million additional consideration may be payable if milestones are achieved.
- In May 2021, onsemi issued $805 million of 0% convertible notes due 2027 and repurchased or exchanged $372.4 million principal amount of 1.625% notes. It repaid the outstanding revolving-credit balance. The remaining 1.625% notes were classified as current, and holders had a conversion right for the quarter ending December 31, 2021.
- On October 28, 2021, after quarter-end, onsemi completed its acquisition of GT Advanced Technologies for approximately $425 million in cash, intended to support silicon-carbide supply. Initial acquisition accounting was incomplete at filing.
Outlook, management commentary, and risks
- No numerical revenue or earnings guidance is provided in the filing. Management expects 2021 property, plant, and equipment purchases to be 6%–7% of revenue on an annualized basis; the minimum contractual capital-expenditure commitment for the remainder of 2021 was approximately $168.2 million. It expects capital expenditures to increase in 2022.
- Management said substantially all global manufacturing sites were operating, but COVID-19 outbreaks, restrictions, or new variants could disrupt or curtail production. The company also cited demand uncertainty, competitive pricing, supply-chain constraints, manufacturing capacity, and access to financing as factors affecting cash generation and operations.
- The company is pursuing a lighter internal-fabrication model and exploring sales of its six-inch fabrication facilities in Oudenaarde, Belgium, and Niigata, Japan. It was in discussions with potential buyers. It also expected to complete an acquisition of East Fishkill, New York, fabrication facilities and related assets and liabilities around December 31, 2022.
- A 2021 separation program notified approximately 725 employees and resulted in $55.1 million of nine-month charges; approximately $14.8 million remained accrued, expected to be paid in Q4 2021 and Q1 2022. Further restructuring charges are possible.
- One distributor represented approximately 14% of quarterly revenue and 13% of nine-month revenue. The company also highlighted IP infringement claims, product liability and recall exposure, foreign-exchange and interest-rate risk, tax audits, and conflict-minerals compliance as risks. Management reported no pending or threatened legal proceeding it believed would likely have a material adverse effect.
- Effective January 1, 2022, adoption of ASU 2020-06 was expected to increase opening retained earnings by an estimated $73 million, reduce fiscal 2022 interest expense by approximately $29 million, and increase diluted weighted-average shares by 9.8 million, based on debt outstanding at quarter-end.
Most important facts for investors to verify
- Whether demand, pricing, product mix, and manufacturing utilization sustain the reported margin improvement.
- How supply-chain conditions and COVID-19 developments affect production, orders, and customer demand.
- The effects of the GTAT acquisition on cash, silicon-carbide capacity, and future financial results, including final purchase accounting.
- Conversion, refinancing, and dilution outcomes for the convertible notes and the remaining 1.625% notes.
- Execution and costs of the manufacturing-footprint strategy, planned capital spending, and restructuring.
- Distributor concentration and the effect of tax items and other unusual gains or charges on comparable earnings.