filings.toolsItem 1. Financial Statements (unaudited)
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Item 1. Financial Statements (unaudited)
ON SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(unaudited)
| July 1, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 1,791.6 | $ | 1,352.6 | |||||||
| Receivables, net | 1,138.1 | 809.4 | |||||||||
| Inventories | 1,563.2 | 1,379.5 | |||||||||
| Other current assets | 292.4 | 240.1 | |||||||||
| Total current assets | 4,785.3 | 3,781.6 | |||||||||
| Property, plant and equipment, net | 2,709.8 | 2,524.3 | |||||||||
| Goodwill | 1,815.4 | 1,937.5 | |||||||||
| Intangible assets, net | 452.6 | 495.7 | |||||||||
| Deferred tax assets | 375.7 | 366.3 | |||||||||
| Other assets | 649.9 | 520.6 | |||||||||
| Total assets | $ | 10,788.7 | $ | 9,626.0 | |||||||
| Liabilities, Non-Controlling Interest and Stockholders’ Equity | |||||||||||
| Accounts payable | $ | 793.8 | $ | 635.1 | |||||||
| Accrued expenses and other current liabilities | 754.3 | 747.6 | |||||||||
| Current portion of long-term debt | 165.2 | 160.7 | |||||||||
| Total current liabilities | 1,713.3 | 1,543.4 | |||||||||
| Long-term debt | 3,047.4 | 2,913.9 | |||||||||
| Deferred tax liabilities | 36.8 | 43.2 | |||||||||
| Other long-term liabilities | 581.1 | 521.1 | |||||||||
| Total liabilities | 5,378.6 | 5,021.6 | |||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| ON Semiconductor Corporation stockholders’ equity: | |||||||||||
| Common stock ($0.01 par value, 1,250,000,000 shares authorized, 606,427,684 and 603,044,079 issued, 433,322,860 and 432,472,818 outstanding, respectively) | 6.1 | 6.0 | |||||||||
| Additional paid-in capital | 4,565.9 | 4,633.3 | |||||||||
| Accumulated other comprehensive loss | (29.3) | (40.6) | |||||||||
| Accumulated earnings | 3,448.2 | 2,435.1 | |||||||||
| Less: Treasury stock, at cost: 173,104,824 and 170,571,261 shares, respectively | (2,601.4) | (2,448.4) | |||||||||
| Total ON Semiconductor Corporation stockholders’ equity | 5,389.5 | 4,585.4 | |||||||||
| Non-controlling interest | 20.6 | 19.0 | |||||||||
| Total stockholders' equity | 5,410.1 | 4,604.4 | |||||||||
| Total liabilities and stockholders' equity | $ | 10,788.7 | $ | 9,626.0 |
See accompanying notes to consolidated financial statements
ON SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in millions, except per share data)
(unaudited)
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2022 | July 2, 2021 | July 1, 2022 | July 2, 2021 | ||||||||||||||||||||
| Revenue | $ | 2,085.0 | $ | 1,669.9 | $ | 4,030.0 | $ | 3,151.6 | |||||||||||||||
| Cost of revenue (exclusive of amortization shown below) | 1,047.9 | 1,029.8 | 2,031.6 | 1,990.3 | |||||||||||||||||||
| Gross profit | 1,037.1 | 640.1 | 1,998.4 | 1,161.3 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 161.6 | 166.3 | 318.4 | 339.9 | |||||||||||||||||||
| Selling and marketing | 73.1 | 76.1 | 144.2 | 155.0 | |||||||||||||||||||
| General and administrative | 83.2 | 73.2 | 161.1 | 145.6 | |||||||||||||||||||
| Amortization of acquisition-related intangible assets | 21.9 | 24.8 | 43.2 | 49.8 | |||||||||||||||||||
| Restructuring, asset impairments and other, net | (1.7) | 17.5 | (14.7) | 60.0 | |||||||||||||||||||
| Goodwill and intangible asset impairment | 115.0 | — | 115.0 | 2.9 | |||||||||||||||||||
| Total operating expenses | 453.1 | 357.9 | 767.2 | 753.2 | |||||||||||||||||||
| Operating income | 584.0 | 282.2 | 1,231.2 | 408.1 | |||||||||||||||||||
| Other income (expense), net: | |||||||||||||||||||||||
| Interest expense | (22.1) | (33.1) | (43.7) | (66.5) | |||||||||||||||||||
| Interest income | 1.1 | 0.2 | 1.5 | 0.6 | |||||||||||||||||||
| Loss on debt refinancing and prepayment | (7.3) | (26.2) | (7.3) | (26.2) | |||||||||||||||||||
| Gain on divestiture of business | 1.9 | — | 1.9 | — | |||||||||||||||||||
| Other income (expense) | 6.4 | (1.1) | 8.5 | 3.4 | |||||||||||||||||||
| Other income (expense), net | (20.0) | (60.2) | (39.1) | (88.7) | |||||||||||||||||||
| Income before income taxes | 564.0 | 222.0 | 1,192.1 | 319.4 | |||||||||||||||||||
| Income tax provision | (107.4) | (37.9) | (204.5) | (45.0) | |||||||||||||||||||
| Net income | 456.6 | 184.1 | 987.6 | 274.4 | |||||||||||||||||||
| Less: Net income attributable to non-controlling interest | (0.8) | — | (1.6) | (0.4) | |||||||||||||||||||
| Net income attributable to ON Semiconductor Corporation | $ | 455.8 | $ | 184.1 | $ | 986.0 | $ | 274.0 | |||||||||||||||
| Net income for diluted earnings per share of common stock (Note 8) | 456.3 | 184.1 | $ | 987.0 | $ | 274.0 | |||||||||||||||||
| Net income per share of common stock: | |||||||||||||||||||||||
| Basic | $ | 1.05 | $ | 0.43 | $ | 2.27 | $ | 0.65 | |||||||||||||||
| Diluted | $ | 1.02 | $ | 0.42 | $ | 2.20 | $ | 0.62 | |||||||||||||||
| Weighted-average shares of common stock outstanding: | |||||||||||||||||||||||
| Basic | 434.2 | 427.7 | 433.8 | 420.5 | |||||||||||||||||||
| Diluted | 447.0 | 443.6 | 448.1 | 444.5 | |||||||||||||||||||
| Comprehensive income, net of tax: | |||||||||||||||||||||||
| Net income | $ | 456.6 | $ | 184.1 | $ | 987.6 | $ | 274.4 | |||||||||||||||
| Foreign currency translation adjustments | (4.2) | (0.2) | (6.6) | (2.5) | |||||||||||||||||||
| Effects of cash flow hedges and other adjustments | 1.3 | 3.9 | 17.9 | 7.9 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | (2.9) | 3.7 | 11.3 | 5.4 | |||||||||||||||||||
| Comprehensive income | 453.7 | 187.8 | 998.9 | 279.8 | |||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | (0.8) | — | (1.6) | (0.4) | |||||||||||||||||||
| Comprehensive income attributable to ON Semiconductor Corporation | $ | 452.9 | $ | 187.8 | $ | 997.3 | $ | 279.4 |
See accompanying notes to consolidated financial statements
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 April 1, 2022 | 606,021,655 | $ | 6.1 | $ | 4,533.3 | $ | (26.4) | $ | 2,992.4 | (171,526,902) | $ | (2,507.2) | $ | 19.8 | $ | 5,018.0 | |||||||||||||
| Shares issued pursuant to the ESPP | 127,830 | — | 5.5 | — | — | — | — | — | 5.5 | ||||||||||||||||||||
| RSUs and stock grant awards issued | 277,961 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement - 1.625% Notes | 238 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement of bond hedges - 1.625% Notes | — | — | — | — | — | (232) | — | — | — | ||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | (77,690) | (4.5) | — | (4.5) | ||||||||||||||||||||
