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)
| March 31, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 2,702.4 | $ | 2,919.0 | |||||||
| Receivables, net | 880.9 | 842.3 | |||||||||
| Inventories | 1,814.9 | 1,616.8 | |||||||||
| Other current assets | 318.1 | 351.3 | |||||||||
| Total current assets | 5,716.3 | 5,729.4 | |||||||||
| Property, plant and equipment, net | 3,692.9 | 3,450.7 | |||||||||
| Goodwill | 1,577.6 | 1,577.6 | |||||||||
| Intangible assets, net | 339.8 | 359.7 | |||||||||
| Deferred tax assets | 473.1 | 376.7 | |||||||||
| Right-of-use financing lease | 45.2 | 45.8 | |||||||||
| Other assets | 429.4 | 438.6 | |||||||||
| Total assets | $ | 12,274.3 | $ | 11,978.5 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Accounts payable | $ | 976.2 | $ | 852.1 | |||||||
| Accrued expenses and other current liabilities | 666.0 | 1,047.3 | |||||||||
| Current portion of financing lease liabilities | 11.6 | 14.2 | |||||||||
| Current portion of long-term debt | 926.2 | 147.8 | |||||||||
| Total current liabilities | 2,580.0 | 2,061.4 | |||||||||
| Long-term debt | 2,538.0 | 3,045.7 | |||||||||
| Deferred tax liabilities | 36.6 | 34.1 | |||||||||
| Long-term financing lease liabilities | 24.0 | 23.0 | |||||||||
| Other long-term liabilities | 628.7 | 607.3 | |||||||||
| Total liabilities | 5,807.3 | 5,771.5 | |||||||||
| Commitments and contingencies (Note 9) | |||||||||||
| ON Semiconductor Corporation stockholders’ equity: | |||||||||||
| Common stock ($0.01 par value, 1,250,000,000 shares authorized, 610,278,043 and 608,367,713 issued, 431,851,090 and 431,936,415 outstanding, respectively) | 6.1 | 6.1 | |||||||||
| Additional paid-in capital | 4,633.6 | 4,670.9 | |||||||||
| Accumulated other comprehensive loss | (29.6) | (23.2) | |||||||||
| Accumulated earnings | 4,826.1 | 4,364.4 | |||||||||
| Less: Treasury stock, at cost: 178,426,953 and 176,431,298 shares, respectively | (2,988.2) | (2,829.7) | |||||||||
| Total ON Semiconductor Corporation stockholders’ equity | 6,448.0 | 6,188.5 | |||||||||
| Non-controlling interest | 19.0 | 18.5 | |||||||||
| Total stockholders’ equity | 6,467.0 | 6,207.0 | |||||||||
| Total liabilities and stockholders’ equity | $ | 12,274.3 | $ | 11,978.5 |
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 | |||||||||||||||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||||||||||||||
| Revenue | $ | 1,959.7 | $ | 1,945.0 | |||||||||||||||||||
| Cost of revenue | 1,042.2 | 983.7 | |||||||||||||||||||||
| Gross profit | 917.5 | 961.3 | |||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 138.4 | 156.8 | |||||||||||||||||||||
| Selling and marketing | 71.8 | 71.1 | |||||||||||||||||||||
| General and administrative | 75.9 | 77.9 | |||||||||||||||||||||
| Amortization of acquisition-related intangible assets | 15.0 | 21.3 | |||||||||||||||||||||
| Restructuring, asset impairments and other charges, net | 51.5 | (13.0) | |||||||||||||||||||||
| Total operating expenses | 352.6 | 314.1 | |||||||||||||||||||||
| Operating income | 564.9 | 647.2 | |||||||||||||||||||||
| Other income (expense), net: | |||||||||||||||||||||||
| Interest expense | (26.4) | (21.6) | |||||||||||||||||||||
| Interest income | 17.1 | 0.4 | |||||||||||||||||||||
| Loss on debt prepayment | (13.3) | — | |||||||||||||||||||||
| Loss on divestiture of business | (1.1) | — | |||||||||||||||||||||
| Other income | 4.7 | 2.1 | |||||||||||||||||||||
| Other income (expense), net | (19.0) | (19.1) | |||||||||||||||||||||
| Income before income taxes | 545.9 | 628.1 | |||||||||||||||||||||
| Income tax provision | (83.7) | (97.1) | |||||||||||||||||||||
| Net income | 462.2 | 531.0 | |||||||||||||||||||||
| Less: Net income attributable to non-controlling interest | (0.5) | (0.8) | |||||||||||||||||||||
| Net income attributable to ON Semiconductor Corporation | $ | 461.7 | $ | 530.2 | |||||||||||||||||||
| Net income for diluted earnings per share of common stock (Note 7) | 462.1 | 530.7 | |||||||||||||||||||||
| Net income per share of common stock attributable to ON Semiconductor Corporation: | |||||||||||||||||||||||
| Basic | $ | 1.07 | $ | 1.22 | |||||||||||||||||||
| Diluted | $ | 1.03 | $ | 1.18 | |||||||||||||||||||
| Weighted-average shares of common stock outstanding: | |||||||||||||||||||||||
| Basic | 431.9 | 433.3 | |||||||||||||||||||||
| Diluted | 448.5 | 448.9 | |||||||||||||||||||||
| Comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Net income | $ | 462.2 | $ | 531.0 | |||||||||||||||||||
| Foreign currency translation adjustments | 0.3 | (2.4) | |||||||||||||||||||||
| Effects of cash flow hedges and other adjustments | (6.7) | 16.6 | |||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (6.4) | 14.2 | |||||||||||||||||||||
| Comprehensive income | 455.8 | 545.2 | |||||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | (0.5) | (0.8) | |||||||||||||||||||||
| Comprehensive income attributable to ON Semiconductor Corporation | $ | 455.3 | $ | 544.4 |
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 December 31, 2022 | 608,367,713 | $ | 6.1 | $ | 4,670.9 | $ | (23.2) | $ | 4,364.4 | (176,431,298) | $ | (2,829.7) | $ | 18.5 | $ | 6,207.0 | |||||||||||||
| Shares issued pursuant to the ESPP | 136,856 | — | 7.3 | — | — | — | — | — | 7.3 | ||||||||||||||||||||
| RSUs released and stock grant awards issued | 1,680,376 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement - 1.625% Notes | 93,098 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement of bond hedges - 1.625% Notes | — | — | 6.9 | — | — | (93,098) | (6.9) | — | — | ||||||||||||||||||||
| Warrants and bond hedges, net - 0.50% Notes | — | — | (171.5) | — | — | — | — | — | (171.5) | ||||||||||||||||||||
| Tax impact of warrants and bond hedges, net | — | — | 92.3 | — | — | — | — | — | 92.3 | ||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | (578,406) | (47.6) | — | (47.6) | ||||||||||||||||||||
| Share-based compensation | — | — | 27.7 | — | — | — | — | — | 27.7 | ||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (1,324,151) | (104.0) | — | (104.0) | ||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | (6.4) | 461.7 | — | — | 0.5 | 455.8 | ||||||||||||||||||||
| Balance at March 31, 2023 | 610,278,043 | $ | 6.1 | $ | 4,633.6 | $ | (29.6) | $ | 4,826.1 | (178,426,953) | $ | (2,988.2) | $ | 19.0 | $ | 6,467.0 | |||||||||||||
| 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 | 126,388 | — | 6.7 | — | — | — | — | — | 6.7 | ||||||||||||||||||||
