|
ON SEMICONDUCTOR CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following discussion in conjunction with our audited
historical consolidated financial statements, which are included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2011 ("2011 Form
10-K"), filed with the Securities and Exchange Commission (the "Commission") on
February 22, 2012, and our unaudited consolidated financial statements for the
fiscal quarter ended September 28, 2012, included elsewhere in this Form 10-Q.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains statements that are forward-looking. These statements are
based on current expectations and assumptions that are subject to risk,
uncertainties, and other factors. Actual results could differ materially because
of the factors discussed below or elsewhere in this Form 10-Q. See Part II,
Item 1A. "Risk Factors" of this Form 10-Q and Part I, Item 1A. "Risk Factors" of
our 2011 Form 10-K.
Company Highlights for the Quarter Ended September 28, 2012
• Total revenues of $725.5 million
• Gross margin of 32.8 percent
• Net income per fully diluted share of $0.03
• Extended debt maturity for $99.9 million of 2.625% Convertible Senior
Subordinated Notes due 2026 from December 2013 to December 2016
• Completed repurchase of $27.0 million of common stock under our previously
announced share repurchase program
Executive Overview
This Executive Overview presents summary information regarding our industry,
markets, business and operating trends only. For further information regarding
the events summarized herein, you should read "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in its entirety.
Industry Overview
We participate in unit and revenue surveys and use data summarized by the World
Semiconductor Trade Statistics ("WSTS") group to evaluate overall semiconductor
market trends and also to track our progress against the total market in the
areas we provide semiconductor components. The most recently published estimates
of WSTS project a compound annual growth rate in our total addressable market of
approximately 6.5% during 2012 through 2014. These are not our projections and
may not be indicative of actual results, but we, like many of our competitors,
use this information as helpful, third party projections and estimates.
Business Overview
We are a supplier of high performance silicon solutions for energy efficient
electronics. Our broad portfolio of power and signal management, logic, discrete
and custom devices helps customers efficiently solve their design challenges in
automotive, communications, computing, consumer, industrial, LED lighting,
medical, military/aerospace, smart grid and power applications. We design,
manufacture and market an extensive portfolio of semiconductor components that
address the design needs of sophisticated electronic systems and products. Our
power management semiconductor components control, convert, protect and monitor
the supply of power to the different elements within a wide variety of
electronic devices. Our custom application specific integrated circuits
("ASICs") use analog, digital signal processing, mixed-signal and advanced logic
capabilities to act as the brain behind many of our automotive, medical,
military-aerospace, consumer and industrial customers' unique products. Our data
management semiconductor components provide high-performance clock management
and data flow management for precision computing and communications systems. Our
standard semiconductor components serve as "building block" components within
virtually all types of electronic devices. These various products fall into the
logic, analog, discrete, image sensors and memory categories used by the WSTS
group.
42
--------------------------------------------------------------------------------
Table of Contents
We serve a broad base of end-user markets, including automotive, communications,
computing, consumer, medical, industrial, smart grid and military/aerospace.
Applications for our products in these markets include portable electronics,
computers, game consoles, servers, automotive and industrial control systems,
LED lighting, power supplies, networking and telecommunications gear and
automated test equipment.
Our extensive portfolio of devices enables us to offer advanced integrated
circuits and the "building block" components that deliver system level
functionality and design solutions. Our product portfolio comprises
approximately 40,500 products as of September 28, 2012 and we shipped
approximately 28.4 billion units in the first nine months of 2012 as compared to
33.6 billion units in the first nine months of 2011. We specialize in micro
packages, which offer increased performance characteristics while reducing the
critical board space inside today's ever shrinking electronic devices. We
believe that our ability to offer a broad range of products, global
manufacturing network and logistics provides our customers with single source
purchasing on a cost-effective and timely basis.
Segments
As of September 28, 2012, we were organized into four operating segments, which
also represented our four reporting segments: computing and consumer products
group; automotive, industrial, medical and mil-aero products group; standard
products group; and SANYO Semiconductor products group. Each of our major
product lines has been assigned to a segment based on our operating strategy.
Because many products are sold into different end markets, the total revenue
reported for a segment is not indicative of actual sales in the end-market
associated with that segment, but rather is the sum of the revenues from the
product lines assigned to that segment. From time to time we reassess the
alignment of our product families and devices to our operating segments and may
move product families or individual devices from one operating segment to
another. Subsequent to September 28, 2012, we realigned our segments into three
operating segments, which also represent our three reporting segments:
applications product group, standard products group and SANYO Semiconductor
products group.
Customers
We have approximately 400 direct customers worldwide, and we also service
approximately 250 significant original equipment manufacturers ("OEMs")
indirectly through our distributor and electronic manufacturing service provider
customers. Our direct and indirect customers include: (1) leading OEMs in a
broad variety of industries, such as Continental Automotive Systems, Delta,
Samsung, Hella, Delphi, LG Electronics, Motorola Mobility, Motorola Solutions,
Panasonic, Schneider, GE, Honeywell, Broadcom, Siemens, Nokia, Cisco Systems,
and Sony Ericsson; (2) electronic manufacturing service providers, such as
Flextronics, Celestica, Benchmark Electronic, and Jabil; and (3) global
distributors, such as Arrow, Avnet, EBV Elektronik, Future, World Peace and
Yosun.
Operating Facilities
Our primary domestic design operations are located in Arizona, California,
Idaho, Oregon, Rhode Island and Texas. We also have foreign design operations in
Belgium, Canada, China, Czech Republic, France, Germany, India, Ireland, Japan,
Korea, Romania and Switzerland. Additionally, we currently operate domestic
manufacturing facilities in Idaho and Oregon and have foreign manufacturing
facilities in Belgium, Canada, China, Czech Republic, Japan, Malaysia,
Philippines, Thailand and Vietnam.
