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 2021 Form 10-K and our unaudited consolidated financial statements for the fiscal quarter ended September 30, 2022, 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 2021 Form 10-K.

Executive Overview

onsemi Overview

We provide industry-leading intelligent power and sensing solutions to help our customers solve the most 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 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.

onsemi’s intelligent power allows our customers to exceed range targets with lower weight and reduce system costs through efficiency. With our sensing integration, we believe onsemi’s intelligent power solutions achieve higher efficiencies compared to our peers and allow lower temperature operation, reducing cooling requirements, saving costs and minimizing weight while delivering the required power with less die per module and achieving higher range for a given battery capacity. onsemi’s intelligent sensing solutions offer proprietary features in smaller packages that support customers' use cases. We believe our intelligent sensing technology offers advanced features to achieve optimal results and our product integration drives improved efficiency. This performance is delivered in a smaller footprint while reducing system latency to increase safety and throughput by providing a proprietary feature set to solve different use cases.

We serve a broad base of end-user markets, including automotive, industrial and others, which include communications, computing and consumer. We believe the evolution of automotive, with advancements in autonomous driving, ADAS, vehicle electrification and the increase in electronics content for vehicle platforms, is reshaping the boundaries of transportation. With our extensive portfolio of AEC-qualified products, onsemi helps customers design high-reliability solutions while delivering top performance. Within the industrial space, onsemi is helping OEMs develop innovative products to navigate the ongoing transformation across energy infrastructure, factory automation and power conversion.

As of September 30, 2022, 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 gross margin and operating margin expansion, while at the same time achieving revenue growth in our focused end-markets of automotive and industrial infrastructure, as well as focusing on profitable growth opportunities in other end-markets, including obtaining longer-term supply arrangements with strategic end-customers. We are also focused on achieving efficiencies in our operating expenditures. We believe we have made significant progress on gross margin and operating margin expansion by focusing our capital allocation on research and development investments and resources to accelerate growth in high-margin products and end-markets. Additionally, we continue to rationalize our product portfolio by moving away from non-differentiated products, which have had historically lower gross margins.

During the first nine months of 2022, we divested our front-end wafer manufacturing facilities in Oudenaarde, Belgium and South Portland, Maine, and our non-strategic GTAT Sapphire business in Salem, Massachusetts. We have signed wafer supply agreements with the buyers of the Belgium and South Portland, Maine manufacturing facilities to ensure that there is no disruption in our ability to meet customer demand for our products. Additionally, during the first nine months of 2022, we completed the sale of two office buildings and the sale of our Corporate Headquarters facilities in Phoenix, Arizona.

In September 2022, we approved an exit plan to wind down our QCS division within the Advanced Solutions Group segment, which will further enable us to direct our investments to areas of strategic focus, which include intelligent power and intelligent sensing, streamline our operations and improve costs.

During the third quarter of 2022, we entered into a Stock Purchase Agreement with JS Foundry K.K., to divest our wafer manufacturing facility in Niigata, Japan. The transaction is expected to close as soon as regulatory approvals are received and closing conditions are met.

Subsequent to quarter end, on October 14, 2022, we completed the divestiture of our manufacturing facility in Pocatello, Idaho. We believe these actions, among others, will allow us to transition to a lighter internal fabrication model where our financial performance will be less volatile and not as heavily influenced by our internal manufacturing volumes. As actions are initiated to achieve our business strategy goals, we could incur accounting charges in the future.

As part of our ongoing strategy, we continue to focus on sustainability. During 2021, we announced our commitment to achieving net zero emissions by 2040. As we initiate steps to achieve our sustainability goals, additional investments may be required in the future in connection with such actions, although the timing and amounts of such investments are uncertain at this time.

Impact of the Novel Coronavirus Disease 2019 (“COVID-19”) Pandemic on our Business

We have implemented proactive preventative protocols and updated our business practices in response to the ongoing COVID-19 pandemic. These changes are intended to safeguard our employees, contractors, suppliers and communities. While all of our global manufacturing sites and most of our distribution centers are currently operational, the ongoing COVID-19 pandemic and its effects are impacting and will likely continue to impact market conditions and operations worldwide, including the operations of our Company, and government mandates may order us to curtail production levels or temporarily suspend manufacturing or distribution operations in response to further outbreaks or new COVID-19 variants.

