ON Semiconductor Reports Third Quarter 2011 Results

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share data)
 
        Quarter Ended     Nine Months
September 30,

2011

  July 1,

2011 (1)

  October 1,

2010

  September 30,

2011

  October 1,

2010

     
Revenues $ 898.0 $ 905.8 $ 600.7 $ 2,674.4 $ 1,734.2
Cost of revenues   636.9     639.7     354.2     1,904.8     1,015.8  
Gross profit 261.1 266.1 246.5 769.6 718.4
Gross margin 29.1 % 29.4 % 41.0 % 28.8 % 41.4 %
 
Operating expenses:
Research and development 91.5 89.2 63.3 271.8 188.6
Selling and marketing 48.4 51.2 35.5 149.0 107.6
General and administrative 51.9 52.3 31.2 151.3 98.0
Amortization of acquisition-related intangible assets 10.6 11.4 7.9 31.7 23.8
Restructuring, asset impairments and other, net   65.4     5.1     0.9     82.9     7.0  
Total operating expenses   267.8     209.2     138.8     686.7     425.0  
Operating income (loss)   (6.7 )   56.9     107.7     82.9     293.4  
Other income (expenses), net:
Interest expense (16.9 ) (17.8 ) (14.1 ) (52.5 ) (45.0 )
Interest income 0.3 0.2 0.2 0.8 0.4
Other (3.1 ) (1.0 ) (0.8 ) (6.6 ) (7.0 )
Loss on debt repurchase (5.3 ) - - (5.3 ) (0.7 )
Gain on SANYO Semiconductor acquisition   -     -     -     58.0     -  
Other expenses, net   (25.0 )   (18.6 )   (14.7 )   (5.6 )   (52.3 )
 
Income (loss) before income taxes (31.7 ) 38.3 93.0 77.3 241.1
Income tax provision   (17.3 )   (3.2 )   (4.6 )   (21.3 )   (9.4 )
Net income (loss) (49.0 ) 35.1 88.4 56.0 231.7
Net income attributable to minority interest   (0.4 )   (0.8 )   (0.6 )   (1.9 )   (2.2 )
Net income (loss) attributable to ON Semiconductor Corporation $ (49.4 ) $ 34.3   $ 87.8   $ 54.1   $ 229.5  
 

Net income (loss) per common share attributable to ON Semiconductor Corporation:

Basic: $ (0.11 ) $ 0.08   $ 0.20   $ 0.12   $ 0.53  
Diluted: $ (0.11 ) $ 0.07   $ 0.20   $ 0.12   $ 0.52  
 
Weighted average common shares outstanding:
Basic   448.8     446.2     431.6     445.5     430.0  
Diluted:   448.8     461.5     439.8     454.3     439.8  
 
(1) The consolidated statement of operations has been revised in accordance with ASC 250 "Accounting Changes and Error Corrections" for an identified error related to the amounts recognized for foreign exchange gains and losses associated with its newly acquired SANYO business, which are reported as other income and expense in the consolidated statement of operations.
ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
(in millions)
         
September 30, July 1, December 31,
2011

2011 (1)

2010
Assets
Cash and cash equivalents $ 659.3 $ 756.6 $ 623.3
Short-term investments 178.4 112.2 -
Receivables, net 539.0 575.8 294.6
Inventories 706.6 749.2 360.8
Other current assets 90.3 86.2 63.6
Deferred income taxes, net of allowances   14.6     16.9     15.7  
Total current assets 2,188.2 2,296.9 1,358.0
Restricted cash - - 142.1
Property, plant and equipment, net 1,130.8 1,150.9 864.3
Deferred income taxes, net of allowances 72.2 67.4 -
Goodwill 199.2 199.2 191.2
Intangible assets, net 348.3 359.0 303.0
Other assets   73.2     76.4     60.6  
Total assets $ 4,011.9   $ 4,149.8   $ 2,919.2  
 
Liabilities, Minority Interests and Stockholders' Equity
Accounts payable $ 472.6 $ 537.9 $ 256.9
Accrued expenses 218.6 221.4 162.6
Income taxes payable 13.8 3.4 5.1
Accrued interest 4.0 0.9 0.8
Deferred income on sales to distributors 188.4 187.7 149.5
Deferred income taxes, net of allowances 69.7 65.2 -
Current portion of long-term debt   288.2     286.7     136.0  
Total current liabilities 1,255.3 1,303.2 710.9
Long-term debt 948.8 998.7 752.8
Other long-term liabilities 261.0 247.0 49.3
Deferred income taxes, net of allowances   21.1     22.3     18.2  
Total liabilities   2,486.2     2,571.2     1,531.2  
 