New Product Innovation
As a result of our research and development initiatives, we introduced
approximately 285 new product families in 2011. During the first nine months of
2012, we introduced approximately 160 additional new product families. Our new
product development efforts continue to be focused on building solutions in
power management that appeal to customers in focused market segments and across
multiple high growth applications. As always, it is our practice to regularly
re-evaluate our research and development spending, to assess the
43--------------------------------------------------------------------------------
Table of Contents
deployment of resources and to review the funding of high growth technologies.
We deploy people and capital with the goal of maximizing our investment in
research and development in order to position ourselves for continued growth. As
a result, we often invest opportunistically to refresh existing products in our
commodity logic, analog, memory and discrete products. We invest in these
initiatives when we believe there is a strong customer demand or opportunities
to innovate our current portfolio in high growth markets and applications.
Business and Macroeconomic Environment
We have recognized efficiencies from implemented restructuring activities and
programs and continue to implement profitability enhancement programs to improve
our cost structure; however, the semiconductor industry has traditionally been
highly cyclical and has often experienced significant downturns in connection
with, or in anticipation of, declines in general economic conditions. We believe
the business environment continues to experience significant uncertainty and
volatility, which we believe has contributed to the current market weakness in
our industry. These factors combined with the other negative conditions in Asia,
which include the impact of the flooding in Thailand in October 2011, have and
can continue to adversely affect both our SANYO Semiconductor business and
historic ON Semiconductor business. Additionally, the recent political and
economic tensions between Japan and China could have a negative impact on our
future results.
As a result of these factors, we have started taking actions to reduce our
overall cost structure to align our costs to current revenue levels. See Note 4:
"Restructuring, Asset Impairments, and Other, Net" for further details relating
to our most recent cost saving actions. In addition, we are continuing to review
our capital investments and other expenditures to align our spending and
capacity with our current sales and manufacturing projections.
Seasonality
Historically, our seasonal trend consisted of a stronger second half of the year
for consumer products as compared to the first half of the year. However, given
the current global and industry economic conditions, we are not seeing the
normal seasonal patterns in the second half of 2012. In recent years, the
industry has also been affected by significant shifts in consumer demand due to
economic downturns or other factors, which may result in volatility in order
patterns and lead times, sudden shifts in product demand and periodic production
over-capacity. We have, in the past, experienced substantial quarter-to-quarter
fluctuations in revenues and operating results, and in the future, could
continue to experience short term period-to-period fluctuations in operating
results due to general industry or economic conditions.
Outlook
ON Semiconductor Q4 2012 Outlook
Based upon product booking trends, backlog levels, and estimated turns levels,
we estimate that our revenues will be approximately $650 million to $690 million
in the fourth quarter of 2012. Backlog levels for the fourth quarter of 2012
represent approximately 80% to 85% of our anticipated fourth quarter 2012
revenues. We estimate average selling prices for the fourth quarter of 2012 will
be down approximately 2% when compared to the third quarter of 2012. For the
fourth quarter of 2012, we estimate that gross margin as a percentage of
revenues will be approximately 30% to 32%.
44--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Quarter Ended September 28, 2012 Compared to Quarter Ended September 30, 2011
The following table summarizes certain information relating to our operating
results that has been derived from our unaudited consolidated financial
statements for the quarters ended September 28, 2012 and September 30, 2011. The
amounts in the following table are in millions:
Quarter Ended
September 28, 2012 September 30, 2011 Dollar Change
Revenues $ 725.5 $ 898.0 $ (172.5 )
Cost of product revenues 487.5 636.9 (149.4 )
Gross profit 238.0 261.1 (23.1 )
Operating expenses:
Research and development 90.1 91.5 (1.4 )
Selling and marketing 44.2 48.4 (4.2 )
General and administrative 36.8 51.9 (15.1 )
Amortization of
acquisition-related
intangible assets 11.1 10.6 0.5
Restructuring, asset
impairments and other, net 11.2 65.4 (54.2 )
Total operating expenses 193.4 267.8 (74.4 )
Operating income (loss) 44.6 (6.7 ) 51.3
Other income (expenses), net:
Interest expense (13.6 ) (16.9 ) 3.3
Interest income 0.3 0.3 -
Other (3.6 ) (3.1 ) (0.5 )
Loss on debt repurchase or
exchange (7.8 ) (5.3 ) (2.5 )
Other income (expenses), net (24.7 ) (25.0 ) 0.3
Income (loss) before income
taxes and non-controlling
interests 19.9 (31.7 ) 51.6
Income tax provision (6.5 ) (17.3 ) 10.8
Net income (loss) 13.4 (49.0 ) 62.4
Net income attributable to
non-controlling interests (0.9 ) (0.4 ) (0.5 )
Net income (loss)
attributable to ON
Semiconductor Corporation $ 12.5 $ (49.4 ) $ 61.9
45
--------------------------------------------------------------------------------
Table of Contents
Revenues
Revenues were $725.5 million and $898.0 million for the quarters ended
September 28, 2012 and September 30, 2011, respectively. The decrease in the
third quarter of 2012 as compared to the third quarter of 2011 was primarily
attributable to a reduction in demand across all segments due to the current
industry downturn, as well as a loss in demand of products made in our Thailand
facilities affected by the flood in October 2011. As compared to the quarter
ended September 30, 2011, we experienced a decline in volume and mix of
approximately 14% as well as a decline in average selling prices of
approximately 5%. The revenues by reportable segment were as follows (dollars in
millions):
Quarter Ended As a % of Quarter Ended As a % of
September 28, 2012 Total Revenue (1) September 30, 2011 Total Revenue (1)
Computing &
Consumer
Products Group $ 146.7 20 % $ 151.1 17 %
Automotive,
Industrial,
Medical and
Mil-Aero
Products Group 188.8 26 % 230.4 26 %
Standard
Products Group 197.0 27 % 221.7 25 %
SANYO
Semiconductor
Products Group 193.0 27 % 294.8 33 %
Total revenues $ 725.5 $ 898.0
(1) Certain amounts may not total due to rounding of individual amounts.
