ON Semiconductor forges ahead

Tag : all industrial product

ON Semiconductor Corp. continues to beat the odds.
The 9-year-old Phoenix chip maker has survived an ill-timed 1999leveraged buyout, the 2001 semiconductor-market crash, financialwoes at its biggest customers - Motorola, Ford and GM - and fiercecompetition from companies many times its size.
Now, a series of key acquisitions have diversified its product mixand customer base and enabled it to lower costs and streamlinemanufacturing.
"They've transitioned into a diversified semiconductor company,"noted W. Blake Fischer, analyst at Stifel Nicolaus & Company, in arecent report.
ON Semiconductor was the leader among a half dozen large Arizonacompanies that posted second-quarter stock gains. ON shares closedup 51 percent for the quarter, at $9.17, on June 30.
Its share price has been buoyed by positive first-quarter earnings,an analyst's "buy" recommendations, share buybacks and a string ofacquisitions that is starting to show positive results.
The $615 million deal earlier this year for Idaho chipmaker AMISHoldings Inc. provided needed diversity to ON's product mix andexpanded its customer base.
The all-stock deal for the parent of Pocatello's AMI SemiconductorInc. will result in an estimated $50 million in annual cost savingsand allow ON Semiconductor to boost production at its Gresham,Ore., factory.
The company bought the 500,000-square-foot plant from LSI LogicCorp. for $105 million in 2006, but it never has fully utilized thefacility.
After acquiring AMI, ON quickly moved production from a 5-inchwafer plant in Pocatello to Gresham and announced plans to closetwo plants in Slovakia and move production to the Oregon facility.
Plant closures, along with the planned shutdown this month of itsCom 1 fabrication facility in Phoenix, will enable it to eliminateabout 900 jobs and streamline production.
"We have an opportunity to get more efficient in ourmanufacturing," said Keith Jackson, 52, president and CEO.
Jackson said no plans exist to close its main 1.4million-square-foot plant in Phoenix, which has about 1,200employees. It employs more than 11,700 worldwide.
While other companies close plants and move production overseas, ONis comfortable with its domestic operations.
When time comes to expand in a few years, Jackson said it likelywould look for a secondhand facility in the U.S.
"There should be a lot of good buys in North America," he said,noting the significant savings in buying an existing plant. "Wepaid $105 million for Gresham, after LSI spent more than $1 billionto build it."
Jackson came to ON Semiconductor in 2002 to turn around the ailingchip maker.
The company was carved out of Motorola Inc. in 1999, saddled with$1.5 billion in debt and left totally unprepared to weather thetech blowup in 2000 and 2001. ON Semiconductor lost $831 million in2001, and many people prematurely predicted the company's demise.
Instead, Jackson closed plants, slashed jobs, developed products,restructured debt and pointed the company in a new direction. Aftera string of losses, he has a dozen profitable quarters under hisbelt.
Jackson, who came from Fairchild Semiconductor Corp., recognizedthat battery life would become critical for electronic products inthe future. ON began to specialize in power-management chips thathelp devices use electricity more efficiently, thereby cutting downon battery drain.
Its products found homes in automobiles, handheld devices such ascellphones and MP3 players, computers, industrial and generalconsumer products, which have become the company's five focusareas.
Its computer business, its fastest-growing segment, got a boostwith last year's $185 million cash acquisition of Analog DevicesInc.'s voltage regulation and thermal monitoring lines. Theseproducts manage the power consumption of computers and complementON Semiconductor's existing products. Computing products accountfor 23 percent of its estimated annual sales of $2.3 billion.
Despite problems at its former parent Motorola Inc., itscommunications segment, which includes cellphones, is growing. Asmore features are added to those products, Jackson sees demandcontinuing to grow for chips to manage power consumption.
The AMI deal gave a boost to ON Semiconductor's automotivebusiness, which accounts for 19 percent of its revenues and allowedthe company to expand into making chips for medical equipment.
While ON specialized in more generic chips that could be used by avariety of customers, AMI produces chips tailored to specificbuyers. Those customers often buy both types and, now, can get themboth from ON Semiconductor.
"It makes us much more important to our customers," Jackson said.
It also adds diversity to the company's product mix. Prior to theacquisition, 65 percent of its business came from standardsemiconductor sales and 35 percent from more complex integratedcircuits.
Now, it's about 50-50.
Still, the financial ills of U.S. automakers, some of its biggestcustomers, have made their impact felt at ON Semiconductor. About40 percent of its automotive sales come from U.S. automakers, whichis substantially less than the 80 percent a few years ago.
It also has struggled with Japanese carmakers, but the company hasfound customers and growth in emerging markets such as China, Indiaand Eastern Europe.
Another problem Jackson has addressed is the company's substantialdebt load.
Since 2003, ON Semiconductor has reduced its long-term debt from$1.3 billion to $1.1 billion. Yet, more important, it has cut itsinterest expense, through restructuring the debt from $151 milliona year to $39 million.
Instead, the company has been using it for acquisitions and to buyback shares. The company bought back 5 million shares in 2007 andis proposing to spend $100 million on share repurchases this year.
Fischer, the analyst, noted that ON Semiconductor has restructuredits balance sheet, expanded its manufacturing and engineeringcapabilities and broadened its product offerings through recentacquisitions.
Indeed, the company surprised analysts and investors in the firstquarter. Its sales were up 13 percent, at $422 million,significantly ahead of the $386million analysts had forecast. Theresults prompted Bobby Burleson, analyst at Canaccord Adams, to puta buy recommendation on the stock, forcing others to take notice.
Since the first of April, ON's share price has risen from $6.08 toclose Thursday at $9.22.
Jackson believes the shares remain significantly undervalued butnoted: "As we continue to deliver results on our acquisitions,investors will get excited."