ON Semiconductor Corporation stockholders' equity:
Common stock 5.0 5.0 4.9
Additional paid-in capital 3,102.5 3,098.0 3,016.1
Accumulated other comprehensive loss (48.5 ) (54.5 ) (59.1 )
Accumulated deficit (1,159.8 ) (1,099.3 ) (1,213.9 )
Less: treasury stock, at cost   (397.4 )   (394.1 )   (382.0 )
Total ON Semiconductor Corporation stockholders' equity 1,501.8 1,555.1 1,366.0
Minority interest in consolidated subsidiaries   23.9     23.5     22.0  
Total equity   1,525.7     1,578.6     1,388.0  
Total liabilities and equity $ 4,011.9   $ 4,149.8   $ 2,919.2  
 
(1) The consolidated balance sheet as of July 1, 2011 has been revised in accordance with ASC 250 "Accounting Changes and Error Corrections" for an identified error related to the amounts recognized for foreign exchange gains and losses associated with its newly acquired SANYO business, which impacted accounts payable and accumulated deficit as of July 1, 2011.
ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
UNAUDITED RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA* AND
CASH PROVIDED BY OPERATING ACTIVITIES
(in millions)
 
    Quarter Ended     Nine Months
September 30,   July 1,   October 1, September 30,   October 1,
2011

2011 (1)

2010 2011 2010
 
Net income (loss) $ (49.0 ) $ 35.1 $ 88.4 $ 56.0 $ 231.7
Plus:
Depreciation and amortization 56.9 57.1 42.4 166.8 122.4
Interest expense 16.9 17.8 14.1 52.5 45.0
Interest income (0.3 ) (0.2 ) (0.2 ) (0.8 ) (0.4 )
Income tax provision 17.3 3.2 4.6 21.3 9.4
Net income attributable to minority interest (0.4 ) (0.8 ) (0.6 ) (1.9 ) (2.2 )
Restructuring, asset impairments and other, net 3.7 5.1 0.9 21.2 7.0
Non-cash manufacturing expenses - 30.4 - 80.4 -
Non-cash asset impairment charges 61.2 - - 61.2 -
Non-cash intangible asset impairment 0.5 - - 0.5 -
Non-cash pension plan adjustment 5.7 - - 5.7 -
SANYO inventory valuation adjustment 41.5 - - 41.5 -
Gain on SANYO Semiconductor acquisition - - - (58.0 ) -
Loss on debt repurchase 5.3 - - 5.3 0.7
Expensing of appraised inventory fair market value step up   10.6     22.1     1.0     53.0     7.4  
Adjusted EBITDA* 169.9 169.8 150.6 504.7 421.0
Increase (decrease):
Interest expense (16.9 ) (17.8 ) (14.1 ) (52.5 ) (45.0 )
Interest income 0.3 0.2 0.2 0.8 0.4
Income tax provision (17.3 ) (3.2 ) (4.6 ) (21.3 ) (9.4 )
Net income attributable to minority interest 0.4 0.8 0.6 1.9 2.2
Non-cash pension plan adjustment (5.7 ) - - (5.7 ) -
SANYO inventory valuation adjustment (41.5 ) - - (41.5 ) -
Restructuring, asset impairments, and other, net (3.7 ) (5.1 ) (0.9 ) (21.2 ) (7.0 )
Expensing of appraised inventory fair market value step up (10.6 ) (22.1 ) (1.0 ) (53.0 ) (7.4 )
Stock compensation expense 6.0 10.5 12.2 26.9 41.3
Gain on sale or disposal of fixed assets (1.8 ) (3.0 ) (1.5 ) (6.9 ) (5.2 )
Amortization of debt issuance costs and debt discount 0.6 0.6 0.5 1.8 1.9
Provision for excess inventories 14.9 2.1 2.6 18.7 2.7
Non-cash interest expense 8.9 8.9 8.3 26.5 25.3
Deferred income taxes 2.0 (12.4 ) 1.9 (7.2 ) 5.3
Other 1.1 0.4 (0.7 ) 0.5 (1.5 )
Changes in operating assets and liabilities   12.6     6.3     (30.5 )   8.3     (32.6 )
Net cash provided by operating activities $ 119.2   $ 136.0   $ 123.6   $ 380.8   $ 392.0  
 
 
* Adjusted EBITDA represents net income (loss) before interest expense, interest income, provision for income taxes, depreciation and amortization expense and special items. We use the adjusted EBITDA measure for internal managerial evaluation purposes, as a means to evaluate period-to-period comparisons and as a performance metric for the vesting/releasing of certain of our performance-based equity awards. Adjusted EBITDA is a non-GAAP financial measure. Regulation G and other provisions of the securities laws regulate the use of financial measures that are not prepared in accordance with generally accepted accounting principles. We believe this measure provides important supplemental information to investors. However, we do not, and you should not, rely on non-GAAP financial measures alone as measures of our performance.
 
