Faced with having to repay nearly $1.3 billion of long-term debt in a frail business environment, ON Semiconductor is struggling to steer its ship back on course.
The Phoenix-based semiconductor supplier was spun off from Motorola Inc. in 1999 through a $1.6 billion leveraged buyout by the Texas Pacific Group, Fort Worth, Texas, aided by $1.14 billion in debt financing. Since then, ON has tried to diversify beyond a standard discrete semiconductor and analog IC supplier to focus on higher-margin power management and broadband communications products. The company hopes to generate enough cash to repay the bulk of the debt starting in 2005.
But the downturn has depleted ON's sales and earnings this year, forcing the financially strapped company to amend its lending agreements. To garner cash, ON accelerated a cost reduction program in-
volving job cuts and plant consolidation. With ON not expected to regain profitability until next year, industry observers question whether parts of the company will be sold off.
Despite the worrisome issues, Steve Hanson, president and chief executive of ON, is pretty sanguine about the company's future. "We're comfortable the company will weather its way through the downturn," he said.
Perhaps Hanson is taking solace in the fact that ON is now only repaying libor (London Inter-Bank Offer Rate) interest on $1 billion in bank debt, and 12% interest on $260 million in bond debt. Repayment of the $994 million debt principal will occur between 2005 and 2010 through a series of graduated balloon payments, according to the company.
Hanson is adamant that the back-loaded repayment schedule was the proper way to handle the debt. "If we had loaded up on paying back the principal up front, we would have been in significant trouble."
Still in strife
But the industry downturn has put ON in enough trouble. The company's 2001 fiscal second-quarter revenue of $307.3 million was down 14% from the $357 million in the first quarter, and 38% lower than the $531 million in the second quarter of 2000. The second-quarter pro forma net loss of $61.9 million, or 36 cents per diluted share (before a $95.8 million restructuring charge), was even larger than the first quarter's pro forma net loss of $12.7 million, or 7 cents per diluted share.
ON's strained finances recently forced the company out of compliance with the terms of its lending agreements, so the company last week negotiated a waiver and amendment to its credit facilities in order to achieve compliance.
Tore Svanberg, an analyst at Robertson, Stephens & Co., San Francisco, sees several ominous signs in ON's finances.
The company's cash on hand and securities amounted to $175 million-just 12% of its debt. "That's not good for a company losing money," he said.
Svanberg projects that ON's gross margins in this tough environment will continue to drop to 13% in the third fiscal quarter, from 18% in the second. That will hamper ON's ability to fund research and development, he said.
"Analog product companies usually funnel at least 10% of their revenue into R&D," Svanberg added.
Hanson said that about 7% of revenue now goes into R&D, tripling the 2.3% of two years ago, with 80% of R&D funding going toward power management and broadband products.
To control costs, ON recently moved its Guadalajara, Mexico, operations to Seremban, Malaysia, and moved back-end assembly operations from Seremban to Leshan, China. The company also transferred a 4in.-wafer line in Aizu, Japan, to a 6in. line in the same facility. The restructuring actions resulted in the layoffs of 3,000 employees and will save an additional $300 million annually by the end of 2002.
Weak industry conditions pressured ON to accelerate its restructuring, Hanson said. "We've compressed our five-year restructuring plan into two years," he said.
But whether these actions improve ON's short-term future is unclear. Hanson expects the company's third-quarter revenue to be lower than the second.
"We believe the third quarter is the bottom of the trough, and the fourth will begin an upturn."
At least a year away
Analysts don't see ON recovering for another year.
"The company appears to be doing enough now to control costs and should return to profitability within 12 to 18 months," said Brian Marshall, an analyst at J.P. Morgan Chase & Co. in San Francisco.
But if it continues to flounder, could ON be on the block? Hanson flatly denied the company, or any part of it, is up for sale.
But analysts believe portions could be sold off. "You'd be acquiring a horrific balance sheet, so no one will buy the whole company," Marshall said.
"I wouldn't be surprised if they sell off a division or a plant," Robertson Stephens' Svanberg said. He speculated that companies with discrete semiconductor lines, such as Vishay or Fairchild, might be interested.
Neither of those companies could be reached for comment.
In the meantime, both Hanson and analysts agree ON's future relies on its commitment to power management and broadband products.
"The company has tremendous technology and manufacturing expertise," Marshall said. "If ON focuses on broadband and power management, it will benefit from higher growth rates."
In power management, ON is a major player. The company's $430 million in power management revenue in 2000 equaled National Semiconductor and trailed only Texas Instruments' $570 million, according to Venture Development Corp., Natick, Mass.
ON bolstered its power management line by acquiring Cherry Semiconductor Corp., Greenwich, R.I., for $253 million in April 2000. But the purchase was heavily financed through ON's credit facilities and added $220 million in debt.
In the first half of 2001, ON reported that 59% of its $664.3 million in revenue was derived from standard semiconductors including discrete semiconductors and ICs. Power management products-mostly DC/DC regulators and linear regulators-accounted for 28.2%, while broadband ICs trailed at 12.8%.
ON is continuing new-product development in these areas. "We've just announced a step-down power controller that meets Intel's last VRM specs," Hanson said. He added that ON is developing multichip ICs integrating clock and data management functions.
The company is also looking at integrated passive devices. "All of our R&D investment in discrete products involves integrating passive and active parts," Hanson said. OR