| Share-based compensation | — | — | 27.1 | — | — | — | — | — | 27.1 | ||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (1,500,000) | (89.7) | — | (89.7) | ||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | (2.9) | 455.8 | — | — | 0.8 | 453.7 | ||||||||||||||||||||
| Balance at July 1, 2022 | 606,427,684 | $ | 6.1 | $ | 4,565.9 | $ | (29.3) | $ | 3,448.2 | (173,104,824) | $ | (2,601.4) | $ | 20.6 | $ | 5,410.1 | |||||||||||||
| Balance at December 31, 2021 | 603,044,079 | $ | 6.0 | $ | 4,633.3 | $ | (40.6) | $ | 2,435.1 | (170,571,261) | $ | (2,448.4) | $ | 19.0 | $ | 4,604.4 | |||||||||||||
| Impact of the adoption of ASU 2020-06 | — | — | (129.1) | — | 27.1 | — | — | — | (102.0) | ||||||||||||||||||||
| Shares issued pursuant to the ESPP | 254,218 | — | 12.2 | — | — | — | — | — | 12.2 | ||||||||||||||||||||
| RSUs and stock grant awards issued | 3,129,149 | 0.1 | (0.1) | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement - 1.625% Notes | 238 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement of bond hedges - 1.625% Notes | — | — | — | — | — | (232) | — | — | — | ||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | (1,033,331) | (63.3) | — | (63.3) | ||||||||||||||||||||
| Share-based compensation | — | — | 49.6 | — | — | — | — | — | 49.6 | ||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (1,500,000) | (89.7) | — | (89.7) | ||||||||||||||||||||
| Comprehensive income | — | — | — | 11.3 | 986.0 | — | — | 1.6 | 998.9 | ||||||||||||||||||||
| Balance at July 1, 2022 | 606,427,684 | $ | 6.1 | $ | 4,565.9 | $ | (29.3) | $ | 3,448.2 | (173,104,824) | $ | (2,601.4) | $ | 20.6 | $ | 5,410.1 |
| Balance at April 2, 2021 | 579,553,444 | $ | 5.8 | $ | 4,161.0 | $ | (55.9) | $ | 1,515.4 | (159,657,033) | $ | (1,996.7) | $ | 20.0 | $ | 3,649.6 | |||||||||||||
| Stock option exercises | 4,000 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Shares issued pursuant to the ESPP | 257,416 | — | 6.4 | — | — | — | — | — | 6.4 | ||||||||||||||||||||
| RSUs and stock grant awards issued | 280,649 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Shares issued for warrants exercise -1.00% Notes | 7,111,689 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement -1.625% Notes | 5,425,239 | 0.1 | (141.7) | — | — | — | — | — | (141.6) | ||||||||||||||||||||
| Partial settlement of warrants - 1.625% Notes | 6,764,734 | 0.1 | (0.1) | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement of bond hedges - 1.625% Notes | — | — | 339.0 | — | — | (9,120,930) | (339.0) | — | |||||||||||||||||||||
| Equity component - 0% Notes | — | — | 136.6 | — | — | — | — | — | 136.6 | ||||||||||||||||||||
| Warrants and bond hedges, net - 0% Notes | — | — | (66.5) | — | — | — | — | — | (66.5) | ||||||||||||||||||||
| Tax impact of warrants and bond hedges, net | — | — | 6.5 | — | — | — | — | — | 6.5 | ||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | (86,997) | (3.5) | — | (3.5) | ||||||||||||||||||||
| Share-based compensation | — | — | 29.1 | — | — | — | — | — | 29.1 | ||||||||||||||||||||
| Comprehensive income | — | — | — | 3.7 | 184.1 | — | — | — | 187.8 | ||||||||||||||||||||
| Balance at July 2, 2021 | 599,397,171 | $ | 6.0 | $ | 4,470.3 | $ | (52.2) | $ | 1,699.5 | (168,864,960) | $ | (2,339.2) | $ | 20.0 | $ | 3,804.4 | |||||||||||||
| Balance at December 31, 2020 | 570,766,439 | $ | 5.7 | $ | 4,133.1 | $ | (57.6) | $ | 1,425.5 | (158,923,810) | $ | (1,968.2) | $ | 19.6 | $ | 3,558.1 | |||||||||||||
| Stock option exercises | 4,000 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Shares issued pursuant to the ESPP | 461,831 | — | 12.1 | — | — | — | — | — | 12.1 | ||||||||||||||||||||
| RSUs and stock grant awards issued | 2,549,977 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Shares issued for warrants exercise - 1.00% Notes | 13,424,951 | 0.1 | (0.1) | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement -1.625% Notes | 5,425,239 | 0.1 | (141.7) | — | — | — | — | — | (141.6) | ||||||||||||||||||||
| Partial settlement of warrants - 1.625% Notes | 6,764,734 | 0.1 | (0.1) | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement of bond hedges -1.625% Notes | — | — | 339.0 | — | — | (9,120,930) | (339.0) | — | |||||||||||||||||||||
| Equity component - 0% Notes | — | — | 136.6 | — | — | — | — | — | 136.6 | ||||||||||||||||||||
| Warrants and bond hedges, net - 0% Notes | — | — | (66.5) | — | — | — | — | — | (66.5) | ||||||||||||||||||||
| Tax impact of warrants and bond hedges, net | — | — | 6.5 | — | — | — | — | — | 6.5 | ||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | (820,220) | (32.0) | — | (32.0) | ||||||||||||||||||||
| Share-based compensation | — | — | 51.4 | — | — | — | — | — | 51.4 | ||||||||||||||||||||
| Comprehensive income | — | — | — | 5.4 | 274.0 | — | — | 0.4 | 279.8 | ||||||||||||||||||||
| Balance at July 2, 2021 | 599,397,171 | $ | 6.0 | $ | 4,470.3 | $ | (52.2) | $ | 1,699.5 | (168,864,960) | $ | (2,339.2) | $ | 20.0 | $ | 3,804.4 |
See accompanying notes to consolidated financial statements
ON SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
| Six Months Ended | |||||||||||
| July 1, 2022 | July 2, 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 987.6 | $ | 274.4 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 279.0 | 306.5 | |||||||||
| (Gain) loss on sale or disposal of fixed assets | (16.6) | 0.3 | |||||||||
| Gain on divestiture of business | (1.9) | — | |||||||||
| Loss on debt refinancing and prepayment | 7.3 | 26.2 | |||||||||
| Amortization of debt discount and issuance costs | 6.0 | 5.1 | |||||||||
| Share-based compensation | 49.6 | 51.4 | |||||||||
| Non-cash interest on convertible notes | — | 10.6 | |||||||||
| Non-cash asset impairment charges | 6.7 | 7.5 | |||||||||
| Goodwill and intangible asset impairment charges | 115.0 | — | |||||||||
| Change in deferred tax balances | 6.7 | (4.7) | |||||||||
| Other | 1.3 | — | |||||||||
| Changes in assets and liabilities (exclusive of divestitures): | |||||||||||
| Receivables | (344.4) | 4.3 | |||||||||
| Inventories | (184.5) | (53.5) | |||||||||
| Other assets | (51.5) | 3.5 | |||||||||
| Accounts payable | 58.1 | 32.0 | |||||||||
| Accrued expenses and other current liabilities | 9.2 | 61.4 | |||||||||
| Other long-term liabilities | (28.2) | (18.5) | |||||||||
