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)
| June 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 2,622.2 | $ | 2,919.0 | |||||||
| Receivables, net | 944.4 | 842.3 | |||||||||
| Inventories | 1,964.4 | 1,616.8 | |||||||||
| Other current assets | 399.2 | 351.3 | |||||||||
| Total current assets | 5,930.2 | 5,729.4 | |||||||||
| Property, plant and equipment, net | 3,991.4 | 3,450.7 | |||||||||
| Goodwill | 1,577.6 | 1,577.6 | |||||||||
| Intangible assets, net | 326.3 | 359.7 | |||||||||
| Deferred tax assets | 502.4 | 376.7 | |||||||||
| ROU financing lease assets | 44.6 | 45.8 | |||||||||
| Other assets | 390.2 | 438.6 | |||||||||
| Total assets | $ | 12,762.7 | $ | 11,978.5 | |||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Accounts payable | $ | 907.5 | $ | 852.1 | |||||||
| Accrued expenses and other current liabilities | 654.1 | 1,047.3 | |||||||||
| Current portion of financing lease liabilities | 7.0 | 14.2 | |||||||||
| Current portion of long-term debt | 912.1 | 147.8 | |||||||||
| Total current liabilities | 2,480.7 | 2,061.4 | |||||||||
| Long-term debt | 2,539.6 | 3,045.7 | |||||||||
| Deferred tax liabilities | 37.7 | 34.1 | |||||||||
| Long-term financing lease liabilities | 24.1 | 23.0 | |||||||||
| Other long-term liabilities | 677.0 | 607.3 | |||||||||
| Total liabilities | 5,759.1 | 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, 611,286,417 and 608,367,713 issued, 431,520,606 and 431,936,415 outstanding, respectively) | 6.1 | 6.1 | |||||||||
| Additional paid-in capital | 4,714.6 | 4,670.9 | |||||||||
| Accumulated other comprehensive loss | (37.4) | (23.2) | |||||||||
| Accumulated earnings | 5,402.7 | 4,364.4 | |||||||||
| Less: Treasury stock, at cost: 179,765,811 and 176,431,298 shares, respectively | (3,101.9) | (2,829.7) | |||||||||
| Total ON Semiconductor Corporation stockholders’ equity | 6,984.1 | 6,188.5 | |||||||||
| Non-controlling interest | 19.5 | 18.5 | |||||||||
| Total stockholders’ equity | 7,003.6 | 6,207.0 | |||||||||
| Total liabilities and stockholders’ equity | $ | 12,762.7 | $ | 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 | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | ||||||||||||||||||||
| Revenue | $ | 2,094.4 | $ | 2,085.0 | $ | 4,054.1 | $ | 4,030.0 | |||||||||||||||
| Cost of revenue | 1,101.0 | 1,047.9 | 2,143.2 | 2,031.6 | |||||||||||||||||||
| Gross profit | 993.4 | 1,037.1 | 1,910.9 | 1,998.4 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 145.3 | 161.6 | 283.7 | 318.4 | |||||||||||||||||||
| Selling and marketing | 71.6 | 73.1 | 143.4 | 144.2 | |||||||||||||||||||
| General and administrative | 87.2 | 83.2 | 163.1 | 161.1 | |||||||||||||||||||
| Amortization of acquisition-related intangible assets | 12.0 | 21.9 | 27.0 | 43.2 | |||||||||||||||||||
| Restructuring, asset impairments and other charges, net | 2.6 | (1.7) | 54.1 | (14.7) | |||||||||||||||||||
| Goodwill and intangible asset impairment charges | — | 115.0 | — | 115.0 | |||||||||||||||||||
| Total operating expenses | 318.7 | 453.1 | 671.3 | 767.2 | |||||||||||||||||||
| Operating income | 674.7 | 584.0 | 1,239.6 | 1,231.2 | |||||||||||||||||||
| Other income (expense), net: | |||||||||||||||||||||||
| Interest expense | (16.4) | (22.1) | (42.8) | (43.7) | |||||||||||||||||||
| Interest income | 24.0 | 1.1 | 41.1 | 1.5 | |||||||||||||||||||
| Loss on debt prepayment | — | (7.3) | (13.3) | (7.3) | |||||||||||||||||||
| Gain (loss) on divestiture of business | 0.5 | 1.9 | (0.6) | 1.9 | |||||||||||||||||||
| Other income (expense) | (1.3) | 6.4 | 3.4 | 8.5 | |||||||||||||||||||
| Other income (expense), net | 6.8 | (20.0) | (12.2) | (39.1) | |||||||||||||||||||
| Income before income taxes | 681.5 | 564.0 | 1,227.4 | 1,192.1 | |||||||||||||||||||
| Income tax provision | (104.4) | (107.4) | (188.1) | (204.5) | |||||||||||||||||||
| Net income | 577.1 | 456.6 | 1,039.3 | 987.6 | |||||||||||||||||||
| Less: Net income attributable to non-controlling interest | (0.5) | (0.8) | (1.0) | (1.6) | |||||||||||||||||||
| Net income attributable to ON Semiconductor Corporation | $ | 576.6 | $ | 455.8 | $ | 1,038.3 | $ | 986.0 | |||||||||||||||
| Net income for diluted earnings per share of common stock (Note 7) | $ | 577.0 | $ | 456.3 | $ | 1,039.1 | $ | 987.0 | |||||||||||||||
| Net income per share of common stock attributable to ON Semiconductor Corporation: | |||||||||||||||||||||||
| Basic | $ | 1.34 | $ | 1.05 | $ | 2.40 | $ | 2.27 | |||||||||||||||