New Legislation

In August of 2022, the CHIPS Act and the IRA were signed into law. Among other things, the CHIPS Act of 2022 provides various incentives and tax credits to U.S. companies for research, development, manufacturing and workforce development. The IRA introduces a 15% CAMT for certain corporations. See Note 3: ''Recent Accounting Pronouncements and Other Developments'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.

Results of Operations

Quarter Ended September 30, 2022 compared to the Quarter Ended October 1, 2021

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
			September 30, 2022						October 1, 2021						Dollar Change
Revenue			$	2,192.6					$	1,742.1					$	450.5
Cost of revenue (exclusive of amortization shown below)			1,134.3						1,021.3						113.0
Gross profit			1,058.3						720.8						337.5
Operating expenses:
Research and development			145.4						154.5						(9.1)
Selling and marketing			69.5						68.4						1.1
General and administrative			84.9						75.7						9.2
Amortization of acquisition-related intangible assets			21.9						24.7						(2.8)
Restructuring, asset impairments and other, net			40.3						(1.7)						42.0
Goodwill and intangible asset impairment			271.8						—						271.8
Total operating expenses			633.8						321.6						312.2
Operating income			424.5						399.2						25.3
Other income (expense), net:
Interest expense			(23.7)						(31.9)						8.2
Interest income			4.9						0.5						4.4
Gain on divestiture of business			0.2						10.2						(10.0)
Other income (expense)			0.9						(5.8)						6.7
Other income (expense), net			(17.7)						(27.0)						9.3
Income before income taxes			406.8						372.2						34.6
Income tax provision			(94.9)						(61.8)						(33.1)
Net income			311.9						310.4						1.5
Less: Net income attributable to non-controlling interest			—						(0.7)						0.7
Net income attributable to ON Semiconductor Corporation			$	311.9					$	309.7					$	2.2

Revenue

Revenue was $2,192.6 million and $1,742.1 million for the quarters ended September 30, 2022 and October 1, 2021, respectively, representing an increase of $450.5 million, or approximately 26%. We had one customer, a distributor, whose revenue accounted for approximately 12% and 14% of our total revenue for the quarters ended September 30, 2022 and October 1, 2021, respectively.

Revenue by operating and reportable segments was as follows (dollars in millions):

			Quarter Ended September 30, 2022						As a % of Total Revenue (1)						Quarter Ended October 1, 2021						As a % of Total Revenue (1)
PSG			$	1,116.1					50.9		%				$	892.1					51.2		%
ASG			734.3						33.5		%				613.5						35.2		%
ISG			342.2						15.6		%				236.5						13.6		%
Total revenue			$	2,192.6											$	1,742.1

(1) Certain amounts may not total due to rounding of individual amounts.

Revenue from PSG increased by $224.0 million, or approximately 25%, for the quarter ended September 30, 2022 compared to the quarter ended October 1, 2021. The revenue from our Advanced Power Division and our Integrated Circuits, Protection and Signal Division increased by $200.4 million and $23.5 million, respectively, primarily due to our strategy to focus on a product mix that yields higher margins and an increase in average selling prices driven by strong market demand, compared to the quarter ended October 1, 2021.

Revenue from ASG increased by $120.8 million, or approximately 20%, for the quarter ended September 30, 2022 compared to the quarter ended October 1, 2021. The revenue from our Automotive Division, Industrial Solutions Division, and Mobile, Computing and Cloud Division increased by $54.1 million, $53.4 million and $19.9 million, respectively. The increases were primarily due to our strategy to focus on a product mix that yields higher margins, and an increase in average selling prices driven by strong market demand, compared to the quarter ended October 1, 2021.

Revenue from ISG increased by $105.7 million, or approximately 45%, for the quarter ended September 30, 2022 compared to the quarter ended October 1, 2021, largely driven by an increase in revenue from our Automotive Sensing Division of $99.3 million. The increase was due to our strategy to focus on a product mix that yields higher margins, and an increase in average selling prices driven by strong market demand, compared to the quarter ended October 1, 2021.

Revenue by geographic location, based on sales billed from the respective country or region, was as follows (dollars in millions):

			Quarter Ended September 30, 2022						As a % of Total Revenue (1)						Quarter Ended October 1, 2021						As a % of Total Revenue (1)
Singapore			$	544.0					24.8		%				$	544.0					31.2		%
Hong Kong			617.9						28.2		%				487.0						28.0		%
United Kingdom			372.5						17.0		%				273.2						15.7		%
United States			415.4						18.9		%				238.7						13.7		%
Other			242.8						11.1		%				199.2						11.4		%
Total revenue			$	2,192.6											$	1,742.1

(1) Certain amounts may not total due to rounding of individual amounts.