| Net cash provided by operating activities | $ | 899.4 | $ | 706.5 | |||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property, plant and equipment | $ | (391.9) | $ | (181.8) | |||||||
| Proceeds from sale of property, plant and equipment | 38.2 | 6.6 | |||||||||
| Deposits made for purchase of property, plant and equipment | (31.4) | (2.8) | |||||||||
| Divestiture of business, net of cash transferred | 90.5 | — | |||||||||
| Purchase of available-for-sale securities | (16.3) | — | |||||||||
| Proceeds from sale or maturity of available-for-sale securities | 13.8 | — | |||||||||
| Payments related to prior acquisition | (2.4) | — | |||||||||
| Net cash used in investing activities | $ | (299.5) | $ | (178.0) | |||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds for the issuance of common stock under the ESPP | $ | 12.5 | $ | 12.3 | |||||||
| Payment of tax withholding for RSUs | (63.3) | (32.0) | |||||||||
| Repurchase of common stock | (89.7) | — | |||||||||
| Issuance and borrowings under debt agreements | 500.0 | 787.3 | |||||||||
| Reimbursement of debt issuance costs | — | 2.7 | |||||||||
| Payment of debt issuance and other financing costs | — | (3.5) | |||||||||
| Repayment of borrowings under debt agreements | (506.8) | (1,214.7) | |||||||||
| Payment for purchase of bond hedges | — | (160.3) | |||||||||
| Proceeds from issuance of warrants | — | 93.8 | |||||||||
| Payments related to prior acquisition | — | (2.3) | |||||||||
| Financing lease payment | (10.9) | — | |||||||||
| Dividend to non-controlling shareholder | (2.2) | — | |||||||||
| Net cash used in financing activities | $ | (160.4) | $ | (516.7) | |||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2.6) | (0.8) | |||||||||
| Net increase in cash, cash equivalents and restricted cash | 436.9 | 11.0 | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period (Note 6) | 1,377.7 | 1,081.5 | |||||||||
| Cash, cash equivalents and restricted cash, end of period (Note 6) | $ | 1,814.6 | $ | 1,092.5 |
See accompanying notes to consolidated financial statements
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 the following three operating and reportable segments:
-
The Power Solutions Group ("PSG")
-
The Advanced Solutions Group ("ASG") and
-
The Intelligent Sensing Group ("ISG")
The Company's fiscal calendar year begins on January 1 and ends on December 31. The fiscal quarters contain a thirteen-week accounting period. Minor day adjustments are required in the first and fourth quarters to account for the Company's fiscal calendar year's starting and ending dates. The quarters ended July 1, 2022 and July 2, 2021 contained 91 days each. The six months ended July 1, 2022 and July 2, 2021 contained 182 and 183 days, respectively.
The accompanying unaudited financial statements as of and for the quarter and six months ended July 1, 2022 have been prepared following generally accepted accounting principles in the United States of America ("GAAP"). 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, 2021 was derived from the Company's audited financial statements but does not include all disclosures required by GAAP for audited financial statements. In the opinion of the Company's management, 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, 2021, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 14, 2022 (the "2021 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) future payouts for customer incentives and amounts subject to allowances and returns; (ii) valuation and obsolescence relating to inventories; and (iii) measurement of valuation allowances against deferred tax assets and evaluations of uncertain tax positions. Additionally, during periods where it becomes applicable, significant estimates will be used by management in determining the future cash flows used to assess and test for impairment of long-lived assets and goodwill and in assumptions used in connection with business combinations. Actual results may differ from the estimates and assumptions used in the consolidated financial statements.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 2: Revenue and Segment Information
The Company is organized into three operating and reportable segments consisting of PSG, ASG and ISG. These segments represent the Company's view of the business, and its gross profit is used to evaluate the performance of the Company's segments, the progress of major initiatives and the allocation of resources. Gross profit is exclusive of the amortization of acquisition-related intangible assets.
A significant portion of the Company’s orders are firm commitments that are non-cancellable, including certain orders or contracts with a duration of less than one year. Certain of the Company's customer contracts are multi-year agreements that include firmly committed amounts ("Long-term Supply Agreements" or "LTSA's") for which the remaining performance obligations as of July 1, 2022 were approximately $8.8 billion (excluding the remaining performance obligations for contracts having a duration of one year or less). The Company expects to recognize approximately 40% of this amount as revenue during the next twelve months upon shipment of products under these contracts. Total sales estimates are based on negotiated contract prices and demand quantities, and could be influenced by manufacturing issues, supply chain constraints, and modifications to customer agreements, among other things. Accordingly, the amount represented by remaining performance obligations may not be indicative of the actual revenue recognized for future periods.
A portion of our LTSA’s include capacity payments which secure production availability for our customer’s orders or deposits which prepay a portion of the customer’s product obligation. During the quarter and six months ended July 1, 2022, the Company recorded capacity payments and deposits of $30.8 million and $36.3 million, respectively, which were recorded as contract liabilities, of which $12.8 million remains to be collected as of July 1, 2022. An immaterial amount was recognized as revenue for satisfying the associated performance obligations. The remaining balance related to the capacity payments and deposits totaled $82.4 million as of July 1, 2022, $30.7 million and $51.7 million were recorded as current liabilities and other long-term liabilities, respectively. Contract assets were immaterial as of July 1, 2022. There were no corresponding amounts for the quarter and six months ended July 2, 2021.