Revenues from the computing and consumer products group decreased $4.4 million
or 2.9% from the third quarter of 2011 to the third quarter of 2012, which is
primarily attributable to a $4.0 million or 15.1% decrease in revenues for our
standard logic devices.
Revenues from the automotive, industrial, medical and mil-aero products group
decreased $41.6 million or 18.1% from the third quarter of 2011 to the third
quarter of 2012. The decrease is primarily attributed to ASIC product revenues
declining by approximately $27.9 million or 17.0%, and memory devices revenues
decreasing by approximately $7.0 million or 32.6%, with the remaining reduction
primarily associated with foundry services.
Revenues from the standard products group decreased $24.7 million or 11.1% from
the third quarter of 2011 to the third quarter of 2012. The revenue decrease is
primarily attributed to discrete products revenue declining by $17.7 million or
14.4%, and MOSFET products decreasing by $6.7 million or 9.5%.
Revenues from the SANYO Semiconductor products group decreased $101.8 million or
34.5% from the third quarter of 2011 to the third quarter of 2012 mainly due to
the loss in demand of products made in our Thailand factory affected by the 2011
flood, as well as softening demand in the Japanese consumer markets.
Revenues by geographic area as a percentage of total revenues were as follows
(dollars in millions):
Quarter Ended As a % of Quarter Ended As a % of
September 28, 2012 Total Revenue (1) September 30, 2011 Total Revenue (1)
Americas $ 113.9 16 % $ 142.5 16 %
Japan 93.9 13 % 136.4 15 %
Other Asia/Pacific 423.5 58 % 507.3 56 %
Europe 94.2 13 % 111.8 12 %
Total $ 725.5 $ 898.0
(1) Certain amounts may not total due to rounding of individual amounts.
46
--------------------------------------------------------------------------------
Table of Contents
A majority of our end customers, served directly or through distribution
channels, are manufacturers of electronic devices. For the quarters ended
September 28, 2012 and September 30, 2011, we had no single customer that
accounted for 10% of our total revenues.
Gross Profit
The gross profit by reportable segment for the quarters ended September 28, 2012
and September 30, 2011 was as follows (in millions):
Quarter Ended As a % of Quarter Ended As a % of
September 28, 2012 Segment Revenue September 30, 2011 Segment Revenue
Computing &
Consumer Products
Group $ 57.5 39.2 % $ 55.7 36.9 %
Automotive,
Industrial,
Medical and
Mil-Aero Products
Group 87.8 46.5 % 119.5 51.9 %
Standard Products
Group 68.3 34.7 % 69.8 31.5 %
SANYO
Semiconductor
Products Group 37.0 19.2 % 26.5 9.0 %
Gross profit by
segment $ 250.6 $ 271.5
Unallocated
Manufacturing (1) (12.6 ) (1.7 )% (10.4 ) (1.2 )%
Total gross
profit $ 238.0 32.8 % $ 261.1 29.1 %
(1) Unallocated manufacturing costs are being shown as a percentage of total
revenue.
Our gross profit was $238.0 million in the third quarter of 2012 compared to
$261.1 million in the third quarter of 2011. The gross profit decrease of $23.1
million in the third quarter of 2012 is primarily due to the revenue declines in
our automotive, industrial, medical and mil-aero products group, which was
offset by an increase in gross profit for our SANYO Semiconductor products
group.
Gross profit as a percentage of revenues increased from 29.1% in the third
quarter of 2011 to 32.8% in the third quarter of 2012, primarily due to
increased gross margin in our SANYO Semiconductor products group. The
improvement in our SANYO Semiconductor products group was attributable to the
$10.6 million expensing of the step-up in the fair market value of inventory in
the third quarter of 2011. There was no expensing for the step-up in fair market
value of inventory in the third quarter of 2012. Additionally, our SANYO
Semiconductor products group gross profit increased due to the impact of the
reduction in work force initiated in the second quarter of 2012. The increases
in gross margin for our SANYO Semiconductor products group was offset by
declines gross margin in our automotive, industrial, medical and mil-aero
products group and our standard products group.
Operating Expenses
Research and development expenses were $90.1 million in the third quarter of
2012 compared to $91.5 million in the third quarter of 2011, representing a
decrease of $1.4 million or 1.5%. Research and development expenses represented
12.4% and 10.2% of revenues for the third quarter of 2012 and the third quarter
of 2011, respectively. Research and development expenses were down slightly due
to reduced usage of engineering materials, offset by an increase in depreciation
associated with new capital projects and design software.
Selling and marketing expenses were $44.2 million in the third quarter of 2012
compared to $48.4 million in the third quarter of 2011, representing a decrease
of $4.2 million or 8.7%. Selling and marketing expenses represented 6.1% and
5.4% of revenues for the third quarter of 2012 and the third quarter of 2011,
respectively. The decrease is primarily attributable to reductions in bonus and
share-based compensation expenses and reduced travel costs, as well as a
reduction in outside services.
47--------------------------------------------------------------------------------
Table of Contents
General and administrative expenses were $36.8 million in the third quarter of
2012 compared to $51.9 million in the third quarter of 2011, representing a
decrease of $15.1 million or 29.1%. General and administrative expenses
represented 5.1% and 5.8% of revenues for the third quarter of 2012 and the
third quarter of 2011, respectively. The decrease is primarily attributable to
reductions in labor costs, which include the impact of reduced bonus and
share-based compensation expenses and lower headcount in our SANYO Semiconductor
product group, as well as a reduction in outside services associated with
acquisition and integration activities.
Other Operating Expenses
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets was $11.1 million and
$10.6 million for the quarters ended September 28, 2012 and September 30, 2011,
respectively. The increase of $0.5 million was primarily attributed to full
amortization of various intangible assets during the periods compared.