| RSUs released and stock grant awards issued | 2,851,188 | 0.1 | (0.1) | — | — | — | — | — | — | ||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | (955,641) | (58.8) | — | (58.8) | ||||||||||||||||||||
| Share-based compensation | — | — | 22.5 | — | — | — | — | — | 22.5 | ||||||||||||||||||||
| Comprehensive income | — | — | — | 14.2 | 530.2 | — | — | 0.8 | 545.2 | ||||||||||||||||||||
| 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 | |||||||||||||
See accompanying notes to consolidated financial statements
ON SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
| Quarters Ended | |||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 462.2 | $ | 531.0 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 145.0 | 140.6 | |||||||||
| Loss (gain) on sale or disposal of fixed assets | 1.2 | (16.6) | |||||||||
| Loss on divestiture of business | 1.1 | — | |||||||||
| Loss on debt prepayment | 13.3 | — | |||||||||
| Amortization of debt discount and issuance costs | 2.9 | 3.2 | |||||||||
| Share-based compensation | 27.7 | 22.5 | |||||||||
| Non-cash asset impairment charges | 12.7 | 6.7 | |||||||||
| Change in deferred tax balances | (1.5) | 38.3 | |||||||||
| Other | (7.0) | 0.5 | |||||||||
| Changes in assets and liabilities (exclusive of divestitures): | |||||||||||
| Receivables | (37.7) | (107.2) | |||||||||
| Inventories | (198.1) | (116.7) | |||||||||
| Other assets | 54.8 | (0.8) | |||||||||
| Accounts payable | 53.5 | 35.7 | |||||||||
| Accrued expenses and other current liabilities | (154.6) | (83.2) | |||||||||
| Other long-term liabilities | 33.4 | 24.6 | |||||||||
| Net cash provided by operating activities | $ | 408.9 | $ | 478.6 | |||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property, plant and equipment | $ | (321.5) | $ | (173.8) | |||||||
| Proceeds from sale of property, plant and equipment | 1.7 | 36.7 | |||||||||
| Deposits utilized (made) for purchase of property, plant and equipment | (16.7) | 1.6 | |||||||||
| Divestiture of business, net of cash transferred and deposits received | — | 12.9 | |||||||||
| Purchase of available-for-sale securities | — | (7.8) | |||||||||
| Proceeds from sale or maturity of available-for-sale securities | 10.8 | 3.4 | |||||||||
| Payments related to acquisition of business, net of cash acquired | (236.3) | (2.4) | |||||||||
| Net cash used in investing activities | $ | (562.0) | $ | (129.4) | |||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds for the issuance of common stock under the ESPP | $ | 7.3 | $ | 7.8 | |||||||
| Payment of tax withholding for RSUs | (47.6) | (58.8) | |||||||||
| Repurchase of common stock | (104.0) | — | |||||||||
| Issuance and borrowings under debt agreements | 1,470.0 | — | |||||||||
| Reimbursement of debt issuance and other financing costs | 4.5 | — | |||||||||
| Payment of debt issuance and other financing costs | (4.8) | — | |||||||||
| Repayment of borrowings under debt agreements | (1,213.7) | (4.1) | |||||||||
| Payment for purchase of bond hedges | (414.0) | — | |||||||||
| Proceeds from issuance of warrants | 242.5 | — | |||||||||
| Payment of financing lease obligations | (3.6) | — | |||||||||
| Dividend to non-controlling shareholder | — | (2.2) | |||||||||
| Net cash used in financing activities | $ | (63.4) | $ | (57.3) | |||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 0.1 | (0.7) | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (216.4) | 291.2 | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period (Note 5) | 2,933.0 | 1,377.7 | |||||||||
| Cash, cash equivalents and restricted cash, end of period (Note 5) | $ | 2,716.6 | $ | 1,668.9 |
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 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 March 31, 2023 and April 1, 2022 contained 90 days and 91 days, respectively.
The accompanying unaudited financial statements as of and for the quarter ended March 31, 2023 have been prepared following generally accepted accounting principles in the United States of America ("GAAP") for interim financial reporting and the rules and regulations of the SEC for interim reporting. Accordingly, the unaudited financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. The balance sheet as of December 31, 2022 was derived from the Company's audited financial statements but does not include all disclosures required by GAAP for annual financial statements. In 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, 2022, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 6, 2023 (the "2022 Form 10-K").
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Management evaluates these estimates and judgments on an ongoing basis and bases its estimates on experience, current and expected future conditions, third-party evaluations, and various other assumptions that management believes are reasonable under the circumstances. Significant estimates have been used by management in conjunction with the following: (i) future payouts for customer incentives and amounts subject to allowances and returns; (ii) valuation and obsolescence relating to inventories; (iii) measurement of valuation allowances against deferred tax assets and evaluations of uncertain tax positions and (iv) testing for impairment of long-lived assets and goodwill. Additionally, during periods where it becomes applicable, significant estimates will be used by management in determining the future cash flows 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.
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 committed amounts ("Long-term Supply Agreements" or "LTSA's").
The estimated remaining performance obligations as of March 31, 2023, are approximately $17.6 billion (excluding the remaining performance obligations for contracts having an original duration of one year or less). This amount is subject to contractual increases based on negotiated contract prices and volumes, defined product mix flexibility, and the timing of new part introductions, among other contractual provisions. The Company expects to recognize approximately 33% of the remaining purchase obligation as revenue during the next twelve months upon shipment of products under these contracts. Total revenue estimates could be influenced by risks and uncertainties including manufacturing or supply chain constraints, modifications to customer agreements, and regulatory changes, among other factors. Accordingly, our actual revenue recognized for the remaining performance obligation in future periods may fluctuate from estimates.