| Diluted | $ | 1.29 | $ | 1.02 | $ | 2.32 | $ | 2.20 | |||||||||||||||
| Weighted-average shares of common stock outstanding: | |||||||||||||||||||||||
| Basic | 431.7 | 434.2 | 431.8 | 433.8 | |||||||||||||||||||
| Diluted | 448.7 | 447.0 | 448.6 | 448.1 | |||||||||||||||||||
| Comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Net income | $ | 577.1 | $ | 456.6 | $ | 1,039.3 | $ | 987.6 | |||||||||||||||
| Foreign currency translation adjustments | (3.0) | (4.2) | (2.7) | (6.6) | |||||||||||||||||||
| Effects of cash flow hedges and other adjustments | (4.8) | 1.3 | (11.5) | 17.9 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | (7.8) | (2.9) | (14.2) | 11.3 | |||||||||||||||||||
| Comprehensive income | 569.3 | 453.7 | 1,025.1 | 998.9 | |||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | (0.5) | (0.8) | (1.0) | (1.6) | |||||||||||||||||||
| Comprehensive income attributable to ON Semiconductor Corporation | $ | 568.8 | $ | 452.9 | $ | 1,024.1 | $ | 997.3 |
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 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 | |||||||||||||
| Shares issued pursuant to the ESPP | 83,858 | — | 5.9 | — | — | — | — | — | 5.9 | ||||||||||||||||||||
| RSUs released and stock grant awards issued | 396,303 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement - 1.625% Notes | 528,213 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement of bond hedges - 1.625% Notes | — | — | 43.5 | — | — | (528,205) | (43.5) | — | — | ||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | (116,917) | (9.8) | — | (9.8) | ||||||||||||||||||||
| Share-based compensation | — | — | 31.6 | — | — | — | — | — | 31.6 | ||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (693,736) | (60.4) | — | (60.4) | ||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | (7.8) | 576.6 | — | — | 0.5 | 569.3 | ||||||||||||||||||||
| Balance at June 30, 2023 | 611,286,417 | $ | 6.1 | $ | 4,714.6 | $ | (37.4) | $ | 5,402.7 | (179,765,811) | $ | (3,101.9) | $ | 19.5 | $ | 7,003.6 | |||||||||||||
| 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 | 220,714 | — | 13.2 | — | — | — | — | — | 13.2 | ||||||||||||||||||||
| RSUs released and stock grant awards issued | 2,076,679 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Warrants and bond hedges, net - 0.50% Notes | — | — | (171.5) | — | — | — | — | — | (171.5) | ||||||||||||||||||||
| Tax impact of warrants and bond hedges, net | — | — | 92.3 | — | — | — | — | — | 92.3 | ||||||||||||||||||||
| Partial settlement - 1.625% Notes | 621,311 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement of bond hedges - 1.625% Notes | — | — | 50.4 | — | — | (621,303) | (50.4) | — | — | ||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | (695,323) | (57.4) | — | (57.4) | ||||||||||||||||||||
| Share-based compensation | — | — | 59.3 | — | — | — | — | — | 59.3 | ||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (2,017,887) | (164.4) | — | (164.4) | ||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | (14.2) | 1,038.3 | — | — | 1.0 | 1,025.1 | ||||||||||||||||||||
| Balance at June 30, 2023 | 611,286,417 | $ | 6.1 | $ | 4,714.6 | $ | (37.4) | $ | 5,402.7 | (179,765,811) | $ | (3,101.9) | $ | 19.5 | $ | 7,003.6 |
| Balance at April 1, 2022 | 606,021,655 | $ | 6.1 | $ | 4,533.3 | $ | (26.4) | $ | 2,992.4 | (171,526,902) | $ | (2,507.2) | $ | 19.8 | $ | 5,018.0 | |||||||||||||
| Shares issued pursuant to the ESPP | 127,830 | — | 5.5 | — | — | — | — | — | 5.5 | ||||||||||||||||||||
| RSUs released and stock grant awards issued | 277,961 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement - 1.625% Notes | 238 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement of bond hedges - 1.625% Notes | — | — | — | — | — | (232) | — | — | — | ||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | (77,690) | (4.5) | — | (4.5) | ||||||||||||||||||||
| Share-based compensation | — | — | 27.1 | — | — | — | — | — | 27.1 | ||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (1,500,000) | (89.7) | — | (89.7) | ||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | (2.9) | 455.8 | — | — | 0.8 | 453.7 | ||||||||||||||||||||
| Balance at July 1, 2022 | 606,427,684 | $ | 6.1 | $ | 4,565.9 | $ | (29.3) | $ | 3,448.2 | (173,104,824) | $ | (2,601.4) | $ | 20.6 | $ | 5,410.1 | |||||||||||||
| Balance at December 31, 2021 | 603,044,079 | $ | 6.0 | $ | 4,633.3 | $ | (40.6) | $ | 2,435.1 | (170,571,261) | $ | (2,448.4) | $ | 19.0 | $ | 4,604.4 | |||||||||||||