Restructuring, Asset Impairments and Other, Net
Restructuring, asset impairments and other, net was $11.2 million in the third
quarter of 2012 compared to $65.4 million in the third quarter of 2011.
In the third quarter of 2012, we initiated a global headcount reduction program.
Restructuring charges for the quarter ended September 28, 2012 consisted
primarily of $7.8 million associated with employee severance charges. The
restructuring charges for the third quarter of 2011 were primarily related to
the closure of our Aizu facility.
For detailed information relating to restructuring, asset impairments and other,
net for the third quarter of 2012, see Note 4: "Restructuring, Asset Impairments
and Other, Net" of the notes to our unaudited consolidated financial statements
included elsewhere in this report.
Operating Income
Information about operating income (loss) from our reportable segments for the
quarters ended September 28, 2012 and September 30, 2011 is as follows (in
millions):
SANYO
Computing & Automotive, Industrial, Standard Semiconductor
Consumer Medical and Mil-Aero Products Products
Group Products Group Group Group Total
For quarter ended
September 28, 2012:
Segment operating income
(loss) $ 25.1 $ 21.1 $ 43.5 $ (21.4 ) $ 68.3
For quarter ended
September 30, 2011:
Segment operating income
(loss) $ 22.3 $ 50.0 $ 39.7 $ (41.9 ) $ 70.1
Depreciation and amortization expense is included in segment operating income.
Reconciliations of segment information to the financial statements is as follows
(in millions):
Quarter Ended
September 28, 2012 September 30, 2011
Operating income for reportable
segments $ 68.3 $ 70.1
Unallocated amounts:
Restructuring, asset impairments and
other charges, net (11.2 ) (65.4 )
Other unallocated manufacturing costs (12.6 ) (10.4 )
Other unallocated operating expenses 0.1 (1.0 )
Operating income (loss) $ 44.6 $ (6.7 )
48
--------------------------------------------------------------------------------
Table of Contents
Interest Expense
Interest expense decreased by $3.3 million to $13.6 million in the third quarter
of 2012 compared to $16.9 million in the third quarter of 2011. We recorded
amortization of debt discount to interest expense of $5.5 million and $8.9
million for the quarters ended September 28, 2012 and September 30, 2011,
respectively. Our average long-term debt balance (including current maturities
and net of debt discount) in the third quarter of 2012 was $1,066.9 million with
a weighted average interest rate of 5.1%, compared to $1,261.2 million and a
weighted average interest rate of 5.4% in the third quarter of 2011.
Loss on Debt Repurchase or Exchange
During the quarter ended September 28, 2012, we exchanged $99.9 million in par
value ($92.8 million of carrying value) of our 2.625% Convertible Senior
Subordinated Notes due 2026 for $99.9 million in par value of 2.625% Convertible
Senior Subordinated Notes due 2026, Series B and $2.0 million in cash, which
resulted in a loss on debt exchange of $7.8 million.
During the quarter ended September 30, 2011, we repurchased $53.0 million in par
value ($46.6 million of carrying value) of our 2.625% Convertible Senior
Subordinated Notes due 2026 for $56.2 million in cash, which resulted in a loss
on debt repurchase of $5.3 million.
For further discussion of these transactions see Note 6: "Long-Term Debt" of the
notes to our unaudited consolidated financial statements included elsewhere in
this Form 10-Q.
Other
Other expense increased $0.5 million from a loss of $3.1 million at
September 30, 2011 to a loss of $3.6 million at September 28, 2012. The increase
is attributable to translation losses associated with our net foreign currency
exposures, which includes the impact of our hedging strategies.
Provision for Income Taxes
The provision for the third quarter of 2012 was $6.5 million, which consisted of
$6.6 million for income and withholding taxes of certain of our foreign
operations and $0.2 million of interest on existing reserves for potential
liabilities in foreign taxing jurisdictions, partially offset by the reversal of
$0.3 million for reserves and interest for potential liabilities in foreign
taxing jurisdictions which were effectively settled or for which the statute
lapsed during the third quarter of 2012.
The provision for the third quarter of 2011 was $17.3 million, which consisted
of $14.7 million for income and withholding taxes of certain of our foreign
operations, $3.2 million of additional valuation allowance against certain
deferred tax assets and $0.3 million of interest on existing reserves for
potential liabilities in foreign taxing jurisdictions, partially offset by the
reversal of $0.9 million for reserves and interest for potential liabilities in
foreign taxing jurisdictions which were effectively settled or for which the
statute lapsed during the third quarter of 2011.
Our provision for income taxes is subject to volatility and could be adversely
impacted by earnings being lower than anticipated in countries that have lower
tax rates and higher than anticipated in countries that have higher tax rates.
Our effective tax rate was 32.7% for the quarter ended September 28, 2012, which
is below the U.S. statutory federal income tax rate of 35%, due to our domestic
and foreign tax rate differentials in our foreign subsidiaries. We continue to
maintain a full valuation allowance on all of our domestic deferred tax assets.
49
--------------------------------------------------------------------------------
Table of Contents
Nine Months Ended September 28, 2012 Compared to Nine Months Ended September 30,
2011
The following table summarizes certain information relating to our operating
results that has been derived from our unaudited consolidated financial
statements for the nine months ended September 28, 2012 and September 30, 2011.
