ON Semiconductor 10-Q 2023-03-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2023

Or

For the transition period from to

(Commission File Number) 001-39317

ON SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)

5701 N. Pima Road

Scottsdale, AZ 85250

(602) 244-6600

(Address, zip code and telephone number, including area code, of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

The number of shares outstanding of the issuer's class of common stock as of the close of business on April 26, 2023:

ON SEMICONDUCTOR CORPORATION FORM 10-Q

TABLE OF CONTENTS

(See the glossary of selected terms immediately following this table of contents for definitions of certain abbreviated terms)

ON SEMICONDUCTOR CORPORATION

FORM 10-Q

GLOSSARY OF SELECTED ABBREVIATED TERMS*

• Terms used, but not defined, within the body of the Form 10-Q are defined in this Glossary.

PART I: FINANCIAL INFORMATION

ON SEMICONDUCTOR CORPORATION

CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)

(unaudited)

See accompanying notes to consolidated financial statements

ON SEMICONDUCTOR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in millions, except per share data)

(unaudited)

Showing the first 8K of 108K characters. Open the full section

You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included in the 2022 Form 10-K and our unaudited consolidated financial statements for the fiscal quarter ended March 31, 2023, which are included elsewhere in this Form 10-Q. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks, uncertainties and other factors. Actual results could differ materially because of the factors discussed below or elsewhere in this Form 10-Q. See Part II, Item 1A. "Risk Factors" of this Form 10-Q and Part I, Item 1A. "Risk Factors" of the 2022 Form 10-K.

Executive Overview

onsemi Overview

We provide industry-leading intelligent power and sensing solutions to help our customers solve challenging problems and create cutting-edge products for a better future. Our intelligent power technologies enable the electrification of the automotive industry that allows for lighter and longer-range electric vehicles, empowers efficient fast-charging systems and propels sustainable energy for the highest efficiency solar strings, industrial power and storage systems. Our intelligent power solutions for automotive allows customers to exceed range targets with lower weight and reduce system cost through efficiency. Our intelligent sensing technologies support the next generation industry, allowing for smarter factories and buildings while also enhancing the automotive mobility experience with imaging and depth sensing that make advanced vehicle safety and automated driving systems possible. We believe the evolution of the automotive industry, with advancements in autonomous driving, ADAS, vehicle electrification, and the increase in electronics content for vehicle platforms, is reshaping the boundaries

of transportation.

Through sensing integration, we believe our intelligent power solutions achieve superior efficiencies compared to our peers. This integration allows lower temperature operation, and reduced cooling requirements, while saving costs and minimizing weight. In addition, our power solutions deliver power with less die per module, achieving higher range for a given battery capacity.

We serve a broad base of end-user markets, with a primary focus towards automotive and industrial and including communications, computing and consumer.

As of March 31, 2023, we were organized into the three operating and reportable segments of PSG, ASG and ISG.

Business Strategy Developments

Our primary focus continues to be on profitable revenue growth in our focused end-markets of automotive and industrial infrastructure, as well as obtaining longer-term supply arrangements with strategic end-customers. We are focused on achieving efficiencies in our operating and capital expenditures. Additionally, we continue to rationalize our product portfolio by moving away from non-differentiated, non-strategic products, which in most cases had lower gross and operating margins.

2023 Business Realignment

In order to streamline our operations and achieve organizational efficiencies, we realigned our operating models in ASG and the Corporate Information Technology ("IT") organization during the first quarter of 2023. Under this business realignment, approximately 400 employees were notified of their employment termination, and we incurred severance and related charges of approximately $41.4 million. We continue to evaluate employee positions and locations for potential efficiencies and may incur additional severance and related charges in the future. For additional information, see Note 4: ''Restructuring, Asset Impairments and Other, Net'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.

0.50% Convertible Senior Notes due 2029

During the first quarter of 2023, we completed the offering of $1.5 billion aggregate principal amount of our 0.50% Notes and utilized the net proceeds along with cash generated from operations to which were used (i) to repay $1,086.0 million of the existing outstanding indebtedness under the Company’s Term Loan “B” Facility and the related transaction fees and expenses, (ii) to pay approximately $171.5 million net cost of the related convertible note hedges after such costs were offset by the proceeds from the sale of warrants, and (iii) for general corporate purposes.