Revenue and gross profit for the Company’s operating and reportable segments are as follows (in millions):
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| For the quarter ended July 1, 2022: | |||||||||||||||||||||||
| Revenue from external customers | $ | 1,057.0 | $ | 716.7 | $ | 311.3 | $ | 2,085.0 | |||||||||||||||
| Gross profit | $ | 511.2 | $ | 380.3 | $ | 145.6 | $ | 1,037.1 | |||||||||||||||
| For the quarter ended July 2, 2021: | |||||||||||||||||||||||
| Revenue from external customers | $ | 846.6 | $ | 607.6 | $ | 215.7 | $ | 1,669.9 | |||||||||||||||
| Gross profit | $ | 314.3 | $ | 252.3 | $ | 73.5 | $ | 640.1 | |||||||||||||||
| For the six months ended July 1, 2022: | |||||||||||||||||||||||
| Revenue from external customers | $ | 2,043.7 | $ | 1,406.0 | $ | 580.3 | $ | 4,030.0 | |||||||||||||||
| Gross profit | $ | 985.9 | $ | 747.0 | $ | 265.5 | $ | 1,998.4 | |||||||||||||||
| For the six months ended July 2, 2021: | |||||||||||||||||||||||
| Revenue from external customers | $ | 1,593.6 | $ | 1,139.1 | $ | 418.9 | $ | 3,151.6 | |||||||||||||||
| Gross profit | $ | 560.8 | $ | 459.1 | $ | 141.4 | $ | 1,161.3 |
The Company had one customer, a distributor, whose revenue accounted for approximately 12% and 14% of the Company's total revenue for the quarters ended July 1, 2022 and July 2, 2021, respectively, and 12% of the Company's total revenue for the six months ended July 1, 2022, and July 2, 2021.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Revenue for the Company's 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 July 1, 2022 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Singapore | $ | 292.3 | $ | 221.0 | $ | 42.4 | $ | 555.7 | |||||||||||||||
| Hong Kong | 326.5 | 181.7 | 76.2 | 584.4 | |||||||||||||||||||
| United Kingdom | 182.7 | 109.4 | 67.7 | 359.8 | |||||||||||||||||||
| United States | 180.1 | 107.0 | 74.1 | 361.2 | |||||||||||||||||||
| Other | 75.4 | 97.6 | 50.9 | 223.9 | |||||||||||||||||||
| Total | $ | 1,057.0 | $ | 716.7 | $ | 311.3 | $ | 2,085.0 | |||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | 696.4 | $ | 372.8 | $ | 164.5 | $ | 1,233.7 | |||||||||||||||
| Direct Customers | 360.6 | 343.9 | 146.8 | 851.3 | |||||||||||||||||||
| Total | $ | 1,057.0 | $ | 716.7 | $ | 311.3 | $ | 2,085.0 | |||||||||||||||
| Six Months Ended July 1, 2022 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Singapore | $ | 572.8 | $ | 454.8 | $ | 83.9 | $ | 1,111.5 | |||||||||||||||
| Hong Kong | 629.6 | 355.6 | 128.8 | 1,114.0 | |||||||||||||||||||
| United Kingdom | 369.5 | 216.0 | 119.7 | 705.2 | |||||||||||||||||||
| United States | 325.0 | 199.3 | 148.7 | 673.0 | |||||||||||||||||||
| Other | 146.8 | 180.3 | 99.2 | 426.3 | |||||||||||||||||||
| Total | $ | 2,043.7 | $ | 1,406.0 | $ | 580.3 | $ | 4,030.0 | |||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | 1,330.3 | $ | 729.7 | $ | 315.0 | $ | 2,375.0 | |||||||||||||||
| Direct Customers | 713.4 | 676.3 | 265.3 | 1,655.0 | |||||||||||||||||||
| Total | $ | 2,043.7 | $ | 1,406.0 | $ | 580.3 | $ | 4,030.0 |
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
| Quarter Ended July 2, 2021 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Singapore | $ | 273.1 | $ | 226.8 | $ | 33.1 | $ | 533.0 | |||||||||||||||
| Hong Kong | 261.0 | 144.3 | 44.0 | 449.3 | |||||||||||||||||||
| United Kingdom | 147.4 | 84.9 | 44.2 | 276.5 | |||||||||||||||||||
| United States | 108.1 | 76.4 | 41.1 | 225.6 | |||||||||||||||||||
| Other | 57.0 | 75.2 | 53.3 | 185.5 | |||||||||||||||||||
| Total | $ | 846.6 | $ | 607.6 | $ | 215.7 | $ | 1,669.9 | |||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | 611.1 | $ | 344.3 | $ | 140.5 | $ | 1,095.9 | |||||||||||||||
| Direct Customers | 235.5 | 263.3 | 75.2 | 574.0 | |||||||||||||||||||
| Total | $ | 846.6 | $ | 607.6 | $ | 215.7 | $ | 1,669.9 | |||||||||||||||
| Six Months Ended July 2, 2021 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Singapore | $ | 547.6 | $ | 428.5 | $ | 65.9 | $ | 1,042.0 | |||||||||||||||
| Hong Kong | 457.1 | 244.8 | 89.6 | 791.5 | |||||||||||||||||||
| United Kingdom | 290.1 | 167.5 | 87.8 | 545.4 | |||||||||||||||||||
| United States | 183.4 | 146.6 | 79.9 | 409.9 | |||||||||||||||||||
| Other | 115.4 | 151.7 | 95.7 | 362.8 | |||||||||||||||||||
| Total | $ | 1,593.6 | $ | 1,139.1 | $ | 418.9 | $ | 3,151.6 | |||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | 1,135.0 | $ | 633.2 | $ | 261.7 | $ | 2,029.9 | |||||||||||||||
| Direct Customers | 458.6 | 505.9 | 157.2 | 1,121.7 | |||||||||||||||||||
| Total | $ | 1,593.6 | $ | 1,139.1 | $ | 418.9 | $ | 3,151.6 |
The Company operates in various geographic locations. Sales to external customers have little correlation with the location of 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 Company’s consolidated assets are not specifically ascribed to its individual reportable segments. Instead, assets used in operations are generally shared across the Company’s operating and reportable segments.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Property, plant and equipment, net by geographic location, is summarized as follows (in millions):
| As of | |||||||||||
| July 1, 2022 | December 31, 2021 | ||||||||||
| United States | $ | 805.5 | $ | 767.1 | |||||||
| South Korea | 656.1 | 492.8 | |||||||||
| Philippines | 321.1 | 342.4 | |||||||||
| Czech Republic | 238.2 | 214.2 | |||||||||
| China | 208.1 | 216.8 | |||||||||
| Japan | 187.1 | 198.6 | |||||||||
| Malaysia | 169.6 | 175.3 | |||||||||
| Other | 124.1 | 117.1 | |||||||||
| Total | $ | 2,709.8 | $ | 2,524.3 |
Note 3: Recent Accounting Pronouncements
Adopted:
ASU 2020-06 - Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06")
In August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. Also, ASU 2020-06 requires the application of the if-converted method for the purpose of calculating diluted earnings per share, and the treasury stock method will be no longer available for instruments that fall under this category. The Company adopted ASU 2020-06 as of January 1, 2022 using the modified retrospective method, and recorded adjustments to reduce additional paid-in capital by $129.1 million and increase opening retained earnings by $27.1 million to reflect the cumulative effect of the adoption. See Note 7: ''Long-Term Debt'' for further information.
Pending adoption:
ASU 2021-10 - Government Assistance (Topic 832) - Disclosures by Business Entities about Government Assistance ("ASU 2021-10")
In November 2021, the FASB issued ASU 2021-10, which requires business entities to make annual disclosures about the nature of certain government assistance received, the related accounting policies used to account for the transactions, the effect of the transactions on company financial statements and the significant terms and conditions of the transactions. The Company is planning to complete the required ASU 2021-10 disclosures with the filing of its Annual Report on Form 10-K for the year ending on December 31, 2022.
Note 4: Acquisition and Divestitures
Acquisition:
The Company finalized its determination relating to the fair value of assets acquired and liabilities assumed from GTAT during the quarter ended April 1, 2022. The final allocation of the purchase price, which did not change from the preliminary allocation disclosed in the 2021 Form 10-K is as follows (in millions):
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
| Purchase Price Allocation | ||||||||
| Cash and cash equivalents | $ | 8.2 | ||||||
| Inventory and other current assets | 10.0 | |||||||
| Property, plant and equipment | 31.9 | |||||||
| Goodwill | 274.8 | |||||||
| Intangible assets - Developed Technology | 130.0 | |||||||
| Deferred tax assets | 13.4 | |||||||
| Other non-current assets | 7.4 | |||||||
| Total assets acquired | 475.7 | |||||||
| Current liabilities | 5.8 | |||||||
| Other long-term liabilities | 35.0 | |||||||
| Total liabilities assumed | 40.8 | |||||||
| Net assets acquired/purchase price | $ | 434.9 |
All assumptions and disclosures remained unchanged from the amounts included in the 2021 Form 10-K.