Gross Profit and Gross Margin (exclusive of amortization of acquisition-related intangible assets)

Our gross profit by operating and reportable segments was as follows (dollars in millions):

			Quarter Ended September 30, 2022						As a % of Segment Revenue (1)						Quarter Ended October 1, 2021						As a % of Segment Revenue (1)
PSG			$	508.5					45.6		%				$	346.0					38.8		%
ASG			381.7						52.0		%				280.1						45.7		%
ISG			168.1						49.1		%				94.7						40.0		%
Total gross profit			$	1,058.3					48.3		%				$	720.8					41.4		%

(1)Certain amounts may not total due to rounding of individual amounts.

Our gross profit increased by $337.5 million, or approximately 47%, from $720.8 million for the quarter ended October 1, 2021 to $1,058.3 million for the quarter ended September 30, 2022. Our gross margin increased to 48.3% for the quarter ended September 30, 2022 from 41.4% for the quarter ended October 1, 2021.

The significant increase in both gross profit and gross margin was primarily driven by higher revenue, particularly in the automotive and industrial end-markets, and a favorable product mix, which included actions aimed to resolve price-to-value discrepancies for our products.

Operating Expenses

Research and development expenses were $145.4 million for the quarter ended September 30, 2022, as compared to $154.5 million for the quarter ended October 1, 2021, representing a decrease of $9.1 million, or approximately 6%. The decrease was primarily due to a reduction in payroll and other expenses as a result of the restructuring programs implemented during the period.

Selling and marketing expenses were $69.5 million for the quarter ended September 30, 2022, as compared to $68.4 million for the quarter ended October 1, 2021, representing an increase of $1.1 million, or approximately 2%. The increase was primarily due to an increase in variable compensation and travel-related expenses, partially offset by a decrease in payroll-related expenses.

General and administrative expenses were $84.9 million for the quarter ended September 30, 2022, as compared to $75.7 million for the quarter ended October 1, 2021, representing an increase of $9.2 million, or approximately 12%. The increase was primarily due to higher stock compensation, variable compensation and payroll-related expenses.

Other Operating Expenses

Amortization of Acquisition-Related Intangible Assets

Amortization of acquisition-related intangible assets was $21.9 million for the quarter ended September 30, 2022, as compared to $24.7 million for the quarter ended October 1, 2021, representing a decrease of $2.8 million, or approximately 11%. The decrease in expense was due to the reduction in amortization expense as certain intangible technology-related assets became fully amortized in 2021.

Restructuring, Asset Impairments and Other, Net

Restructuring, asset impairments and other, net was $40.3 million for the quarter ended September 30, 2022, as compared to a credit of $1.7 million for the quarter ended October 1, 2021. During the quarter ended September 30, 2022, we approved an exit plan to wind down the legacy QCS division as part of our ongoing efforts to focus on growth drivers and key markets and to streamline our operations. Charges during the third quarter of 2022, represent severance charges, contract termination costs and litigation expenses. Amounts incurred for the quarter ended October 1, 2021 primarily relate to the 2021 involuntary severance plan. See Note 6: ''Restructuring, Asset Impairments and Other, Net'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.

Goodwill and Intangible Asset Impairment

Goodwill and intangible asset impairment was $271.8 million for the quarter ended September 30, 2022, as compared to zero for the quarter ended October 1, 2021. During the quarter ended September 30, 2022, we approved an exit plan to wind down the QCS division and impaired the remaining goodwill and unamortized intangible assets impairment charges of $215.0 million and $56.8 million, respectively. See Note 5: ''Goodwill and Intangible Assets'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.

Interest Expense

Interest expense decreased by $8.2 million to $23.7 million during the quarter ended September 30, 2022, as compared to $31.9 million during the quarter ended October 1, 2021. The decrease was primarily due to a lack of amortization of debt discount on our convertible notes due to the adoption of ASU 2020-06, lower interest rates as a result of interest rate swap contracts and a decrease in our long-term debt. Our average gross long-term debt balance (including current maturities) for the quarter ended September 30, 2022 was $3,250.1 million at a weighted-average interest rate of 2.9%, as compared to $3,311.9 million at a weighted-average interest rate of 3.9% for the quarter ended October 1, 2021. The calculation of our weighted-average interest rates includes the effect of our interest rate swap agreements.