The amounts in the following table are in millions:
Nine Months Ended
September 28, 2012 September 30, 2011 Dollar Change
Revenues $ 2,214.7 $ 2,674.4 $ (459.7 )
Cost of product revenues 1,473.2 1,904.8 (431.6 )
Gross profit 741.5 769.6 (28.1 )
Operating expenses:
Research and development 279.3 271.8 7.5
Selling and marketing 136.8 149.0 (12.2 )
General and administrative 119.7 151.3 (31.6 )
Amortization of
acquisition-related
intangible assets 33.3 31.7 1.6
Restructuring, asset
impairments and other, net 57.3 82.9 (25.6 )
Total operating expenses 626.4 686.7 (60.3 )
Operating income 115.1 82.9 32.2
Other income (expenses), net:
Interest expense (43.4 ) (52.5 ) 9.1
Interest income 1.1 0.8 0.3
Other 3.4 (6.6 ) 10.0
Loss on debt repurchase or
exchange (7.8 ) (5.3 ) (2.5 )
Gain on SANYO Semiconductor
acquisition - 24.3 (24.3 )
Other income (expenses), net (46.7 ) (39.3 ) (7.4 )
Income before income taxes
and non-controlling interests 68.4 43.6 24.8
Income tax provision (17.8 ) (21.3 ) 3.5
Net income 50.6 22.3 28.3
Net income attributable to
non-controlling interests (3.0 ) (1.9 ) (1.1 )
Net income attributable to ON
Semiconductor Corporation $ 47.6 $ 20.4 $ 27.2
Revenues
Revenues were $2,214.7 million and $2,674.4 million for the nine months ended
September 28, 2012 and September 30, 2011, respectively. The decrease in the
first nine months of 2012 as compared to the first nine months of 2011 was
primarily due to a reduction in demand across all segments due to the current
industry down turn. Our SANYO Semiconductor products group was also impacted by
a loss in demand of products made in our Thailand factories affected by the
flood in October 2011.
50
--------------------------------------------------------------------------------
Table of Contents
As compared to the nine months ended September 30, 2011, we experienced a
decrease in volume and mix of approximately 13% and a decline in average selling
prices of approximately 4%. The revenues by reportable segment were as follows
(dollars in millions):
Nine Months Ended As a % of Nine Months Ended As a % of
September 28, 2012 Total Revenue (1) September 30, 2011 Total Revenue (1)
Computing &
Consumer
Products Group $ 421.4 19 % $ 473.5 18 %
Automotive,
Industrial,
Medical and
Mil-Aero
Products Group 593.3 27 % 667.8 25 %
Standard
Products Group 595.7 27 % 685.8 26 %
SANYO
Semiconductor
Products Group 604.3 27 % 847.3 32 %
Total revenues $ 2,214.7 $ 2,674.4
(1) Certain amounts may not total due to rounding of individual amounts.
Revenues from the computing and consumer products group decreased $52.1 million
or 11.0% from the nine months ended September 30, 2011 to the nine months ended
September 28, 2012. The decrease in revenue can be attributed mainly to a
decrease in analog products revenue of $41.4 million or 10.4%, with standard
logic products revenue decreasing as well.
Revenues from the automotive, industrial, medical and mil-aero products group
decreased $74.5 million or 11.2% from the nine months ended September 30, 2011
to the nine months ended September 28, 2012. The decrease in revenue can be
attributed to a decrease in revenue from ASIC products of $42.4 million or 9.1%,
a decrease in revenue from memory products of $17.3 million or 27.9%, and a
decrease in foundry services revenue of $8.6 million or 42%, with the remainder
primarily associated with high-frequency products.
Revenues from the standard products group decreased $90.1 million or 13.1% from
the nine months ended September 30, 2011 to the nine months ended September 28,
2012. The revenue decrease is primarily attributable to decreases in discrete
products of $63.2 million or 16.6%, with the remaining decrease primarily
associated with our MOSFET products.
Revenues from the SANYO Semiconductor products group decreased $243.0 million or
28.7% from the nine months ended September 30, 2011 to the nine months ended
September 28, 2012 mainly due to the loss in demand of products made in our
Thailand facilities affected by the 2011 flood, as well as softening demand in
the Japanese consumer markets.
Revenues by geographic area as a percentage of total revenues were as follows
(dollars in millions):
Nine Months Ended As a % of Nine Months Ended As a % of
September 28, 2012 Total Revenue (1) September 30, 2011 Total Revenue (1)
Americas $ 358.7 16 % $ 421.8 16 %
Japan 314.2 14 % 380.8 14 %
Other Asia/Pacific 1,241.7 56 % 1,539.3 58 %
Europe 300.1 14 % 332.5 12 %
Total $ 2,214.7 $ 2,674.4
(1) Certain amounts may not total due to rounding of individual amounts.
51
--------------------------------------------------------------------------------
Table of Contents
A majority of our end customers, served directly or through distribution
channels, are manufacturers of electronic devices. For the nine months ended
September 28, 2012 and September 30, 2011, we had no single customer that
accounted for 10% of our total revenues.
Gross Profit
The gross profit by reportable segment for the nine months ended September 28,
2012 and September 30, 2011, respectively, was as follows (in millions):
Nine Months Ended As a % of Nine Months Ended As a % of
September 28, 2012 Segment Revenue September 30, 2011 Segment RevenueComputing & Consumer
Products Group $ 162.5 38.6 % $ 186.6 39.4 %
Automotive, Industrial,
Medical and Mil-Aero
Products Group 279.3 47.1 % 336.1 50.3 %
Standard Products Group 223.3 37.5 % 239.1 34.9 %
SANYO Semiconductor
Products Group 110.8 18.3 % 52.5 6.2 %
Gross profit by segment $ 775.9 $ 814.3
Unallocated
Manufacturing (1) (34.4 ) (1.6 )% (44.7 ) (1.7 )%
Total gross profit $ 741.5 33.5 % $ 769.6 28.8 %
(1) Unallocated manufacturing costs are being shown as a percentage of total
revenue.
Our gross profit was $741.5 million for the nine months ended September 28, 2012
compared to $769.6 million for the nine months ended September 30, 2011. The
gross profit decrease of $28.1 million for the nine months ended September 28,
2012 is primarily attributable to decreases in gross profit for our historic ON
Semiconductor product groups, offset by a $58.3 million increase in gross profit
for our SANYO Semiconductor products group.
