On Semiconductor Corp 10-Q for FY2023 Q2
On Semiconductor Corp (ON)
10-Q
2023-07-31
For: 2023-06-30
View Original
Added on
April 07, 2026
About this 10-Q
On Semiconductor Corp filed this 10-Q on July 31, 2023, covering the quarter ended June 30, 2023 (FY2023 Q2).
Headline figures
Quarter ended June 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.09B
- up 0.5% from $2.09B a year earlier
- Net income
- $576.6M
- up 26.5% from net income of $455.8M a year earlier
- Diluted EPS
- $1.29
- up 26.5% from $1.02 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2023
Or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
(Commission File Number) 001-39317
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(602 ) 244-6600
(Address, zip code and telephone number, including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The number of shares outstanding of the issuer's class of common stock as of the close of business on July 26, 2023:
| Title of Each Class | Number of Shares | |||||||
| Common Stock, par value $0.01 per share | ||||||||
ON SEMICONDUCTOR CORPORATION FORM 10-Q
TABLE OF CONTENTS
| Part I: Financial Information | ||||||||
| Item 1. Financial Statements (unaudited) | ||||||||
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | ||||||||
| Item 4. Controls and Procedures | ||||||||
| Part II: Other Information | ||||||||
| Item 1. Legal Proceedings | ||||||||
| Item 1A. Risk Factors | ||||||||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||
| Item 3. Defaults Upon Senior Securities | ||||||||
| Item 4. Mine Safety Disclosures | ||||||||
| Item 5. Other Information | ||||||||
| Item 6. Exhibits | ||||||||
| Signatures | ||||||||
(See the glossary of selected terms immediately following this table of contents for definitions of certain abbreviated terms.)
ON SEMICONDUCTOR CORPORATION
FORM 10-Q
GLOSSARY OF SELECTED ABBREVIATED TERMS*
| Abbreviated Term | Defined Term | |||||||
| 0% Notes | 0% Convertible Senior Notes due 2027 | |||||||
| 0.50% Notes | 0.50% Convertible Senior Notes due 2029 | |||||||
| 1.625% Notes | 1.625% Convertible Senior Notes due 2023 | |||||||
| 3.875% Notes | 3.875% Senior Notes due 2028 | |||||||
| ADAS | Advanced driver-assistance systems | |||||||
| Amended and Restated SIP | ON Semiconductor Corporation Amended and Restated Stock Incentive Plan, as amended | |||||||
| ASU | Accounting Standards Update | |||||||
| Commission or SEC | Securities and Exchange Commission | |||||||
| New Credit Agreement | Credit agreement, dated as of June 22, 2023, by and among the Company, as borrower, the several lenders party thereto, JP Morgan Chase Bank, N.A., as administrative agent, and certain other parties, providing for the Revolving Credit Facility due 2028 | |||||||
| EFK | East Fishkill, New York fabrication facility | |||||||
| ESPP | ON Semiconductor Corporation 2000 Employee Stock Purchase Plan, as amended | |||||||
| Exchange Act | Securities Exchange Act of 1934, as amended | |||||||
| GTAT | GT Advanced Technologies Inc. | |||||||
| IP | Intellectual property | |||||||
| IRS | United States Internal Revenue Service | |||||||
| IT | Information Technology | |||||||
| Existing Credit Agreement | Credit agreement, dated as of April 15, 2016, as subsequently amended, by and among the Company, as borrower, the several lenders party thereto, Deutsche Bank AG, New York Branch, as administrative agent and collateral agent, and certain other parties, providing for the Revolver due 2024 and the Term Loan “B” Facility | |||||||
| Revolver due 2024 | A $1.97 billion revolving credit facility created pursuant to the Existing Credit Agreement | |||||||
| QCS | Division within ASG, primarily associated with the legacy Quantenna division | |||||||
| Revolving Credit Facility | A $1.5 billion senior revolving credit facility created pursuant to the New Credit Agreement | |||||||
| ROU | Right-of-use | |||||||
| RSU | Restricted stock unit | |||||||
| SCI LLC | Semiconductor Components Industries, LLC | |||||||
| SiC | Silicon carbide | |||||||
| Securities Act | Securities Act of 1933, as amended | |||||||
| Term Loan "B" Facility | A $2.4 billion term loan "B" facility created pursuant to the Existing Credit Agreement | |||||||
| U.S. or United States | United States of America | |||||||
* Terms used, but not defined, within the body of the Form 10-Q are defined in this Glossary.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
ON SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(unaudited)
| June 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Receivables, net | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Deferred tax assets | |||||||||||
| ROU financing lease assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Current portion of financing lease liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred tax liabilities | |||||||||||
| Long-term financing lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 9) | |||||||||||
| ON Semiconductor Corporation stockholders’ equity: | |||||||||||
Common stock ($ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Accumulated earnings | |||||||||||
Less: Treasury stock, at cost: | ( | ( | |||||||||
| Total ON Semiconductor Corporation stockholders’ equity | |||||||||||
| Non-controlling interest | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes to consolidated financial statements
4
ON SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in millions, except per share data)
(unaudited)
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Amortization of acquisition-related intangible assets | |||||||||||||||||||||||
| Restructuring, asset impairments and other charges, net | ( | ( | |||||||||||||||||||||
| Goodwill and intangible asset impairment charges | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Other income (expense), net: | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Loss on debt prepayment | ( | ( | ( | ||||||||||||||||||||
| Gain (loss) on divestiture of business | ( | ||||||||||||||||||||||
| Other income (expense) | ( | ||||||||||||||||||||||
| Other income (expense), net | ( | ( | ( | ||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax provision | ( | ( | ( | ( | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Less: Net income attributable to non-controlling interest | ( | ( | ( | ( | |||||||||||||||||||
| Net income attributable to ON Semiconductor Corporation | $ | $ | $ | $ | |||||||||||||||||||
| Net income for diluted earnings per share of common stock (Note 7) | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share of common stock attributable to ON Semiconductor Corporation: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average shares of common stock outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
| Effects of cash flow hedges and other adjustments | ( | ( | |||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ( | ( | ||||||||||||||||||||
| Comprehensive income | |||||||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive income attributable to ON Semiconductor Corporation | $ | $ | $ | $ | |||||||||||||||||||
See accompanying notes to consolidated financial statements
5
ON SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions, except share data)
(unaudited)
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Treasury Stock | Non-Controlling Interest | |||||||||||||||||||||||||
| Number of shares | At Par Value | Accumulated Earnings | Number of shares | At Cost | Total Equity | ||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||
| Shares issued pursuant to the ESPP | — | — | — | — | — | — | |||||||||||||||||||||||
| RSUs released and stock grant awards issued | — | — | — | — | — | ||||||||||||||||||||||||
Partial settlement - | — | — | — | — | — | ||||||||||||||||||||||||
Partial settlement of bond hedges - | — | — | — | — | ( | ( | — | ||||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | ( | — | — | |||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||
| Shares issued pursuant to the ESPP | — | — | — | — | — | — | |||||||||||||||||||||||
| RSUs released and stock grant awards issued | — | — | — | — | — | ||||||||||||||||||||||||
Warrants and bond hedges, net - | — | — | ( | — | — | — | — | — | ( | ||||||||||||||||||||
| Tax impact of warrants and bond hedges, net | — | — | — | — | — | — | — | ||||||||||||||||||||||
Partial settlement - | — | — | — | — | — | ||||||||||||||||||||||||
Partial settlement of bond hedges - | — | — | — | — | ( | ( | — | ||||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | ( | — | — | |||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||
| Balance at April 1, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||
| Shares issued pursuant to the ESPP | — | — | — | — | — | — | |||||||||||||||||||||||
| RSUs released and stock grant awards issued | — | — | — | — | — | ||||||||||||||||||||||||
Partial settlement - | — | — | — | — | — | ||||||||||||||||||||||||
Partial settlement of bond hedges - | — | — | — | — | ( | — | |||||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | ( | — | — | |||||||||||||||||||||||
| Balance at July 1, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||
| — | — | ( | — | — | — | — | ( | ||||||||||||||||||||||
| Shares issued pursuant to the ESPP | — | — | — | — | — | — | |||||||||||||||||||||||
| RSUs released and stock grant awards issued | ( | — | — | — | — | — | |||||||||||||||||||||||
Partial settlement - | — | — | — | — | — | ||||||||||||||||||||||||
Partial settlement of bond hedges - | — | — | — | — | ( | — | |||||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||
| Comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||
| Balance at July 1, 2022 | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | |||||||||||||||||||
See accompanying notes to consolidated financial statements
6
ON SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
| Six Months Ended | |||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Loss (gain) on sale or disposal of fixed assets | ( | ||||||||||
| Loss (gain) on divestiture of business | ( | ||||||||||
| Loss on debt prepayment | |||||||||||
| Amortization of debt discount and issuance costs | |||||||||||
| Share-based compensation | |||||||||||
| Non-cash asset impairment charges | |||||||||||
| Goodwill and intangible asset impairment charges | |||||||||||
| Change in deferred tax balances | ( | ||||||||||
| Other | ( | ||||||||||
| Changes in assets and liabilities (exclusive of divestitures): | |||||||||||
| Receivables | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses and other current liabilities | ( | ||||||||||
| Other long-term liabilities | ( | ||||||||||
| Net cash provided by operating activities | $ | $ | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property, plant and equipment | $ | ( | $ | ( | |||||||
| Proceeds from sale of property, plant and equipment | |||||||||||
| Deposits utilized (made) for purchase of property, plant and equipment | ( | ||||||||||
| Divestiture of business, net of cash transferred | |||||||||||
| Purchase of available-for-sale securities | ( | ||||||||||
| Proceeds from sale or maturity of available-for-sale securities | |||||||||||
| Payments related to acquisition of business | ( | ( | |||||||||
| Net cash used in investing activities | $ | ( | $ | ( | |||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds for the issuance of common stock under the ESPP | $ | $ | |||||||||
| Payment of tax withholding for RSUs | ( | ( | |||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Issuance and borrowings under debt agreements | |||||||||||
| Reimbursement of debt issuance and other financing costs | |||||||||||
| Payment of debt issuance and other financing costs | ( | ||||||||||
| Repayment of borrowings under debt agreements | ( | ( | |||||||||
| Payment for purchase of bond hedges | ( | ||||||||||
| Proceeds from issuance of warrants | |||||||||||
| Payment of financing lease obligations | ( | ( | |||||||||
| Dividend to non-controlling shareholder | ( | ||||||||||
| Net cash used in financing activities | $ | ( | $ | ( | |||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of period (Note 5) | |||||||||||
| Cash, cash equivalents and restricted cash, end of period (Note 5) | $ | $ | |||||||||
See accompanying notes to consolidated financial statements
7
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: Background and Basis of Presentation
ON Semiconductor Corporation (“onsemi,” “we,” “us,” “our,” or the “Company”), with its wholly and majority-owned subsidiaries, operates under the onsemiTM brand. The Company is organized into three
The Company's fiscal calendar year begins on January 1 and ends on December 31, with each fiscal quarter containing a thirteen-week accounting period. The quarters ended June 30, 2023 and July 1, 2022 contained 91 181 days and 182 days, respectively.