Other Income (Expense)

Other income (expense) was an income of $0.9 million during the quarter ended September 30, 2022 compared to an expense of $5.8 million during the quarter ended October 1, 2021. The increase was primarily due to the fluctuations in foreign currencies resulting in increased transaction gains offset by losses on hedges that were realized.

Income Tax Provision

We recorded an income tax provision of $94.9 million and $61.8 million for the quarters ended September 30, 2022 and October 1, 2021, respectively, representing effective tax rates of 23.3% and 16.6%. The increase in our effective tax rate was substantially driven by the impact of goodwill impairments, which are not deductible for tax purposes.

For additional information, see Note 14: ''Income Taxes'' and Note 7: ''Balance Sheet Information and Other'' in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q.

Results of Operations

Nine Months Ended September 30, 2022 compared to the Nine Months Ended October 1, 2021

The following table summarizes certain information relating to our operating results that has been derived from our unaudited consolidated financial statements (in millions):

			Nine Months Ended
			September 30, 2022						October 1, 2021						Dollar Change
Revenue			$	6,222.6					$	4,893.7					$	1,328.9
Cost of revenue (exclusive of amortization shown below)			3,165.9						3,011.6						154.3
Gross profit			3,056.7						1,882.1						1,174.6
Operating expenses:
Research and development			463.8						494.4						(30.6)
Selling and marketing			213.7						223.4						(9.7)
General and administrative			246.0						221.3						24.7
Amortization of acquisition-related intangible assets			65.1						74.5						(9.4)
Restructuring, asset impairments and other, net			25.6						58.3						(32.7)
Goodwill and intangible asset impairment			386.8						2.9						383.9
Total operating expenses			1,401.0						1,074.8						326.2
Operating income			1,655.7						807.3						848.4
Other income (expense), net:
Interest expense			(67.4)						(98.4)						31.0
Interest income			6.4						1.1						5.3
Loss on debt refinancing and prepayment			(7.3)						(26.2)						18.9
Gain on divestiture of business			2.1						10.2						(8.1)
Other income (expense)			9.4						(2.4)						11.8
Other income (expense), net			(56.8)						(115.7)						58.9
Income before income taxes			1,598.9						691.6						907.3
Income tax provision			(299.4)						(106.8)						(192.6)
Net income			1,299.5						584.8						714.7
Less: Net income attributable to non-controlling interest			(1.6)						(1.1)						(0.5)
Net income attributable to ON Semiconductor Corporation			$	1,297.9					$	583.7					$	714.2

Revenue

Revenue was $6,222.6 million and $4,893.7 million for the nine months ended September 30, 2022 and nine months ended October 1, 2021, respectively, representing an increase of $1,328.9 million, or approximately 27%. We had one customer, a distributor, whose revenue accounted for approximately 12% of our total revenue for the nine months ended September 30, 2022 and 13% of our total revenue for the nine months ended October 1, 2021.

Revenue by operating and reportable segments was as follows (dollars in millions):

			Nine Months Ended September 30, 2022						As a % of Total Revenue (1)						Nine Months Ended October 1, 2021						As a % of Total Revenue (1)
PSG			$	3,159.8					50.8		%				$	2,485.7					50.8		%
ASG			2,140.3						34.4		%				1,752.6						35.8		%
ISG			922.5						14.8		%				655.4						13.4		%
Total revenue			$	6,222.6											$	4,893.7

(1) Certain amounts may not total due to rounding of individual amounts.

Revenue from PSG increased by $674.1 million, or approximately 27%, for the nine months ended September 30, 2022 compared to the nine months ended October 1, 2021. The revenue from our Advanced Power Division and our Integrated Circuits, Protection and Signal Division increased by $537.8 million and $136.2 million, respectively, primarily due to our strategy to focus on a product mix that yields higher margins, and an increase in average selling prices driven by strong market demand, compared to the nine months ended October 1, 2021.

Revenue from ASG increased by $387.7 million, or approximately 22%, for the nine months ended September 30, 2022 compared to the nine months ended October 1, 2021. The revenue from our Automotive Division, Industrial Solutions Division and Mobile, Computing and Cloud Division increased by $150.5 million, $141.7 million and $102.7 million, respectively. The increases were primarily due to our strategy to focus on a product mix that yields higher margins and an increase in average selling prices driven by strong market demand, compared to the nine months ended October 1, 2021.

