01—Abstract
Summary
Summary of the 10-K filed February 21, 2018. Cited figures are marked; the original filing is the authoritative source.
ON Semiconductor Corporation reported total revenues of $5,543.1 milliona for 2017, up from $3,906.9 million in 2016, with the increase primarily attributable to the acquisition of Fairchild, which closed on September 19, 2016 for an aggregate purchase price of approximately $2,532.2 million.
Gross margin rose to 36.7% from 33.2%, driven by higher factory utilization, product mix and contributions from Fairchild. Net income attributable to ON Semiconductor Corporation was $810.7 millionb, or $1.89 per diluted share, compared with $182.1 million in 2016. The filing states that the result was attributable to the impact of U.S. tax reform, including a provisional income tax benefit of $449.9 million under the Tax Cuts and Jobs Act, as well as improved results and contributions from the acquired Fairchild business.
Debt remains a central consideration for investors. As of December 31, 2017, the company had $3,175.0 millionc of outstanding indebtedness, including a $1.2 billion Term Loan B facility and $400.0 million drawn on a $1.0 billion Revolving Credit Facility, plus $575.0 million of 1.625% convertible notes issued in March 2017 and $690.0 million of 1.00% convertible notes. Cash and cash equivalents were $949.2 million, and cash flow from operating activities was $1,094.2 million in 2017, against capital expenditures of $387.5 million.
The company repurchased $25.0 milliond of stock in 2017 and had $603.2 million remaining under its 2014 Share Repurchase Program. Management estimates Q1 2018 revenues of $1,340.0 to $1,390.0 million. The filing also highlights concentration and industry risks: Power Solutions Group, Analog Solutions Group and Image Sensor Group generated 50.9%, 35.2% and 13.9% of 2017 revenues, respectively.
Sales to distributors represented approximately 60% of revenues in 2017, and the company disclosed ongoing patent litigation with Power Integrations, Inc., with an estimated range of possible losses for all PI cases of approximately $4 million to $20 million in the aggregate. The company has never declared or paid cash dividends on its common stock since its IPO.
02—Key points
Key Highlights
- Total revenues rose to $5,543.1 million in 2017 from $3,906.9 million in 2016, primarily due to the full-year contribution of the Fairchild acquisition.
- Gross margin increased to 36.7% in 2017 from 33.2% in 2016, attributed to higher factory utilization, product mix and Fairchild contributions.
- Net income attributable to ON Semiconductor Corporation was $810.7 million ($1.89 diluted EPS) in 2017, including a provisional $449.9 million income tax benefit from U.S. tax reform.
- Total outstanding indebtedness was $3,175.0 million at December 31, 2017, with $1,204.5 million in Term Loan B borrowings and $575.0 million of 1.625% convertible notes due 2023.
- Cash and cash equivalents of $949.2 million at year-end, with operating cash flow of $1,094.2 million and capital expenditures of $387.5 million in 2017.
- Power Solutions Group revenue of $2,819.3 million (50.9% of total) led segment performance, while Analog Solutions Group revenue was $1,950.9 million and Image Sensor Group revenue was $772.9 million.
- Management guided Q1 2018 revenues to $1,340.0 to $1,390.0 million and gross margin to 36.4% to 38.4%.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, On Semiconductor kept $0.15.
- Revenue$5.54B100.0%
- Cost of revenue−$3.51B63.3%
- Gross profit$2.04B36.7%
- Operating costs−$1.35B24.4%
- Operating income$681.6M12.3%
- Interest, other & tax$129.1M2.3%
- Net income$810.7M14.6%
Where FY2017 revenue went
$5.54B- Cost of revenue: $3.51B, 63% of revenue
- Operating costs: $1.35B, 24% of revenue
- Operating income: $681.6M, 12% of revenue
Kept 12% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 21, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $5.54B$3.91B | +41.9% |
| Cost of Revenue | $3.51B$2.61B | +34.6% |
| Gross Profit | $2.04B$1.30B | +56.5% |
| Operating Expenses | $1.35B$1.05B | +28.5% |
| Operating Income | $681.60M$246.80M | +176.2% |
| Interest Expense | $141.20M$145.30M | −2.8% |
| Net Income | $810.70M$182.10M | +345.2% |
| EPS (Basic) | $1.92$0.44 | +336.4% |
| EPS (Diluted) | $1.89$0.43 | +339.5% |
| Shares Outstanding (Basic) | 421.90M415.20M | +1.6% |
| Shares Outstanding (Diluted) | 428.30M420.00M | +2.0% |
05—Questions
Frequently Asked Questions
What drove the large increase in revenue and net income in 2017?
Revenue increased $1,636.2 million to $5,543.1 million, primarily because 2017 included a full twelve months of Fairchild, which was acquired on September 19, 2016. The filing also cites $155.1 million of revenue from a change in how distributor sales are recognized in Q1 2017. Net income rose to $813.0 million, with the company attributing the increase in net income attributable to ON Semiconductor to U.S. tax reform benefits and improved results from the acquired Fairchild business.
How much debt does ON Semiconductor carry and when does it come due?
As of December 31, 2017, gross long-term debt including current maturities was $3,175.0 million. Expected maturities are $248.1 million in 2018, $47.6 million in 2019, $699.7 million in 2020, $400.0 million in 2021 and $1,779.6 million thereafter. The Term Loan B facility matures March 31, 2023 and the Revolving Credit Facility matures September 19, 2021. The filing notes that the debt is secured by substantially all of the company's personal property and material real property assets.
What is the company's capital return policy and how much has been used?
The company's Capital Allocation Policy, announced December 1, 2014, intends to return approximately 80 percent of free cash flow, less repayments of long-term debt, to stockholders, subject to strategic plans, market conditions and the Board's discretion. In 2017 the company repurchased only $25.0 million of common stock, tied to the 1.625% Notes offering, and $603.2 million remained available under the 2014 Share Repurchase Program at year-end. The company has neither declared nor paid cash dividends since its initial public offering, and its credit agreement limits dividends to $100.0 million unless leverage conditions are met.
What are the main risks identified in the filing?
The filing highlights semiconductor industry cyclicality, customer concentration (the five largest customers per segment accounted for approximately 43%, 35% and 48% of segment revenue, respectively), reliance on automotive, industrial and communications end markets (31%, 25% and 20% of 2017 revenue), and heavy indebtedness with variable-rate exposure. It also discloses ongoing patent litigation with Power Integrations, Inc., and risks from international operations, currency fluctuations, and the uncertain impact of the Tax Cuts and Jobs Act.
06—Continue