The accompanying unaudited financial statements as of and for the quarter and six months ended June 30, 2023 have been prepared following generally accepted accounting principles in the United States of America ("GAAP") for interim financial reporting and the rules and regulations of the SEC for interim reporting. Accordingly, the unaudited financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. The balance sheet as of December 31, 2022 was derived from the Company's audited financial statements but does not include all disclosures required by GAAP for annual financial statements. In management's opinion, the interim information contains all adjustments, which include normal recurring adjustments necessary for a fair statement of the results for the interim periods. The footnote disclosures related to the interim financial information contained herein are also unaudited. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto for the year ended December 31, 2022, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 6, 2023 (the "2022 Form 10-K").
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Management evaluates these estimates and judgments on an ongoing basis and bases its estimates on experience, current and expected future conditions, third-party evaluations, and various other assumptions that management believes are reasonable under the circumstances. Significant estimates have been used by management in conjunction with the following: (i) calculating future payouts for customer incentives and amounts subject to allowances and returns; (ii) valuation and obsolescence relating to inventories; (iii) measurement of valuation allowances against deferred tax assets and evaluations of uncertain tax positions; and (iv) cash flow projections for impairment of long-lived assets and goodwill. Additionally, during periods where it becomes applicable, significant estimates will be used by management in determining the future cash flows in assumptions used in business combinations. Actual results may differ from the estimates and assumptions used in the consolidated financial statements.
8
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 2: Revenue and Segment Information
A significant portion of the Company’s revenue orders are firm commitments that are non-cancellable, including certain orders or contracts with a duration of one year or less. Certain customer contracts are multi-year agreements that include committed amounts ("Long-term Supply Agreements" or "LTSAs").
The estimated remaining performance obligations as of June 30, 2023 are approximately $20.0 billion (excluding the remaining performance obligations for contracts having an original duration of one year or less). This amount is subject to contractual increases based on negotiated contract prices and volumes, defined product mix flexibility, and the timing of new part introductions, among other contractual provisions. The Company expects to recognize approximately 32 % of the remaining purchase obligation as revenue during the next 12 months upon shipment of products under these contracts. Total revenue estimates could be influenced by risks and uncertainties, including manufacturing or supply chain constraints, modifications to customer agreements, and regulatory changes, among other factors. Accordingly, the actual revenue recognized for the remaining performance obligation in future periods may significantly fluctuate from these estimates.
Certain LTSAs include non-cancellable capacity payments from the customer, which are generally due within 30 days of the agreement. These payments reserve production availability or are prepayments for the same purpose and are not recognized as revenue until the performance obligations are satisfied. For the quarters and six months ending June 30, 2023, and July 1, 2022, the Company recognized revenue of $16.8 million and $4.6 million, and $31.6 million and $9.1 million, respectively, representing the corresponding portions of performance obligations fulfilled.
As of June 30, 2023, and December 31, 2022, the remaining capacity payments were $317.9 million and $190.4 million, respectively, of which $88.8 million and $60.5 million were recorded as other current liabilities, with the remainder recorded as other long-term liabilities.
The Company is organized into three
Revenue and gross profit for the operating and reportable segments are as follows (in millions):
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| For the quarter ended June 30, 2023: | |||||||||||||||||||||||
| Revenue from external customers | $ | $ | $ | $ | |||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
| For the quarter ended July 1, 2022: | |||||||||||||||||||||||
| Revenue from external customers | $ | $ | $ | $ | |||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
| For the six months ended June 30, 2023: | |||||||||||||||||||||||
| Revenue from external customers | $ | $ | $ | $ | |||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
| For the six months ended July 1, 2022: | |||||||||||||||||||||||
| Revenue from external customers | $ | $ | $ | $ | |||||||||||||||||||
| Gross profit | $ | $ | $ | $ | |||||||||||||||||||
The Company had one customer, a distributor, whose revenue accounted for approximately 10.9 % and 12 % of the total revenue for the quarters ended June 30, 2023 and July 1, 2022, respectively, and 10.1 % and 12 % of the total revenue for the six months ended June 30, 2023 and July 1, 2022, respectively.
9
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Revenue for the operating and reportable segments disaggregated into geographic locations based on sales billed from the respective country and sales channels are as follows (in millions):
| Quarter Ended June 30, 2023 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Hong Kong | $ | $ | $ | $ | |||||||||||||||||||
| Singapore | |||||||||||||||||||||||
| United Kingdom | |||||||||||||||||||||||
| United States | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | $ | $ | $ | |||||||||||||||||||
| Direct customers | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Six Months Ended June 30, 2023 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Hong Kong | $ | $ | $ | $ | |||||||||||||||||||
| Singapore | |||||||||||||||||||||||
| United Kingdom | |||||||||||||||||||||||
| United States | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | $ | $ | $ | |||||||||||||||||||
| Direct customers | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
10
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
| Quarter Ended July 1, 2022 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Hong Kong | $ | $ | $ | $ | |||||||||||||||||||
| Singapore | |||||||||||||||||||||||
| United Kingdom | |||||||||||||||||||||||
| United States | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | $ | $ | $ | |||||||||||||||||||
| Direct customers | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Six Months Ended July 1, 2022 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Hong Kong | $ | $ | $ | $ | |||||||||||||||||||
| Singapore | |||||||||||||||||||||||
| United Kingdom | |||||||||||||||||||||||
| United States | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | $ | $ | $ | |||||||||||||||||||
| Direct customers | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The Company operates in various geographic locations. Sales to external customers have little correlation to where products are manufactured or the location of the end-customers. It is, therefore, not meaningful to present operating profit by geographical location. The Company does not discretely allocate assets to its operating segments, nor does management evaluate operating segments using discrete asset information. The consolidated assets used in manufacturing are generally shared across and are not specifically ascribed to operating and reportable segments.
11
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Property, plant and equipment, net by geographic location, is summarized below (in millions):
| As of | |||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| United States | $ | $ | |||||||||
| South Korea | |||||||||||
| Czech Republic | |||||||||||
| Philippines | |||||||||||
| China | |||||||||||
| Malaysia | |||||||||||
| Japan | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
Note 3: Acquisition and Divestitures
Acquisition:
During the quarter ended June 30, 2023, the Company finalized its determination relating to the fair value of assets acquired and liabilities assumed from the EFK acquisition, which was completed on December 31, 2022. The final allocation of the purchase price, which is materially consistent with the preliminary allocation disclosed in the 2022 Form 10-K, is as follows (in millions):
| Purchase Price Allocation | ||||||||
| Inventory | $ | |||||||
| Other current assets | ||||||||
| Property, plant and equipment | ||||||||
| Other non-current assets | ||||||||
| Total assets acquired | ||||||||
| Current liabilities | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities assumed | ||||||||
| Net assets acquired/purchase price | $ | |||||||
All other assumptions and disclosures are materially consistent with the amounts included in the 2022 Form 10-K. The Company paid the remaining acquisition consideration of $236.3 million on January 3, 2023, which is disclosed under investing activities in the Consolidated Statement of Cash Flows.
12
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 4: Restructuring, Asset Impairments and Other Charges, Net
Details of restructuring, asset impairments and other charges, net are as follows (in millions):
| Restructuring | Asset Impairments | Other Charges | Total | ||||||||||||||||||||||||||||||||||||||
| Quarter ended June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| 2023 Business Realignment | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Restructuring | Asset Impairments | Other Charges | Total | ||||||||||||||||||||||||||||||||||||||
| Six months ended June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| 2023 Business Realignment | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| QCS wind down | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Other | (1) | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
(1)Relates to property, plant and equipment and ROU asset impairment charges associated with site consolidation efforts in the U.S.
A summary of changes in accrued restructuring balance is as follows (in millions):
| As of | As of | |||||||||||||||||||||||||||||||
| December 31, 2022 | Charges | Usage | June 30, 2023 | |||||||||||||||||||||||||||||
| Employee separation charges | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
2023 Business Realignment
During the first quarter of 2023, the Company announced the elimination of approximately 400 jobs in an effort to realign its operating models, drive organizational effectiveness and efficiencies, and increase collaboration primarily within its ASG operating segment and IT support organizations. As a result, ASG ceased its design and test operations in certain Asia and U.S.-based locations and initiated a plan to exit its Toulouse, France design center location. The announcement also included changes in the IT operating model by transferring selected IT functions to strategic service providers. During the second quarter of 2023, an additional 60 employees were notified of their employment termination for similar reasons.
In connection with these actions, severance costs, related benefit expenses and other ancillary charges of $39.2 million were recognized with an insignificant amount expected to be recorded during the remainder of 2023. The Company paid approximately $11.5 million of the aggregate expense for the 293 terminated employees and had $27.7 million accrued as of June 30, 2023. The remaining employees subject to this realignment are expected to be terminated and paid any applicable severance and related benefit payments over the next nine months.
The Company continues to evaluate employee positions and locations for potential operating improvements and efficiencies, and may incur additional severance and related charges in the future.
QCS wind down
13
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 5: Balance Sheet Information and Other Supplemental Disclosures
Goodwill
There was no change in the balance of goodwill from December 31, 2022 to June 30, 2023. Goodwill is tested for impairment annually on the first day of the fourth quarter or more frequently if events or changes in circumstances (each, a "triggering event") would more likely-than-not reduce the fair value of a reporting unit below its carrying value. Management did not identify any triggering events during the quarter ended June 30, 2023 that would require an interim impairment analysis.
Inventory
| As of | |||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| Inventories: | |||||||||||
| Raw materials | $ | $ | |||||||||
| Work in process | |||||||||||
| Finished goods | |||||||||||
| $ | $ | ||||||||||
Defined Benefit Plans
The Company recognizes the aggregate amount of all over-funded plans as assets and the aggregate amount of all underfunded plans as liabilities in its financial statements. As of June 30, 2023, the net assets for the over-funded plans totaled $12.9 million. The total accrued pension liability for underfunded plans was $68.8 million, of which the current portion of $1.3 million was classified as accrued expenses and other current liabilities. As of December 31, 2022, the net funded status for all the plans was a liability of $53.8 million, of which the current portion of $0.4 million was classified as accrued expenses and other current liabilities.
