ON Semiconductor Corporation — Q1 2019 Form 10-Q
Reporting period: 13-week quarter ended March 29, 2019 (88 days), compared with the quarter ended March 30, 2018 (89 days). Unaudited results. The company reports three segments: Power Solutions Group (PSG), Analog Solutions Group (ASG), and Intelligent Sensing Group (ISG).
Financial performance and liquidity
| Metric | Q1 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $1,386.6 million | $1,377.6 million | +$9.0 million, about 1% |
| Gross profit / margin | $513.7 million / 37.0% | $517.4 million / 37.6% | Profit down $3.7 million; margin down 0.6 percentage points |
| Operating income | $179.4 million | $185.7 million | Down $6.3 million |
| Net income attributable to ON Semiconductor | $114.1 million | $139.6 million | Down $25.5 million |
| Diluted EPS | $0.27 | $0.31 | Down $0.04 |
| Operating cash flow | $138.2 million | $226.5 million | Down $88.3 million |
| Capital expenditures | $157.0 million | $99.5 million | Up $57.5 million |
- Gross margin decline was attributed primarily to product mix. Segment revenue was PSG $704.2 million (up about 2%), ASG $494.1 million (down less than 1%), and ISG $188.3 million (down less than 1%).
- Operating cash flow was below capital expenditures; the difference was negative $18.8 million before other investing outflows. Net cash used in investing activities was $167.1 million.
- Cash and cash equivalents were $939.6 million at quarter-end, down from $1,069.6 million at December 31, 2018. Working capital was $1,729.2 million including cash and current debt, as reported by management.
- Long-term debt, including current maturities, was $2,769.8 million net of discounts and issuance costs on the balance sheet; gross debt was $2,931.1 million. The company reported compliance with debt covenants. Management said cash, operating cash flow, and available revolver capacity should fund operating and capital needs for at least 12 months, including planned transactions.
- The income tax provision was $38.2 million, with a 25.1% effective tax rate. The prior-year provision was $16.4 million; the comparison reflects differing discrete tax items and tax benefits.
Material changes and notable items
- Revenue was nearly flat year over year, while shipments fell to 16.3 billion units from 17.6 billion. PSG growth was partly offset by declines in ASG and ISG; demand varied across product lines and end markets.
- Lower operating income and higher tax expense contributed to lower net income. The tax provision included a $6.0 million charge related to resolution of a foreign tax dispute, partly offset by a $5.1 million discrete benefit from equity-award tax benefits. Other income included a $4.9 million indemnification gain related to a foreign tax dispute.
- Operating cash flow declined mainly because of working-capital changes. Capital spending increased, and the company repurchased 4.4 million shares for $75.7 million under its $1.5 billion share-repurchase authorization; $1,424.3 million remained authorized at quarter-end.
- The company adopted the new lease standard on January 1, 2019, recording $112.3 million of right-of-use assets net of reclassified deferred rent and $117.4 million of lease liabilities at adoption. Quarter-end operating lease liabilities were $113.8 million.
Outlook, transactions, and risks
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects an effective tax rate of 22%–26% before discrete items until U.S. federal net operating losses and credits are used, which it anticipates by 2021. It expects capital expenditures of approximately 8%–9% of annual revenue for the remainder of 2019 and in 2020.
- On March 27, 2019, the company agreed to acquire Quantenna for $24.50 per share in cash, representing approximately $1.07 billion of equity value. It expects to fund the consideration with cash and revolver capacity and anticipated closing in the second half of 2019, subject to stockholder and regulatory approvals.
- After quarter-end, on April 22, 2019, the company agreed to acquire GLOBALFOUNDRIES’ East Fishkill site and related assets for $400 million in cash, subject to adjustment, with closing expected around December 31, 2022. It paid a $70 million deposit and a $30 million technology license fee after quarter-end. Management cited manufacturing capacity, technology access, and potential cost-structure benefits.
- Management describes the semiconductor industry as cyclical and identifies demand changes, customer and distributor inventory, pricing pressure, manufacturing execution, supply availability, foreign exchange, interest rates, leverage, acquisitions, and restructuring as risks. A 50-basis-point rate increase was estimated to raise annual interest expense by about $3.2 million, after swaps.
- First-quarter restructuring charges were $5.5 million for workforce reductions; approximately 100 employees were notified and 27 had exited by quarter-end. Management said further charges may occur. A separate $1.2 million impairment followed abandonment of an in-process research and development project.
- ON Semiconductor disclosed ongoing Power Integrations patent litigation and estimated aggregate possible losses of approximately $4 million to $20 million across those cases; outcomes remain uncertain. The filing also discusses product liability, indemnification, environmental matters, and other ordinary-course legal proceedings.
Important facts for investors to verify
- Whether semiconductor demand, product mix, and unit shipments recover, and how these affect margins across the three segments.
- Whether operating cash flow improves relative to capital spending and planned acquisition-related cash needs.
- Quantenna approval, financing, closing timing, and realized integration benefits; separately, the terms, funding, and long-dated execution of the GLOBALFOUNDRIES transaction.
- Debt maturities, revolver availability, covenant compliance, and sensitivity to rates and foreign exchange.
- Developments in Power Integrations litigation and any resulting change to the disclosed loss estimate.
- Progress and additional costs from workforce restructuring, capital spending plans, and the forecast timing of U.S. tax-attribute utilization.