ON Semiconductor Corporation — FY2018 Form 10-K Summary
Business context and reporting period
This 10-K reports the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter filing. ON Semiconductor designs and manufactures power, analog, sensing and related semiconductor products. It reports three segments: Power Solutions Group (PSG), Analog Solutions Group (ASG) and Intelligent Sensing Group (ISG). Automotive and industrial were its largest end markets, representing approximately 31% and 27% of 2018 revenue.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $5,878.3 million | $5,543.1 million |
| Gross profit / margin | $2,238.7 million / 38.1% | $2,035.6 million / 36.7% |
| Operating income | $847.2 million | $681.6 million |
| Net income attributable to ON Semiconductor | $627.4 million | $810.7 million |
| Diluted earnings per share | $1.44 | $1.89 |
| Cash provided by operating activities | $1,274.2 million | $1,094.2 million |
| Capital expenditures | $514.8 million | $387.5 million |
- Revenue rose 6.0% year over year; excluding the $155.1 million 2017 benefit from a distributor revenue-recognition change, management reported growth of approximately 9%.
- Gross margin improved 140 basis points, which management attributed principally to favorable product mix, stronger demand and operational leverage, partly offset by slightly lower factory utilization.
- Net income fell despite higher operating income. 2017 included a $449.9 million provisional tax-reform benefit; 2018 recorded a $125.1 million income tax provision. 2018 also included $36.6 million of licensing income and a $5.0 million gain on divestitures.
- At December 31, 2018, cash and cash equivalents were $1,069.6 million, including $448.7 million available in the United States. Current assets were $3,167.8 million and current liabilities were $1,469.3 million.
- Gross debt was $2,939.0 million; reported net long-term debt, including current maturities and net of discounts and issuance costs, was $2,766.1 million. Interest expense was $128.2 million. The company reported compliance with debt covenants.
- Operating cash flow less capital expenditures was approximately $759.4 million. The company repurchased approximately $315 million of shares under its 2014 program during 2018; a new $1.5 billion authorization became effective December 1, 2018, with no purchases under it during 2018.
Material changes and fourth-quarter results
- PSG revenue increased 8% to $3,038.2 million and ASG revenue increased 6% to $2,071.2 million. ISG revenue decreased 1% to $768.9 million, as automotive growth was offset by the Mobile CIS business exit and weaker or de-emphasized products.
- The company acquired SensL for $71.6 million in cash, adding LiDAR and photon-detection capabilities, and acquired an additional 50% interest in OSA for approximately $24.6 million, obtaining control in October 2018. It also divested a transient-voltage-suppression diode business.
- Fourth-quarter 2018 revenue was $1,503.1 million, compared with $1,377.5 million in fourth-quarter 2017. Attributable net income was $165.6 million versus $529.9 million, and diluted EPS was $0.39 versus $1.22. The filing’s quarterly data show the unusually high 2017 fourth-quarter earnings in the context of the year’s tax-reform benefit.
- Year-end inventory rose to $1,225.2 million from $1,089.5 million. The cash-flow statement shows a $185.2 million use of cash from inventory growth.
Outlook, risks and unusual items
- Management stated that cash, operating cash flow and available credit were expected to fund operating and capital needs for at least the next 12 months. It expected 2019 capital expenditures to remain at approximately 8% to 9% of revenue, similar to 2018, to support growth and manufacturing improvements. No specific revenue or earnings guidance is provided in the supplied filing text.
- Management expected an effective tax rate, before discrete items, of 23% to 27% until U.S. federal net operating losses were fully used, anticipated by 2021; thereafter, it expected the rate to approximate or be below the 21% federal statutory rate.
- Key risks include semiconductor cyclicality and pricing pressure, demand and inventory uncertainty, customer concentration, supply-chain and manufacturing-site disruptions, reliance on third-party manufacturers, foreign-exchange and trade-policy exposure, and substantial debt and restrictive covenants.
- ON Semiconductor disclosed multiple patent disputes with Power Integrations, including a stated aggregate estimated possible-loss range of approximately $4 million to $20 million. Outcomes remained uncertain; the filing describes adverse jury findings and pending post-trial motions, appeals and administrative patent proceedings.
- Other notable items include $6.8 million of goodwill and intangible-asset impairment charges, a $4.6 million debt-refinancing and prepayment loss, and the adoption of the new revenue standard. Management and the auditor concluded that internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether demand and gross-margin improvements persist, particularly in PSG and ASG, and whether ISG automotive growth offsets declines in other sensing products.
- Inventory levels, utilization, customer order changes and the extent to which backlog converts to shipments; the company cautions that orders may be revised or canceled.
- Debt repayment and refinancing requirements, including the scheduled 2020 and 2023 maturities, variable-rate exposure, covenant limits and the cash available domestically.
- The outcome and potential exposure from Power Integrations litigation and related patent proceedings.
- How 2019 capital spending, share repurchases and tax-rate expectations compare with subsequent results and cash generation.