The components of the net periodic pension expense were as follows (in millions):
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Total net periodic pension cost | $ | $ | $ | $ | |||||||||||||||||||
Leases
Operating lease arrangements are comprised primarily of real estate and equipment agreements. The components of lease expense were as follows (in millions):
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | ||||||||||||||||||||
| Operating lease | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease | |||||||||||||||||||||||
| Short-term lease | |||||||||||||||||||||||
| Total lease expense | $ | $ | $ | $ | |||||||||||||||||||
14
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
The ROU assets and lease liabilities for operating leases recognized in the Consolidated Balance Sheets are as follows (in millions):
| As of | |||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| Operating lease liabilities included in: | |||||||||||
| $ | $ | ||||||||||
| Total | $ | $ | |||||||||
| Operating ROU assets included in: | |||||||||||
| $ | $ | ||||||||||
As of June 30, 2023, the weighted-average remaining lease-terms were 11.1 years and 18.5 years, and the weighted-average discount rates were 4.8 % and 6.0 %, for operating leases and financing leases, respectively.
Supplemental Disclosure of Cash Flow Information
| Six Months Ended | |||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||||||||||||||
| Non-cash investing activities: | |||||||||||||||||||||||
| Capital expenditures in accounts payable and other long-term liabilities | $ | $ | |||||||||||||||||||||
| Operating ROU assets obtained in exchange of lease liabilities | |||||||||||||||||||||||
| Cash paid for: | |||||||||||||||||||||||
| Interest expense | $ | $ | |||||||||||||||||||||
| Income taxes | |||||||||||||||||||||||
| Operating lease payments in operating cash flows | |||||||||||||||||||||||
| As of | ||||||||||||||||||||||||||
| June 30, 2023 | December 31, 2022 | July 1, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Consolidated Balance Sheets: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||||||||||||
| Restricted cash (included in other current assets) | ||||||||||||||||||||||||||
| Restricted cash (included in other non-current assets) | ||||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash in Consolidated Statements of Cash Flows | $ | $ | $ | $ | ||||||||||||||||||||||
15
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 6: Long-Term Debt
Long-term debt consists of the following (in millions, with annualized interest rates):
| As of | |||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| New Credit Agreement: | |||||||||||
Revolving Credit Facility due 2028, interest payable monthly at | $ | $ | |||||||||
| Existing Credit Agreement: | |||||||||||
Revolving Credit Facility due 2024, interest payable monthly at | |||||||||||
Term Loan "B" Facility due 2026, interest payable monthly at | |||||||||||
| Gross long-term debt, including current maturities | $ | $ | |||||||||
| Less: Debt discount (4) | ( | ( | |||||||||
| Less: Debt issuance costs (5) | ( | ( | |||||||||
| Net long-term debt, including current maturities | $ | $ | |||||||||
| Less: Current maturities | ( | ( | |||||||||
| Net long-term debt | $ | $ | |||||||||
(1)Interest is payable on March 1 and September 1 of each year at 0.50 % annually.
(2)Interest is payable on March 1 and September 1 of each year at 3.875
(3)Interest is payable on April 15 and October 15 of each year at 1.625
(4)Debt discount of $0.0 million and $4.2 million for the Term Loan "B" Facility and $4.5 million and $5.0 million for the 3.875 % Notes, in each case as of June 30, 2023 and December 31, 2022, respectively.
(5)Debt issuance costs of $0.0 million and $9.7 million for the Term Loan "B" Facility, $29.4 million and $0.0 million for the 0.50 % Notes, $12.4 million and $13.9 million for the 0 % Notes, $1.5 million and $1.7 million for the 3.875 % Notes and $0.1 million and $0.3 million for the 1.625
Expected maturities of gross long-term debt (including current portion - see sections regarding 1.625 % Notes and 0 % Notes) as of June 30, 2023 were as follows (in millions):
| Period | Expected Maturities | |||||||
| Remainder of 2023 | $ | |||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
The Company was in compliance with its covenants under all debt agreements as of June 30, 2023, and expects to remain in compliance with all covenants over at least the next 12 months.
16
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
New Credit Agreement
On June 22, 2023, the Company entered into the New Credit Agreement by and among the Company, JP Morgan Chase Bank, N.A., as Administrative Agent (the “Agent”), and the other financial institutions party thereto as Lenders (collectively, the “Lenders” and individually each a “Lender”), consisting of the $1.5 billion Revolving Credit Facility due 2028, to be used for general corporate purposes including working capital, capital expenditures, and acquisitions, including $25.0 million available for the issuance of letters of credit and a foreign currency sub-limit of $75.0 million. The Company drew down $375.0 million under this facility and repaid the entire outstanding balance under the Revolver due 2024.
The maturity date for the borrowings under the New Credit Agreement is June 22, 2028. Interest is payable based on either Secured Overnight Financing Rate (“SOFR”) or base rate options, as established at the commencement of each borrowing period, plus an applicable rate that varies based on the total leverage ratio. Lenders are owed certain fees, including a commitment fee that varies based on the total leverage ratio. The Company may prepay loans at any time, in whole or in part, upon payment of accrued interest and break funding payments, if applicable.
The obligations are guaranteed by certain of the Company’s domestic subsidiaries and SCI LLC and are collateralized by, among other things, a pledge of the equity interests in certain of the Company’s and SCI LLC’s domestic subsidiaries and material first tier foreign subsidiaries. The affirmative and negative covenants are customary for credit agreements of this nature. The New Credit Agreement contains customary events of default, the occurrence of which could result in the acceleration of the associated obligations. The financial covenant relates to a maximum total net leverage ratio of 4.00 to 1.00 calculated using the consolidated total indebtedness to consolidated earnings before interest, taxes, depreciation and amortization and other adjustments for the trailing four consecutive quarters.
Included in other assets as of June 30, 2023 was $6.8 million of debt issuance costs incurred for the Revolving Credit Facility which, along with the existing debt issuance costs, will be amortized through June 22, 2028. As of June 30, 2023, the Company had approximately $1,125.0 million available under the Revolving Credit Facility for future borrowings, except for amounts utilized for the letters of credit.
On February 28, 2023, the Company completed a private unregistered offering of $1.5 billion aggregate principal amount of its 0.50 % Convertible Senior Notes due 2029 (the "0.50 % Notes") and received net proceeds of approximately $1,470 million after deducting the initial purchasers' discount. The Company used the net proceeds to repay $1,086.0 million of the existing outstanding indebtedness under the Term Loan “B” Facility, the related transaction fees and expenses, to pay approximately $171.5 million net cost of the related convertible note hedges after such costs were offset by the proceeds from the sale of warrants, and for general corporate purposes. The 0.50 % Notes were issued under an indenture (the "0.50 % Indenture"), dated as of February 28, 2023, by and among the Company, the guarantors (as defined therein) and Computershare Trust Company, National Association, as trustee, which provides, among other things, that the 0.50 % Notes will mature on March 1, 2029, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. On or after December 1, 2028, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 0.50 % Notes may convert all or a portion of their 0.50 % Notes at any time. The 0.50 % Notes are senior unsecured obligations and are fully and unconditionally guaranteed, on a joint and several basis, by each of the Company’s subsidiaries that is a borrower or guarantor under the Existing Credit Agreement. The Company may satisfy any conversion elections by paying cash up to the aggregate principal amount of the 0.50 % Notes to be converted, and paying or delivering, as the case may be, cash, shares of common stock or a combination thereof, at the Company’s election, in respect of the remainder, if any, of its conversion obligation in excess of the aggregate principal amount of the 0.50 % Notes to be converted.
The initial conversion rate of the 0.50 % Notes is 9.6277 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $103.87 per share of common stock. The Company may redeem for cash all or any portion of the 0.50 % Notes, at the Company’s option, on or after March 6, 2026, if the last reported sale price of the Company’s common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides the related notice of redemption at a redemption price equal to 100 % of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Prior to December 1, 2028, the holders may convert their 0.50 % Notes at their option only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2023 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each
17
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
applicable trading day; (ii) during the consecutive business-day period after any five consecutive trading-day period in which the trading price per $1,000 principal amount of the 0.50 % Notes for each trading day of such period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (iii) if the Company calls any or all of the 0.50 % Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (iv) upon the occurrence of specified corporate transactions described in the 0.50 % Indenture.
The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the 0.50 % Indenture. The maximum number of shares of common stock issuable in connection with the conversion of the 0.50 % Notes is approximately 19.1 million. In addition to the initial purchasers' discount of $30.0 million, the Company also incurred issuance costs of approximately $1.3 million, all of which was capitalized as debt issuance costs. The effective interest rate, including the impact of the debt discount and debt issuance costs is 0.85 % over the contractual term of the 0.50 % Notes.
In addition, the Company entered into convertible note hedge transactions with respect to the common stock with the initial purchasers or their affiliates and certain other financial institutions. The Company will exercise the note hedges simultaneously when the 0.50 % Notes are settled. The convertible note hedges cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie the 0.50 % Notes and are expected to reduce the potential dilution to the common stock and/or offset potential cash payments in excess of the principal amount upon conversion of the 0.50 % Notes. The Company paid approximately $414.0 million in cash for the convertible note hedges, which was recorded to stockholders’ equity.
The Company also entered into warrant transactions with certain other financial institutions, whereby the Company sold warrants to acquire 14.4 million shares of the Company's common stock, which is the same number of shares of the Company’s common stock covered by the convertible note hedges at an initial strike price of $156.78 per share, which represents a 100 % premium over the closing price of the Company's common stock of $78.39 per share on February 23, 2023, subject to anti-dilution adjustments. The warrants expire on June 1, 2029. The maximum number of shares of common stock issuable in connection with the warrants is approximately 28.9 million. The Company received $242.5 million in cash for the sale of warrants, which was recorded to stockholders’ equity.
Deferred tax assets of $92.3 million were recorded to reflect the tax impact of the issuance of the 0.50 % Notes and the convertible note hedge transactions.
Debt prepayments
During the first quarter of 2023, the Company used a portion of the proceeds of the 0.50 % Notes to repay the remaining outstanding balance of $1,086.0 million under the Term Loan "B" Facility and expensed $13.3 million of unamortized debt discount and issuance costs as loss on debt prepayment. The Company also repaid $125.0 million of the outstanding balance under the Revolver due 2024 during the first quarter.
Pursuant to the indenture governing the 1.625 % Notes, as of June 30, 2023, the $119.5 million remaining outstanding principal amount of the 1.625 % Notes, net of unamortized issuance costs, continued to be classified as a current portion of long-term debt since the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on June 30, 2023 was greater than or equal to $26.94 (130 % of the conversion price) on each applicable trading day. This condition gives holders the right to surrender any portion of their 1.625 % Notes (in minimum denominations of $1,000 in principal amount or an integral multiple thereof) for conversion during the calendar quarter ending September 30, 2023. The 1.625 % Notes mature on October 15, 2023 with the holders having the option to convert after July 15, 2023.
