ON Semiconductor Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter ended July 3, 2020; six-month results compared with the six months ended June 28, 2019. Amounts are in U.S. dollars. The six-month periods differed in length: 185 days in 2020 versus 179 days in 2019.
Business context and results
ON Semiconductor supplies semiconductors for automotive, industrial, communications, computing, consumer and other markets. It reports three segments: Power Solutions Group (PSG), Advanced Solutions Group (ASG) and Intelligent Sensing Group (ISG). Management attributed weaker demand and operating disruption to COVID-19, including factory restrictions and supply-chain constraints.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,213.5m | $1,347.7m | $2,491.4m | $2,734.3m |
| Gross profit | $374.3m | $499.0m | $777.0m | $1,012.7m |
| Gross margin | 30.8% | 37.0% | 31.2% | 37.0% |
| Operating income | $43.1m | $158.3m | $61.7m | $337.7m |
| Net income (loss) attributable to ON Semiconductor | $(1.4)m | $101.8m | $(15.4)m | $215.9m |
| Diluted EPS | $0.00 | $0.24 | $(0.04) | $0.52 |
| Cash from operations | Not separately stated | Not separately stated | $320.5m | $360.8m |
Material changes, cash flow and liquidity
- Q2 revenue fell 10% year over year; first-half revenue declined 8.9%. Q2 segment revenue was PSG $618.4m, ASG $426.7m and ISG $168.4m. All three segments declined year over year.
- Gross margin fell to 30.8% from 37.0%, reflecting lower sales volume, lower average selling prices and factory underutilization. COVID-related restrictions led to about $13m of under-absorbed fixed overhead charged to Q2 cost of revenue and about $33m in the first half.
- Six-month operating cash flow was $320.5m. Capital expenditures were $205.6m, implying cash flow after capital expenditures of approximately $114.9m; the comparable 2019 amounts were $360.8m, $310.5m and approximately $50.3m.
- Cash and cash equivalents were $2,060.4m at July 3, 2020, versus $894.2m at year-end 2019. The increase largely reflects a $1,165m precautionary revolver borrowing in March. Management said approximately $1.4bn of cash was available in the United States.
- Total debt, net of discounts and issuance costs, was $4,740.4m, including $695.6m current debt; reported gross debt was $4,853.2m. The $1.97bn revolver was substantially drawn, leaving $4m available subject to conditions. The company reported compliance with debt covenants.
- Six-month interest expense rose to $84.4m from $65.4m. Management expects interest expense to remain significant. Working capital was $2,379.8m including cash and current debt, and $1,015.0m excluding both.
Outlook, risks and unusual items
- Management said the business had stabilized but emphasized that the duration, severity and possible resurgence of COVID-19, demand recovery and supply-chain effects remained uncertain. It did not provide a specific revenue or margin forecast in the supplied filing text.
- For the remainder of 2020, the company expected capital expenditures of approximately 7%–8% of revenue. It cited automotive, industrial and cloud-power trends as longer-term growth drivers, while warning that recovery timing and sustainability were uncertain.
- Cost actions included voluntary and involuntary separations and other workforce reductions. First-half restructuring, impairment and other charges were $49.0m, including $43.1m in restructuring charges. Further workforce actions remained possible.
- In July 2020, the company completed a corporate-structure domestication. It estimated a $50m–$80m deferred-tax benefit plus an additional approximately $50m benefit from releasing a U.S. state tax valuation allowance, to be recorded in Q3 2020.
- The 1.00% convertible notes, with $690m principal, mature December 1, 2020 and could be submitted for conversion from September 1, 2020. The filing identifies the maturity and liquidity implications but does not specify a completed repayment or refinancing plan.
- A $6m settlement resolving the AcBel/Synnex dispute was paid by the filing date. The company also adopted a stockholder rights plan with a 15% ownership trigger, expiring no later than June 7, 2021.
- Key risks include continuing pandemic-related demand, production and logistics disruption; semiconductor cyclicality and pricing pressure; substantial debt and variable-rate exposure; customer concentration (one distributor represented about 11% of Q2 revenue); and dependence on certain manufacturing sites and suppliers.
Important facts for investors to verify
- How the company intends to address the $690m convertible-note maturity and maintain liquidity with only $4m of revolver capacity reported available.
- Whether demand, factory utilization, pricing and gross margins recover, and whether COVID-related production constraints or overhead charges recur.
- Actual Q3 recognition and realization of the estimated $100m–$130m in tax benefits.
- Progress on planned manufacturing-footprint changes and whether any fab sales or transition costs result in material charges.
- Subsequent cash generation, capital spending and debt levels; first-half cash growth included substantial new borrowing.