Revenue from ISG increased by $267.1 million, or approximately 41%, for the nine months ended September 30, 2022 compared to the nine months ended October 1, 2021. The increase was largely due to an increase in revenue from our Automotive Sensing Division of $261 million. The increase was primarily due to our strategy to focus on a product mix that yields higher margins, and an increase in average selling prices driven by strong market demand, compared to the nine months ended October 1, 2021.

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):

			Nine Months Ended September 30, 2022						As a % of Total Revenue (1)						Nine Months Ended October 1, 2021						As a % of Total Revenue (1)
Singapore			$	1,655.5					26.6		%				$	1,586.0					32.4		%
Hong Kong			1,731.9						27.8		%				1,278.5						26.1		%
United Kingdom			1,077.7						17.3		%				818.6						16.7		%
United States			1,088.3						17.5		%				648.6						13.3		%
Other			669.2						10.8		%				562.0						11.5		%
Total revenue			$	6,222.6											$	4,893.7

(1) Certain amounts may not total due to rounding of individual amounts.

Gross Profit and Gross Margin (exclusive of amortization of acquisition-related intangible assets described below)

Our gross profit by operating and reportable segments was as follows (dollars in millions):

			Nine Months Ended September 30, 2022						As a % of Segment Revenue (1)						Nine Months Ended October 1, 2021						As a % of Segment Revenue (1)
PSG			$	1,494.4					47.3		%				$	906.8					36.5		%
ASG			1,128.7						52.7		%				739.2						42.2		%
ISG			433.6						47.0		%				236.1						36.0		%
Total gross profit			$	3,056.7					49.1		%				$	1,882.1					38.5		%

(1)Certain amounts may not total due to rounding of individual amounts.

(2)Beginning in the first quarter of 2021, unallocated manufacturing costs were included as part of segment operating results to determine segment gross profit. As a result, the prior-period amounts have been reclassified to conform to current-period presentation.

Our gross profit was $3,056.7 million for the nine months ended September 30, 2022 compared to $1,882.1 million for the nine months ended October 1, 2021. Gross profit increased by $1,174.6 million, or approximately 62%. Gross margin increased to 49.1% for the nine months ended September 30, 2022 from 38.5% for the nine months ended October 1, 2021.

The significant increase in both gross profit and gross margin was primarily driven by higher revenue, particularly in the automotive and industrial end-markets, and a favorable product mix, which included actions aimed to resolve price-to-value discrepancies for our products.

Operating Expenses

Research and development expenses were $463.8 million for the nine months ended September 30, 2022, as compared to $494.4 million for the nine months ended October 1, 2021, representing a decrease of $30.6 million, or approximately 6%. The decrease was primarily due to a decrease in payroll-related expenses.

Selling and marketing expenses were $213.7 million for the nine months ended September 30, 2022, as compared to $223.4 million for the nine months ended October 1, 2021, representing a decrease of $9.7 million, or approximately 4%. The decrease was primarily due to a reduction in payroll-related expenses.

General and administrative expenses were $246.0 million for the nine months ended September 30, 2022, as compared to $221.3 million for the nine months ended October 1, 2021, representing an increase of $24.7 million, or approximately 11%. The increase was primarily due to higher variable compensation and stock compensation.

Other Operating Expenses

Amortization of Acquisition-Related Intangible Assets

Amortization of acquisition-related intangible assets was $65.1 million and $74.5 million for the nine months ended September 30, 2022 and nine months ended October 1, 2021, respectively, representing a decrease of $9.4 million, or approximately 13%. The decrease in expense was due to the reduction in amortization expense as certain intangible technology-related assets became fully amortized in 2021.

Restructuring, Asset Impairments and Other, Net

Restructuring, asset impairments and other, net was $25.6 million for the nine months ended September 30, 2022, as compared to $58.3 million for the nine months ended October 1, 2021, representing a decrease of $32.7 million. Charges represent severance charges, contract termination costs and litigation expenses. Amounts incurred for the nine months ended October 1, 2021 primarily relate to the 2021 involuntary severance plan. For additional information, see Note 6: ''Restructuring, Asset Impairments and Other, 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 $386.8 million for the nine months ended September 30, 2022, as compared to $2.9 million for the nine months ended October 1, 2021. During the second quarter of 2022, the Company 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. During the third quarter of 2022, we approved an exit plan to wind down the QCS division and recorded goodwill and intangible asset impairment charges of $215.0 million and $56.8 million, respectively. See Note 5: ''Goodwill and Intangible Assets'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.