Pursuant to the indenture governing the 0 % Notes, as of June 30, 2023, the $792.6 million remaining outstanding principal amount of the 0 % Notes, net of unamortized issuance costs, was classified as a current portion of long-term debt since the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on June 30, 2023 was greater than or equal to $68.86 (130 % of the conversion price) on each applicable trading day. This condition gives holders the right to surrender any portion of their 0 % Notes (in minimum denominations of $1,000 in principal amount or an integral multiple thereof) for conversion during the calendar quarter ending September 30, 2023, and only during such calendar quarter.
18
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 7: Earnings Per Share and Equity
Earnings Per Share
Net income per share of common stock for calculating basic and diluted earnings per share is calculated as follows (in millions, except per share data):
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | ||||||||||||||||||||
| Net income for basic earnings per share of common stock | $ | $ | $ | $ | |||||||||||||||||||
Add: Interest on | |||||||||||||||||||||||
| Net income for diluted earnings per share of common stock | $ | $ | $ | $ | |||||||||||||||||||
| Basic weighted-average shares of common stock outstanding | |||||||||||||||||||||||
| Dilutive effect of share-based awards | |||||||||||||||||||||||
| Dilutive effect of convertible notes and warrants | |||||||||||||||||||||||
| Diluted weighted-average shares of common stock outstanding | |||||||||||||||||||||||
| Net income per share of common stock attributable to ON Semiconductor Corporation: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
Basic income per share of common stock is computed by dividing net income for basic earnings by the weighted-average number of shares of common stock outstanding during the period. To calculate the diluted weighted-average shares of common stock outstanding, the treasury stock method has been applied to calculate the number of incremental shares from the assumed issuance of shares relating to RSUs. The excluded number of anti-dilutive share-based awards was 0.1 million and 0.9 million for the quarters ended June 30, 2023 and July 1, 2022, respectively, and 0.2 million and 0.6 million for the six months ended June 30, 2023 and July 1, 2022, respectively.
The dilutive impacts related to the 0.50 % Notes, 0 1.625 0.50 % Notes and the 0 % Notes are repayable in cash up to the par value and in cash or shares of common stock for the excess over par value. The 1.625 0.50 % Notes, 0 % Notes, and 1.625 % Notes when the stock price is above $103.87 , $52.97 and $20.72 per share, respectively.
The dilutive impact of the warrants issued concurrently with the issuance of the 0.50 % Notes, 0 % Notes and 1.625 156.78 , $74.34 and $30.70 , respectively, has been included in the calculation of diluted weighted-average common shares outstanding, if applicable.
Equity
Share Repurchase Program
Under the share repurchase program announced on February 6, 2023 (the "Share Repurchase Program"), the Company may repurchase up to $3.0 billion (exclusive of fees, commissions and other expenses) of the Company's common stock through December 31, 2025. As of June 30, 2023, the authorized amount remaining under the Share Repurchase Program was approximately $2.8 billion.
19
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Activity under the Share Repurchase Program and the Company's prior share repurchase program (which expired on December 31, 2022), during the quarters and six months ended June 30, 2023 and July 1, 2022, respectively, was as follows (in millions, except per share data):
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | ||||||||||||||||||||
| Number of repurchased shares (1) | |||||||||||||||||||||||
| Aggregate purchase price | $ | $ | $ | $ | |||||||||||||||||||
| Fees, commissions and excise tax | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average purchase price per share (2) | $ | $ | $ | $ | |||||||||||||||||||
(1) None
(2) Exclusive of fees, commissions or other expenses.
Shares for Restricted Stock Units Tax Withholding
The amounts remitted for employee withholding taxes during the quarter and six months ended June 30, 2023 was $9.8 million and $57.4 million, respectively, for which the Company withheld approximately 0.1 million and 0.7 million shares of common stock, respectively, that were underlying the RSUs that vested. The amounts remitted for employee withholding taxes during the quarter and six months ended July 1, 2022 was $4.5 million and $63.3 million, respectively, for which the Company withheld approximately 0.1 million and 1.0 million shares of common stock, respectively, that were underlying the RSUs that vested. This tax withholding activity is separate from the Share Repurchase Program.
Non-Controlling Interest in Leshan-Phoenix Semiconductor Company Limited (“Leshan”)
The results of Leshan have been consolidated in the Company's financial statements. As of December 31, 2022, the non-controlling interest, which represents 20 % of the Leshan balance, amounted to $18.5 million. This amount increased to $19.5 million as of June 30, 2023, after including the $1.0 million of earnings for the six months ending June 30, 2023.
Note 8: Share-Based Compensation
Total share-based compensation expense related to the RSUs, stock grant awards and the ESPP was recorded within the Consolidated Statements of Operations and Comprehensive Income as follows (in millions):
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | ||||||||||||||||||||
| Cost of revenue | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Share-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
| Income tax benefit | ( | ( | ( | ( | |||||||||||||||||||
| Share-based compensation expense, net of taxes | $ | $ | $ | $ | |||||||||||||||||||
As of June 30, 2023, total unrecognized expected share-based compensation expense, net of estimated forfeitures, related to non-vested RSUs with service, performance and market conditions was $176.1 million, which is expected to be recognized over a weighted-average period of 1.8 years. Upon vesting of RSUs, stock grant awards or completion of a purchase under the ESPP, new shares of common stock are issued. The annualized pre-vesting forfeiture rate for RSUs was estimated to be 8
Shares Available
20
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
As of June 30, 2023 and December 31, 2022, there was an aggregate of 37.2 million and 40.1 million shares of common stock, respectively, available for grant under the Amended and Restated SIP.
Restricted Stock Units
RSUs generally vest ratably over three years for awards with service conditions and over or three years for awards with performance or market conditions, or a combination thereof, and are settled in shares of common stock upon vesting. A summary of the RSU transactions for the six months ended June 30, 2023 is as follows (in millions, except per share data):
| Number of Shares | Weighted-Average Grant Date Fair Value Per Share | |||||||||||||
| Non-vested RSUs at December 31, 2022 | $ | |||||||||||||
| Granted | ||||||||||||||
| Achieved | ||||||||||||||
| Released | ( | |||||||||||||
| Forfeited | ( | |||||||||||||
| Non-vested RSUs at June 30, 2023 | ||||||||||||||
Note 9: Commitments and Contingencies
Environmental Contingencies
The Company has encountered and dealt with a number of environmental issues over time relating to the various locations that comprise its operations and has incurred certain costs related to clean-up activities and environmental remediation efforts. In certain instances, the Company has been indemnified for such costs, often from third parties who were the prior owners of such facilities. Any costs to the Company in connection with such environmental matters have generally not been, and, based on the information available, are not expected to be material.
Financing Contingencies
In the ordinary course of business, the Company provides standby letters of credit or other guarantee instruments to certain parties initiated by either the Company or its subsidiaries, as required for transactions, including, but not limited to, material purchase commitments, agreements to mitigate collection risk, leases, utilities or customs guarantees. The Revolving Credit Facility includes $25.0 million available for the issuance of letters of credit, of which $0.9 million was outstanding as of June 30, 2023, which reduced the borrowing capacity under such facility. As of June 30, 2023, the Company also had outstanding guarantees and letters of credit outside of its Revolving Credit Facility totaling $16.0 million.
As part of obtaining financing in the ordinary course of business, the Company issued guarantees related to certain of its subsidiaries, which totaled $0.9 million as of June 30, 2023. Based on historical experience and information currently available, the Company believes that it will not be required to make payments under the standby letters of credit or guarantee arrangements for the foreseeable future.
Indemnification Contingencies
The Company is a party to a variety of agreements entered into in the ordinary course of business, including acquisition agreements, pursuant to which it may be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by the Company require it to indemnify the other party against losses due to IP infringement, property damage (including environmental contamination), personal injury, failure to comply with applicable laws, the Company’s negligence or willful misconduct or breach of representations and warranties and covenants related to such matters as title to sold assets. In the case of certain acquisition agreements, these agreements may require us to maintain such indemnification provisions for the acquiree’s directors, officers and other employees and agents, in certain cases for a number of years following the acquisition.
While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential
21
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under any of these indemnities have not had a material effect on the Company’s business, financial condition, results of operations or cash flows. Additionally, the Company does not believe that any amounts that it may be required to pay under these indemnities in the future will be material to the Company’s business, financial position, results of operations, or cash flows.
Legal Matters
The Company is currently involved in a variety of legal matters that arise in the ordinary course of business. Based on information currently available, the Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations or liquidity. The litigation process is inherently uncertain, and the Company cannot guarantee that the outcome of any litigation matter will be favorable to the Company.
Intellectual Property Matters
The Company faces risk of exposure from claims of infringement of the IP rights of others. In the ordinary course of business, the Company receives letters asserting that the Company’s products or components breach another party’s rights. Such letters may request royalty payments from the Company, that the Company cease and desist using certain IP, and/or request other remedies.
Note 10: Fair Value Measurements
Fair Value of Financial Instruments
The Company invests portions of its excess cash in different marketable securities, which are classified as available-for-sale. The following tier level hierarchy is used to determine fair values of the financial instruments:
•Level 1: based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
•Level 2: based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.
•Level 3: based on the use of unobservable inputs for the assets and liabilities and other types of analyses.
The carrying value of cash and cash equivalents which includes money market funds, corporate bonds and commercial paper approximates fair value because of the short-term maturity of these instruments. Demand deposits and money market funds are classified as Level 1 within the fair value hierarchy, while corporate bonds and commercial paper are classified as Level 2. The carrying amount of other current assets and liabilities, such as accounts receivable and accounts payable approximates fair value due to the short-term maturity of the amounts and are considered Level 2 in the fair value hierarchy.
The following table summarizes financial assets and liabilities, excluding pension assets, disaggregated by the security type, measured at fair value on a recurring basis (in millions):
| As of June 30, 2023 | Fair Value Level | |||||||||||||||||||||||||||||||||||||||||||
| Description | Amortized Cost | Unrealized gains | Unrealized losses | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||||||||||||||||||||
| Demand and time deposits | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Money market funds | ||||||||||||||||||||||||||||||||||||||||||||
| Other current assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Certificate of deposit | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | ||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury bonds | ||||||||||||||||||||||||||||||||||||||||||||
22
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
All investments are included in other current assets and have maturity dates of one year or less.
| As of December 31, 2022 | Fair Value Level | |||||||||||||||||||||||||||||||||||||||||||
| Description | Amortized Cost | Unrealized gains | Unrealized losses | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||||||||||||||||||||
| Demand and time deposits | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Money market funds | ||||||||||||||||||||||||||||||||||||||||||||
| Other current assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Certificate of deposit | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial paper | ||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury bonds | ||||||||||||||||||||||||||||||||||||||||||||
| Other assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Other
The carrying amounts of other current assets and liabilities, such as accounts receivable and accounts payable, approximate fair value based on the short-term nature of these instruments.