Divestitures:
During the first quarter of 2022, the Company divested its six-inch front-end wafer manufacturing facility in Oudenaarde, Belgium, to BelGaN Group BV for an aggregate consideration of approximately $19.9 million. During the second quarter of 2022, the Company completed the divestiture of its eight-inch front-end wafer manufacturing facility in South Portland, Maine, to Diodes Incorporated for an aggregate consideration of approximately $80.0 million. The Company has signed wafer supply agreements with the buyers of the Belgium and South Portland, Maine manufacturing facilities. Additionally, during the second quarter of 2022, the Company divested its non-strategic GTAT Sapphire business in Salem, Massachusetts, to Crystal Systems, LLC for nominal consideration. These divestiture transactions resulted in a gain on divestiture of approximately $1.9 million.
Note 5: Restructuring, Asset Impairments and Other, Net
Details of restructuring, asset impairments and other charges, net are as follows (in millions):
| Restructuring | Asset Impairments | Other | Total | ||||||||||||||||||||||||||||||||||||||
| Quarter ended July 1, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Other (1) | $ | (0.7) | $ | — | $ | (1.0) | $ | (1.7) | |||||||||||||||||||||||||||||||||
| Total | $ | (0.7) | $ | — | $ | (1.0) | $ | (1.7) | |||||||||||||||||||||||||||||||||
| Restructuring | Asset Impairments | Other | Total | ||||||||||||||||||||||||||||||||||||||
| Six months ended July 1, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Other (2) | $ | (1.2) | $ | 4.0 | $ | (17.5) | $ | (14.7) | |||||||||||||||||||||||||||||||||
| Total | $ | (1.2) | $ | 4.0 | $ | (17.5) | $ | (14.7) |
(1)Primarily includes a gain of approximately $1.4 million from the sale of an office building.
(2)Primarily includes a gain of approximately $17.5 million related to the sale of two office buildings and a $1.2 million reduction in workforce restructuring expenses, offset by a $4.0 million asset impairment of the GTAT Sapphire manufacturing facility.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
A summary of changes in accrued restructuring balance is as follows (in millions):
| As of | As of | |||||||||||||||||||||||||||||||
| December 31, 2021 | Charges | Usage | July 1, 2022 | |||||||||||||||||||||||||||||
| Employee separation charges | $ | 10.8 | $ | (1.2) | $ | (7.1) | $ | 2.5 | ||||||||||||||||||||||||
| Total | $ | 10.8 | $ | (1.2) | $ | (7.1) | $ | 2.5 |
There were no new restructuring programs implemented and the activity during the quarter and six months ended July 1, 2022 represented payments to employees whose employment was terminated during 2021. The Company expects to pay the remaining accrued expense during the second half of 2022.
The Company continues to evaluate employee positions and locations for potential efficiencies and may incur additional charges in the future.
Note 6: Balance Sheet Information and Other
Goodwill
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 carrying value of goodwill below its fair value. During the second quarter of 2022, the Company determined that one of its reporting units within ASG, representing less than 3.0 percent of the Company's consolidated revenue for 2021, incurred a partial impairment of goodwill due to the Company’s focus on its long-term product mix into its strategic markets. This event resulted in a more-likely-than-not expectation of selling or disposing of the reporting unit.
The Company determined that a market approach was the most appropriate method to evaluate the recoverability of the carrying value of the net assets of the reporting unit. For the quarter ended July 1, 2022, management performed an event-triggered impairment analysis and a goodwill impairment charge of $115.0 million was recorded under the caption ‘Goodwill and intangible asset impairment’ within the Consolidated Statements of Operations and Comprehensive Income. If further steps are undertaken to dispose of the reporting unit (or if the long-term business outlook of the reporting unit is adversely affected by economic conditions or other factors) it could result in additional impairments in the future.
Changes in the goodwill balance from December 31, 2021 to July 1, 2022 related to the ASG reporting unit impairment and the divestiture of the Belgium and South Portland, Maine manufacturing facilities and were as follows (in millions):
| Net balance as of December 31, 2021 | $ | 1,937.5 | ||||||
| Goodwill impairment | (115.0) | |||||||
| Goodwill disposed | (7.1) | |||||||
| Net balance as of July 1, 2022 | $ | 1,815.4 |
Inventory
Details of Inventory included in the Company’s Consolidated Balance Sheets is as follows (in millions):
| As of | |||||||||||
| July 1, 2022 | December 31, 2021 | ||||||||||
| Inventories: | |||||||||||
| Raw materials | $ | 198.0 | $ | 174.2 | |||||||
| Work in process | 1,009.2 | 888.9 | |||||||||
| Finished goods | 356.0 | 316.4 | |||||||||
| $ | 1,563.2 | $ | 1,379.5 | ||||||||
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
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 July 1, 2022, the net assets for the over-funded plans totaled $13.1 million. The total accrued pension liability for underfunded plans was $105.6 million, of which the current portion of $0.3 million was classified as accrued expenses and other current liabilities. As of December 31, 2021, the net funded status for all the plans was a liability of $103.9 million, of which the current portion of $0.2 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 | ||||||||||||||||||||||
| July 1, 2022 | July 2, 2021 | July 1, 2022 | July 2, 2021 | ||||||||||||||||||||
| Service cost | $ | 2.2 | $ | 3.0 | $ | 4.4 | $ | 6.1 | |||||||||||||||
| Interest cost | 1.0 | 1.1 | 2.1 | 2.2 | |||||||||||||||||||
| Expected return on plan assets | (1.1) | (1.6) | (2.3) | (3.3) | |||||||||||||||||||
| Curtailment loss | — | — | — | 1.9 | |||||||||||||||||||
| Total net periodic pension cost | $ | 2.1 | $ | 2.5 | $ | 4.2 | $ | 6.9 |
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 | ||||||||||||||||||||||
| July 1, 2022 | July 2, 2021 | July 1, 2022 | July 2, 2021 | ||||||||||||||||||||
| Operating lease | $ | 11.7 | $ | 9.8 | $ | 22.9 | $ | 19.7 | |||||||||||||||
| Variable lease | 4.1 | 1.0 | 5.7 | 1.9 | |||||||||||||||||||
| Short-term lease | 0.8 | 0.5 | 1.2 | 1.2 | |||||||||||||||||||
| Total lease expense | $ | 16.6 | $ | 11.3 | $ | 29.8 | $ | 22.8 |
The ROU assets and lease liabilities recognized in the Consolidated Balance Sheets are as follows (in millions):
| As of | |||||||||||
| July 1, 2022 | December 31, 2021 | ||||||||||
| Operating lease liabilities included in: | |||||||||||
| Accrued expenses and other current liabilities | $ | 31.1 | $ | 32.5 | |||||||
| Other long-term liabilities | 214.3 | 142.4 | |||||||||
| Total | $ | 245.4 | $ | 174.9 | |||||||
| Operating ROU assets included in: | |||||||||||
| Other assets | $ | 234.3 | $ | 170.1 | |||||||
| Financing lease liabilities included in: | |||||||||||
| Accrued expenses and other current liabilities | $ | 13.5 | $ | 12.7 | |||||||
| Other long-term liabilities | 22.2 | 10.2 | |||||||||
| Total | $ | 35.7 | $ | 22.9 | |||||||
| Financing ROU assets included in: | |||||||||||
| Other assets | $ | 47.0 | $ | 22.3 |
As of July 1, 2022, the weighted-average remaining lease-terms were 10.6 years and 19.8 years and the weighted-average discount rates were 4.6% and 6.0% for operating and financing leases, respectively.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
New Leases
During the second quarter of 2022, the Company entered into leases and related agreements to lease space for a new corporate headquarters in Arizona and new office space in California. The Company recorded cumulative ROU assets and liabilities of $70.7 million.