Certain of the Company’s LTSA’s include non-cancellable capacity payments from the customer, which are generally due within 30 days of the agreement. These payments reserve production availability or are prepayments to secure production availability and are not recognized as revenue until the performance obligations are satisfied. For the periods ending March 31, 2023, and April 1, 2022, the Company recognized revenue of $14.8 million and $4.5 million, respectively, for the portion of performance obligations fulfilled during those periods.
As of March 31, 2023, and December 31, 2022, the remaining capacity payments were $225.5 million and $190.4 million, respectively, of which $69.0 million and $60.5 million were recorded as current liabilities, with the remainder recorded as other long-term liabilities.
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 March 31, 2023: | |||||||||||||||||||||||
| Revenue from external customers | $ | 1,012.8 | $ | 592.8 | $ | 354.1 | $ | 1,959.7 | |||||||||||||||
| Gross profit | $ | 480.3 | $ | 260.1 | $ | 177.1 | $ | 917.5 | |||||||||||||||
| For the quarter ended April 1, 2022: | |||||||||||||||||||||||
| Revenue from external customers | $ | 986.7 | $ | 689.3 | $ | 269.0 | $ | 1,945.0 | |||||||||||||||
| Gross profit | $ | 474.7 | $ | 366.7 | $ | 119.9 | $ | 961.3 | |||||||||||||||
The Company had one customer, a distributor, whose revenue accounted for approximately 10.1% and 12.4% of the Company's total revenue for the quarters ended March 31, 2023 and April 1, 2022, respectively.
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 March 31, 2023 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Hong Kong | $ | 286.9 | $ | 139.7 | $ | 63.8 | 490.4 | ||||||||||||||||
| Singapore | 276.4 | 116.1 | 58.2 | 450.7 | |||||||||||||||||||
| United Kingdom | 204.1 | 128.1 | 81.1 | 413.3 | |||||||||||||||||||
| United States | 166.3 | 121.3 | 101.5 | 389.1 | |||||||||||||||||||
| Other | 79.1 | 87.6 | 49.5 | 216.2 | |||||||||||||||||||
| Total | $ | 1,012.8 | $ | 592.8 | $ | 354.1 | $ | 1,959.7 | |||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | 629.3 | $ | 222.8 | $ | 187.1 | $ | 1,039.2 | |||||||||||||||
| Direct Customers | 383.5 | 370.0 | 167.0 | 920.5 | |||||||||||||||||||
| Total | $ | 1,012.8 | $ | 592.8 | $ | 354.1 | $ | 1,959.7 | |||||||||||||||
| Quarter Ended April 1, 2022 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Singapore | $ | 280.5 | $ | 233.8 | $ | 41.4 | $ | 555.7 | |||||||||||||||
| Hong Kong | 303.1 | 173.9 | 52.6 | 529.6 | |||||||||||||||||||
| United Kingdom | 186.9 | 106.6 | 52.0 | 345.5 | |||||||||||||||||||
| United States | 144.9 | 92.3 | 74.5 | 311.7 | |||||||||||||||||||
| Other | 71.3 | 82.7 | 48.5 | 202.5 | |||||||||||||||||||
| Total | $ | 986.7 | $ | 689.3 | $ | 269.0 | $ | 1,945.0 | |||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | 633.9 | $ | 356.9 | $ | 150.6 | $ | 1,141.4 | |||||||||||||||
| Direct Customers | 352.8 | 332.4 | 118.4 | 803.6 | |||||||||||||||||||
| Total | $ | 986.7 | $ | 689.3 | $ | 269.0 | $ | 1,945.0 | |||||||||||||||
The Company operates in various geographic locations. Sales to external customers have little correlation with the location of the Company's manufacturing or the location of the end-customers. It is, therefore, not meaningful to present operating profit by geographical location. The Company does not discretely allocate assets to its operating segments, nor does management evaluate operating segments using discrete asset information. The 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 | |||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| United States | $ | 1,360.8 | $ | 1,329.2 | |||||||
| South Korea | 990.9 | 871.0 | |||||||||
| Czech Republic | 335.3 | 279.3 | |||||||||
| Philippines | 287.1 | 296.8 | |||||||||
| China | 227.4 | 215.3 | |||||||||
| Malaysia | 199.0 | 190.2 | |||||||||
| Japan | 128.1 | 133.2 | |||||||||
| Other | 164.3 | 135.7 | |||||||||
| Total | $ | 3,692.9 | $ | 3,450.7 |
Note 3: Acquisition and Divestitures
Acquisition:
During the year ended December 31, 2022, the Company closed the acquisition of EFK. The preliminary allocation of the purchase price of EFK to the assets acquired and liabilities assumed based on their relative fair values is as follows (in millions):
| Purchase Price Allocation | ||||||||
| Inventory | $ | 3.3 | ||||||
| Other current assets | 4.4 | |||||||
| Property, plant and equipment | 396.5 | |||||||
| Other non-current assets | 11.4 | |||||||
| Total assets acquired | 415.6 | |||||||
| Current liabilities | 3.0 | |||||||
| Other long-term liabilities | 6.3 | |||||||
| Total liabilities assumed | 9.3 | |||||||
| Net assets acquired/purchase price | $ | 406.3 |
The preliminary allocation, assumptions and disclosures are materially consistent with the amounts included in the 2022 Form 10-K.
The Company paid the remaining acquisition consideration of $236.3 million on January 3, 2023, which is disclosed under investing activities in the Consolidated statement of cash flows.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 4: 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 March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| 2023 Business Realignment | $ | 36.1 | $ | 2.5 | (1) | $ | 2.8 | $ | 41.4 | ||||||||||||||||||||||||||||||||
| QCS wind down | — | — | (2.3) | (2.3) | |||||||||||||||||||||||||||||||||||||
| Other | — | 10.2 | (2) | 2.2 | 12.4 | ||||||||||||||||||||||||||||||||||||
| Total | $ | 36.1 | $ | 12.7 | $ | 2.7 | $ | 51.5 | |||||||||||||||||||||||||||||||||
(1)Includes $1.7 million property, plant and equipment asset impairments charges and $0.8 million of ROU asset impairment charges associated with the 2023 Business Realignment efforts.
(2)Includes $10.2 million of property, plant and equipment and ROU lease asset impairment charges associated with site consolidation efforts in the United States.