Fair Value of Long-Term Debt, including Current Portion
The carrying amounts and fair values of the long-term borrowings were as follows (in millions):
| As of | |||||||||||||||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Long-term debt, including current portion (1) | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Other long-term debt | |||||||||||||||||||||||
(1) Carrying amounts shown are net of debt discount, if applicable, and debt issuance costs.
Fair values of the 0 0.50 % Notes, 1.625 3.875
Note 11: Financial Instruments
Foreign Currencies
23
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
As a multinational business, the Company engages in transactions that are denominated in a variety of currencies. When appropriate, the Company uses forward foreign currency contracts to reduce its overall exposure to the effects of currency fluctuations on its results of operations and cash flows. The Company’s policy prohibits trading in currencies for which there are no underlying exposures and entering into trades for any currency to intentionally increase the underlying exposure. The Company primarily hedges existing assets and liabilities associated with transactions currently on its balance sheet, which are undesignated hedges for accounting purposes. The Company is exposed to credit-related losses if counterparties to hedge contracts fail to perform their obligations.
As of June 30, 2023 and December 31, 2022, the Company had net outstanding foreign exchange contracts with notional amounts of $300.4 million and $272.0 million, respectively. Such contracts were obtained through financial institutions and were scheduled to mature within to three months from the time of purchase. Management believes that these financial instruments should not subject the Company to increased risks from foreign exchange movements because gains and losses on these contracts should offset losses and gains on the underlying assets, liabilities and transactions to which they are related.
| As of | ||||||||||||||||||||||||||
| June 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Buy (Sell) | Notional Amount | Buy (Sell) | Notional Amount | |||||||||||||||||||||||
| Japanese Yen | ||||||||||||||||||||||||||
| Philippine Peso | ||||||||||||||||||||||||||
| Czech Koruna | ||||||||||||||||||||||||||
| Euro | ||||||||||||||||||||||||||
| Korean Won | ||||||||||||||||||||||||||
| Other Currencies - Buy | ||||||||||||||||||||||||||
| Other Currencies - Sell | ( | ( | ||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
Amounts receivable or payable under the contracts were not material as of June 30, 2023 or December 31, 2022. During the quarters ended June 30, 2023 and July 1, 2022, net of the impact of the hedge positions, the realized and unrealized foreign currency transactions totaled a loss of $0.7 million and a gain of $6.3 million, respectively. During the six months ended June 30, 2023 and July 1, 2022, net of the impact of the hedge positions, the realized and unrealized foreign currency transactions totaled a loss of $2.7 million and a gain of $8.2 million, respectively. The realized and unrealized foreign currency transactions are included in other income (expense) in the Consolidated Statements of Operations and Comprehensive Income.
Cash Flow Hedges
Foreign currency risk
During the second quarter of 2023, the Company entered into foreign currency forward contracts to hedge its exposure to foreign currency exchange rate risk related to future forecasted transactions denominated in certain currencies other than the U.S. Dollar. These contracts generally mature within 12 months and are designated as cash flow hedges for accounting purposes.
As of June 30, 2023, the notional value of outstanding foreign currency forward contracts designated as cash flow hedges was $131.0 million, with a fair value of $2.9 million recorded as accrued expenses and other current liabilities. A loss of $0.8
Interest Rate Risk
During the first quarter of 2023, the Company terminated its interest rate swap agreements with a notional value of $500 27.7 million, net of termination fees,
24
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
and recognized $6.9 million of other income related to the termination. Approximately $20.7 million was recorded in Accumulated Other Comprehensive Income, which will be recognized to other income through December 2024.
As of December 31, 2022, the Company had interest rate swap agreements for notional amounts of $750 million, $500 million and $500 million for fiscal years 2022, 2023 and 2024, respectively. The fair value of these swaps totaled $36.0 million as of December 31, 2022, and was classified based on each instrument’s maturity dates.
See Note 13: ''Changes in Accumulated Other Comprehensive Loss'' for the effective amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive loss and the Consolidated Statements of Operations
and Comprehensive Income for the six months ended June 30, 2023.
Convertible Note Hedges
The Company entered into convertible note hedges in connection with the issuance of the 0 0.50 % Notes and 1.625
Other
As of June 30, 2023, the Company had no outstanding commodity derivatives, currency swaps, options, or equity investments held at subsidiaries or affiliated companies. The Company does not hedge the value of its equity investments in its subsidiaries or affiliated companies. The Company is exposed to credit-related losses if its hedge counterparties fail to perform their obligations.
As of June 30, 2023, the counterparties to the Company's hedge contracts are held at financial institutions which the Company believes to be highly rated, and no credit related losses are anticipated.
Note 12: Income Taxes
The Company recognizes interest and penalties related to uncertain tax positions in tax expense in the Consolidated Statements of Operations and Comprehensive Income. The Company had approximately $5.4 million and $2.7 million of net interest and penalties accrued as of June 30, 2023 and December 31, 2022, respectively. It is reasonably possible that $67.0 million of its uncertain tax positions will be reduced in the next 12 months due to settlement with tax authorities or expiration of the applicable statute of limitations.
The Company maintains a partial valuation allowance on its U.S. state deferred tax assets and a valuation allowance on foreign net operating losses and tax credits in certain foreign jurisdictions, a substantial portion of which relate to Japan and Hong Kong net operating losses, which are projected to expire prior to utilization.
The Company is currently under IRS examination for the 2017 and 2018 tax years. Tax years prior to 2017 are generally not subject to examination by the IRS. For state tax returns, the Company is generally not subject to income tax examinations for tax years prior to 2018. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates. With respect to jurisdictions outside the United States, the Company is generally not subject to examination for tax years prior to 2013. The Company believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the tax audits are resolved in a manner not consistent with expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
25
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 13: Changes in Accumulated Other Comprehensive Loss
Amounts comprising accumulated other comprehensive loss and reclassifications are as follows (in millions):
| Currency Translation Adjustments | Effects of Cash Flow Hedges and Other Adjustments | Total | |||||||||||||||||||||
| Balance as of December 31, 2022 | $ | ( | $ | $ | ( | ||||||||||||||||||
| Other comprehensive income (loss) prior to reclassifications | ( | ||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | ( | ( | |||||||||||||||||||||
| Net current period other comprehensive income (loss) (1) | ( | ( | ( | ||||||||||||||||||||
| Balance as of June 30, 2023 | $ | ( | $ | $ | ( | ||||||||||||||||||
(1) Effects of cash flow hedges are net of tax impact of $0.7 million for the six months ended June 30, 2023.
| Quarters Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | To caption | ||||||||||||||||||||||||||||
| Cash Flow Hedges | $ | ( | $ | $ | ( | $ | COGS | |||||||||||||||||||||||||
| Interest rate swaps | ( | ( | ( | Interest expense | ||||||||||||||||||||||||||||
| Interest rate swaps terminations | ( | Other Income | ||||||||||||||||||||||||||||||
| Total reclassifications | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included in the 2022 Form 10-K and our unaudited consolidated financial statements for the fiscal quarter ended June 30, 2023, which are included elsewhere in this Form 10-Q. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks, uncertainties and other factors. Actual results could differ materially because of the factors discussed below or elsewhere in this Form 10-Q. See Part II, Item 1A. "Risk Factors" of this Form 10-Q and Part I, Item 1A. "Risk Factors" of the 2022 Form 10-K.
Executive Overview
onsemi Overview
onsemi provides intelligent power and intelligent sensing solutions with a primary focus towards automotive and industrial markets to help our customers solve challenging problems and create cutting-edge products for a better future. Our intelligent power technologies enable the electrification of the automotive industry that allows for lighter and longer-range electric vehicles, empowers efficient fast-charging systems and propels sustainable energy for the highest efficiency solar strings, industrial power and storage systems. Our intelligent power solutions for automotive allows customers to exceed range targets with lower weight and reduce system cost through efficiency. Our intelligent sensing technologies support the next generation industry, allowing for smarter factories and buildings while also enhancing the automotive mobility experience with imaging and depth sensing that make advanced vehicle safety and automated driving systems possible.
We believe the evolution of the automotive industry, with advancements in autonomous driving, ADAS, vehicle electrification, and the increase in electronics content for vehicle platforms, is reshaping the boundaries of transportation. Through sensing integration, we believe our intelligent power solutions achieve superior efficiencies compared to our peers. This integration allows lower temperature operation and reduced cooling requirements while saving costs and minimizing weight. In addition, our power solutions deliver power with less die per module, achieving higher range for a given battery capacity. As of June 30, 2023, we were organized into the three operating and reportable segments of PSG, ASG and ISG.
Business Strategy Developments
Our primary focus continues to be on profitable revenue and operating income growth by capturing high-growth megatrends in our focused end-markets of automotive and industrial infrastructure, as well as obtaining LTSAs with strategic end-customers. We are designing products in highly differentiated markets focused on customer needs while optimizing our manufacturing footprint to support growth and expanding gross margins through efficiencies and new product ramps. We continue to rationalize our product portfolio by moving away from non-differentiated, non-strategic products, which in most cases had lower gross margins.
2023 Business Realignment
In order to streamline our operations and achieve organizational efficiencies, we realigned our operating models in ASG and the Corporate IT organization during the first quarter of 2023 and continued such efforts through the second quarter. Under this business realignment, approximately 460 employees were notified of their employment termination, and we incurred severance and related charges of $44.5 million.
2023 Financing activities
New Credit Agreement
During the second quarter of 2023, we entered into the New Credit Agreement to replace the Revolver due 2024 which was maturing on June 28, 2024. We drew $375.0 million against the Revolving Credit Facility and repaid the entire outstanding balance under the Revolver due 2024. We had repaid $125.0 million of the outstanding balance under the Revolver due 2024 during the first quarter of 2023. As of June 30, 2023, we had approximately $1.1 billion available under the Revolving Credit Facility for future borrowings.
0.50% Convertible Senior Notes due 2029
During the first quarter of 2023, we completed the offering of $1.5 billion aggregate principal amount of our 0.50% Notes and utilized the net proceeds along with cash generated from operations to (i) repay $1,086.0 million of the outstanding indebtedness under the Term Loan “B” Facility and the related transaction fees and expenses, (ii) pay $171.5 million net cost of
27
the related convertible note hedges after such costs were offset by the proceeds from the sale of warrants, and (iii) for general corporate purposes.