We believe that non-GAAP financial measures reflect an additional way of viewing aspects of our operations that – when taken together with GAAP results and the reconciliations to corresponding GAAP financial measures that we also provide in our press releases – provide a more complete understanding of factors and trends affecting our business. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with non-GAAP financial measures used by ON Semiconductor or other companies, even if they have similar names.
 
(1) The consolidated statement of operations has been revised in accordance with ASC 250 "Accounting Changes and Error Corrections" for an identified error related to the amounts recognized for foreign exchange gains and losses associated with its newly acquired SANYO business, which are reported as other income and expense in the consolidated statement of operations.
ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
ANALYSIS OF GAAP VERSUS NON-GAAP DISCLOSURES
(in millions, except per share and percentage data)
 
      Quarter Ended     Nine Months Ended
Reconciliation of GAAP gross profit to non-GAAP gross profit:  

September 30,
2011

 

July 1,
2011 (1)

 

October 1,
2010

 

September 30,
2011

 

October 1,
2010

     
GAAP gross profit $ 261.1   $ 266.1   $ 246.5   $ 769.6   $ 718.4  
 
Special items:
a) Expensing of appraised inventory fair market value step up 10.6 22.1 1.0 53.0 7.4
b) Non-cash manufacturing expenses and amortization of intangibles - 30.9 0.6 81.5 1.8

c)

 

SANYO inventory valuation adjustment 41.5 - - 41.5 -
d) Pension plan adjustment   1.5     -     -     1.5     -  
Total Special items   53.6     53.0     1.6     177.5     9.2  
Non-GAAP gross profit $ 314.7   $ 319.1   $ 248.1   $ 947.1   $ 727.6  
 
Reconciliation of GAAP gross margin to non-GAAP gross margin:
 
GAAP gross margin   29.1 %   29.4 %   41.0 %   28.8 %   41.4 %
 
Special items:
a) Expensing of appraised inventory fair market value step up 1.2 % 2.4 % 0.2 % 2.0 % 0.4 %
b) Non-cash manufacturing expenses and amortization of intangibles 0.0 % 3.4 % 0.1 % 3.0 % 0.1 %

c)

 

SANYO inventory valuation adjustment 4.6 % 0.0 % 0.0 % 1.6 % 0.0 %
d) Pension plan adjustment   0.2 %   0.0 %   0.0 %   0.1 %   0.0 %
Total Special items   6.0 %   5.9 %   0.3 %   6.6 %   0.5 %
Non-GAAP gross margin   35.0 %   35.2 %   41.3 %   35.4 %   42.0 %
 
Reconciliation of GAAP net income (loss) to non-GAAP net income:
 
GAAP net income (loss) attributable to ON Semiconductor Corporation $ (49.4 ) $ 34.3   $ 87.8   $ 54.1   $ 229.5  
 
Special items:
a) Expensing of appraised inventory fair market value step up - cost of revenues 10.6 22.1 1.0 53.0 7.4
b) Non-cash manufacturing expenses and amortization of intangibles - cost of revenues - 30.9 0.6 81.5 1.8

c)

 

SANYO inventory valuation adjustment 41.5 - - 41.5 -
d) Pension plan adjustment - cost of revenues 1.5 - - 1.5 -
e) Amortization of acquisition related intangible assets - operating expenses 10.6 11.4 7.9 31.7 23.8
f) Pension plan adjustment - operating expenses 4.2 - - 4.2 -
e) Restructuring, asset impairments and other, net 65.4 5.1 0.9 82.9 7.0
f) Gain on SANYO Semiconductor acquisition - - - (58.0 ) -
g) SANYO Semiconductor acquisition related costs - - - 7.3 -
h) Loss on debt repurchase 5.3 - - 5.3 0.7
i) Non-cash interest expense 8.9 8.9 8.3 26.5 25.3
j) Cash taxes   11.9     (5.0 )   1.3     5.6     1.0  
Total Special items   159.9     73.4     20.0     283.0     67.0  
Non-GAAP net income $ 110.5   $ 107.7   $ 107.8   $ 337.1   $ 296.5  
 
