ON Semiconductor has announced severe cuts to its workforce, capital expenditures, manufacturing operations, and employee compensation that it expects will reduce total fixed costs by up to $50 million a quarter and will help it navigate the continuingly challenging economic climate.

The Phoenix-based power IC maker will layoff approximately 1,500 employees, reducing total payroll expenses by approximately 10%, according to a statement made Wednesday afternoon. The company is complementing that action by halting annual merit increases and bonus payments on a temporary basis.

Senior executives will also take three weeks of unpaid time off in both Q1 and Q2, which ON Semi estimated equates to an approximate 23% decrease in base salary. Two weeks of unpaid time off or a four-day work week (based upon local legal requirements) for other employees in both the quarters will also be implemented. ON Semi estimated that action equates to an approximate 15% decrease in base salary.

Further, ON Semi said it will enact factory shutdowns for four to six weeks in Q1 and Q2. Factory closures planned for the end of 2009 will be brought forward to the middle of the year, the company said. ON Semi in May 2008 confirmed plans to close two wafer manufacturing facilities located in Piestany, Slovakia, laying off approximately 400 employees. Two months prior to that, ON Semi confirmed plans to cut about 200 global employees and close a Pocatello, Idaho, fab as it merged in AMI Semiconductor (AMIS) following its $915 million acquisition.

ON Semi said this week that evaluation of other front-end manufacturing locations are ongoing with the objective of closing an additional location by the end of 2009.

The efforts announced follow cost-reduction measures ON Semi began taking in Q4 2008, including the reduction of 2009 planned capital expenditures to $50 million to $60 million from normalized yearly levels of $130 million to $140 million, temporary site shutdowns during the quarter, a hiring freeze, the elimination of second half 2008 bonus payments, and strict controls over all discretionary spending.

All in all, the actions are expected to reduce total fixed costs by approximately $40 million to $50 million a quarter, of which approximately $10 million to $15 million will be from temporary actions. ON Semi said the actions are expected to reduce operating expenses by approximately $20 million from Q3 2008 run-rates and exclude the operating expense impact associated with the Catalyst Semiconductor acquisition, which closed in Q4. That acquisition cost ON Semi $115 million and was first announced in July 2008.

The company expects initial benefits from the actions to start in the current quarter 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, ON Semi said, adding that it anticipates it will use $20 million to $30 million of cash over the next five quarters and incur restructuring and other charges as it executes the cost-reduction actions.

The company also lowered its Q4 guidance Wednesday. In its original forecast made October 30, 3008, ON Semi had guided December quarter revenues to be $500 million to $550 million, or down approximately 5% to 14% sequentially. ON Semi now anticipates Q4 revenues to be approximately $480 million to $490 million, or down approximately 16% to 17% sequentially.

ON Semi is slated to provide full Q4 details the first week of February. ON Semi noted that it recognizes revenue on a sell-thru basis, a method that, as component distributors trim inventory stock, financial analysts have cautioned on in recent weeks.

"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 Semi's president and CEO, in a statement.

"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," Jackson continued.

"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."

By Suzanne Deffree, Managing Editor, News - Electronic News

See also: Credit Crunch: Semiconductor gloom amid economic gloom, in which Electronics Weekly highlights some recent stories that detail the effect of the economic downturn on the electronics industry.

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