For additional information on these financing activities, see Note 6: ''Long-Term Debt'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Results of Operations
Quarter Ended June 30, 2023 compared to the Quarter Ended July 1, 2022
The following table summarizes certain information relating to our operating results that has been derived from our unaudited consolidated financial statements (in millions):
| Quarters Ended | |||||||||||||||||
| June 30, 2023 | July 1, 2022 | Dollar Change | |||||||||||||||
| Revenue | $ | 2,094.4 | $ | 2,085.0 | $ | 9.4 | |||||||||||
| Cost of revenue | 1,101.0 | 1,047.9 | 53.1 | ||||||||||||||
| Gross profit | 993.4 | 1,037.1 | (43.7) | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 145.3 | 161.6 | (16.3) | ||||||||||||||
| Selling and marketing | 71.6 | 73.1 | (1.5) | ||||||||||||||
| General and administrative | 87.2 | 83.2 | 4.0 | ||||||||||||||
| Amortization of acquisition-related intangible assets | 12.0 | 21.9 | (9.9) | ||||||||||||||
| Restructuring, asset impairments and other charges, net | 2.6 | (1.7) | 4.3 | ||||||||||||||
| Goodwill and intangible asset impairment charges | — | 115.0 | (115.0) | ||||||||||||||
| Total operating expenses | 318.7 | 453.1 | (134.4) | ||||||||||||||
| Operating income | 674.7 | 584.0 | 90.7 | ||||||||||||||
| Other income (expense), net: | |||||||||||||||||
| Interest expense | (16.4) | (22.1) | 5.7 | ||||||||||||||
| Interest income | 24.0 | 1.1 | 22.9 | ||||||||||||||
| Loss on debt prepayment | — | (7.3) | 7.3 | ||||||||||||||
| Gain on divestiture of business | 0.5 | 1.9 | (1.4) | ||||||||||||||
| Other income (expense) | (1.3) | 6.4 | (7.7) | ||||||||||||||
| Other income (expense), net | 6.8 | (20.0) | 26.8 | ||||||||||||||
| Income before income taxes | 681.5 | 564.0 | 117.5 | ||||||||||||||
| Income tax provision | (104.4) | (107.4) | 3.0 | ||||||||||||||
| Net income | 577.1 | 456.6 | 120.5 | ||||||||||||||
| Less: Net income attributable to non-controlling interest | (0.5) | (0.8) | 0.3 | ||||||||||||||
| Net income attributable to ON Semiconductor Corporation | $ | 576.6 | $ | 455.8 | $ | 120.8 | |||||||||||
Revenue
Revenue stayed flat at $2,094.4 million and $2,085.0 million for the quarters ended June 30, 2023 and July 1, 2022, respectively. We had one customer, a distributor, whose revenue accounted for approximately 10.9% and 12% of our total revenue for the quarters ended June 30, 2023 and July 1, 2022, respectively. Revenue by operating and reportable segments was as follows (dollars in millions):
| Quarter Ended June 30, 2023 | As a % of Total Revenue (1) | Quarter Ended July 1, 2022 | As a % of Total Revenue (1) | ||||||||||||||||||||
| PSG | $ | 1,119.8 | 53.5 | % | $ | 1,057.0 | 50.7 | % | |||||||||||||||
| ASG | 649.5 | 31.0 | % | 716.7 | 34.4 | % | |||||||||||||||||
| ISG | 325.1 | 15.5 | % | 311.3 | 14.9 | % | |||||||||||||||||
| Total revenue | $ | 2,094.4 | $ | 2,085.0 | |||||||||||||||||||
28
(1) Certain amounts may not total due to rounding of individual amounts.
Revenue from PSG increased by $62.8 million, or approximately 6%, for the quarter ended June 30, 2023 compared to the quarter ended July 1, 2022. Revenue from our Advanced Power Division increased by $138.4 million, which was partially offset by a decrease of $75.7 million in our Integrated Circuits, Protection and Signal Division. The increases were primarily driven by our continued ramp in SiC and other power automotive solutions while the decrease was driven by planned customer product exits and reduced demand driven by lower end-market requirements for these products.
Revenue from ASG decreased by $67.2 million, or approximately 9%, for the quarter ended June 30, 2023 compared to the quarter ended July 1, 2022. The revenue from our Power Management Division decreased by $94.0 million, which was partially offset by an increase of $26.9 million in our Sensor Interface Division driven by foundry business through our EFK location. The decrease in revenue generated by our Power Management Division was driven by planned end of life for targeted products, as well as a general drop in end-market demand for these products.
Revenue from ISG increased by $13.8 million, or approximately 4%, for the quarter ended June 30, 2023 compared to the quarter ended July 1, 2022, largely driven by an increase in revenue from our Automotive Sensing Division of $30.7 million, partially offset by a decrease of $16.8 million in our Industrial and Consumer Solutions Division. The increase was due to an increase in demand for these products and an increase in average selling prices.
Revenue by geographic location, based on sales billed from the respective country or region, was as follows (dollars in millions):
| Quarter Ended June 30, 2023 | As a % of Total Revenue (1) | Quarter Ended July 1, 2022 | As a % of Total Revenue (1) | ||||||||||||||||||||
| Hong Kong | $ | 530.2 | 25.3 | % | $ | 584.4 | 28.0 | % | |||||||||||||||
| Singapore | 519.3 | 24.8 | % | 555.7 | 26.7 | % | |||||||||||||||||
| United Kingdom | 449.4 | 21.5 | % | 359.8 | 17.3 | % | |||||||||||||||||
| United States | 380.9 | 18.2 | % | 361.2 | 17.3 | % | |||||||||||||||||
| Other | 214.6 | 10.2 | % | 223.9 | 10.7 | % | |||||||||||||||||
| Total revenue | $ | 2,094.4 | $ | 2,085.0 | |||||||||||||||||||
(1) Certain amounts may not total due to rounding of individual amounts.
Gross Profit and Gross Margin
Our gross profit by operating and reportable segments was as follows (dollars in millions):
| Quarter Ended June 30, 2023 | As a % of Segment Revenue (1) | Quarter Ended July 1, 2022 | As a % of Segment Revenue (1) | ||||||||||||||||||||
| PSG | $ | 536.7 | 47.9 | % | $ | 511.2 | 48.4 | % | |||||||||||||||
| ASG | 301.5 | 46.4 | % | 380.3 | 53.1 | % | |||||||||||||||||
| ISG | 155.2 | 47.7 | % | 145.6 | 46.8 | % | |||||||||||||||||
| Total gross profit | $ | 993.4 | 47.4 | % | $ | 1,037.1 | 49.7 | % | |||||||||||||||
(1)Certain amounts may not total due to rounding of individual amounts.
During the quarter ended June 30, 2023 our gross profit decreased by $43.7 million from $1,037.1 million for the quarter ended July 1, 2022 to $993.4 million for the quarter ended June 30, 2023. Our gross margin decreased by 2.3% from 49.7% for the quarter ended July 1, 2022 to 47.4% for the quarter ended June 30, 2023.
The decline in both gross profit and gross margin was primarily driven by start-up and ramp-up costs at our EFK location and new products.
Operating Expenses
Research and development expenses were $145.3 million for the quarter ended June 30, 2023, as compared to $161.6 million for the quarter ended July 1, 2022, representing a decrease of $16.3 million, or approximately 10%. The decrease was primarily due to a reduction in variable compensation expense.
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Selling and marketing expenses were $71.6 million for the quarter ended June 30, 2023, as compared to $73.1 million for the quarter ended July 1, 2022, representing a decrease of $1.5 million, or approximately 2%.
General and administrative expenses were $87.2 million for the quarter ended June 30, 2023, as compared to $83.2 million for the quarter ended July 1, 2022, representing an increase of $4.0 million, or approximately 5%.
Other Operating Expenses
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets was $12.0 million for the quarter ended June 30, 2023, as compared to $21.9 million for the quarter ended July 1, 2022, representing a decrease of $9.9 million, or approximately 45%. The decrease was due to the impairment of intangible assets due to the QCS wind down during the third quarter of 2022 and a reduction in amortization expense as certain intangible assets became fully amortized.
Restructuring, Asset Impairments and Other, Net
Restructuring, asset impairments and other, net was $2.6 million for the quarter ended June 30, 2023, as compared to a credit of $1.7 million for the quarter ended July 1, 2022.
Goodwill and Intangible Asset Impairment
Goodwill and intangible asset impairment was zero for the quarter ended June 30, 2023, as compared to $115.0 million for the quarter ended July 1, 2022. During the second quarter of 2022, we recorded a goodwill impairment charge of $115.0 million as a result of a shift in our focus on long-term product mix in our strategic markets.
Interest Expense
Interest expense decreased by $5.7 million to $16.4 million during the quarter ended June 30, 2023, as compared to $22.1 million during the quarter ended July 1, 2022. The decrease was primarily due to the repayment of the balances under the Term Loan "B" Facility and replacement by the issuance of the 0.5% Notes. Our average gross long-term debt for the quarter ended June 30, 2023 was $3,507.1 million at a weighted-average interest rate of 1.9%, as compared to $3,253.0 million at a weighted-average interest rate of 2.7% for the quarter ended July 1, 2022. The calculation of our weighted-average interest rates includes the effect of our interest rate swap agreements.
Other Income (Expense)
During the quarter ended June 30, 2023, other income (expense) was an expense of $1.3 million compared to an income of $6.4 million during the quarter ended July 1, 2022. The decrease was primarily due to transaction losses resulting from fluctuations in foreign currencies.
Income Tax Provision
We recorded an income tax provision of $104.4 million and $107.4 million for the quarters ended June 30, 2023 and July 1, 2022, respectively, representing effective tax rates of 15.3% and 19.0%. The decrease in our effective tax rate is due to the goodwill impairments in the prior year, which were not deductible for tax purposes.
For additional information, see Note 12: ''Income Taxes'' and Note 5: ''Balance Sheet Information and Other Supplemental Disclosures'' in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q.