Repayments under the Revolving Credit Facility

During the quarter ended March 31, 2023, we repaid $125.0 million of the outstanding balance under the Revolving Credit Facility.

For additional information, see Note 6: ''Long-Term Debt'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.

Results of Operations

Quarter Ended March 31, 2023 compared to the Quarter Ended April 1, 2022

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

Revenue

Revenue was $1,959.7 million and $1,945.0 million for the quarters ended March 31, 2023 and April 1, 2022, respectively, representing an increase of $14.7 million, or approximately 1%. We had one customer, a distributor, whose revenue accounted for approximately 10.1% and 12.4% of our total revenue for the quarters ended March 31, 2023 and April 1, 2022, respectively.

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

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

Revenue from PSG increased by $26.1 million, or approximately 3%, for the quarter ended March 31, 2023 compared to the quarter ended April 1, 2022. The revenue from our Advanced Power Division increased by $96.6 million, which was partially offset by a decrease of $70.5 million in our Integrated Circuits, Protection and Signal Division. The increases were primarily driven by our continued ramp in SiC and other high-power automotive solutions, compared to the quarter ended April 1, 2022. The decrease in revenue generated by our Integrated Circuits, Protection and Signal Division was driven by planned customer product exits and reduced demand driven by lower end-market requirements for these products.

Revenue from ASG decreased by $96.5 million, or approximately 14%, for the quarter ended March 31, 2023 compared to the quarter ended April 1, 2022. The revenue from our Mobile, Computing and Cloud Division decreased by $109.5 million, which was partially offset by an increase of $18.0 million and $19.8 million, respectively, in our Automotive Division and Industrial Solutions Division driven by Foundry business through our new EFK location. The decrease in revenue generated by our Mobile, Computing and Cloud Division was influenced by our 2023 exit of our Quantenna business, planned end of life for targeted products as well as a general drop in end market demand for these products.

Revenue from ISG increased by $85.1 million, or approximately 32%, for the quarter ended March 31, 2023 compared to the quarter ended April 1, 2022, largely driven by an increase in revenue from our Automotive Sensing Division of $90.9 million. The increase was due to an increase in demand for these products and an increase in average selling prices, compared to the quarter ended April 1, 2022.

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

(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):

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

During the quarter ended March 31, 2023 our gross profit was $917.5 million and our gross margin was 46.8%, representing a decline of approximately $43.8 million and a 4.6% decrease compared to a gross profit of $961.3 million and a gross margin of 49.4% reported for the quarter ended April 1, 2022.

The decline in both gross profit and gross margin was primarily driven by start-up and ramp-up costs associated with the ramp up of our EFK facility and new products.

Operating Expenses

Research and development expenses were $138.4 million for the quarter ended March 31, 2023, as compared to $156.8 million for the quarter ended April 1, 2022, representing a decrease of $18.4 million, or approximately 12%. The decrease was primarily due to a reduction in payroll, variable compensation and other expenses as a result of the restructuring programs implemented during the period.

Selling and marketing expenses were $71.8 million for the quarter ended March 31, 2023, as compared to $71.1 million for the quarter ended April 1, 2022, representing an increase of $0.7 million, or approximately 1%.

General and administrative expenses were $75.9 million for the quarter ended March 31, 2023, as compared to $77.9 million for the quarter ended April 1, 2022, representing a decrease of $2.0 million, or approximately 3%. The decrease was primarily due to a reduction in variable compensation and other expenses as a result of the restructuring programs implemented during the period.

Other Operating Expenses

Amortization of Acquisition-Related Intangible Assets

Amortization of acquisition-related intangible assets was $15.0 million for the quarter ended March 31, 2023, as compared to $21.3 million for the quarter ended April 1, 2022, representing a decrease of $6.3 million, or approximately 30%. The decrease in expense was due to the impairment of certain intangible assets recorded due to the QCS shutdown during the third quarter of 2022 and a reduction in amortization expense as certain intangible technology-related assets became fully amortized in 2022.

Restructuring, Asset Impairments and Other, Net

Restructuring, asset impairments and other, net was $51.5 million for the quarter ended March 31, 2023, as compared to a credit of $13.0 million for the quarter ended April 1, 2022. Amounts incurred during the quarter ended March 31, 2023 primarily related to the business realignment that was announced in the first quarter of 2023. Amounts incurred for the quarter ended April 1, 2022 were partially offset by a gain from the sale of an office building in the first quarter of 2022. See Note 4: ''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.