Interest Expense

Interest expense decreased by $31.0 million to $67.4 million during the nine months ended September 30, 2022, as compared to $98.4 million during the nine months ended October 1, 2021. The decrease was primarily due to the lack of amortization of debt discount on our convertible notes due to the adoption of ASU 2020-06, lower interest rates as a result of interest rate swap contracts, and a decrease in our long-term debt. Our average gross long-term debt balance (including current maturities) for the nine months ended September 30, 2022 was $3,253.5 million at a weighted-average interest rate of 2.8%, as compared to $3,449.7 million at a weighted-average interest rate of 3.8% for the nine months ended October 1, 2021. The calculation of our weighted-average interest rates includes the effect of our interest rate swap agreements.

Loss on Debt Refinancing and Prepayment

Loss on debt refinancing and prepayment was $7.3 million for the nine months ended September 30, 2022, as compared to $26.2 million for the nine months ended October 1, 2021. The loss on debt refinancing and prepayment for the nine months ended October 1, 2021 primarily related to the partial prepayment of the Term Loan "B" Facility.

Gain on Divestiture of Business

Gain on divestiture of a business was $2.1 million during the nine months ended September 30, 2022, as compared to $10.2 for the nine months ended October 1, 2021. The gain relates to the divestiture of the wafer manufacturing facility in South Portland, Maine and the sale of the non-strategic GTAT Sapphire business in Salem, Massachusetts. See Note 4: ''Acquisition and Divestitures'' 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 $9.4 million for the nine months ended September 30, 2022 as compared to income of $2.4 million for the nine months ended October 1, 2021. The increase was primarily due to the fluctuations in foreign currencies resulting in increased transaction gains offset by losses on hedges that were realized.

Income Tax Provision

We recorded an income tax provision of $299.4 million and $106.8 million during the nine months ended September 30, 2022 and October 1, 2021, respectively, representing effective tax rates of 18.7% and 15.4%. The increase in our effective tax rate was substantially driven by the impact of goodwill impairments, which are not deductible for tax purposes.

For additional information, see Note 14: ''Income Taxes'' and Note 7: ''Balance Sheet Information and Other'' in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q.

Liquidity and Capital Resources

Overview

Our principal sources of liquidity are cash on hand, cash generated from operations, funds from external borrowings and equity issuances. In the near term, we expect to fund our primary cash requirements through cash generated from operations and with cash and cash equivalents on hand. We also have the ability to utilize our Revolving Credit Facility, which has approximately $1.5 billion available for future borrowings. Our balance of cash and cash equivalents was $2,450.2 million as of September 30, 2022.

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) conduct research and development; (iv) incur capital expenditures; and (v) 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 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 long-term cash generation is dependent on the ability of our operations to generate cash. Our cash flows from operating activities were $1,901.8 million and $1,155.4 million for the nine months ended September 30, 2022 and October 1, 2021, respectively. The increase of $746.4 million was primarily attributable to a significant increase in net income due to our strategy to focus on a product mix that yields higher margins combined with increased demand and prices for our products.

Investing Activities

Our cash flows used in investing activities were $563.6 million and $327.5 million for the nine months ended September 30, 2022 and October 1, 2021, respectively. The increase of $236.1 million was primarily attributable to capital expenditures offset by proceeds from the sale of real estate and divestitures. During the nine months ended September 30, 2022 and October 1, 2021, we paid $663.0 million and $275.0 million, respectively, for capital expenditures.

Financing Activities

Our cash flows used in financing activities were $240.3 million and $517.8 million for the nine months ended September 30, 2022 and October 1, 2021, respectively. The decrease of $277.5 million was primarily attributable to proceeds and payments related to long-term borrowings and share repurchase activity.

We believe that the key factors that could affect our sources of cash include:

• changes in demand for our products, competitive pricing pressures, supply chain constraints, effective management of our manufacturing capacity, 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, inflationary pressures, and our ability to make the research and development expenditures required to remain competitive in our business; and

• our access to bank financing and the debt and equity capital markets that 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 September 30, 2022, we were in compliance with the indentures relating to our 0% Notes, 3.875% Notes and 1.625% Notes and with covenants relating to our Term Loan "B" Facility and Revolving Credit Facility. The 0% 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 2021 Form 10-K and Note 3: "Recent Accounting Pronouncements" in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.