Grade: B — Generally Healthy, Minor Concerns
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-09) + Yahoo Finance
Auditor: PricewaterhouseCoopers LLP — Clean opinion (auditor since 1999)
One-line verdict: ON Semiconductor is navigating a severe cyclical downturn -- revenue fell 15% to $6.0B and net income collapsed from $1.6B to $121M -- but the company took decisive action with a Manufacturing Realignment Program that included $496M in asset impairments and $268M in excess inventory charges. Three watch items fire: gross margin collapsed 12.3 percentage points to 33.1%, CFFO far exceeds net income at 14.5x (due to massive non-cash charges), and cash covers 85% of debt. Despite the pain, zero red flags fire. The M-Score of -3.05 is deeply safe, cash flow remains strong at $1.8B, and the balance sheet is in reasonable shape with only 26% goodwill-to-equity.
| Metric | Result |
|---|---|
| Red Flags | **0** |
| Watch Items | **3** |
| Checks Completed | **17/18** (1 N/A) |
| Beneish M-Score | **-3.05** (safe -- well below -2.22 threshold) |
| F-Score (Fraud Probability) | **0.30** (0.11% probability) |
| Altman Z-Score | **6.30** (safe zone) |
| Auditor | PricewaterhouseCoopers LLP -- Unqualified opinion |
| Fiscal Year | 2025 (ended December 31, 2025) |
| Report Date | 2026-04-05 |
Semiconductor Downturn with Strategic Restructuring
ON Semi operates three segments: Power Solutions Group (PSG, 47% of revenue), Analog and Mixed-Signal Group (AMG, 38%), and Intelligent Sensing Group (ISG, 15%). Per the filing: "Revenue was $5,995.4 million and $7,082.3 million for 2025 and 2024, respectively. The decrease from 2024 to 2025 of $1,086.9 million, or 15.3%, was attributable primarily to lower sales volumes across all reportable segments."
The company simultaneously executed a major manufacturing restructuring. Per the filing: "We incurred total severance costs and related benefit expenses of $67.1 million related to the termination of approximately 2,400 employees. Additionally, we recorded non-cash impairment charges of $496.0 million during the year ended December 31, 2025 related to previous investments in manufacturing equipment at certain manufacturing facilities pursuant to held-for-sale accounting guidance."
The inventory charges were massive: "$268.2 million relating to excess and obsolete inventory charges, of which $37.9 million and $230.3 million related to inventory primarily considered work in progress within the PSG and ISG reportable segments, respectively."
Profitability: Deliberately Compressed by Restructuring
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $8.3B | $8.3B | $7.1B | $6.0B | -15% YoY |
| Gross Profit | $4.1B | $3.9B | $3.2B | $2.0B | -38% |
| Gross Margin | 49.0% | 47.1% | 45.4% | 33.1% | -12.3pp |
| Net Income | $1.9B | $2.2B | $1.6B | $121M | -92% |
| Net Margin | 22.8% | 26.5% | 22.2% | 2.0% | Collapsed |
| ROE | 30.7% | 28.1% | 17.9% | 1.6% | Collapsed |
The gross margin collapse requires disaggregation by segment:
Per the filing: "PSG gross margin decreased by 16.8 percentage points to 24.5% from 41.3%, primarily as a result of the decline in sales volume, underutilization of our manufacturing facilities, the related impact of unfavorable product mix, and the impact of the consumables and manufacturing supplies write-off."
"AMG gross margin increased by 1.0 percentage point to 51.1% from 50.1%, primarily due to the reduction in the lower-margin manufacturing services revenue at our EFK location."
"ISG gross margin decreased 31.6 percentage points to 15.1% from 46.7%, primarily due to the excess and obsolete inventory charges resulting from certain strategy changes in connection with the 2025 Manufacturing Realignment Program."
The ISG gross margin collapse from 46.7% to 15.1% is the most dramatic, driven by $230.3M in inventory write-offs from strategic changes in the sensing business.
Cash Flow: Massive Non-Cash Charges Create Divergence
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Operating Cash Flow | $2.0B | $1.9B | $1.8B |
| Net Income | $2.2B | $1.6B | $121M |
| **CFFO / Net Income** | **0.91** | **1.21** | **14.54** |
| CapEx | -$1.5B | -$0.7B | -$0.3B |
| Free Cash Flow | $438M | $1.2B | $1.4B |
The 14.5x CFFO/NI ratio is not a manipulation signal -- it directly reflects the $496M in non-cash impairments and $268M in inventory charges that reduced net income to $121M while having no cash impact. The accruals ratio of -13.1% confirms the deeply non-cash nature of the charges.
CapEx declined dramatically from $1.5B in FY2023 to $341M in FY2025 -- a 77% reduction. Per the filing, the company is "right-sizing our manufacturing footprint to align our capacity with our long-term outlook." This CapEx reduction is boosting FCF even as the business contracts.
Balance Sheet: Manageable with No Acquisition Baggage
The balance sheet is cleaner than many peers:
Per the filing: "Our weighted average interest rate was 2.1% and 1.8% per annum in 2025 and 2024, respectively." Low-cost debt is a significant advantage during a downturn -- interest expense was only $70.9M on $3.0B in debt.
Customer and Channel Dynamics
Distribution is critical: "Sales to distributors accounted for approximately 54%, 53% and 52% of our revenue in 2025, 2024 and 2023, respectively." One distributor accounted for approximately 11% of total revenue.
