ONNN

ON Semiconductor Corporation (ONNN)

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ON Semiconductor (ONNN)

Q2 2011 Earnings Call

August 03, 2011 5:00 pm ET

Executives

Keith Jackson - Chief Executive Officer, President, Director, Member of Executive Committee, Chief Executive Officer of Semiconductor Components Industries LLC and President of Semiconductor Components Industries LLC

Donald Colvin - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Chief Financial Officer of SCI LLC and Executive Vice President of SCI LLC

Ken Rizvi - Vice President of M&A, Real Estate & Investor Relations and Treasurer

Analysts

Craig Berger - FBR Capital Markets & Co.

Tristan Gerra - Robert W. Baird & Co. Incorporated

James Schneider - Goldman Sachs Group Inc.

Parag Agarwal - UBS Investment Bank

Christopher Danely - JP Morgan Chase & Co

Ross Seymore - Deutsche Bank AG

Kevin Cassidy - Stifel, Nicolaus & Co., Inc.

Christopher Caso - Susquehanna Financial Group, LLLP

Craig Ellis - Caris & Company

Jonathan Smigie - Raymond James & Associates, Inc.

John Pitzer - Crédit Suisse AG

Ramesh Misra - Brigantine Advisors LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the ON Semiconductor Second Quarter Financial Earnings Call. [Operator Instructions] I would now like to turn the conference over to Ken Rizvi. Please go ahead, sir.

Ken Rizvi

Thank you, Tiffany. Good afternoon, and thank you for joining ON Semiconductor Corporation's Second Quarter 2011 Conference Call. I'm joined today by Keith Jackson, our President and CEO; and Donald Colvin, our CFO. This call is being webcast on the Investor Relations section of our website, at onsemi.com, and a replay will be available for approximately 30 days following this conference call, along with our earnings release for the second quarter. The script for today's call is posted on our website, and will be furnished via a Form 8-K filing.

Our earnings release in this presentation includes certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measures under GAAP are in our earnings release and posted separately on our website in the Investor Relations section. In the upcoming quarter, we will be attending the Pacific Crest Technology Forum on August 9; the Citi Technology Conference on September 7; and the Deutsche Bank Securities Technology Conference on September 13.

During the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The words believe, estimate, anticipate, intend, expect, plan or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risk and uncertainties that could cause actual events or results to differ materially.

Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements, are described in our earnings release, Form 10-K, Form 10-Qs and other filings with the SEC. The company assumes no obligation to update forward-looking statements to reflect actual results, change assumptions or other factors.

Now let's hear from Donald Colvin, who will provide an overview of the second quarter results. Donald?

Donald Colvin

Thank you, Ken, and thanks to everyone joining us today. ON Semiconductor Corporation today announced that total revenues in the second quarter of 2011 were approximately $905.8 million, up approximately 4% from the first quarter of 2011. Excluding SANYO Semiconductor, ON Semiconductor historical revenues were up approximately 7% sequentially to approximately $631.5 million in the second quarter. During the second quarter of 2011, the company reported GAAP net income of $41 million or $0.09 per fully diluted share. The second quarter 2011 GAAP net income included net charges of $73.4 million or $0.16 per fully diluted share from special items, which are detailed in schedules included in our earnings release.

GAAP gross margin in the second quarter was 29.4%. Included in our GAAP gross margin is approximately $53 million of special items, approximately $31 million relates to the expensing of noncash manufacturing expenses associated with our SANYO Semiconductor acquisition, and approximately $22 million relates to the expensing of upraised inventory fair market value step up. Non-GAAP gross margin in the second quarter of 2011 was 35.2%.

Second quarter 2011 gross profit and net income were slightly less than anticipated due to a more adverse impact from the March 2011 earthquake and resulting tsunami in Japan, and manufacturing cost increases from commodity prices and foreign currencies. For SANYO Semiconductor, fab manufacturing activity was approximately 70% of the pre-earthquake second quarter manufacturing forecast. In addition, since the third quarter of 2010, commodity and foreign currency headwinds have impacted total company gross margins by approximately 200 basis points. Second quarter 2011 non-GAAP net income was $114.4 million or $0.25 per fully diluted share.

We exited the second quarter of 2011 with cash, cash equivalents and short-term investments of approximately $868.8 million, a record for the company. At the end of the second quarter, total days sales outstanding were approximately 58 days, down approximately 2 days compared with the first quarter of 2011. Internal inventories were down approximately 3 days to 107 days. Internal inventories are still elevated primarily due to the elevated inventories acquired as part of the SANYO Semiconductor acquisition. Included in our total internal inventory is approximately $14 million of bridge inventory associated with the shutdown of our factories.

At the end of the week, we will shut down our remaining fabrication facility in Phoenix. With this closure and the related production move to our site in Malaysia, we expect incremental cost savings of approximately $2 million per quarter. Distribution inventories in the second quarter increased as expected to approximately 11 weeks exiting the quarter. We expect to see distribution inventory dollars decrease in the third quarter. Cash capital expenditure during the second quarter were approximately $85 million. We currently anticipate total expenditures for 2011 of approximately $340 million, which includes SANYO Semiconductor.

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