A summary of changes in accrued restructuring balance is as follows (in millions):
| As of | As of | |||||||||||||||||||||||||||||||
| December 31, 2022 | Charges | Usage | March 31, 2023 | |||||||||||||||||||||||||||||
| Employee separation charges | $ | 4.4 | $ | 36.1 | $ | (4.9) | $ | 35.6 | ||||||||||||||||||||||||
| Total | $ | 4.4 | $ | 36.1 | $ | (4.9) | $ | 35.6 |
2023 Business Realignment
During the first quarter of 2023, the Company announced the elimination of approximately 400 jobs in an effort to realign its operating models, drive organizational effectiveness and efficiencies, and increase collaboration primarily within its ASG business unit and IT support organizations. As a result, ASG ceased its design and test operations in certain Asia and U.S.-based locations and initiated a plan to exit its Toulouse, France design center location. The announcement also included changes in the Company's IT operating model by transferring selected IT functions to strategic service providers.
In connection with these actions, the Company recognized severance costs, related benefit expenses and other ancillary charges of $36.1 million and expects to record an additional $1.5 million during the remainder of 2023. The Company paid approximately $2.5 million of the aggregate expense and had $33.6 million accrued as of March 31, 2023, which is expected to be paid during the remainder of 2023. As of March 31, 2023, 137 employees have been terminated.
The Company continues to evaluate employee positions and locations for potential operating improvements and efficiencies, and may incur additional severance and related charges in the future.
QCS wind down
On September 16, 2022, the Company's Board of Directors approved an exit plan to wind down QCS as part of its ongoing efforts to focus on growth drivers and key markets and to streamline its operations. As part of the exit plan, during the third quarter of 2022, the Company notified approximately 330 employees of their employment termination and incurred severance costs and other benefits of approximately $12.7 million.
As of March 31, 2023, $1.5 million of severance costs and other benefits remained accrued and, based on the exit dates of the notified employees, is expected to be paid during the fourth quarter of 2023.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 5: Balance Sheet Information and Other Supplemental Disclosures
Goodwill
There was no change in the balance of goodwill from December 31, 2022 to March 31, 2023. Goodwill is tested for impairment annually on the first day of the fourth quarter or more frequently if events or changes in circumstances (each, a "triggering event") would more likely-than-not reduce the fair value of a reporting unit below its carrying value. Management did not identify any triggering events during the quarter ended March 31, 2023 that would require an interim impairment analysis.
Inventory
Details of Inventory included in the Company’s Consolidated Balance Sheets are as follows (in millions):
| As of | |||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| Inventories: | |||||||||||
| Raw materials | $ | 271.3 | $ | 236.8 | |||||||
| Work in process | 1,053.5 | 951.0 | |||||||||
| Finished goods | 490.1 | 429.0 | |||||||||
| $ | 1,814.9 | $ | 1,616.8 | ||||||||
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 March 31, 2023, the net assets for the over-funded plans totaled $13.5 million. The total accrued pension liability for underfunded plans was $69.1 million, of which the current portion of $1.5 million was classified as accrued expenses and other current liabilities. As of December 31, 2022, the net funded status for all the plans was a liability of $53.8 million, of which the current portion of $0.4 million was classified as accrued expenses and other current liabilities.
The components of the net periodic pension expense were as follows (in millions):
| Quarters Ended | |||||||||||||||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||||||||||||||
| Service cost | $ | 1.2 | $ | 2.2 | |||||||||||||||||||
| Interest cost | 1.6 | 1.1 | |||||||||||||||||||||
| Expected return on plan assets | (1.2) | (1.2) | |||||||||||||||||||||
| Total net periodic pension cost | $ | 1.6 | $ | 2.1 |
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 | |||||||||||||||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||||||||||||||
| Operating lease | $ | 12.4 | $ | 11.2 | |||||||||||||||||||
| Variable lease | 1.8 | 1.6 | |||||||||||||||||||||
| Short-term lease | 0.5 | 0.4 | |||||||||||||||||||||
| Total lease expense | $ | 14.7 | $ | 13.2 |
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
The ROU assets and lease liabilities recognized in the Consolidated Balance Sheets are as follows (in millions):
| As of | |||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| Operating lease liabilities included in: | |||||||||||
| Accrued expenses and other current liabilities | $ | 33.5 | $ | 35.2 | |||||||
| Other long-term liabilities | 244.8 | 246.5 | |||||||||
| Total | $ | 278.3 | $ | 281.7 | |||||||
| Operating ROU assets included in: | |||||||||||
| Other assets | $ | 251.9 | $ | 262.1 | |||||||
| Current portion of financing lease liabilities | $ | 11.6 | $ | 14.2 | |||||||
| Long-term financing lease liabilities | 24.0 | 23.0 | |||||||||
| Total | $ | 35.6 | $ | 37.2 | |||||||
| Right-of-use financing lease | $ | 45.2 | $ | 45.8 |
As of March 31, 2023, the weighted-average remaining lease-terms were 10.8 years and 18.8 years, and the weighted-average discount rates were 4.8% and 6.0%, for operating and financing leases, respectively.
Supplemental Disclosure of Cash Flow Information
Certain of the Company's cash and non-cash activities were as follows (in millions):
| Quarters Ended | |||||||||||||||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||||||||||||||
| Non-cash investing activities: | |||||||||||||||||||||||
| Capital expenditures in accounts payable and other long-term liabilities | $ | 388.8 | $ | 225.4 | |||||||||||||||||||
| Operating ROU assets obtained in exchange of lease liabilities | 4.6 | 10.7 | |||||||||||||||||||||
| Cash paid for: | |||||||||||||||||||||||
| Interest expense | $ | 29.1 | $ | 24.0 | |||||||||||||||||||
| Income taxes | 35.2 | 15.7 | |||||||||||||||||||||
| Operating lease payments in operating cash flows | 11.2 | 11.0 |
Reconciliation of the captions in the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows (in millions):
| As of | ||||||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | April 1, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Consolidated Balance Sheets: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 2,702.4 | $ | 2,919.0 | $ | 1,645.1 | $ | 1,352.6 | ||||||||||||||||||
| Restricted cash (included in other current assets) | 14.2 | 14.0 | 18.8 | 20.1 | ||||||||||||||||||||||
| Restricted cash (included in other non-current assets) | — | — | 5.0 | 5.0 | ||||||||||||||||||||||
| Cash, cash equivalents and restricted cash in Consolidated Statements of Cash Flows | $ | 2,716.6 | $ | 2,933.0 | $ | 1,668.9 | $ | 1,377.7 |
As of March 31, 2023, $5.8 million of the restricted cash balance relating to the acquisition of GTAT was held in escrow and will be released during the fourth quarter of 2023 upon satisfaction of certain outstanding items contained in the Agreement and Plan of Merger relating to such acquisition.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 6: Long-Term Debt
The Company's long-term debt consists of the following (annualized interest rates, dollars in millions):
| As of | |||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| Amended Credit Agreement: | |||||||||||
| Revolving Credit Facility due 2024, interest payable monthly at 6.16% and 5.67%, respectively | $ | 375.0 | $ | 500.0 | |||||||
| Term Loan "B" Facility due 2026, interest payable monthly at 6.91% and 6.42%, respectively | — | 1,086.0 | |||||||||
| 0.50% Notes due 2029 (1) | 1,500.0 | — | |||||||||
| 0% Notes due 2027 | 805.0 | 805.0 | |||||||||
| 3.875% Notes due 2028 (2) | 700.0 | 700.0 | |||||||||
| 1.625% Notes due 2023 (3) | 134.6 | 137.3 | |||||||||
| Gross long-term debt, including current maturities | $ | 3,514.6 | $ | 3,228.3 | |||||||
| Less: Debt discount (4) | (4.7) | (9.2) | |||||||||
| Less: Debt issuance costs (5) | (45.7) | (25.6) | |||||||||
| Net long-term debt, including current maturities | $ | 3,464.2 | $ | 3,193.5 | |||||||
| Less: Current maturities | (926.2) | (147.8) | |||||||||
| Net long-term debt | $ | 2,538.0 | $ | 3,045.7 |
(1)Interest is payable on March 1 and September 1 of each year at 0.50% annually.
