Why did the company report a net loss in 2002 despite improved gross margins?

Interest expense of $145.2 million exceeded operating income of $14.7 million, and other items including a $6.5 million extraordinary loss on debt prepayment and $8.8 million of income tax provision contributed to a net loss of $141.9 million. Gross profit improved to $285.5 million, but high leverage costs absorbed most of the operating gains.

How much debt does the company carry, and what are its key maturities?

Total long-term debt was $1,403.2 million at December 31, 2002, including $701.6 million under senior bank facilities, $291.4 million of 12% second-lien senior secured notes due 2008, $260.0 million of 12% senior subordinated notes due 2009, and $126.9 million under a junior subordinated note to Motorola due 2011. Scheduled maturities are $9.3 million in 2003, $11.8 million in 2004, $236.9 million in 2005, $280.9 million in 2006 and $176.8 million in 2007, with $687.5 million thereafter. The March 2003 first-lien notes add further debt due in 2010.

What cost savings has management identified, and what remains to be realized?

Actions from the 2000 program that were completed in the fourth quarter of 2002 produced $365.0 million of annualized savings compared with the first quarter of 2001. The 2002 program is expected to produce an estimated $80.0 million of savings in 2003 and $125.0 million in each year thereafter, measured against the third quarter of 2002 cost structure.

What are the main risks flagged for the stock and the business?

The filing cites continued revenue pressure from a prolonged semiconductor downturn, pricing pressure, and a expected 200 to 300 basis point gross margin decline in the first quarter of 2003. It also notes heavy leverage and restrictive debt covenants, the move to the Nasdaq SmallCap Market, potential dilution from the Series A convertible preferred stock held by Texas Pacific Group affiliates, and pending securities class action litigation.

What is the company's outlook for 2003?

Management expects the market to remain challenging but to begin recovering in the latter half of 2003, supporting a 4% to 5% increase in total revenues for the year. It targets gross margins above 30% per quarter by year-end, research and development near 6% of revenue, sales and marketing near 5%, and positive earnings per share in the fourth quarter of 2003.

ON 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 25, 2003. Cited figures are marked; the original filing is the authoritative source.

ON Semiconductor Corporation, filing under the name ON Semiconductor Corporation, reported a 2002 net loss of $141.9 million^a on total revenues of $1,084.5 million, down 10.7% from $1,214.6 million in 2001.

Gross margin improved to 26.3% of revenue from 17.7% in 2001, driven by restructuring savings and lower excess-inventory provisions. Operating income was $14.7 million^b in 2002 versus an operating loss of $245.0 million in 2001, and the company reported a stockholders' deficit of $662.1 million at December 31, 2002. Restructuring and other charges fell to $27.7 million from $150.4 million, and management cites $365.0 million of annualized savings from completed 2000-plan actions, with further savings of $80.0 million expected in 2003.

The balance sheet is heavily leveraged. Total long-term debt including current maturities was $1,403.2 million^c, interest expense was $145.2 million, and cash was $182.4 million. In March 2003 the company issued $200.0 million of 12% first-lien senior secured notes due 2010 at 95.467% of par, and it expects net interest expense of approximately $150 million in 2003.

Operating cash flow was $30.6 million^d in 2002, and management expects capital expenditures of roughly $50-$60 million in 2003. The company was in compliance with its debt covenants at year-end and expects to remain so through 2003. The filing also highlights risks investors should weigh.

Management guides to a 4% to 5% increase in 2003 revenue and expects gross margins to exceed 30% per quarter by year-end, but also anticipates a 200 to 300 basis point gross margin decline in the first quarter of 2003 from pricing pressure. The common stock moved to the Nasdaq SmallCap Market in October 2002, and Texas Pacific Group affiliates hold over 76% of the voting power. Securities class action litigation related to the 2000 IPO remains pending, although the court dismissed the antifraud claims in February 2003.

02—Key points

Key Highlights

Revenue fell 10.7% to $1,084.5 million in 2002 from $1,214.6 million in 2001, reflecting lower average selling prices of about 10% and reduced foundry revenue.
Gross margin rose to 26.3% in 2002 from 17.7% in 2001, helped by $175.2 million of cost reduction activities and lower excess-inventory provisions.
Operating income was $14.7 million in 2002, compared with an operating loss of $245.0 million in 2001; the net loss narrowed to $141.9 million from $831.4 million.
Total long-term debt including current maturities was $1,403.2 million at December 31, 2002, and the company reported a stockholders' deficit of $662.1 million.
Issued $200.0 million of 12% first-lien senior secured notes due 2010 in March 2003 at 95.467% of par, with net proceeds of $180.9 million used to prepay senior bank facilities.
Management expects 2003 total revenues to rise 4% to 5%, with net interest expense of about $150 million and capital expenditures of $50-$60 million.
Texas Pacific Group affiliates hold over 76% of voting power, and the common stock moved to the Nasdaq SmallCap Market effective October 25, 2002.

03—Questions

Frequently Asked Questions

Why did the company report a net loss in 2002 despite improved gross margins?
Interest expense of $145.2 million exceeded operating income of $14.7 million, and other items including a $6.5 million extraordinary loss on debt prepayment and $8.8 million of income tax provision contributed to a net loss of $141.9 million. Gross profit improved to $285.5 million, but high leverage costs absorbed most of the operating gains.
How much debt does the company carry, and what are its key maturities?
Total long-term debt was $1,403.2 million at December 31, 2002, including $701.6 million under senior bank facilities, $291.4 million of 12% second-lien senior secured notes due 2008, $260.0 million of 12% senior subordinated notes due 2009, and $126.9 million under a junior subordinated note to Motorola due 2011. Scheduled maturities are $9.3 million in 2003, $11.8 million in 2004, $236.9 million in 2005, $280.9 million in 2006 and $176.8 million in 2007, with $687.5 million thereafter. The March 2003 first-lien notes add further debt due in 2010.
What cost savings has management identified, and what remains to be realized?
Actions from the 2000 program that were completed in the fourth quarter of 2002 produced $365.0 million of annualized savings compared with the first quarter of 2001. The 2002 program is expected to produce an estimated $80.0 million of savings in 2003 and $125.0 million in each year thereafter, measured against the third quarter of 2002 cost structure.
What are the main risks flagged for the stock and the business?
The filing cites continued revenue pressure from a prolonged semiconductor downturn, pricing pressure, and a expected 200 to 300 basis point gross margin decline in the first quarter of 2003. It also notes heavy leverage and restrictive debt covenants, the move to the Nasdaq SmallCap Market, potential dilution from the Series A convertible preferred stock held by Texas Pacific Group affiliates, and pending securities class action litigation.
What is the company's outlook for 2003?
Management expects the market to remain challenging but to begin recovering in the latter half of 2003, supporting a 4% to 5% increase in total revenues for the year. It targets gross margins above 30% per quarter by year-end, research and development near 6% of revenue, sales and marketing near 5%, and positive earnings per share in the fourth quarter of 2003.

04—Continue

← View all 10-K filings