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Results of Operations
Six Months Ended June 30, 2023 compared to the Six Months Ended July 1, 2022
The following table summarizes certain information relating to our operating results that has been derived from our unaudited consolidated financial statements (in millions):
| Six Months Ended | |||||||||||||||||
| June 30, 2023 | July 1, 2022 | Dollar Change | |||||||||||||||
| Revenue | $ | 4,054.1 | $ | 4,030.0 | $ | 24.1 | |||||||||||
| Cost of revenue | 2,143.2 | 2,031.6 | 111.6 | ||||||||||||||
| Gross profit | 1,910.9 | 1,998.4 | (87.5) | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 283.7 | 318.4 | (34.7) | ||||||||||||||
| Selling and marketing | 143.4 | 144.2 | (0.8) | ||||||||||||||
| General and administrative | 163.1 | 161.1 | 2.0 | ||||||||||||||
| Amortization of acquisition-related intangible assets | 27.0 | 43.2 | (16.2) | ||||||||||||||
| Restructuring, asset impairments and other charges, net | 54.1 | (14.7) | 68.8 | ||||||||||||||
| Goodwill and intangible asset impairment charges | — | 115.0 | (115.0) | ||||||||||||||
| Total operating expenses | 671.3 | 767.2 | (95.9) | ||||||||||||||
| Operating income | 1,239.6 | 1,231.2 | 8.4 | ||||||||||||||
| Other income (expense), net: | |||||||||||||||||
| Interest expense | (42.8) | (43.7) | 0.9 | ||||||||||||||
| Interest income | 41.1 | 1.5 | 39.6 | ||||||||||||||
| Loss on debt prepayment | (13.3) | (7.3) | (6.0) | ||||||||||||||
| Gain (loss) on divestiture of business | (0.6) | 1.9 | (2.5) | ||||||||||||||
| Other income | 3.4 | 8.5 | (5.1) | ||||||||||||||
| Other income (expense), net | (12.2) | (39.1) | 26.9 | ||||||||||||||
| Income before income taxes | 1,227.4 | 1,192.1 | 35.3 | ||||||||||||||
| Income tax provision | (188.1) | (204.5) | 16.4 | ||||||||||||||
| Net income | 1,039.3 | 987.6 | 51.7 | ||||||||||||||
| Less: Net income attributable to non-controlling interest | (1.0) | (1.6) | 0.6 | ||||||||||||||
| Net income attributable to ON Semiconductor Corporation | $ | 1,038.3 | $ | 986.0 | $ | 52.3 | |||||||||||
Revenue
Revenue was $4,054.1 million and $4,030.0 million for the six months ended June 30, 2023 and July 1, 2022, respectively, representing an increase of $24.1 million, or approximately 1%. We had one customer, a distributor, whose revenue accounted for approximately 10.1% of our total revenue for the six months ended June 30, 2023 and 12% of our total revenue for the six months ended July 1, 2022.
Revenue by operating and reportable segments was as follows (dollars in millions):
| Six Months Ended June 30, 2023 | As a % of Total Revenue (1) | Six Months Ended July 1, 2022 | As a % of Total Revenue (1) | ||||||||||||||||||||
| PSG | $ | 2,132.6 | 52.6 | % | $ | 2,043.7 | 50.7 | % | |||||||||||||||
| ASG | 1,242.3 | 30.6 | % | 1,406.0 | 34.9 | % | |||||||||||||||||
| ISG | 679.2 | 16.8 | % | 580.3 | 14.4 | % | |||||||||||||||||
| Total revenue | $ | 4,054.1 | $ | 4,030.0 | |||||||||||||||||||
(1) Certain amounts may not total due to rounding of individual amounts.
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Revenue from PSG increased by $88.9 million, or approximately 4%, for the six months ended June 30, 2023 compared to the six months ended July 1, 2022. The revenue from our Advanced Power Division increased by $235.0 million, offset by a decrease of $146.2 million in our Integrated Circuits, Protection and Signal Division. The increase was primarily driven by our continued ramp in SiC and other power automotive solutions, while the decrease was primarily driven by planned customer product exits and reduced demand driven by lower end-market requirements for these products.
Revenue from ASG decreased by $163.7 million, or approximately 12%, for the six months ended June 30, 2023 compared to the six months ended July 1, 2022. The revenue from our Power Management Division decreased by $187.5 million, which was partially offset by an increase of $23.8 million in our Sensor Interface Division driven by foundry business through our EFK location. The decrease in revenue in our Power Management Division was primarily driven by the QCS wind down, planned end of life for targeted products as well as a general drop in end-market demand for these products.
Revenue from ISG increased by $98.9 million, or approximately 17%, for the six months ended June 30, 2023 compared to the six months ended July 1, 2022, which was largely driven by an increase in revenue from our Automotive Sensing Division of $121.5 million, partially offset by a decrease of $22.5 million in our Industrial and Consumer Solutions Division. The increase was due to an increase in demand for these products and an increase in average selling prices.
Revenue by geographic location, including local sales made by operations within each area, based on sales billed from the respective region, was as follows (dollars in millions):
| Six Months Ended June 30, 2023 | As a % of Total Revenue (1) | Six Months Ended July 1, 2022 | As a % of Total Revenue (1) | ||||||||||||||||||||
| Hong Kong | $ | 1,020.6 | 25.2 | % | $ | 1,114.0 | 27.6 | % | |||||||||||||||
| Singapore | 970.0 | 23.9 | % | 1,111.5 | 27.6 | % | |||||||||||||||||
| United Kingdom | 862.7 | 21.3 | % | 705.2 | 17.5 | % | |||||||||||||||||
| United States | 770.0 | 19.0 | % | 673.0 | 16.7 | % | |||||||||||||||||
| Other | 430.8 | 10.6 | % | 426.3 | 10.6 | % | |||||||||||||||||
| Total revenue | $ | 4,054.1 | $ | 4,030.0 | |||||||||||||||||||
(1) Certain amounts may not total due to rounding of individual amounts.
Gross Profit and Gross Margin
Our gross profit by operating and reportable segments was as follows (dollars in millions):
| Six Months Ended June 30, 2023 | As a % of Segment Revenue (1) | Six Months Ended July 1, 2022 | As a % of Segment Revenue (1) | ||||||||||||||||||||
| PSG | $ | 1,017.0 | 47.7 | % | $ | 985.9 | 48.2 | % | |||||||||||||||
| ASG | 561.6 | 45.2 | % | 747.0 | 53.1 | % | |||||||||||||||||
| ISG | 332.3 | 48.9 | % | 265.5 | 45.8 | % | |||||||||||||||||
| Total gross profit | $ | 1,910.9 | 47.1 | % | $ | 1,998.4 | 49.6 | % | |||||||||||||||
(1)Certain amounts may not total due to rounding of individual amounts.
Our gross profit was $1,910.9 million for the six months ended June 30, 2023 compared to $1,998.4 million for the six months ended July 1, 2022. Gross profit decreased by $87.5 million. Gross margin decreased by 2.5% from 49.6% for the six months ended July 1, 2022 to 47.1% for the six months ended June 30, 2023.
The decline in both gross profit and gross margin was primarily driven by start-up and ramp-up costs at our EFK location and new products.
Operating Expenses
Research and development expenses were $283.7 million for the six months ended June 30, 2023, as compared to $318.4 million for the six months ended July 1, 2022, representing a decrease of $34.7 million, or approximately 11%. The decrease was primarily due to a reduction in variable compensation expense.
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Selling and marketing expenses were $143.4 million for the six months ended June 30, 2023, as compared to $144.2 million for the six months ended July 1, 2022, representing a decrease of $0.8 million, or approximately 1%.
General and administrative expenses were $163.1 million for the six months ended June 30, 2023, as compared to $161.1 million for the six months ended July 1, 2022, representing an increase of $2.0 million, or approximately 1%.
Other Operating Expenses
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets was $27.0 million and $43.2 million for the six months ended June 30, 2023 and July 1, 2022, respectively, representing a decrease of $16.2 million, or approximately 38%. The decrease was due to the impairment of intangible assets due to the QCS wind down and a reduction in amortization expense as certain intangible assets became fully amortized.
Restructuring, Asset Impairments and Other, Net
Restructuring, asset impairments and other, net was $54.1 million for the six months ended June 30, 2023, as compared to a credit of $14.7 million for the six months ended July 1, 2022, representing an increase of $68.8 million. Amounts incurred for the six months ended June 30, 2023 related primarily to the business realignment efforts announced in the first quarter of 2023. The credit for the six months ended July 1, 2022 was primarily due to the gain from the sale of two office buildings. For additional information, see Note 4: ''Restructuring, Asset Impairments and Other Charges, Net'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Goodwill and Intangible Asset Impairment
Goodwill and intangible asset impairment was zero for the six months ended June 30, 2023, as compared to $115.0 million for the six months ended July 1, 2022. During the second quarter of 2022, we recorded a goodwill impairment charge of $115.0 million as a result of a shift in our focus on long-term product mix in our strategic markets.
Interest Expense
Interest expense decreased by $0.9 million to $42.8 million during the six months ended June 30, 2023, as compared to $43.7 million during the six months ended July 1, 2022. The decrease was primarily due to the repayment of the balances under the Term Loan "B" Facility and replacement by the issuance of the 0.5% Notes. Our average gross long-term debt balance for the six months ended June 30, 2023 was $3,363.9 million at a weighted-average interest rate of 2.5%, as compared to $3,255.0 million at a weighted-average interest rate of 2.7% for the six months ended July 1, 2022. The calculation of our weighted-average interest rates includes the effect of our interest rate swap agreements.
Loss on Debt Prepayment
Loss on debt prepayment was $13.3 million for the six months ended June 30, 2023 due to the write-off relating to the repayment of the Term Loan "B" Facility, as compared to $7.3 million for the six months ended July 1, 2022 due to the write-off relating to the partial repayment of the Term Loan "B" Facility. See Note 6: ''Long-Term Debt'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.
Other Income (Expense)
Other income (expense) was income of $3.4 million for the six months ended June 30, 2023 as compared to income of $8.5 million for the six months ended July 1, 2022. The decrease was primarily due to an increase in transaction losses resulting from fluctuations in foreign currencies, partially offset by a gain resulting from the termination of interest rate swaps.
Income Tax Provision
We recorded an income tax provision of $188.1 million and $204.5 million during the six months ended June 30, 2023 and July 1, 2022, respectively, representing effective tax rates of 15.3% and 17.2%. The decrease in our effective tax rate is due to the goodwill impairments during the prior year, which were not deductible for tax purposes.
For additional information, see Note 12: ''Income Taxes'' and Note 5: ''Balance Sheet Information and Other Supplemental Disclosures'' in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q.
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Liquidity and Capital Resources
Overview
Our principal sources of liquidity are cash on hand, cash generated from operations, available borrowings under our Revolving Credit Facility as well as new debt and/or equity issuances. In the near term, we expect to fund our cash requirements by utilizing any or a combination of these principal sources, including any amounts required to satisfy our current portion of long-term debt. Our cash and cash equivalents was approximately $2.6 billion as of June 30, 2023, and the Revolving Credit Facility has approximately $1.1 billion available for future borrowings.