(2)Interest is payable on March 1 and September 1 of each year at 3.875% annually.
(3)Interest is payable on April 15 and October 15 of each year at 1.625% annually.
(4)Debt discount of $0.0 million and $4.2 million for the Term Loan "B" Facility and $4.7 million and $5.0 million for the 3.875% Notes, in each case as of March 31, 2023 and December 31, 2022, respectively.
(5)Debt issuance costs of $0.0 million and $9.7 million for the Term Loan "B" Facility, $30.7 million and $0.0 million for the 0.50% Notes, $13.1 million and $13.9 million for the 0% Notes, $1.7 million and $1.7 million for the 3.875% Notes and $0.2 million and $0.3 million for the 1.625% Notes, in each case as of March 31, 2023 and December 31, 2022, respectively.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Expected maturities of gross long-term debt (including current portion - see section regarding 1.625% and 0% Notes below) as of March 31, 2023 were as follows (in millions):
| Period | Expected Maturities | |||||||
| Remainder of 2023 | $ | 939.6 | ||||||
| 2024 | 375.0 | |||||||
| 2025 | — | |||||||
| 2026 | — | |||||||
| 2027 | — | |||||||
| Thereafter | 2,200.0 | |||||||
| Total | $ | 3,514.6 |
The Company was in compliance with its covenants under all debt agreements as of March 31, 2023.
0.50% Convertible Senior Notes due 2029
On February 28, 2023, the Company completed a private unregistered offering of $1.5 billion aggregate principal amount of its 0.50% Convertible Senior Notes due 2029 (the "0.50% Notes"). The Company received net proceeds of approximately $1,470 million after deducting the initial purchasers' discount. The Company used the net proceeds to repay $1,086.0 million of the existing outstanding indebtedness under the Company’s Term Loan “B” Facility, the related transaction fees and expenses, to pay approximately $171.5 million net cost of the related convertible note hedges after such costs were offset by the proceeds from the sale of warrants, and for general corporate purposes. The 0.50% Notes were issued under an indenture (the "0.50% Indenture"), dated as of February 28, 2023, by and among the Company, the guarantors (as defined therein) and Computershare Trust Company, National Association, as trustee, which provides, among other things, that the 0.50% Notes will mature on March 1, 2029, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. On or after December 1, 2028, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 0.50% Notes may convert all or a portion of their 0.50% Notes at any time. The 0.50% Notes are the Company’s senior unsecured obligations and are fully and unconditionally guaranteed, on a joint and several basis, by each of the Company’s subsidiaries that is a borrower or guarantor under the Company’s Amended Credit Agreement. The Company may satisfy any conversion elections by paying cash up to the aggregate principal amount of the 0.50% Notes to be converted, and paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, in respect of the remainder, if any, of its conversion obligation in excess of the aggregate principal amount of the 0.50% Notes to be converted.
The initial conversion rate of the 0.50% Notes is 9.6277 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $103.87 per share of common stock. The Company may redeem for cash all or any portion of the 0.50% Notes, at the Company’s option, on or after March 6, 2026, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides the related notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Prior to December 1, 2028, the holders may convert their 0.50% Notes at their option only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2023 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five consecutive business-day period after any five consecutive trading-day period in which the trading price per $1,000 principal amount of the 0.50% Notes for each trading day of such period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (iii) if the Company calls any or all of the 0.50% Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (iv) upon the occurrence of specified corporate transactions described in the 0.50% Indenture.
The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the 0.50% Indenture. The maximum number of shares of common stock issuable in connection with the conversion of the 0.50% Notes is approximately 19.1 million. In addition to the initial purchasers' discount of $30.0 million, the Company also incurred issuance
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
costs of approximately $1.3 million, all of which was capitalized as debt issuance costs. The effective interest rate, including the impact of the debt discount and debt issuance costs is approximately 0.85% over the contractual term of the 0.50% Notes.
In addition, the Company entered into convertible note hedge transactions with respect to the common stock with the initial purchasers or their affiliates and certain other financial institutions. The Company will exercise the note hedges simultaneously when the 0.50% Notes are settled. The convertible note hedges cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie the 0.50% Notes, and are expected to reduce the potential dilution to the common stock and/or offset potential cash payments in excess of the principal amount upon conversion of the 0.50% Notes. The Company paid approximately $414.0 million in cash for the convertible note hedges, which was recorded to stockholders’ equity.
The Company also entered into warrant transactions with certain other financial institutions, whereby the Company sold warrants to acquire 14.4 million shares of the Company's common stock, which is the same number of shares of the Company’s common stock covered by the convertible note hedges at an initial strike price of $156.78 per share, which represents a 100% premium over the closing price of the Company's common stock of $78.39 per share on February 23, 2023, subject to antidilution adjustments. The warrants expire on June 1, 2029. The maximum number of shares of common stock issuable in connection with the warrants is approximately 28.9 million. The Company received $242.5 million in cash for the sale of warrants, which was recorded to stockholders’ equity.