Interest Expense

Interest expense increased by $4.8 million to $26.4 million during the quarter ended March 31, 2023, as compared to $21.6 million during the quarter ended April 1, 2022. The increase was primarily due to an increase in our outstanding long-term debt balances and an increase in interest rates offset by effects of interest rate swap agreements. Our average gross long-term debt balance (including current maturities) for the quarter ended March 31, 2023 was $3,371.4 million at a weighted-average interest rate of 3.1%, as compared to $3,256.3 million at a weighted-average interest rate of 2.7% for the quarter ended April 1, 2022. The calculation of our weighted-average interest rates includes the effect of our interest rate swap agreements.

Loss on Debt Prepayment

We recorded loss on debt prepayment of $13.3 million during the quarter ended March 31, 2023. The loss is attributable to the unamortized debt discount and issuance costs written-off relating to the repayment of the Term Loan "B" Facility. See Note 6: ''Long-Term Debt'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.

Other Income (Expense)

During the quarter ended March 31, 2023, Other income (expense) resulted in an income of $4.7 million compared to an income of $2.1 million during the quarter ended April 1, 2022. The increase was primarily due to a gain resulting from the termination of interest rate swaps partially offset by transaction losses resulting from fluctuations in foreign currencies.

Income Tax Provision

We recorded an income tax provision of $83.7 million and $97.1 million for the quarters ended March 31, 2023 and April 1, 2022, respectively, representing effective tax rates of 15.3% and 15.5%.

For additional information, see Note 12: ''Income Taxes'' 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, available borrowings under our Revolving Credit Facility as well as debt and/or equity issuances. In the near term, we expect to fund our cash requirements (including any amounts required to satisfy our current portion of long-term debt) utilizing any or a combination of these principal sources. Our balance of cash and cash equivalents was $2.7 billion as of March 31, 2023, and the Revolving Credit Facility has approximately $1.6 billion available for future borrowings.

We require cash to: (i) fund our operating expenses, working capital requirements, outlays for strategic acquisitions and investments; (ii) service our debt, including principal and interest; (iii) 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 $408.9 million and $478.6 million for the quarters ended March 31, 2023 and April 1, 2022, respectively. The decrease of $69.7 million was primarily attributable to a reduction in net income driven by lower end-market requirements for our products

Our ability to maintain positive operating cash flows is dependent on, among other factors, our success in achieving our revenue goals and manufacturing and operating cost targets. Management of our assets and liabilities, including both working capital and long-term assets and liabilities, also influences our operating cash flows.

Investing Activities

Our cash flows used in investing activities were $562.0 million and $129.4 million for the quarters ended March 31, 2023 and April 1, 2022, respectively. The increase of $432.6 million was primarily attributable to capital expenditures and the remaining payment of $236.3 million related to the acquisition of the EFK facility. During the quarters ended March 31, 2023 and April 1, 2022, we paid $321.5 million and $173.8 million, respectively, for capital expenditures. Our capital expenditures as a percent of revenue in the first quarter of 2023 increased to approximately 16%, primarily as a result of the SiC expansion and our facility expansion investments. As a result of these investments, for 2023, we expect capital expenditures to be approximately 18% to 20% of revenue.

Financing Activities

Our cash flows used in financing activities were $63.4 million and $57.3 million for the quarters ended March 31, 2023 and April 1, 2022, respectively. The increase of $6.1 million was primarily attributable to proceeds and payments related to long-term borrowings and share repurchase activity. Cash used in financing activities includes repayments of outstanding indebtedness under the Company’s Term Loan “B” Facility of $1.1 billion and $125.0 million under the Revolving Credit Facility. The Company also paid approximately $414 million for convertible note hedges and approximately $104.0 million for the repurchase of common stock, offset by $1.5 billion of proceeds from the private unregistered offering of our 0.50% Notes and $242.5 million of proceeds from the issuance of warrants.

See Note 6: ''Long-Term Debt'' and Note 7: ''Earnings Per Share and Equity'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.