The company recently acquired: "the Silicon Carbide Junction Field-Effect Transistor" technology on January 14, 2025, paying $118.8M. This positions ON Semi for the growing SiC power semiconductor market in EVs and industrial applications.
The 18-Point Screening
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 55 days, -5 days YoY |
| A2 | AR vs Revenue Growth | PASS | AR -21.7% vs revenue -15.3% |
| A3 | Revenue vs CFFO | PASS | Revenue -15.3%, CFFO -7.7% |
| B1 | Inventory vs COGS | PASS | Inventory -11.3% vs COGS +3.8% |
| B2 | CapEx vs Revenue | PASS | CapEx -50.8% vs revenue -15.3% |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 30.5% |
| B4 | Gross Margin | WATCH | Gross margin swung -12.3pp (45.4% to 33.1%) |
| C1 | CFFO vs Net Income | WATCH | CFFO far exceeds NI (14.5x) |
| C2 | Free Cash Flow | PASS | FCF $1.4B, FCF/NI = 11.72 |
| C3 | Accruals Ratio | PASS | -13.1%. Very low accruals |
| C4 | Cash vs Debt | WATCH | Cash $2.5B covers 85% of $3.0B debt |
| D1 | Goodwill + Intangibles | PASS | $2.0B = 26% of equity |
| D2 | Leverage | PASS | Debt/EBITDA = 3.4x |
| D3 | Soft Asset Growth | PASS | Other assets -1.2% vs revenue -15.3% |
| D4 | Asset Impairment | N/A | No write-off data |
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | Goodwill +10% YoY |
| F1 | Beneish M-Score | PASS | M-Score = -3.05 |
Beneish M-Score Component Breakdown:
| Component | Value | What It Measures | Concern? |
|---|---|---|---|
| DSRI | 0.925 | Days Sales in Receivables | Good (improving) |
| GMI | 1.372 | Gross Margin Index -- margins declining | Elevated |
| AQI | 1.268 | Asset Quality Index | Moderate |
| SGI | 0.847 | Sales Growth Index -- declining revenue | Normal |
| DEPI | 0.758 | Depreciation Index | Good |
| SGAI | 1.099 | SG&A Index | Normal |
| TATA | -0.131 | Total Accruals to Assets | Very good |
| LVGI | 1.026 | Leverage Index | Normal |
The elevated GMI of 1.372 reflects the 12.3pp gross margin decline. In the M-Score model, declining margins reduce the incentive to manipulate earnings, which is why the overall M-Score remains very safe at -3.05.
Key Risks from the 10-K
1. Manufacturing Realignment Execution Risk
The $496M in asset impairments, $268M in inventory charges, and 2,400 employee terminations represent a massive restructuring. If end-market demand recovers faster than expected, ON Semi may find itself capacity-constrained. If recovery is slower, additional charges could follow.
2. SiC Investment Timing
The SiC JFET acquisition and investment in silicon carbide production is a long-term bet on EV and industrial electrification. If EV adoption slows or competitors (Wolfspeed, STMicro, Infineon) capture share, the investment may not generate adequate returns.
3. Automotive and Industrial End-Market Dependency
Revenue declines were broad: PSG -13.7%, AMG -18.5%, ISG driven by strategy changes. The automotive and industrial markets are cyclical -- recovery timing is uncertain.
4. Inventory Write-Down Finality
The $268M in inventory charges were recorded in cost of revenue. Per accounting standards, once inventory is written down, the new lower cost basis is established and cannot be reversed. If written-down inventory is subsequently sold, it would generate an outsized margin benefit -- watch for this in future quarters.
Key Financial Trends (4-Year)
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Revenue | $8.3B | $8.3B | $7.1B | $6.0B |
| Net Income | $1.9B | $2.2B | $1.6B | $121M |
| Gross Margin | 49.0% | 47.1% | 45.4% | 33.1% |
| CFFO | $2.6B | $2.0B | $1.9B | $1.8B |
| FCF | $1.6B | $438M | $1.2B | $1.4B |
| Cash | $2.9B | $2.5B | $3.0B | $2.5B |
| Total Debt | $3.2B | $3.4B | $3.4B | $3.0B |
Summary
Grade: B. Zero red flags despite a brutal downturn -- the company is managing the cycle proactively.
ON Semi receives a B grade because all three items are watches, not fails. The 12.3pp gross margin decline is real but explained by $268M in deliberate inventory write-offs and manufacturing underutilization during a cyclical downturn. The 14.5x CFFO/NI ratio reflects $496M in non-cash asset impairments, not earnings manipulation. Cash covering 85% of debt is a moderate concern.
What is impressive: the company generated $1.8B in CFFO and $1.4B in FCF despite revenue declining 15% and net income dropping 92%. CapEx was slashed from $1.5B to $341M, demonstrating management's willingness to adjust investment to market conditions. The M-Score of -3.05 -- one of the safest readings we screen -- confirms no manipulation.
What to watch: (1) gross margin recovery trajectory as restructuring charges normalize, (2) whether written-down inventory generates outsized margins when sold, (3) SiC investment returns and competitive positioning, and (4) automotive and industrial end-market recovery timing.
**Disclaimer**: This report is based on ON Semiconductor's fiscal year 2025 10-K filed with the SEC on February 9, 2026. This is NOT investment advice.
**About EarningsGrade**: We screen earnings reports for financial red flags using an 18-point forensic framework. Grade B means generally healthy with minor concerns worth monitoring.