We require cash to: (i) fund our operating expenses, working capital requirements, outlays for strategic acquisitions and investments; (ii) service our debt, including principal and interest; (iii) incur capital expenditures; and (iv) repurchase our common stock. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures to reflect the current market conditions and our projected sales and demand. Our capital expenditures are primarily directed towards manufacturing equipment and can materially influence our available cash for other initiatives. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.
We believe that our cash on hand, cash generated from our operations and the amounts available under the Revolving Credit Facility are adequate to meet our working capital requirements and other business needs for at least the next 12 months.
Operating Activities
Our cash flows from operating activities were $799.7 million and $899.4 million for the six months ended June 30, 2023 and July 1, 2022, respectively. The decrease of $99.7 million was primarily attributable to increased working capital requirements in light of our strategic investments in SiC products and LTSA commitments.
Our ability to maintain positive operating cash flows is dependent on, among other factors, our success in achieving our revenue goals, meeting LTSA commitments and manufacturing and operating cost targets. Management of our assets and liabilities, including both working capital and long-term assets and liabilities, also influences our operating cash flows.
Investing Activities
Our cash flows used in investing activities were $945.5 million and $299.5 million for the six months ended June 30, 2023 and July 1, 2022, respectively. The increase of $646.0 million was primarily attributable to capital expenditures and the remaining payment of $236.3 million related to the acquisition of our EFK location. During the six months ended June 30, 2023 and July 1, 2022, we paid $752.1 million and $391.9 million, respectively, for capital expenditures. Our capital expenditures as a percent of revenue during the six months ended June 30, 2023 increased to approximately 19%, primarily as a result of investments to expand SiC manufacturing capacity. For the remainder of 2023, we expect capital expenditures to remain at approximately 19% of revenue.
Financing Activities
Our cash flows used in financing activities were $153.0 million and $160.4 million for the six months ended June 30, 2023 and July 1, 2022, respectively. The decrease of $7.4 million was primarily attributable to proceeds and payments related to long-term borrowings and share repurchase activity. During the quarter ended June 30, 2023, we replaced the Revolver due 2024 maturing on June 28, 2024 with the Revolving Credit Facility. Other than the 1.625% Notes, we do not have any meaningful debt maturing during the next 12 months. Our 0.5% Notes are also classified as a current liability based on share price trigger provisions. We expect to continue our Share Repurchase Program depending on market conditions.
See Note 6: ''Long-Term Debt'' and Note 7: ''Earnings Per Share and Equity'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.
Key Factors Potentially Affecting Liquidity
We believe that the key factors that could adversely affect our internal and external sources of cash include, among other considerations:
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•changes in demand for our products, competitive pricing pressures, supply chain constraints, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, our ability to make progress on the achievement of our business strategy and sustainability goals, the impact of our restructuring programs on our production and cost efficiency, and our ability to make the research and development expenditures required to remain competitive in our business; and
•the debt and equity capital markets could impact our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing and our ability to maintain compliance with covenants under our debt agreements in effect from time to time.
Debt Guarantees and Related Covenants
As of June 30, 2023, we were in compliance with the indentures relating to our 0% Notes, 0.50% Notes, 3.875% Notes and 1.625% Notes and with covenants included in the New Credit Agreement. The 0% Notes, 0.50% Notes, 3.875% Notes and 1.625% Notes are senior to the existing and future subordinated indebtedness of onsemi and its guarantor subsidiaries, rank equally in right of payment to all of our existing and future senior debt and, as unsecured obligations, are subordinated to all of our existing and future secured debt to the extent of the assets securing such debt.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 6, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk from the information presented in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” in the 2022 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
We also carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended June 30, 2023.
There have been no changes to our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended June 30, 2023 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9: ''Commitments and Contingencies'' under the heading "Legal Matters" in the notes to the consolidated unaudited financial statements included elsewhere in this Form 10-Q for additional information on our legal proceedings and related matters. See also Part I, Item 1 "Business - Government Regulation" of the 2022 Form 10-K for information on certain environmental matters.
Item 1A. Risk Factors
Our business, financial condition and results of operations are subject to a number of trends, risks and uncertainties. We review and, where applicable, update our risk factors each quarter. There have been no material changes from the risk factors disclosed in Part I, Item 1A of the 2022 Form 10-K.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements," as that term is defined in Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements, other than statements of historical facts, included or incorporated in this Form 10-Q could be deemed forward-looking statements, particularly statements about our plans, strategies and prospects under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements are often characterized by the use of words such as "believes," "estimates," "expects," "projects," "may," "will," "intends," "plans," "anticipates," "should" or similar expressions, or by discussions of strategy, plans or intentions. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements.
Important factors that could cause our actual results to differ materially from those anticipated in the forward-looking statements are described under Part I, Item 1A "Risk Factors" in the 2022 Form 10-K, in this Form 10-Q and from time to time in our other SEC reports. Readers are cautioned not to place undue reliance on forward-looking statements. We assume no obligation to update such information, which speaks only as of the date made, except as may be required by law. Investing in our securities involves a high degree of risk and uncertainty, and you should carefully consider the trends, risks and uncertainties described in the aforementioned reports and subsequent reports filed with or furnished to the SEC before making any investment decision with respect to our securities. The risk factors described herein and in our 2022 Form 10-K are not all of the risks we may face. Other risks not presently known to us or that we currently believe are immaterial may materially affect our business. If any of the trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding repurchases of our common stock during the quarter ended June 30, 2023:
Period (1) | Total Number of Shares Purchased | Average Price Paid per Share ($) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar value of Shares that May Yet be Purchased Under the Plans or Programs (in millions) ($) | ||||||||||||||||||||||
| April 1, 2023 - April 28, 2023 | 74,657 | 73.77 | — | 2,896.0 | ||||||||||||||||||||||
| April 29, 2023 - May 26, 2023 | 597,142 | 83.59 | 144,222 | 2,884.0 | ||||||||||||||||||||||
| May 27, 2023 - June 30, 2023 | 550,142 | 87.37 | 549,514 | 2,836.0 | ||||||||||||||||||||||
| Total | 1,221,941 | 84.69 | 693,736 | |||||||||||||||||||||||
(1) These time periods represent our fiscal month start and end dates for the second quarter of 2023.
Shares withheld to satisfy statutory tax withholding requirements related to the vesting of share-based awards are not issued or considered repurchases of our common stock under our Share Repurchase Program and, therefore, are excluded from the table above.
Share Repurchase Program
In February 2023, the Board of Directors approved a new share repurchase program (the “Share Repurchase Program”), which allows for the repurchase of our common stock from time to time in privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 of the Exchange Act, or by any combination of such methods or other methods. The Share Repurchase Program, which does not require us to purchase any minimum amount of our common stock, has an aggregate limit of $3.0 billion from February 8, 2023 through December 31, 2025 (exclusive of fees, commissions and other expenses). Any repurchases will be at the Company’s discretion and will be subject to market conditions, the price of our shares and other factors. The share repurchase program may be modified, suspended or terminated by the Board of Directors at any time without prior notice.
There were 0.7 million shares of the Company's common stock repurchased under the Share Repurchase Program during the quarter ended June 30, 2023. As of June 30, 2023, the authorized amount remaining under the Share Repurchase Program was approximately $2.8 billion.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Insider Trading Arrangements
During the quarter ended June 30, 2023, two individuals serving as a director and/or an officer (as defined in Rule 16a-1(f) of the Exchange Act) of the Company adopted or terminated
•Christine Y. Yan , a director of the Company, adopted a Rule 10b5-1 Plan on May 18, 2023 . Under this plan, a total of 3,624 shares of the Company’s common stock may be sold before the plan expires on May 21, 2024.
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•Bernard R. Colpitts, Jr. , Senior Vice President and Chief Accounting Officer of the Company, adopted a Rule 10b5-1 Plan on June 12, 2023 . Under this plan, a total of 3,800 shares of the Company’s common stock may be sold before the plan expires on December 31, 2023.
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Item 6. Exhibits
EXHIBIT INDEX
| Exhibit No. | Exhibit Description* | ||||||||||||||||
| 10.1 | |||||||||||||||||
| 10.2 | |||||||||||||||||
| 10.3 | |||||||||||||||||
| 31.1 | |||||||||||||||||
| 31.2 | |||||||||||||||||
| 32 | |||||||||||||||||
| 101.INS | XBRL Instance Document(1) | ||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document(1) | ||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document(1) | ||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document(1) | ||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document(1) | ||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document(1) | ||||||||||||||||
| 104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document. | ||||||||||||||||
* | Reports filed under the Exchange Act (Form 10-K, Form 10-Q and Form 8-K) are filed under File No. 000-30419 and File No. 001-39317. | ||||
† | The Company has omitted certain schedules and exhibits pursuant to Item 601(b)(2) of Regulation S-K and, upon request by the Commission, agrees to furnish supplementally to the Commission a copy of any omitted schedule or exhibit. | ||||
(1) | Filed herewith. | ||||
(2) | Furnished herewith. | ||||
39
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ON SEMICONDUCTOR CORPORATION (Registrant) | |||||||||||
| Date: | July 31, 2023 | By: | /s/ THAD TRENT | ||||||||
| Thad Trent | |||||||||||
Executive Vice President, Chief Financial Officer and Treasurer | |||||||||||
(Principal Financial Officer and officer duly authorized to sign this report) | |||||||||||
| By: | /s/ BERNARD R. COLPITTS, JR. | ||||||||||
| Bernard R. Colpitts, Jr. | |||||||||||
| Chief Accounting Officer | |||||||||||
| (Principal Accounting Officer and officer duly authorized to sign this report) | |||||||||||
40
Exhibit 31.1
CERTIFICATIONS
I, Hassane El-Khoury, certify that:
1.I have reviewed this quarterly report on Form 10-Q of ON Semiconductor Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: July 31, 2023 | /s/ HASSANE EL-KHOURY | ||||
Hassane El-Khoury | |||||
Chief Executive Officer | |||||
Exhibit 31.2
CERTIFICATIONS
I, Thad Trent, certify that:
1.I have reviewed this quarterly report on Form 10-Q of ON Semiconductor Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: July 31, 2023 | /s/ THAD TRENT | ||||
Thad Trent | |||||
| Chief Financial Officer | |||||
Exhibit 32
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
For purposes of Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of ON Semiconductor Corporation, a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: July 31, 2023 | /s/ HASSANE EL-KHOURY | ||||
| Hassane El-Khoury | |||||
| President and Chief Executive Officer | |||||
| Dated: July 31, 2023 | /s/ THAD TRENT | ||||
| Thad Trent | |||||
| Executive Vice President, | |||||
| Chief Financial Officer and Treasurer | |||||