Gross profit as a percentage of revenues increased from 28.8% for the nine
months ended September 30, 2011 to 33.5% for the nine months ended September 28,
2012, primarily due to increased gross margin from our SANYO Semiconductor
products group, which included the impact of the expensing of the step-up in
fair market value of inventory of $53.0 million and $80.4 million of expensing
of non-cash manufacturing expenses during the first nine months of 2011. There
were no such charges in 2012.
Operating Expenses
Research and development expenses were $279.3 million for the nine months ended
September 28, 2012 compared to $271.8 million for the nine months ended
September 30, 2011, representing an increase of $7.5 million or 2.8%. Research
and development expenses represented 12.6% and 10.2% of revenues for the nine
months ended September 28, 2012 and for the nine months ended September 30,
2011, respectively. The increase in the period is due to increased costs related
to the usage of engineering materials and depreciation for new capital projects
and design software.
Selling and marketing expenses were $136.8 million for the nine months ended
September 28, 2012 compared to $149.0 million for the nine months ended
September 30, 2011, representing a decrease of
52--------------------------------------------------------------------------------
Table of Contents
$12.2 million or 8.2%. Selling and marketing expenses represented 6.2% and 5.6%
of revenues for the nine months ended September 28, 2012 and for the nine months
ended September 30, 2011, respectively. The decrease is primarily attributable
to reductions in bonus and share-based compensation expenses and reduced travel
costs, as well as a reduction in outside services.
General and administrative expenses were $119.7 million for the nine months
ended September 28, 2012 compared to $151.3 million for the nine months ended
September 30, 2011, representing a decrease of $31.6 million or 20.9%. General
and administrative expenses represented 5.4% and 5.7% of revenues for the nine
months ended September 28, 2012 and for the nine months ended September 30,
2011, respectively. The decrease is primarily attributable to reductions in
labor costs, which include the impact of reduced bonus and share-based
compensation expenses and lower headcount in our SANYO Semiconductor product
group, as well as a reduction in outside services associated with acquisition
and integration activities.
Other Operating Expenses
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets was $33.3 million and
$31.7 million for the nine months ended September 28, 2012 and September 30,
2011, respectively. The increase of $1.6 million was primarily attributed to
increased amortization of in-process research and development projects
associated with our acquisition of the CMOS Image Sensor Business Unit, that
were completed during fiscal 2011 and for which amortization did not begin until
after the projects were completed.
Restructuring, Asset Impairments and Other, Net
Restructuring, asset impairments and other, net was $57.3 million in the nine
months ended September 28, 2012 compared to $82.9 million for the nine months
ended September 30, 2011.
During the quarter ended June 29, 2012, we initiated a voluntary retirement
program for employees of SANYO Semiconductor and certain of its subsidiaries.
During the nine months ended September 28, 2012, we recorded charges of $34.0
million associated with this activity, which was comprised of employee severance
charges of $45.7 million, reduced by $11.7 million in decreases in associated
pension obligations for these individuals.
In the third quarter of 2012, we initiated a global headcount reduction program.
Restructuring for the quarter ended September 28, 2012 consisted primarily of
$7.8 million associated with employee severance charges.
The restructuring charges for the nine months ended September 30, 2011 were
primarily related to the closure of our Aizu facility and the SANYO
Semiconductor consolidation program initiated in 2011.
For detailed information relating to our activities for the nine months ended
September 28, 2012, see Note 4: "Restructuring, Asset Impairments and Other,
Net" of the notes to our unaudited consolidated financial statements included
elsewhere in this report.
53
--------------------------------------------------------------------------------
Table of Contents
Operating Income
Information about operating income (loss) from our reportable segments for the
nine months ended September 28, 2012 and September 30, 2011 is as follows (in
millions):
SANYO
Computing & Automotive, Industrial, Standard Semiconductor
Consumer Medical and Mil-Aero Products Products
Group Products Group Group Group Total
For the nine months ended
September 28, 2012:
Segment operating income
(loss) $ 65.8 $ 71.1 $ 144.0 $ (73.2 ) $ 207.7
For the nine months ended
September 30, 2011:
Segment operating income
(loss) $ 83.8 $ 120.2 $ 147.3 $ (127.1 ) $ 224.2
Depreciation and amortization expense is included in segment operating income.
Reconciliations of segment information to the financial statements is as follows
(in millions):
Nine Months Ended
September 28, 2012 September 30, 2011
Operating income for reportable
segments $ 207.7 $ 224.2
Unallocated amounts:
Restructuring, asset impairments
and other charges, net (57.3 ) (82.9 )
Other unallocated manufacturing
costs (34.4 ) (44.7 )
Other unallocated operating
expenses (0.9 ) (13.7 )
Operating income $ 115.1 $ 82.9
Interest Expense
Interest expense decreased by $9.1 million to $43.4 million for the nine months
ended September 28, 2012 compared to $52.5 million in the first nine months of
2011. We recorded amortization of debt discount to interest expense of $18.7
million and $26.5 million for the nine months ended September 28, 2012 and
September 30, 2011, respectively. Our average long-term debt balance (including
current maturities and net of debt discount) for the nine months ended
September 28, 2012 was $1,135.2 million with a weighted average interest rate of
5.1%, compared to $1,062.9 million and a weighted average interest rate of 6.6%
for the nine months ended September 30, 2011.
Other
Other expense decreased $10.0 million from a loss of $6.6 million for the nine
months ended September 30, 2011 to a gain of $3.4 million for the nine months
ended September 28, 2012. The decrease is attributable to a $2.2 million gain
related to certain amounts due from SANYO Electric, combined with certain
foreign exchange movements on the net underlying exposures that have no
offsetting hedge positions.
Loss on Debt Repurchase or Exchange
During the nine months ended September 28, 2012, we exchanged $99.9 million in
par value ($92.8 million of carrying value) of our 2.625% Convertible Senior
Subordinated Notes due 2026 for $99.9 million in par value of 2.625% Convertible
Senior Subordinated Notes due 2026, Series B and $2.0 million in cash, which
resulted in a loss on debt exchange of $7.8 million.
