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TEXT-S&P revises ON Semiconductor outlook to positive
February 29, 2012 / 9:04 PM / in 6 years

TEXT-S&P revises ON Semiconductor outlook to positive

Overview	
     -- U.S. semiconductor manufacturer ON Semiconductor's cash flow 	
generation has proven resilient through the industry inventory correction and 	
the impact of natural disasters.	
     -- We are revising our rating outlook on the company to positive from 	
stable.	
     -- The positive outlook reflects the potential for an upgrade if ON can 	
improve its profitability through the successful integration of its acquired 	
SANYO unit while maintaining adjusted leverage at or below the mid-2x level.	
	
Rating Action	
On Feb. 29, 2012, Standard & Poor's Ratings Services revised its rating 	
outlook on Phoenix-based ON Semiconductor Corp. to positive from stable. At 	
the same time, we affirmed our existing ratings on the company, including the 	
'BB' corporate credit rating. 	
	
At the same time, we affirmed our 'BB' corporate credit rating on subsidiary 	
Semiconductor Components Industries LLC and revised our outlook to positive 	
from stable.	
	
The outlook revision to positive reflects ON's cash flow resiliency through 	
the current industry inventory correction and the impact of external shocks 	
from natural disasters in Japan and Thailand during the past year on its 	
operations.	
	
Rationale	
We anticipate that the industrywide semiconductor inventory correction will be 	
largely completed by the first quarter of 2012, with sequential improvements 	
through the remainder of the year. We expect ON's full-year revenues and 	
EBITDA margin to be lower year over year in 2012 due to the residual impact 	
from Thailand flooding, but also anticipate that the company will be able to 	
sustain adjusted leverage at or below mid-2x through the cycle while 	
generating consistent cash flow. 	
	
Standard & Poor's views ON's business risk profile as "fair" according to our 	
criteria. The company is a vertically integrated manufacturer of logic, power, 	
and analog integrated circuits, and discrete semiconductors with over 42,000 	
products and nearly 50 billion units shipped in 2011. The analog and discrete 	
markets remain highly fragmented but ON maintains leadership in certain 	
submarkets, especially in high-performance, energy-efficient products. ON's 	
diverse end markets and customer base also provide a degree of revenue 	
stability.	
	
The acquisition of SANYO Semiconductor in early 2011 increased ON's scale and 	
continues the evolution of its business model toward a primarily proprietary 	
analog semiconductor provider with less reliance on lower margin standard 	
products. For now, however, ON generates margins that are below both its 	
pre-SANYO period and those of many of its peers, reflecting SANYO's 	
below-average margins and ON's still significant exposure to commodity-like 	
products. In addition, the confluence of an industry inventory correction, the 	
tsunami in Japan, and flooding in Thailand have severely affected overall 	
profitability, especially within SANYO. 	
	
We expect ON's revenues to decline in fiscal 2012, lagging the broader 	
semiconductor sector, as it recovers from the inventory correction and the 	
impact of the flooding on its operations. Revenues are likely to bottom out in 	
the first quarter of 2012 before experiencing sequential growth. We also 	
anticipate EBITDA margins to be lower in fiscal 2012 but with sequential 	
improvements throughout the year. We note that this will largely depend on the 	
pace of SANYO's recovery, as well as the ongoing fab consolidation program.	
	
Standard & Poor's currently views ON's financial risk profile as "significant" 	
(according to our criteria). Adjusted leverage as of December 2011 was 2.1x. 	
However, EBITDA on a trailing-12-month basis is likely to decline in the near 	
term before operating performance rebounds in the second half of 2012. We 	
estimate that in this scenario leverage could peak in the mid-2x area. As 	
industry revenues recover and ON's margins normalize, we believe that ON may 	
again seek growth opportunities through acquisitions or return cash to 	
shareholders. However, we believe that management should be able to accomplish 	
these objectives within the bounds of around 2.5x leverage through a cycle, 	
given its cash position and cash generation.	
	
Liquidity	
We view ON's liquidity as "adequate" (as defined in our criteria), with 	
sources of cash likely to exceed uses for the next 12 to 24 months. Sources 	
include cash and investments of $901 million as of December 2011, a new 	
undrawn $325 million revolving credit facility, and expected discretionary 	
cash flow near $150 million during the next 12 months. Uses of cash include 	
modest investments in working capital, capital spending in excess of $275 	
million, and the potential redemption of various debt instruments in excess of 	
$300 million during 2012.	
	
Our assessment of ON's liquidity profile incorporates the following 	
expectations, assumptions, and factors: 	
     -- We expect sources of liquidity will exceed uses by 1.2x or more, and 	
that net sources would be positive, even with a 15% to 20% drop in EBITDA. 	
     -- Because of the company's good cash position, we believe it could 	
absorb low-probability, high-impact shocks and that it has adequate access to 	
capital markets. 	
     -- About two-thirds of the cash balance is located in the U.S. 	
	
Outlook	
The positive outlook reflects our expectation that ON will continue to 	
generate good cash flow through 2012. We anticipate that revenues and 	
profitability are likely to decline in the near term due to the effects of the 	
inventory correction and Thailand flooding. If ON can improve its 	
profitability through the successful integration of SANYO and fab 	
consolidation while maintaining debt to EBITDA at or below the mid-2x area, we 	
would consider raising the rating. 	
	
Alternatively, if operating performance remains challenged, or if the company 	
pursues a more aggressive financial policy via a sizable debt-financed 	
acquisition or shareholder returns, resulting in leverage above 3x, we could 	
revise the outlook to stable.	
Ratings List	
	
Ratings Affirmed; Outlook Action	
                                        To                 From	
ON Semiconductor Corp.	
Semiconductor Components Industries LLC	
 Corporate Credit Rating                BB/Positive/--     BB/Stable/--	
	
Ratings Affirmed; Recovery Ratings Unchanged	
	
ON Semiconductor Corp.	
 Subordinated                           BB                 	
   Recovery Rating                      4

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