Non-GAAP net income per share:
Basic $ 0.25   $ 0.24   $ 0.25   $ 0.76   $ 0.69  
 
Diluted   0.24   $ 0.23   $ 0.25   $ 0.74   $ 0.67  
 
Weighted average common shares outstanding:
Basic   448.8     446.2     431.6     445.5     430.0  
 
Diluted:   454.8     461.5     439.6     454.3     439.8  
 
Total share-based compensation expense, related to the Company's stock options, restricted stock units, restricted stock awards and employee stock purchase plan is included below.
 
Quarter Ended Nine Months Ended
September 30,

2011

  July 1,

2011

  October 1,

2010

  September 30,

2011

  October 1,

2010

Cost of revenues $ 1.3 $ 1.7 $ 4.5 $ 4.9 $ 11.1
Research and development 1.6 1.9 2.8 5.5 8.1
Selling and marketing 1.3 1.7 2.9 4.9 7.5
General and administrative 1.8 5.2 2.0 11.6 14.3
Restructuring   -     -     -     -     0.3  
Total share-based compensation expense $ 6.0   $ 10.5   $ 12.2   $ 26.9   $ 41.3  
 

Non-GAAP Measures

 
To supplement the consolidated financial results prepared under GAAP, ON Semiconductor uses non-GAAP measures which are adjusted from the most directly comparable GAAP results to exclude items related to amortization of intangible assets, amortization of acquisition-related intangibles, expensing of appraised inventory fair market value step up, inventory valuation adjustments, purchased in-process research and development expenses, restructuring, asset impairments and other, net, goodwill impairment charges, gains and losses on debt prepayment, non-cash interest expense, their related tax effects, income tax adjustments to appropriate cash taxes, and certain other special items as necessary. Management does not consider these charges in evaluating the core operational activities of ON Semiconductor. Management uses these non-GAAP measures internally to make strategic decisions, forecast future results and evaluate ON Semiconductor's current performance. Most analysts covering ON Semiconductor use the non-GAAP measures as well. Given management's use of these non-GAAP measures, ON Semiconductor believes these measures are important to investors in understanding ON Semiconductor's current and future operating results as seen through the eyes of management. In addition, management believes these non-GAAP measures are useful to investors in enabling them to better assess changes in ON Semiconductor's core business across different time periods. These non-GAAP measures are not in accordance with or an alternative to GAAP financial data and may be different from non-GAAP measures used by other companies. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures, even if they have similar names.
 
-- Non-GAAP gross profit and gross margin. The use of this non-GAAP financial measure allows management to evaluate the gross margin of the company's core businesses and trends across different reporting periods on a consistent basis, independent of non-cash items including expensing of appraised inventory fair market value step up and amortization of intangible assets. In addition, it is an important component of management's internal performance measurement and reward process as it is used to assess the current and historical financial results of the business, for strategic decision making, preparing budgets and forecasting future results. Management presents this non-GAAP financial measure to enable investors and analysts to evaluate our revenue generation performance relative to the direct costs of revenue of ON Semiconductor's core businesses.
 
-- Non-GAAP net income and net income per share. The use of these non-GAAP financial measures allows management to evaluate the operating results of ON Semiconductor's core businesses and trends across different reporting periods on a consistent basis, independent of non-cash items including amortization of intangible assets, amortization of acquisition-related intangibles, expensing of appraised inventory fair market value step up, purchased in-process research and development expenses, restructuring, asset impairments and other, net, goodwill impairment charges, gains and losses on debt prepayment, non-cash interest expense, their related tax effects and certain other special items as appropriate. In addition, they are important components of management's internal performance measurement and reward process as they are used to assess the current and historical financial results of the business, for strategic decision making, preparing budgets and forecasting future results. Management presents these non-GAAP financial measures to enable investors and analysts to understand the results of operations of ON Semiconductor's core businesses and to compare our results of operations on a more consistent basis against that of other companies in our industry.
 

(1) The consolidated statement of operations has been revised in accordance with ASC 250 "Accounting Changes and Error Corrections" for an identified error related to the amounts recognized for foreign exchange gains and losses associated with its newly acquired SANYO business, which are reported as other income and expense in the consolidated statement of operations.


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