The Company recorded $92.3 million deferred tax asset related to the tax treatment of entering into the 0.50% Notes and the convertible note hedge.
Loss on debt prepayment
As mentioned above, with a portion of the proceeds of 0.50% Convertible Senior Notes due 2029, the Company repaid the remaining principal balance of $1.1 billion associated with its Term Loan "B" Facility. As a result of the prepayment, $13.3 million of unamortized debt discount and issuance costs were expensed and recorded as loss on debt prepayment.
Repayments under the Revolving Credit Facility
During the quarter ended March 31, 2023, the Company repaid $125.0 million of the outstanding balance under the Revolving Credit Facility. As of March 31, 2023, the Company had approximately $1.6 billion available under the Revolving Credit Facility for future borrowings, except for amounts utilized for the letters of credit.
1.625% Notes due 2023
Pursuant to the indenture governing the 1.625% Notes, as of March 31, 2023, the $134.4 million remaining outstanding principal amount of the 1.625% Notes, net of unamortized issuance costs, continued to be classified as a current portion of long-term debt since the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on March 31, 2023 was greater than or equal to $26.94 (130% of the conversion price) on each applicable trading day. This condition gives holders the right to surrender any portion of their 1.625% Notes (in minimum denominations of $1,000 in principal amount or an integral multiple thereof) for conversion during the calendar quarter ending June 30, 2023, and only during such calendar quarter.
0% Notes due 2027
Pursuant to the indenture governing the 0% Notes, as of March 31, 2023, the $791.9 million outstanding principal amount of the 0% Notes, net of unamortized issuance costs, was classified as a current portion of long-term debt since the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on March 31, 2023 was greater than or equal to $68.86 (130% of the conversion price) on each applicable trading day. This condition gives holders the right to surrender any portion of their 0% Notes (in minimum denominations of $1,000 in principal amount or an integral multiple thereof) for conversion during the calendar quarter ending June 30, 2023, and only during such calendar quarter.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 7: Earnings Per Share and Equity
Earnings Per Share
Net income per share of common stock for calculating basic and diluted earnings per share is calculated as follows (in millions, except per share data):
| Quarters Ended | |||||||||||||||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||||||||||||||
| Net income for basic earnings per share of common stock | $ | 461.7 | $ | 530.2 | |||||||||||||||||||
| Add: Interest on 1.625% Notes | 0.4 | 0.5 | |||||||||||||||||||||
| Net income for diluted earnings per share of common stock | $ | 462.1 | $ | 530.7 | |||||||||||||||||||
| Basic weighted-average shares of common stock outstanding | 431.9 | 433.3 | |||||||||||||||||||||
| Dilutive effect of share-based awards | 1.4 | 2.4 | |||||||||||||||||||||
| Dilutive effect of convertible notes and warrants | 15.2 | 13.2 | |||||||||||||||||||||
| Diluted weighted-average shares of common stock outstanding | 448.5 | 448.9 | |||||||||||||||||||||
| Net income per share of common stock attributable to ON Semiconductor Corporation: | |||||||||||||||||||||||
| Basic | $ | 1.07 | $ | 1.22 | |||||||||||||||||||
| Diluted | $ | 1.03 | $ | 1.18 |
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 0.2 million and 0.2 million for the quarters ended March 31, 2023 and April 1, 2022, respectively.
The dilutive impacts related to the 0.50% Notes, 0% Notes and 1.625% Notes have been calculated using the if-converted method. The 0.50% Notes and the 0% Notes are repayable in cash up to the par value and in cash or shares of common stock for the excess over par value, while the 1.625% Notes are repayable in cash, shares of common stock, or any combination of cash and shares of common stock at the election of the Company 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 0.50% Notes, 0% Notes, and 1.625% Notes when the stock price is above $103.87, $52.97 and $20.72 per share, respectively.
The dilutive impact of the warrants issued concurrently with the issuance of the 0.50% Notes, 0% Notes and 1.625% Notes with exercise prices of $156.78, $74.34 and $30.70, respectively, has been included in the calculation of diluted weighted-average common shares outstanding, if applicable.
Equity
Share Repurchase Program
Under the Company's share repurchase program announced on February 6, 2023 (the "Share Repurchase Program"), the Company may repurchase up to $3.0 billion (exclusive of fees, commissions and other expenses) of the Company's common stock through December 31, 2025.
The Company repurchased approximately 1.3 million shares of common stock for an aggregate purchase price of $104.0 million 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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Shares for Restricted Stock Units Tax Withholding
The amounts remitted for employee withholding taxes during the quarters ended March 31, 2023 and April 1, 2022 were $47.6 million and $58.8 million, respectively, for which the Company withheld approximately 0.6 million and 1.0 million shares of common stock, respectively, that were underlying the RSUs that vested. This tax withholding activity is separate from our Share Repurchase Program.
Non-Controlling Interest in Leshan-Phoenix Semiconductor Company Limited (“Leshan”)
The results of Leshan have been consolidated in the Company's financial statements. As of December 31, 2022, the non-controlling interest, which represents 20% of the Leshan balance, amounted to $18.5 million. This amount increased to $19.0 million as of March 31, 2023, after including the $0.5 million share of earnings for the quarter ending March 31, 2023.
Note 8: 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):
| Quarters Ended | |||||||||||||||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||||||||||||||
| Cost of revenue | $ | 3.7 | $ | 2.6 | |||||||||||||||||||
| Research and development | 4.5 | 4.4 | |||||||||||||||||||||
| Selling and marketing | 4.1 | 3.8 | |||||||||||||||||||||
| General and administrative | 15.4 | 11.7 | |||||||||||||||||||||
| Share-based compensation expense | $ | 27.7 | $ | 22.5 | |||||||||||||||||||
| Income tax benefit | (5.8) | (4.7) | |||||||||||||||||||||
| Share-based compensation expense, net of taxes | $ | 21.9 | $ | 17.8 |
As of March 31, 2023, total unrecognized expected share-based compensation expense, net of estimated forfeitures, related to non-vested RSUs with service, performance and market conditions was $149.4 million, which is expected to be recognized over a weighted-average period of 1.7 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 March 31, 2023 and 6% for the quarter ended April 1, 2022.
Shares Available
As of March 31, 2023 and December 31, 2022, there was an aggregate of 38.3 million and 40.1 million shares of common stock, respectively, available for grant under the Amended and Restated SIP.