Supplemental Disclosure of Cash Flow Information
Certain of the Company's cash and non-cash activities were as follows (in millions):
| Six Months Ended | |||||||||||||||||||||||
| July 1, 2022 | July 2, 2021 | ||||||||||||||||||||||
| Non-cash investing activities: | |||||||||||||||||||||||
| Capital expenditures in accounts payable and other long-term liabilities | $ | 259.9 | $ | 160.0 | |||||||||||||||||||
| Operating ROU assets obtained in exchange of lease liabilities | 88.1 | 11.0 | |||||||||||||||||||||
| Cash paid for: | |||||||||||||||||||||||
| Interest expense | $ | 35.6 | $ | 52.6 | |||||||||||||||||||
| Income taxes | 202.8 | 43.7 | |||||||||||||||||||||
| Operating lease payments in operating cash flows | 22.5 | 20.8 |
Reconciliation of the captions in the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows (in millions)
| As of | ||||||||||||||||||||||||||
| July 1, 2022 | December 31, 2021 | July 2, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Consolidated Balance Sheets: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,791.6 | $ | 1,352.6 | $ | 1,091.1 | $ | 1,080.7 | ||||||||||||||||||
| Restricted cash (included in other current assets) | 18.0 | 20.1 | 1.4 | 0.8 | ||||||||||||||||||||||
| Restricted cash (included in other non-current assets) | 5.0 | 5.0 | — | — | ||||||||||||||||||||||
| Cash, cash equivalents and restricted cash in Consolidated Statements of Cash Flows | $ | 1,814.6 | $ | 1,377.7 | $ | 1,092.5 | $ | 1,081.5 |
As of July 1, 2022, $15.0 million of the restricted cash balance was held in escrow relating to the acquisition of GTAT and will be released to the former stockholders of GTAT upon satisfaction of certain outstanding items contained in the acquisition agreement.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 7: Long-Term Debt
The Company's long-term debt consists of the following (annualized interest rates, dollars in millions):
| As of | |||||||||||
| July 1, 2022 | December 31, 2021 | ||||||||||
| Amended Credit Agreement: | |||||||||||
| Revolving Credit Facility due 2024, interest payable monthly at 2.92% and —%, respectively | $ | 500.0 | $ | — | |||||||
| Term Loan "B" Facility due 2026, interest payable monthly at 3.67% and 2.10%, respectively | 1,091.4 | 1,598.2 | |||||||||
| 0% Notes due 2027 | 805.0 | 805.0 | |||||||||
| 3.875% Notes due 2028 (1) | 700.0 | 700.0 | |||||||||
| 1.625% Notes due 2023 (2) | 155.1 | 155.1 | |||||||||
| Gross long-term debt, including current maturities | $ | 3,251.5 | $ | 3,258.3 | |||||||
| Less: Debt discount (3) | (10.0) | (149.0) | |||||||||
| Less: Debt issuance costs (4) | (28.9) | (34.7) | |||||||||
| Net long-term debt, including current maturities | $ | 3,212.6 | $ | 3,074.6 | |||||||
| Less: Current maturities | (165.2) | (160.7) | |||||||||
| Net long-term debt | $ | 3,047.4 | $ | 2,913.9 |
(1)Interest is payable on March 1 and September 1 of each year at 3.875% annually.
(2)Interest is payable on April 15 and October 15 of each year at 1.625% annually.
(3)Debt discount of $4.7 million and $7.5 million for the Term Loan "B" Facility and $5.3 million and $5.8 million for the 3.875% Notes, in each case as of July 1, 2022 and December 31, 2021, respectively. Debt discount of $126.1 million for the 0% Notes and $9.6 million for the 1.625% Notes, in each case as of December 31, 2021. No debt discount as of July 1, 2022 for the 0% Notes and the 1.625% Notes due to the adoption of ASU 2020-06.
(4)Debt issuance costs of $10.9 million and $17.7 million for the Term Loan "B" Facility, $15.5 million and $14.1 million for the 0% Notes, $1.8 million and $2.0 million for the 3.875% Notes and $0.7 million and $0.9 million for the 1.625% Notes, in each case as of July 1, 2022 and December 31, 2021, respectively.
Expected maturities of gross long-term debt (including current portion - see section regarding 1.625% Notes below) as of July 1, 2022 were as follows (in millions):
| Period | Expected Maturities | |||||||
| Remainder of 2022 | $ | 160.6 | ||||||
| 2023 | 10.9 | |||||||
| 2024 | 511.0 | |||||||
| 2025 | 10.9 | |||||||
| 2026 | 1,053.1 | |||||||
| Thereafter | 1,505.0 | |||||||
| Total | $ | 3,251.5 |
The Company was in compliance with its covenants under all debt agreements as of July 1, 2022.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Borrowings and Repayments under the Amended Credit Agreement
During the quarter ended July 1, 2022, the Company borrowed $500.0 million under the Revolving Credit Facility. These proceeds were used to prepay $500.0 million of borrowings under the Term Loan “B” Facility. The Company expensed $7.3 million of unamortized debt discount and issuance costs attributed to the partial pay-down as loss on debt refinancing and prepayment. As of July 1, 2022, the Company had approximately $1.5 billion available under the Revolving Credit Facility for future borrowings.
Adoption of ASU 2020-06
As described in Note 3: ''Recent Accounting Pronouncements,'' the Company adopted ASU 2020-06 using a modified retrospective method and increased long-term debt by eliminating debt discount of $135.7 million, reduced additional paid-in capital by $129.1 million and increased opening retained earnings by $27.1 million to reflect the cumulative effect of adoption as of January 1, 2022. The application of the if-converted method to determine the net income for diluted earnings and diluted weighted-average shares of common stock outstanding did not have a meaningful impact on the diluted net income per share of common stock under the treasury stock method previously applied.
1.625% Notes due 2023
The remaining outstanding principal amount of the 1.625% Notes, amounting to $155.1 million, net of unamortized issuance costs continues to be classified as a current portion of long-term debt as of July 1, 2022. Pursuant to the indenture governing the 1.625% Notes, because 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, 2022 was greater than or equal to $26.94 (130% of the conversion price) on each applicable trading day, the holders have 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, 2022, and only during such calendar quarter.