| Impact of the adoption of ASU 2020-06 | — | — | (129.1) | — | 27.1 | — | — | — | (102.0) | ||||||||||||||||||||
| Shares issued pursuant to the ESPP | 254,218 | — | 12.2 | — | — | — | — | — | 12.2 | ||||||||||||||||||||
| RSUs released and stock grant awards issued | 3,129,149 | 0.1 | (0.1) | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement - 1.625% Notes | 238 | — | — | — | — | — | — | — | — | ||||||||||||||||||||
| Partial settlement of bond hedges - 1.625% Notes | — | — | — | — | — | (232) | — | — | — | ||||||||||||||||||||
| Payment of tax withholding for RSUs | — | — | — | — | — | (1,033,331) | (63.3) | — | (63.3) | ||||||||||||||||||||
| Share-based compensation | — | — | 49.6 | — | — | — | — | — | 49.6 | ||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (1,500,000) | (89.7) | — | (89.7) | ||||||||||||||||||||
| Comprehensive income | — | — | — | 11.3 | 986.0 | — | — | 1.6 | 998.9 | ||||||||||||||||||||
| Balance at July 1, 2022 | 606,427,684 | $ | 6.1 | $ | 4,565.9 | $ | (29.3) | $ | 3,448.2 | (173,104,824) | $ | (2,601.4) | $ | 20.6 | $ | 5,410.1 |
See accompanying notes to consolidated financial statements
ON SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
| Six Months Ended | |||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 1,039.3 | $ | 987.6 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 293.8 | 279.0 | |||||||||
| Loss (gain) on sale or disposal of fixed assets | 4.8 | (16.6) | |||||||||
| Loss (gain) on divestiture of business | 0.6 | (1.9) | |||||||||
| Loss on debt prepayment | 13.3 | 7.3 | |||||||||
| Amortization of debt discount and issuance costs | 5.8 | 6.0 | |||||||||
| Share-based compensation | 59.3 | 49.6 | |||||||||
| Non-cash asset impairment charges | 12.7 | 6.7 | |||||||||
| Goodwill and intangible asset impairment charges | — | 115.0 | |||||||||
| Change in deferred tax balances | (29.6) | 6.7 | |||||||||
| Other | (9.3) | 1.3 | |||||||||
| Changes in assets and liabilities (exclusive of divestitures): | |||||||||||
| Receivables | (106.0) | (344.4) | |||||||||
| Inventories | (347.8) | (184.5) | |||||||||
| Other assets | (29.6) | (51.5) | |||||||||
| Accounts payable | (25.6) | 58.1 | |||||||||
| Accrued expenses and other current liabilities | (175.3) | 9.2 | |||||||||
| Other long-term liabilities | 93.3 | (28.2) | |||||||||
| Net cash provided by operating activities | $ | 799.7 | $ | 899.4 | |||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property, plant and equipment | $ | (752.1) | $ | (391.9) | |||||||
| Proceeds from sale of property, plant and equipment | 2.6 | 38.2 | |||||||||
| Deposits utilized (made) for purchase of property, plant and equipment | 19.5 | (31.4) | |||||||||
| Divestiture of business, net of cash transferred | — | 90.5 | |||||||||
| Purchase of available-for-sale securities | — | (16.3) | |||||||||
| Proceeds from sale or maturity of available-for-sale securities | 20.8 | 13.8 | |||||||||
| Payments related to acquisition of business | (236.3) | (2.4) | |||||||||
| Net cash used in investing activities | $ | (945.5) | $ | (299.5) | |||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds for the issuance of common stock under the ESPP | $ | 13.2 | $ | 12.5 | |||||||
| Payment of tax withholding for RSUs | (56.5) | (63.3) | |||||||||
| Repurchase of common stock | (164.1) | (89.7) | |||||||||
| Issuance and borrowings under debt agreements | 1,845.0 | 500.0 | |||||||||
| Reimbursement of debt issuance and other financing costs | 4.5 | — | |||||||||
| Payment of debt issuance and other financing costs | (11.3) | — | |||||||||
| Repayment of borrowings under debt agreements | (1,603.7) | (506.8) | |||||||||
| Payment for purchase of bond hedges | (414.0) | — | |||||||||
| Proceeds from issuance of warrants | 242.5 | — | |||||||||
| Payment of financing lease obligations | (8.6) | (10.9) | |||||||||
| Dividend to non-controlling shareholder | — | (2.2) | |||||||||
| Net cash used in financing activities | $ | (153.0) | $ | (160.4) | |||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1.0) | (2.6) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | (299.8) | 436.9 | |||||||||
| 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) | $ | 2,633.2 | $ | 1,814.6 |
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, with each fiscal quarter containing a thirteen-week accounting period. The quarters ended June 30, 2023 and July 1, 2022 contained 91 days each. The six months ended June 30, 2023 and July 1, 2022 contained 181 days and 182 days, respectively.