54--------------------------------------------------------------------------------
Table of Contents
During the nine months ended September 30, 2011, we repurchased $53.0 million in
par value ($46.6 million of carrying value) of our 2.625% Convertible Senior
Subordinated Notes due 2026 for $56.2 million in cash, which resulted in a loss
on debt repurchase of $5.3 million.
For further discussion of these transactions see Note 6: "Long-Term Debt" of the
notes to our unaudited consolidated financial statements included elsewhere in
this Form 10-Q.
Gain on SANYO Semiconductor Acquisition
The purchase price of SANYO Semiconductor was less than the fair value of its
net assets, resulting in a gain on acquisition of $24.3 million. We believe the
gain recognized upon acquisition was the result of a number of factors,
including the following: SANYO Electric wanting to discontinue semiconductor
operations, significant losses recognized by SANYO Electric, SANYO Electric
viewing this as the best outcome for SANYO Semiconductor and the fact that we
expect to incur future expenses associated with the transfer and consolidation
of certain operations.
Provision for Income Taxes
The provision for the nine months ended September 28, 2012 was $17.8 million,
which consisted of $17.9 million for income and withholding taxes of certain of
our foreign operations and $0.7 million of interest on existing reserves for
potential liabilities in foreign taxing jurisdictions, partially offset by the
reversal of $0.8 million for reserves and interest for potential liabilities in
foreign taxing jurisdictions which were effectively settled or for which the
statute lapsed during the nine months ended September 28, 2012.
The provision for the nine months ended September 30, 2011 was $21.3 million,
which consisted of $19.6 million for income and withholding taxes of certain of
our foreign operations and $3.2 million of additional valuation allowance
against certain deferred tax assets and $1.0 million of interest on existing
reserves for potential liabilities in foreign taxing jurisdictions, partially
offset by the reversal of $2.5 million for reserves and interest for potential
liabilities in foreign taxing jurisdictions which were effectively settled or
for which the statute lapsed during the nine months ended September 30, 2011.
Our provision for income taxes is subject to volatility and could be adversely
impacted by earnings being lower than anticipated in countries that have lower
tax rates and higher than anticipated in countries that have higher tax rates.
Our effective tax rate was 26.0% for the nine months ended September 28, 2012,
which is below the U.S. statutory federal income tax rate of 35%, due to our
domestic and foreign tax losses and tax rate differentials in our foreign
subsidiaries. We continue to maintain a full valuation allowance on all of our
domestic deferred tax assets.
Liquidity and Capital Resources
This section includes a discussion and analysis of our cash requirements,
off-balance sheet arrangements, contingencies, sources and uses of cash,
operations, working capital, and long-term assets and liabilities.
Contractual Obligations
During the first nine months of 2012, there have not been any material changes
outside of the ordinary course of business to the contractual obligations table,
including notes thereto, contained in our 2011 Form 10-K. For information on
long-term debt see Note 6: "Long-Term Debt," for operating leases see Note 9:
"Commitments and Contingencies" and for pension plans see Note 5: "Balance Sheet
Information" located elsewhere in this Form 10-Q.
55--------------------------------------------------------------------------------
Table of Contents
Our balance of cash and cash equivalents was $421.4 million at September 28,
2012. Additionally, our balance of short-term investments was $221.6 million at
September 28, 2012. We believe that our cash flows from operations, coupled with
our existing cash and cash equivalents and short-term investments will be
adequate to fund our operating and capital needs for at least the next 12
months. Total cash and cash equivalents and short-term investments at
September 28, 2012 include approximately $377.6 million available in the United
States. In addition to cash and cash equivalents and short-term investments
already on hand in the United States, we have the ability to raise cash through
existing credit facilities, new bank loans, debt obligations or by settling
loans with our foreign subsidiaries in order to cover our domestic needs.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various operating leases for
buildings and equipment including our mainframe computer system, desktop
computers, communications, foundry equipment and service agreements relating to
this equipment.
In the normal course of business, we provide standby letters of credit or other
guarantee instruments to certain parties initiated by either our subsidiaries or
us, as required for transactions such as material purchase commitments,
agreements to mitigate collection risk, leases or customs guarantees. Our senior
revolving credit facility includes a $40.0 million availability for the issuance
of letters of credit. A $0.2 million letter of credit was outstanding under our
senior revolving credit facility as of September 28, 2012. We also had
outstanding guarantees and letters of credit outside of our senior revolving
credit facility of $6.2 million at September 28, 2012.
As part of securing financing in the normal course of business, we issued
guarantees related to our receivable financing, capital lease obligations and
real estate mortgages which totaled approximately $94.6 million as of
September 28, 2012. We are also a guarantor of SCI LLC's unsecured loan with
SANYO Electric which had a balance of $311.4 million as of September 28, 2012.
See Note 6: "Long-Term Debt" and Note 9: "Commitments and Contingencies" of the
notes to our unaudited consolidated financial statements found elsewhere in this
Form 10-Q for further discussion.
Based on historical experience and information currently available, we believe
that in the foreseeable future we will not be required to make payments under
the standby letters of credit or guarantee arrangements.
For our operating leases, we expect to make cash payments and similarly incur
expenses totaling $123.0 million as payments come due. We have not recorded any
liability in connection with these operating leases, letters of credit and
guarantee arrangements.
In connection with the SANYO Semiconductor acquisition, we entered into an
operational supply agreement that provided that if we continued to operate in
certain of the SANYO Semiconductor manufacturing facilities in Japan using SANYO
Electric resources through the end of 2012, including certain seconded
employees, we would receive the ability to utilize operation support credits of
approximately $301.6 million. Through September 28, 2012, we have used
approximately $273.1 million of such operation support credits, and expect to
use approximately $8.8 million during the fourth quarter of 2012. As such, we
expect the remaining balance of $19.6 million to expire on December 31, 2012.
