ON Semiconductor Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed February 26, 2013. The filing also reports fourth-quarter results. ON Semiconductor designs, manufactures and sells power, signal-management, logic, discrete and custom semiconductor products across automotive, consumer, industrial, computing, communications and other markets. It reports three segments: Application Products, Standard Products and SANYO Semiconductor Products.
Financial results and position
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $2,894.9 million | $3,442.3 million |
| Gross profit / margin | $951.9 million / 32.9% | $1,008.8 million / 29.3% |
| Operating income (loss) | $(16.3) million | $113.4 million |
| Net income (loss) attributable to ON Semiconductor | $(90.6) million; diluted EPS $(0.20) | $11.6 million; diluted EPS $0.03 |
| Cash from operating activities | $276.0 million | $545.5 million |
| Capital expenditures | $256.3 million | $316.4 million |
| Cash, cash equivalents and short-term investments | $631.7 million | $901.5 million |
| Total assets | $3,328.4 million | $3,883.5 million |
| Long-term debt, including current maturities and capital leases | $1,011.9 million | $1,207.0 million |
Cash flow from operations less capital expenditures was approximately $19.7 million, down from $229.1 million in 2011. Working capital, including cash and short-term investments, was $669.1 million at year-end. The company reported a $325 million revolving credit facility with no borrowings outstanding at year-end. Its reported debt maturities include approximately $360.7 million in 2013 and $364.4 million in 2016; the filing’s contractual-obligations table includes interest and presents different payment totals.
Fourth-quarter 2012 revenue was $680.2 million, gross profit was $210.4 million, and net loss attributable to ON Semiconductor was $138.2 million, or $0.31 per diluted share. The filing attributes the large quarterly loss principally to impairment and restructuring charges.
Changes versus prior period
- Revenue declined 15.9% year over year. Management cited weaker global demand, lower SANYO Semiconductor sales, and lower volume/mix (down approximately 11.2%) and average selling prices (down approximately 4.7%).
- All three segments had lower revenue: Application Products fell about 11% to $1,019.2 million; Standard Products fell about 11% to $1,104.7 million; SANYO Semiconductor fell about 27% to $771.0 million.
- Gross margin rose 3.6 percentage points to 32.9%, largely because 2011 included $58.3 million of SANYO inventory fair-value step-up expense and $80.4 million of non-cash manufacturing expense that did not recur.
- Operating results moved from $113.4 million of income to a $16.3 million loss; attributable net results moved from $11.6 million of income to a $90.6 million loss. FY2012 included $165.3 million of restructuring, asset-impairment and other charges, plus $49.5 million of goodwill and intangible-asset impairments.
- Operating cash flow fell $269.5 million. Cash and short-term investments declined $269.8 million, while reported debt including capital leases declined $195.1 million.
Outlook, management commentary and notable items
- For Q1 2013, management estimated revenue of $645–$685 million, gross margin of 30.5%–32.5%, and an approximately 2% sequential decline in average selling prices. Beginning backlog represented about 80%–85% of anticipated quarterly revenue.
- Management planned a further SANYO Semiconductor voluntary retirement program in 2013, expected to reduce employment by approximately 500–600 employees and incur estimated charges of $40–$50 million, excluding any subsequent pension impact. Capital expenditures were projected at $160–$170 million for 2013.
- SANYO Semiconductor’s performance was affected by Thailand flood damage, a softer Japanese consumer market, customer losses or sourcing changes, and Japan-China political tensions. SANYO-related operational support from SANYO Electric ended December 31, 2012, which management expected to pressure segment margins.
- The company recorded a $126 million impairment of SANYO-related long-lived assets and $49.5 million of goodwill and intangible impairments. It also recorded $16.4 million of business-interruption insurance income related to the 2011 Japan earthquake.
- Management said cash on hand, operating cash flow and available financing should cover anticipated operating and capital needs for at least 12 months. Risks include semiconductor cyclicality, price and margin pressure, order cancellations, customer concentration, supply disruptions and natural disasters, integration and restructuring execution, substantial debt and covenants, foreign-exchange exposure, and potential limits on access to cash held overseas.
- The SANYO customer product-failure matter and Thailand former-employee claims were settled; the company stated the settlements did not materially affect its financial position, results or cash flows. Management assessed disclosure controls and internal control over financial reporting as effective; the independent auditor also gave an unqualified opinion on the financial statements and internal controls.
Key facts for investors to verify
- Whether the Q1 2013 revenue and margin outlook was achieved, and whether subsequent demand and pricing trends stabilized.
- How much of FY2012’s margin improvement reflected nonrecurring 2011 acquisition-related costs versus sustainable operating efficiencies.
- Whether SANYO Semiconductor revenue, segment profitability and customer retention improved after restructuring, the impairment and the end of SANYO Electric support.
- Actual 2013 retirement-program costs, employee reductions, pension effects, restructuring cash payments and capital expenditures.
- Debt repayment and refinancing needs, especially near-term maturities, the 2016 convertible-note put dates, covenant headroom and accessible U.S. liquidity.
- The quality and sustainability of cash generation, including working-capital movements, inventory exposure and distributor sell-through; also reconcile the filing’s debt maturity and contractual-obligation presentations.