Note 8: 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 | ||||||||||||||||||||||
| July 1, 2022 | July 2, 2021 | July 1, 2022 | July 2, 2021 | ||||||||||||||||||||
| Net income for basic earnings per share of common stock | $ | 455.8 | $ | 184.1 | $ | 986.0 | $ | 274.0 | |||||||||||||||
| Add: Interest on 1.625% Notes | 0.5 | — | 1.0 | — | |||||||||||||||||||
| Net income for diluted earnings per share of common stock | $ | 456.3 | $ | 184.1 | $ | 987.0 | $ | 274.0 | |||||||||||||||
| Basic weighted-average shares of common stock outstanding | 434.2 | 427.7 | 433.8 | 420.5 | |||||||||||||||||||
| Dilutive effect of share-based awards | 1.3 | 2.0 | 1.9 | 2.4 | |||||||||||||||||||
| Dilutive effect of convertible notes and warrants | 11.5 | 13.9 | 12.4 | 21.6 | |||||||||||||||||||
| Diluted weighted-average shares of common stock outstanding | 447.0 | 443.6 | 448.1 | 444.5 | |||||||||||||||||||
| Net income per share of common stock: | |||||||||||||||||||||||
| Basic | $ | 1.05 | $ | 0.43 | $ | 2.27 | $ | 0.65 | |||||||||||||||
| Diluted | $ | 1.02 | $ | 0.42 | $ | 2.20 | $ | 0.62 |
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 0.9 million and 0.4 million
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
for the quarters ended July 1, 2022 and July 2, 2021, respectively, and 0.6 million and 0.6 million for the six months ended July 1, 2022 and July 2, 2021, respectively.
The dilutive impacts related to the 0% Notes and 1.625% Notes have been calculated using the if-converted method for the quarter and six months ended July 1, 2022 and using the treasury stock method for the quarter and six months ended July 2, 2021. While 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% Notes are repayable in cash or shares of common stock for their entire value. Prior to conversion, the convertible note hedges are not considered for purposes of the earnings per share calculations, as their effect would be anti-dilutive. Upon conversion, the convertible note hedges are expected to offset the dilutive effect of the 0% Notes and 1.625% Notes when the stock price is above $52.97 and $20.72 per share, respectively.
The dilutive impact of the warrants issued concurrently with the issuance of the 0% Notes and 1.625% Notes with exercise prices of $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 Company's share repurchase program announced on November 15, 2018 (the "Share Repurchase Program"), the Company may repurchase up to $1.5 billion (exclusive of fees, commissions and other expenses) of the Company's common stock from December 1, 2018 through December 31, 2022.
The Company used cash on hand of $89.7 million to repurchase 1.5 million shares of common stock for an aggregate purchase price of $89.6 million during the quarter and six months ended July 1, 2022. There were no repurchases during the quarter and six months ended July 2, 2021 under the Share Repurchase Program. As of July 1, 2022, the authorized amount remaining under the Share Repurchase Program was $1,206.2 million.
Shares for Restricted Stock Units Tax Withholding
The amounts remitted for employee withholding taxes during the quarter and six months ended July 1, 2022 were $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. The amounts remitted during the quarter and six months ended July 2, 2021 were $3.5 million and $32.0 million, respectively, for which the Company withheld approximately 0.1 million and 0.8 million shares of common stock, respectively, that were underlying the RSUs that vested. None of these shares had been reissued or retired as of July 1, 2022 but may be reissued or retired in the future. These deemed repurchases in connection with tax withholding upon vesting were not made under the Share Repurchase Program, and the amounts spent in connection with such deemed repurchases did not reduce the authorized amount remaining under 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, 2021, the non-controlling interest balance was $19.0 million and, along with the $1.6 million share of the earnings for the six months ended July 1, 2022, increased to $20.6 million as of July 1, 2022.
Note 9: Share-Based Compensation
Total share-based compensation expense related to the Company's RSUs, stock grant awards and the ESPP was recorded within the Consolidated Statements of Operations and Comprehensive Income as follows (in millions):
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2022 | July 2, 2021 | July 1, 2022 | July 2, 2021 | ||||||||||||||||||||
| Cost of revenue | $ | 3.1 | $ | 4.9 | $ | 5.7 | $ | 8.2 | |||||||||||||||
| Research and development | 5.2 | 7.3 | 9.6 | 13.0 | |||||||||||||||||||
| Selling and marketing | 4.3 | 4.5 | 8.1 | 8.8 | |||||||||||||||||||
| General and administrative | 14.5 | 12.4 | 26.2 | 21.4 | |||||||||||||||||||
| Share-based compensation expense | $ | 27.1 | $ | 29.1 | $ | 49.6 | $ | 51.4 | |||||||||||||||
| Income tax benefit | (5.7) | (6.1) | (10.4) | (10.8) | |||||||||||||||||||
| Share-based compensation expense, net of taxes | $ | 21.4 | $ | 23.0 | $ | 39.2 | $ | 40.6 |
As of July 1, 2022, total unrecognized expected share-based compensation expense, net of estimated forfeitures, related to non-vested RSUs with service, performance and market conditions was $144.9 million, which is expected to be recognized over a weighted-average period of 1.6 years. Upon vesting of RSUs, stock grant awards or completion of a purchase under the ESPP, the Company issues new shares of common stock. The annualized pre-vesting forfeiture rate for RSUs was estimated to be 8% for the quarter ended July 1, 2022 and 6% for the quarter and six months ended July 2, 2021.
Shares Available
As of July 1, 2022 and December 31, 2021, there was an aggregate of 39.8 million and 42.2 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 two or three years for awards with performance or market conditions, or a combination thereof, and are settled in shares of the Company's common stock upon vesting. A summary of the RSU transactions for the six months ended July 1, 2022 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, 2021 | 6.2 | $ | 28.60 | |||||||||||
| Granted | 1.7 | 60.13 | ||||||||||||
| Achieved | 0.2 | 41.35 | ||||||||||||
| Released | (3.2) | 24.99 | ||||||||||||
| Forfeited | (0.3) | 35.25 | ||||||||||||
| Non-vested RSUs at July 1, 2022 | 4.6 | 42.76 |
Note 10: Commitments and Contingencies
Environmental Contingencies
There are no new material environmental contingencies subsequent to the filing of the 2021 Form 10-K.
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. As of July 1, 2022, the Company's Revolving Credit Facility included $15.0 million available for the issuance of letters of credit. There were $0.9 million in letters of credit outstanding under the Revolving Credit Facility as of July 1, 2022, which reduced the Company's borrowing capacity. As of July 1, 2022, the Company also had outstanding guarantees and letters of credit outside of its Revolving Credit Facility totaling $12.9 million.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
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 July 1, 2022. 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
There are no new material indemnification contingencies subsequent to the filing of the 2021 Form 10-K.
