Gold prices edge higher with focus on Ukraine-Russia, Jackson Hole
Investing.com -- S&P Global Ratings has revised its outlook for ON Semiconductor Corp. (NASDAQ:ON) from positive to stable due to a deeper cyclical downturn than anticipated, resulting in lower profitability. The company’s ’BB+’ issuer credit and ’BB’ issue-level ratings on its senior unsecured notes have been affirmed.
The ratings agency has significantly lowered its revenue and EBITDA margin projections for the semiconductor company, expecting a 15%-17% revenue decline in 2025. The weak demand and inventory corrections in the automotive and industrial end-markets are anticipated to result in lower EBITDA margins of around 31%, impacted by adverse operating leverage effects.
Despite the downturn, the company is expected to maintain solid free operating cash flow (FOCF) as it reduces inventory, manufacturing capacity, and general fixed cost structure. The timing and speed of a market recovery remain uncertain, but S&P believes the business is well positioned to benefit from operating leverage and better utilization rates when the market does recover.
S&P Global Ratings expects an increase in FOCF in 2025, but warns that a prolonged demand downturn could lead to a midteens percent area revenue decline and EBITDA margins falling to just above 30%. The company’s financial policy could allow for leverage to rise above 2x for strategic acquisitions, even though leverage could remain well below 1x.
ON Semiconductor’s EBITDA margins are expected to fall to just above 30% in 2025 due to the continued weak demand environment. The company had previously projected a return to modest revenue growth of 2%-4% in 2025, banking on strength in the Chinese electric vehicle (EV) market and image sensor product group. However, with the company expecting a sequential first quarter revenue decline of up to around 20%, global macroeconomic and policy uncertainties could prolong weak demand in the automotive and industrial end-markets.
The company has announced a new plan to reduce headcount, aiming to generate $105 million-$115 million of savings, which should be reflected in the results of the following year. The company’s structural actions since 2020 have helped it focus on higher-growth and higher-margin products, and it remains well positioned to raise EBITDA margins back above 40% when the market eventually recovers.
Despite an expected EBITDA decline of about 30%, ON Semiconductor could generate greater reported FOCF of $1.4 billion-$1.6 billion this year, driven by lower capital expenditures (capex) and expected net working capital inflows from inventory reductions. Leverage should remain well below 1x, excluding potential acquisition activity. However, the company’s rejected bid for Allegro (WA:ALEP) MicroSystems on March 5, 2025, could have led to pro forma leverage staying above 2x by the end of 2026.
S&P could lower the company’s rating if it experiences significantly weaker-than-expected revenues and operating performance due to operational mishaps, increasing competitive pressures, or a prolonged customer inventory correction. The rating could also be lowered if the management adopts a more aggressive financial policy, including large-scale share repurchases and debt-funded acquisitions, that could push leverage above 3x at the bottom of the demand cycle.
Conversely, the rating could be raised if the company returns to organic revenue growth while maintaining EBITDA margins of well above 35% and improving FOCF generation. An improved competitive standing, characterized by market share gains, technology leadership, and customer design wins, could also lead to a higher rating. The rating could also be raised if the company maintains a financial policy that supports S&P Global Ratings-adjusted leverage below 2x through a cyclical downturn.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.