Contingencies
We are a party to a variety of agreements entered into in the ordinary course of
business pursuant to which we may be obligated to indemnify other parties for
certain liabilities that arise out of or relate to the subject matter of the
agreements. Some of the agreements entered into by us require us to indemnify
the other party against losses due to intellectual property infringement,
property damage including environmental contamination, personal injury, failure
to comply with applicable laws, our negligence or willful misconduct, or breach
of representations and warranties and covenants related to such matters as title
to sold assets.
56
--------------------------------------------------------------------------------
Table of Contents
We face risk of exposure to warranty and product liability claims in the event
that our products fail to perform as expected or such failure of our products
results, or is alleged to result, in bodily injury or property damage (or both).
In addition, if any of our designed products are alleged to be defective, we may
be required to participate in their recall. Depending on the significance of any
particular customer and other relevant factors, we may agree to provide more
favorable indemnity rights to such customer for valid warranty claims.
From time to time, we have been active in merger and acquisition activity. In
connection with these mergers or acquisitions, we have agreed to indemnify the
other party or parties to the merger or acquisition agreement for certain claims
or occurrences, limited in most instances by time and/or monetary amounts.
We and our subsidiaries provide for indemnification of directors, officers and
other persons in accordance with limited liability agreements, certificates of
incorporation, by-laws, articles of association or similar organizational
documents, as the case may be. We maintain directors' and officers' insurance,
which should enable us to recover a portion of any future amounts paid.
In addition to the above, from time to time, we provide standard representations
and warranties to counterparties in contracts in connection with sales of our
securities and the engagement of financial advisers and also provide indemnities
that protect the counterparties to these contracts in the event they suffer
damages as a result of a breach of such representations and warranties or in
certain other circumstances relating to the sale of securities or their
engagement by us.
While our future obligations under certain agreements may contain limitations on
liability for indemnification, other agreements do not contain such limitations
and under such agreements it is not possible to predict the maximum potential
amount of future payments due to the conditional nature of our obligations and
the unique facts and circumstances involved in each particular agreement.
Historically, payments made by us under any of these indemnities have not had a
material effect on our business, financial condition, results of operations or
cash flows, and we do not believe that any amounts that we may be required to
pay under these indemnities in the future will be material to our business,
financial condition, results of operations or cash flows.
See Note 9: "Commitment and Contingencies" of the notes to our unaudited
consolidated financial statements under the heading "Legal Matters" in this Form
10-Q for possible contingencies related to legal matters. See also Part I,
Item 1 "Business-Government Regulation" of our 2011 Form 10-K for information on
certain environmental matters.
Sources and Uses of Cash
We require cash to fund our operating expenses and working capital requirements,
including outlays for research and development, to make capital expenditures,
for strategic acquisitions and investments, to repurchase our stock and other
Company securities, and to pay debt service, including principal and interest
and capital lease payments. Our principal sources of liquidity are cash on hand,
cash generated from operations and funds from external borrowings and equity
issuances. In the near term, we expect to fund our primary cash requirements
through cash generated from operations and cash and cash equivalents on hand and
short-term investments. Additionally, as part of our business strategy, we
review acquisition and divestiture opportunities and proposals on a regular
basis.
We believe that the key factors that could affect our internal and external
sources of cash include:
• Factors that affect our results of operations and cash flows, including
the impact on our business and operations resulting from the 2011 Thailand
flooding, changes in demand for our products, competitive pricing
pressures, effective management of our manufacturing capacity, our ability
to achieve further reductions in operating expenses, the impact of our
restructuring programs on our production and cost efficiency and our
ability to make the research and development expenditures required to
remain competitive in our business; and
57
--------------------------------------------------------------------------------
Table of Contents
• Factors that affect our access to bank financing and the debt and equity
capital markets that could impair our ability to obtain needed financing
on acceptable terms or to respond to business opportunities and
developments as they arise, including interest rate fluctuations,
macroeconomic conditions, sudden reductions in the general availability of
lending from banks or the related increase in cost to obtain bank
financing and our ability to maintain compliance with covenants under our
debt agreements in effect from time to time.
Our ability to service our long-term debt including our senior subordinated
notes, to remain in compliance with the various covenants contained in our debt
agreements and to fund working capital, capital expenditures and business
development efforts will depend on our ability to generate cash from operating
activities, which is subject to, among other things, our future operating
performance, as well as to general economic, financial, competitive,
legislative, regulatory and other conditions, some of which may be beyond our
control.
If we fail to generate sufficient cash from operations, we may need to raise
additional equity or borrow additional funds to achieve our longer term
objectives. There can be no assurance that such equity or borrowings will be
available or, if available, will be at rates or prices acceptable to us. We
believe that cash flow from operating activities coupled with existing cash and
cash equivalents and short-term investments will be adequate to fund our
operating and capital needs as well as enable us to maintain compliance with our
various debt agreements through at least the next twelve months. To the extent
that results or events differ from our financial projections or business plans,
our liquidity may be adversely impacted.
During the ordinary course of business, we evaluate our cash requirements and,
if necessary, adjust our expenditures for inventory, operating expenditures and
capital expenditures to reflect the current market conditions and our projected
sales and demand. For example, in first nine months of 2012, we paid $198.8
million for capital expenditures, while in the first nine months of 2011 we paid
$259.3 million. Our current projection for capital expenditures for the
remainder of 2012 is approximately $50.0 million, of which our current minimum
contractual commitment is $26.7 million. The capital expenditure levels can
materially influence our available cash for other initiatives.
58--------------------------------------------------------------------------------
Table of Contents
[ Back To Contact Center Solutions Homepage's Homepage ]
|
MetricNet Publishes 4 New Australian Benchmarks for IT Support, Contact Centres 
Part 1: Home Agents: The Big Game Changer [white paper]