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 11: 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 table summarizes the Company's financial assets and liabilities, excluding pension assets, disaggregated by the security type, measured at fair value on a recurring basis (in millions):
| As of July 1, 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 | $ | 19.0 | $ | — | $ | — | $ | 19.0 | $ | 19.0 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Money market funds | 1.0 | — | — | 1.0 | 1.0 | — | — | |||||||||||||||||||||||||||||||||||||
| Other current assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 21.1 | $ | — | $ | — | $ | 21.1 | $ | — | $ | 21.1 | $ | — | ||||||||||||||||||||||||||||||
| Certificate of deposit | 4.7 | — | — | 4.7 | — | 4.7 | — | |||||||||||||||||||||||||||||||||||||
| Commercial paper | 7.4 | — | — | 7.4 | 2.5 | 4.9 | — | |||||||||||||||||||||||||||||||||||||
| US Treasury bonds | 1.6 | — | — | 1.6 | — | 1.6 | — | |||||||||||||||||||||||||||||||||||||
| Other assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 11.0 | $ | — | $ | — | $ | 11.0 | $ | — | $ | 11.0 | $ | — | ||||||||||||||||||||||||||||||
| US Treasury bonds | 0.4 | — | — | 0.4 | — | 0.4 | — | |||||||||||||||||||||||||||||||||||||
The investments included in other assets have maturity dates ranging between one and five years.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
| As of December 31, 2021 | 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 | $ | 19.5 | $ | — | $ | — | $ | 19.5 | $ | 19.5 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Money market funds | 0.7 | — | — | 0.7 | 0.7 | — | — | |||||||||||||||||||||||||||||||||||||
| Corporate bonds | 1.6 | — | — | 1.6 | — | 1.6 | — | |||||||||||||||||||||||||||||||||||||
| Commercial paper | 2.0 | — | — | 2.0 | — | 2.0 | — | |||||||||||||||||||||||||||||||||||||
| Other current assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 16.0 | $ | — | $ | — | $ | 16.0 | $ | — | $ | 16.0 | $ | — | ||||||||||||||||||||||||||||||
| Certificate of deposit | 1.9 | — | — | 1.9 | — | 1.9 | — | |||||||||||||||||||||||||||||||||||||
| Commercial paper | 5.0 | — | — | 5.0 | 3.0 | 2.0 | — | |||||||||||||||||||||||||||||||||||||
| US Treasury bonds | 0.4 | — | — | 0.4 | — | 0.4 | — | |||||||||||||||||||||||||||||||||||||
| Other assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 19.7 | $ | — | $ | — | $ | 19.7 | $ | — | $ | 19.7 | $ | — | ||||||||||||||||||||||||||||||
| US Treasury bonds | 1.6 | — | — | 1.6 | — | 1.6 | — | |||||||||||||||||||||||||||||||||||||
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 Company’s long-term borrowings were as follows (in millions):
| As of | |||||||||||||||||||||||
| July 1, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Long-term debt, including current portion (1) | |||||||||||||||||||||||
| 0% Notes | $ | 789.5 | $ | 883.6 | $ | 664.8 | $ | 1,183.1 | |||||||||||||||
| 1.625% Notes | 154.4 | 380.4 | 144.6 | 513.6 | |||||||||||||||||||
| Other long-term debt | 2,268.7 | 2,092.9 | 2,265.2 | 2,245.5 |
(1) Carrying amounts shown are net of debt discount, if applicable, and debt issuance costs.
The fair values of the 3.875% Notes, 1.625% Notes and 0% Notes were estimated based on market prices in active markets (Level 1). The fair value of the Term Loan "B" Facility was estimated based on discounting the remaining principal and interest payments using current market rates for similar debt (Level 2).
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 12: Financial Instruments
Foreign Currencies
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 July 1, 2022, the counterparties to the Company’s hedge contracts were held at financial institutions that the Company believes to be highly-rated, and no credit-related losses are anticipated.
As of July 1, 2022 and December 31, 2021, the Company had net outstanding foreign exchange contracts with notional amounts of $271.1 million and $288.3 million, respectively. Such contracts were obtained through financial institutions and were scheduled to mature within one 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.
The following summarizes the Company’s net foreign exchange positions in U.S. Dollars (in millions):
| As of | ||||||||||||||||||||||||||
| July 1, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| Buy (Sell) | Notional Amount | Buy (Sell) | Notional Amount | |||||||||||||||||||||||
| Japanese Yen | 60.1 | 60.1 | 33.2 | 33.2 | ||||||||||||||||||||||
| Philippine Peso | 57.6 | 57.6 | 67.1 | 67.1 | ||||||||||||||||||||||
| Korean Won | 42.5 | 42.5 | 44.1 | 44.1 | ||||||||||||||||||||||
| Euro | 22.2 | 22.2 | 65.9 | 65.9 | ||||||||||||||||||||||
| Czech Koruna | 16.4 | 16.4 | 15.0 | 15.0 | ||||||||||||||||||||||
| Other Currencies - Buy | 61.7 | 61.7 | 58.7 | 58.7 | ||||||||||||||||||||||
| Other Currencies - Sell | (10.6) | 10.6 | (4.3) | 4.3 | ||||||||||||||||||||||
| $ | 249.9 | $ | 271.1 | $ | 279.7 | $ | 288.3 |
Amounts receivable or payable under the contracts are not material as of July 1, 2022 or December 31, 2021. During the quarters ended July 1, 2022 and July 2, 2021, realized and unrealized foreign currency transactions totaled a gain of $6.3 million and a loss of $1.6 million, respectively. During the six months ended July 1, 2022 and July 2, 2021, realized and unrealized foreign currency transactions totaled a gain of $8.2 million and $2.4 million, respectively. The realized and unrealized foreign currency transactions are included in other income (expense) in the Company's Consolidated Statements of Operations and Comprehensive Income.
Cash Flow Hedges
All derivatives are recognized on the Company’s Consolidated Balance Sheets at their fair value and classified based on the applicable instrument's maturity date.
Foreign Currency Risk
The purpose of the foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies will be affected by changes in exchange rates. The Company enters into forward contracts that are designated as a foreign currency cash flow hedge of a forecasted payment denominated in a currency other than U.S. Dollars. For the quarters ended July 1, 2022 and July 2, 2021, the Company did not have outstanding derivatives for its foreign currency exposure designated as cash flow hedges.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Interest Rate Risk
The Company uses interest rate swap contracts to mitigate its exposure to interest rate fluctuations. The notional amounts of the interest rate swap agreements outstanding as of July 1, 2022 and July 2, 2021 amounted to $750.0 million and $1.5 billion, respectively. The fair value of the interest rate swaps totaled $29.0 million as of July 1, 2022, of which approximately $14.7 million was included in other current assets and approximately $14.3 million was included in other non-current assets. The Company did not identify any ineffectiveness with respect to the notional amounts of the interest rate swap contracts effective as of July 1, 2022 and July 2, 2021.
Other
As of July 1, 2022, the Company had no outstanding commodity derivatives, currency swaps, options, or equity investments held at subsidiaries or affiliated companies.
Note 13: Income Taxes
The Company recognizes interest and penalties related to uncertain tax positions in tax expense on the Company's Consolidated Statements of Operations and Comprehensive Income. The Company had approximately $1.1 million and $1.9 million of net interest and penalties accrued as of July 1, 2022 and July 2, 2021, respectively. It is reasonably possible that $64.8 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 year. 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 2017. 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 2012. 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 Company’s tax audits are resolved in a manner not consistent with the Company's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
Note 14: Changes in Accumulated Other Comprehensive Loss
Amounts comprising the Company's 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, 2021 | $ | (44.4) | $ | 3.8 | $ | (40.6) | |||||||||||||||||
| Other comprehensive income (loss) prior to reclassifications | (6.6) | 18.1 | 11.5 | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | (0.2) | (0.2) | ||||||||||||||||||||
| Net current period other comprehensive income (loss) (1) | (6.6) | 17.9 | 11.3 | ||||||||||||||||||||
| Balance as of July 1, 2022 | $ | (51.0) | $ | 21.7 | $ | (29.3) |
(1) Effects of cash flow hedges are net of tax expense of $5.5 million for the six months ended July 1, 2022.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Amounts reclassified from accumulated other comprehensive loss to the specific caption within Consolidated Statements of Operations and Comprehensive Income were as follows:
| Quarters Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| July 1, 2022 | July 2, 2021 | July 1, 2022 | July 2, 2021 | To caption | ||||||||||||||||||||||||||||
| Interest rate swaps | $ | (0.5) | $ | 4.8 | $ | 0.2 | $ | 9.4 | Interest expense | |||||||||||||||||||||||
| Total reclassifications | $ | (0.5) | $ | 4.8 | $ | 0.2 | $ | 9.4 |
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