Restricted Stock Units
RSUs generally vest ratably over three years for awards with service conditions and over 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 quarter ended March 31, 2023 is as follows (in millions, except per share data):
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
| Number of Shares | Weighted-Average Grant Date Fair Value Per Share | |||||||||||||
| Non-vested RSUs at December 31, 2022 | 3.8 | $ | 46.56 | |||||||||||
| Granted | 0.9 | 77.85 | ||||||||||||
| Achieved | 0.3 | 54.16 | ||||||||||||
| Released | (1.7) | 42.12 | ||||||||||||
| Forfeited | (0.1) | 48.33 | ||||||||||||
| Non-vested RSUs at March 31, 2023 | 3.2 | 58.00 |
Note 9: Commitments and Contingencies
Environmental Contingencies
The Company has encountered and dealt with a number of environmental issues over time relating to the various locations that comprise its operations, and has incurred certain costs related to clean-up activities and environmental remediation efforts. In certain instances, the Company has been indemnified for such costs, often times from third parties who were the prior owners of such facilities. Any costs to the Company in connection with such environmental matters have generally not been, and, based on the information available, are not expected to be material.
Financing Contingencies
In the ordinary course of business, the Company provides standby letters of credit or other guarantee instruments to certain parties initiated by either the Company or its subsidiaries, as required for transactions, including, but not limited to, material purchase commitments, agreements to mitigate collection risk, leases, utilities or customs guarantees. As of March 31, 2023, 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 March 31, 2023, which reduced the Company's borrowing capacity. As of March 31, 2023, the Company also had outstanding guarantees and letters of credit outside of its Revolving Credit Facility totaling $16.5 million.
As part of obtaining financing in the ordinary course of business, the Company issued guarantees related to certain of its subsidiaries, which totaled $0.9 million as of March 31, 2023. Based on historical experience and information currently available, the Company believes that it will not be required to make payments under the standby letters of credit or guarantee arrangements for the foreseeable future.
Indemnification Contingencies
The Company is a party to a variety of agreements entered into in the ordinary course of business, including acquisition agreements, pursuant to which it may be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by the Company require it to indemnify the other party against losses due to IP infringement, property damage (including environmental contamination), personal injury, failure to comply with applicable laws, the Company’s negligence or willful misconduct or breach of representations and warranties and covenants related to such matters as title to sold assets. In the case of certain acquisition agreements, these agreements may require us to maintain such indemnification provisions for the acquiree’s directors, officers and other employees and agents, in certain cases for a number of years following the acquisition.
While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under any of these indemnities have not had a material effect on the Company’s business, financial condition, results of operations or cash flows. Additionally, the Company does not believe that any amounts that it may be required to pay under these indemnities in the future will be material to the Company’s business, financial position, results of operations, or cash flows.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Legal Matters
The Company is currently involved in a variety of legal matters that arise in the ordinary course of business. Based on information currently available, the Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations or liquidity. The litigation process is inherently uncertain, and the Company cannot guarantee that the outcome of any litigation matter will be favorable to the Company.
Intellectual Property Matters
The Company faces risk of exposure from claims of infringement of the IP rights of others. In the ordinary course of business, the Company receives letters asserting that the Company’s products or components breach another party’s rights. Such letters may request royalty payments from the Company, that the Company cease and desist using certain IP, and/or request other remedies.
Note 10: Fair Value Measurements
Fair Value of Financial Instruments
During the year ended December 31, 2022, the Company began investing portions of its excess cash in different marketable
securities, which are classified as available-for-sale.
The Company uses the following fair value tier level hierarchy to determine fair values of its financial instruments:
-
Level 1: based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets
-
Level 2: based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability either
directly or indirectly.
- Level 3: based on the use of unobservable inputs for the assets and liabilities and other types of analyses.
The carrying value of cash and cash equivalents which includes time deposits, money market funds, corporate bonds and commercial paper approximates fair value because of the short-term maturity of these instruments. Demand and time deposits and money market funds are classified as Level 1 within the fair value hierarchy, while corporate bonds and commercial paper are classified as Level 2. The carrying amount of other current assets and liabilities, such as accounts receivable and accounts payable approximates fair value due to the short-term maturity of the amounts and are considered Level 2 in the fair value hierarchy.
The following table summarizes 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):
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
| As of March 31, 2023 | Fair Value Level | |||||||||||||||||||||||||||||||||||||||||||
| Description | Amortized Cost | Unrealized gains | Unrealized losses | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||||||||||||||||||||
| Demand and time deposits | $ | 371.4 | $ | — | $ | — | $ | 371.4 | $ | 371.4 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Money market funds | 28.4 | — | — | 28.4 | 28.4 | — | — | |||||||||||||||||||||||||||||||||||||
| Other current assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 15.2 | $ | — | $ | — | $ | 15.2 | $ | — | $ | 15.2 | $ | — | ||||||||||||||||||||||||||||||
| Certificate of deposit | 2.7 | — | — | 2.7 | — | 2.7 | — | |||||||||||||||||||||||||||||||||||||
| Commercial paper | 2.2 | — | — | 2.2 | 0.2 | 2.0 | — | |||||||||||||||||||||||||||||||||||||
| US Treasury bonds | 1.7 | — | — | 1.7 | — | 1.7 | — | |||||||||||||||||||||||||||||||||||||
| Other assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 0.5 | $ | — | $ | — | $ | 0.5 | $ | — | $ | 0.5 | $ | — | ||||||||||||||||||||||||||||||
The investments included in other assets have maturity dates ranging between one and five years.
