SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community

TMC NEWS

TMCNET eNEWSLETTER SIGNUP

ON SEMICONDUCTOR CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[November 02, 2012]

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 TMCnet.com's Homepage ]





LATEST VIDEOS

DOWNLOAD CENTER

UPCOMING WEBINARS

MOST POPULAR STORIES





Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved | Privacy Policy