Key Factors Potentially Affecting Liquidity:

We believe that the key factors that could adversely affect our internal and external sources of cash include, among other considerations:

• Changes in demand for our products, competitive pricing pressures, supply chain constraints, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, our ability to make progress on the achievement of our business strategy and sustainability goals, the impact of our restructuring programs on our production and cost efficiency, and our ability to make the research and development expenditures required to remain competitive in our business; and

• The debt and equity capital markets could impact our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing and our ability to maintain compliance with covenants under our debt agreements in effect from time to time.

Debt Guarantees and Related Covenants

As of March 31, 2023, we were in compliance with the indentures relating to our 0% Notes, 0.50% Notes, 3.875% Notes and 1.625% Notes, and with covenants relating to our Term Loan "B" Facility and Revolving Credit Facility. The 0% Notes, 0.50% Notes, 3.875% Notes and 1.625% Notes are senior to the existing and future subordinated indebtedness of onsemi and its guarantor subsidiaries, rank equally in right of payment to all of our existing and future senior debt and, as unsecured obligations, are subordinated to all of our existing and future secured debt to the extent of the assets securing such debt.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 6, 2023.

There have been no material changes in market risk from the information presented in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” in the 2022 Form 10-K.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were

effective to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

We also carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended March 31, 2023.

There have been no changes to our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended March 31, 2023 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

See Note 9: ''Commitments and Contingencies'' under the heading "Legal Matters" in the notes to the consolidated unaudited financial statements included elsewhere in this Form 10-Q for additional information on our legal proceedings and related matters. See also Part I, Item 1 "Business - Government Regulation" of the 2022 Form 10-K for information on certain environmental matters.

Our business, financial condition and results of operations are subject to a number of trends, risks and uncertainties. We review and, where applicable, update our risk factors each quarter. There have been no material changes from the risk factors disclosed in Part I, Item 1A of the 2022 Form 10-K.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes "forward-looking statements," as that term is defined in Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements, other than statements of historical facts, included or incorporated in this Form 10-Q could be deemed forward-looking statements, particularly statements about our plans, strategies and prospects under the heading "Management’s Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements are often characterized by the use of words such as "believes," "estimates," "expects," "projects," "may," "will," "intends," "plans," "anticipates," "should" or similar expressions, or by discussions of strategy, plans or intentions. All forward-looking statements in this Form 10-Q are made based on our current expectations, forecasts, estimates and assumptions and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements.

Important factors that could cause our actual results to differ materially from those anticipated in the forward-looking statements are described under Part I, Item 1A "Risk Factors" in the 2022 Form 10-K, in this Form 10-Q and from time to time in our other SEC reports. Readers are cautioned not to place undue reliance on forward-looking statements. We assume no obligation to update such information, which speaks only as of the date made, except as may be required by law. Investing in our securities involves a high degree of risk and uncertainty, and you should carefully consider the trends, risks and uncertainties described in the aforementioned reports and subsequent reports filed with or furnished to the SEC before making any investment decision with respect to our securities. The risk factors described herein and in our 2022 Form 10-K are not all of the risks we may face. Other risks not presently known to us or that we currently believe are immaterial may materially affect our business. If any of the following trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information regarding repurchases of our common stock during the quarter ended March 31, 2023:

(1) These time periods represent our fiscal month start and end dates for the first quarter of 2023.

Shares withheld to satisfy statutory tax withholding requirements related to the vesting of share-based awards are not issued or considered repurchases of our common stock under our Share Repurchase Program and, therefore, are excluded from the table above.

Share Repurchase Program

In February 2023, the Board of Directors approved a new share repurchase program (the “Share Repurchase Program”), which allows for the repurchase of our common stock from time to time in privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 of the Exchange Act, or by any combination of such methods or other methods. The Share Repurchase Program, which does not require us to purchase any minimum amount of our common stock, has an aggregate limit of $3.0 billion from February 8, 2023 through December 31, 2025 (exclusive of fees, commissions and other expenses). Any repurchases will be at the Company’s discretion and will be subject to market conditions, the price of our shares and other factors. The share repurchase program may be modified, suspended or terminated by the Board of Directors at any time without prior notice.

There were 1.3 million shares of the Company's common stock repurchased under the Share Repurchase Program during the quarter ended March 31, 2023. As of March 31, 2023, the authorized amount remaining under the Share Repurchase Program was approximately $2.9 billion.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

None.

EXHIBIT INDEX

SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.