| As of December 31, 2022 | Fair Value Level | |||||||||||||||||||||||||||||||||||||||||||
| Description | Amortized Cost | Unrealized gains | Unrealized losses | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||||||||||||||||||||
| Demand and time deposits | $ | 233.1 | $ | — | $ | — | $ | 233.1 | $ | 233.1 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Money market funds | 17.0 | — | — | 17.0 | 17.0 | — | — | |||||||||||||||||||||||||||||||||||||
| Other current assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 23.8 | $ | — | $ | — | $ | 23.8 | $ | — | $ | 23.8 | $ | — | ||||||||||||||||||||||||||||||
| Certificate of deposit | 3.1 | — | — | 3.1 | — | 3.1 | — | |||||||||||||||||||||||||||||||||||||
| Commercial paper | 3.2 | — | — | 3.2 | 1.2 | 2.0 | — | |||||||||||||||||||||||||||||||||||||
| US Treasury bonds | 2.1 | — | — | 2.1 | — | 2.1 | — | |||||||||||||||||||||||||||||||||||||
| Other assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 0.8 | $ | — | $ | — | $ | 0.8 | $ | — | $ | 0.8 | $ | — | ||||||||||||||||||||||||||||||
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
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
The carrying amounts and fair values of the Company’s long-term borrowings were as follows (in millions):
| As of | |||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Long-term debt, including current portion (1) | |||||||||||||||||||||||
| 0% Notes | $ | 791.9 | $ | 1,306.2 | $ | 791.1 | $ | 1,057.8 | |||||||||||||||
| 0.50% Notes | 1,469.3 | 1,572.8 | — | — | |||||||||||||||||||
| 1.625% Notes | 134.4 | 517.6 | 137.0 | 417.8 | |||||||||||||||||||
| 3.875% Notes | 693.6 | 641.1 | 693.3 | 618.3 | |||||||||||||||||||
| Other long-term debt | 375.0 | 377.0 | 1,572.1 | 1,549.2 |
(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, 0.50% 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 11: 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 March 31, 2023, 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 March 31, 2023 and December 31, 2022, the Company had net outstanding foreign exchange contracts with notional amounts of $279.2 million and $272.0 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 | ||||||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Buy (Sell) | Notional Amount | Buy (Sell) | Notional Amount | |||||||||||||||||||||||
| Japanese Yen | 69.5 | 69.5 | 27.0 | 27.0 | ||||||||||||||||||||||
| Philippine Peso | 49.4 | 49.4 | 63.9 | 63.9 | ||||||||||||||||||||||
| Czech Koruna | 40.4 | 40.4 | 41.7 | 41.7 | ||||||||||||||||||||||
| Euro | 39.5 | 39.5 | 26.0 | 26.0 | ||||||||||||||||||||||
| Korean Won | 20.0 | 20.0 | 35.7 | 35.7 | ||||||||||||||||||||||
| Other Currencies - Buy | 46.5 | 46.5 | 66.5 | 66.5 | ||||||||||||||||||||||
| Other Currencies - Sell | (13.9) | 13.9 | (11.2) | 11.2 | ||||||||||||||||||||||
| $ | 251.4 | $ | 279.2 | $ | 249.6 | $ | 272.0 |
Amounts receivable or payable under the contracts were not material as of March 31, 2023 or December 31, 2022. During the quarters ended March 31, 2023 and April 1, 2022, net of the impact of the hedge positions, the realized and unrealized foreign currency transactions totaled a loss of $1.9 million and a gain of $1.9 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.
Interest Rate Risk
The Company uses interest rate swap contracts to mitigate its exposure to variable interest rate fluctuations.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
As of March 31, 2023, the Company did not have any outstanding derivatives related to cash flow hedges as the Company terminated its interest rate swap agreements with a notional value of $500 million for fiscal years 2023 and 2024, respectively and received cash proceeds of $27.7 million (net of termination fees). The Company recognized $6.9 million of other income related to the termination of these agreements. As of March 31, 2023, approximately $20.7 million was recorded in Accumulated Other Comprehensive Income and will be amortized to income over a period of twenty-one months, which represents the remaining original period of the swap agreements. If the Company prepays the Revolving Credit Facility balance, the Company will release the corresponding amounts from Accumulated Other Comprehensive Income concurrently.
As of December 31, 2022, the Company had interest rate swap agreements for notional amounts of $750 million, $500 million and $500 million for fiscal years 2022, 2023 and 2024, respectively. The fair value of these swaps totaled $36.0 million as of December 31, 2022. The Company did not identify any ineffectiveness with respect to the notional amounts of the interest rate swap contracts effective as of December 31, 2022. These derivatives are recognized on the balance sheet at their fair value and classified based on each instrument’s maturity dates.
See Note 13: ''Changes in Accumulated Other Comprehensive Loss'' for the effective amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive loss and the Consolidated Statements of Operations
and Comprehensive Income for the quarter ended March 31, 2023.
Convertible Note Hedges
The Company entered into convertible note hedges in connection with the issuance of the 0% Notes, 0.50% Notes and 1.625% Notes. See Note 6: ''Long-Term Debt'' for additional information.
Other
As of March 31, 2023, the Company had no outstanding commodity derivatives, currency swaps, options, or equity investments held at subsidiaries or affiliated companies. The Company does not hedge the value of its equity investments in its subsidiaries or affiliated companies.
The Company is exposed to credit-related losses if its hedge counterparties fail to perform their obligations. As of March 31, 2023, the counterparties to the Company's hedge contracts are held at financial institutions which the Company believes to be highly rated, and no credit related losses are anticipated.
Note 12: Income Taxes
The Company recognizes interest and penalties related to uncertain tax positions in tax expense on the Company's Consolidated Statements of Operations and Comprehensive Income. The Company had approximately $4.3 million and $2.7 million of net interest and penalties accrued as of March 31, 2023 and December 31, 2022, respectively. It is reasonably possible that $68.2 million of its uncertain tax positions will be reduced in the next 12 months due to settlement with tax authorities or expiration of the applicable statute of limitations.
The Company maintains a partial valuation allowance on its U.S. state deferred tax assets and a valuation allowance on foreign net operating losses and tax credits in certain foreign jurisdictions, a substantial portion of which relate to Japan and Hong Kong net operating losses, which are projected to expire prior to utilization.
The Company is currently under IRS examination for the 2017 and 2018 tax years. Tax years prior to 2017 are generally not subject to examination by the IRS. For state tax returns, the Company is generally not subject to income tax examinations for tax years prior to 2018. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates. With respect to jurisdictions outside the United States, the Company is generally not subject to examination for tax years prior to 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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 13: 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, 2022 | $ | (50.4) | $ | 27.2 | $ | (23.2) | |||||||||||||||||
| Other comprehensive income (loss) prior to reclassifications | 0.3 | 5.2 | 5.5 | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | (11.9) | (11.9) | ||||||||||||||||||||
| Net current period other comprehensive income (loss) | 0.3 | (6.7) | (6.4) | ||||||||||||||||||||
| Balance as of March 31, 2023 | $ | (50.1) | $ | 20.5 | $ | (29.6) |
Amounts reclassified from accumulated other comprehensive loss to the specific caption within Consolidated Statements of Operations and Comprehensive Income were as follows:
| Quarters Ended | ||||||||||||||||||||||||||||||||
| March 31, 2023 | April 1, 2022 | To caption | ||||||||||||||||||||||||||||||
| Interest rate swaps | $ | (5.0) | $ | 0.7 | Interest expense | |||||||||||||||||||||||||||
| Interest rate swaps terminations | (6.9) | — | Other Income | |||||||||||||||||||||||||||||
| Total reclassifications | $ | (11.9) | $ | 0.7 |
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