ON Semi Announces Additional Cost Reduction Measures; Updates Guidance

January 08, 2009 by Jeff Shepard

ON Semiconductor Corp. announced that it is taking additional cost reduction measures. In the fourth quarter of 2008, the company began taking initial actions to reduce overall spending levels. The actions included the reduction of 2009 planned capital expenditures to $50 to $60 million from normalized yearly levels of approximately $130 to $140 million, temporary site shutdowns during the fourth quarter of 2008, a hiring freeze, the elimination of second half of 2008 bonus payments and strict controls over all discretionary spending.

The company is also planning a series of additional permanent and temporary actions to reduce its overall cost structure. These planned actions include: factory closures planned for the end of 2009 will be brought forward to the middle of 2009; evaluation of other front-end manufacturing locations are ongoing with the objective of closing an additional location by the end of 2009; factory shutdowns for 4 to 6 weeks in the first and second quarter of 2009; and a reduction in worldwide personnel of approximately 1,500 which equates to a reduction of approximately 10% of total payroll expenses.

The combination of these and other actions the company is taking is expected to reduce total fixed costs by approximately $40 to $50 million a quarter, of which approximately $10 to $15 million will be from temporary actions. These actions are expected to reduce operating expenses by approximately $20 million from the third quarter of 2008 run-rates and exclude the operating expense impact associated with the Catalyst Semiconductor acquisition which closed in the fourth quarter of 2008. The company expects initial benefits from these actions to start in the first quarter of 2009 and to increase throughout the year. Once completed, these actions are expected to reduce the revenues required for cash breakeven to approximately $340 million a quarter. To execute these cost reduction actions, the company anticipates it will use approximately $20 to $30 million of cash over the next 5 quarters and incur restructuring and other charges, a portion of which will be recorded in the fourth quarter of 2008.

The company also announced today that it is revising its fourth quarter 2008 outlook provided on its earnings release and conference call on Oct. 30, 2008. The company had previously guided fourth quarter 2008 revenues to be approximately $500 to $550 million or down approximately 5 to 14 percent sequentially from the third quarter of 2008. As a result of the continued deterioration in the global economy, ON Semiconductor now anticipates fourth quarter revenues to be approximately $480 to $490 million or down approximately 16 to 17 percent sequentially from the third quarter of 2008. Due to the timing of the availability of inventory and sales distribution information from our distribution partners globally and ON Semiconductor’s related recognition of revenue on a sell-thru basis, the company will provide full details on fourth quarter and 2008 annual results in its earnings release to be scheduled during the first week of February.

"Our updated fourth quarter 2008 revenue outlook reflects the reduction in demand we have experienced as a result of deteriorating conditions in the global economy," said Keith Jackson, ON Semiconductor president and CEO. "In the fourth quarter of 2008 we utilized approximately $49.4 million of cash to repurchase $60.9 million of our zero coupon convertible senior subordinated notes and still managed to grow our cash and cash equivalents balance by around $30 million to approximately $450 million. Based on the limited visibility we have for the first quarter of 2009, we anticipate another challenging quarter for the semiconductor industry and the company with revenues down more than normal seasonality. While we are hopeful that the economy will improve as we move through 2009, we have and will continue to examine our overall spending and are prepared to take additional actions to ensure we remain competitive and are positioned to generate positive free cash flow in this challenging environment."