The accompanying unaudited financial statements as of and for the quarter and six months ended June 30, 2023 have been prepared following generally accepted accounting principles in the United States of America ("GAAP") for interim financial reporting and the rules and regulations of the SEC for interim reporting. Accordingly, the unaudited financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. The balance sheet as of December 31, 2022 was derived from the Company's audited financial statements but does not include all disclosures required by GAAP for annual financial statements. In management's opinion, the interim information contains all adjustments, which include normal recurring adjustments necessary for a fair statement of the results for the interim periods. The footnote disclosures related to the interim financial information contained herein are also unaudited. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto for the year ended December 31, 2022, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 6, 2023 (the "2022 Form 10-K").
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Management evaluates these estimates and judgments on an ongoing basis and bases its estimates on experience, current and expected future conditions, third-party evaluations, and various other assumptions that management believes are reasonable under the circumstances. Significant estimates have been used by management in conjunction with the following: (i) calculating future payouts for customer incentives and amounts subject to allowances and returns; (ii) valuation and obsolescence relating to inventories; (iii) measurement of valuation allowances against deferred tax assets and evaluations of uncertain tax positions; and (iv) cash flow projections for impairment of long-lived assets and goodwill. Additionally, during periods where it becomes applicable, significant estimates will be used by management in determining the future cash flows in assumptions used in business combinations. Actual results may differ from the estimates and assumptions used in the consolidated financial statements.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 2: Revenue and Segment Information
A significant portion of the Company’s revenue orders are firm commitments that are non-cancellable, including certain orders or contracts with a duration of one year or less. Certain customer contracts are multi-year agreements that include committed amounts ("Long-term Supply Agreements" or "LTSAs").
The estimated remaining performance obligations as of June 30, 2023 are approximately $20.0 billion (excluding the remaining performance obligations for contracts having an original duration of one year or less). This amount is subject to contractual increases based on negotiated contract prices and volumes, defined product mix flexibility, and the timing of new part introductions, among other contractual provisions. The Company expects to recognize approximately 32% of the remaining purchase obligation as revenue during the next 12 months upon shipment of products under these contracts. Total revenue estimates could be influenced by risks and uncertainties, including manufacturing or supply chain constraints, modifications to customer agreements, and regulatory changes, among other factors. Accordingly, the actual revenue recognized for the remaining performance obligation in future periods may significantly fluctuate from these estimates.
Certain LTSAs include non-cancellable capacity payments from the customer, which are generally due within 30 days of the agreement. These payments reserve production availability or are prepayments for the same purpose and are not recognized as revenue until the performance obligations are satisfied. For the quarters and six months ending June 30, 2023, and July 1, 2022, the Company recognized revenue of $16.8 million and $4.6 million, and $31.6 million and $9.1 million, respectively, representing the corresponding portions of performance obligations fulfilled.
As of June 30, 2023, and December 31, 2022, the remaining capacity payments were $317.9 million and $190.4 million, respectively, of which $88.8 million and $60.5 million were recorded as other current liabilities, with the remainder recorded as other long-term liabilities.
The Company is organized into three operating and reportable segments consisting of PSG, ASG and ISG. These segments represent management's view of the business, and gross profit is used to evaluate its performance, the progress of major initiatives and the allocation of resources. During the quarter ended June 30, 2023, management reorganized and consolidated the existing divisions within ASG from the divisions of Automotive (AUT), Mobile, Computing and Cloud (MCC), and Industrial Solutions (ISD) to the divisions of Power Management (PMD) and Sensor Interface (SID). Management performed a goodwill impairment analysis on AUT, MCC and ISD (which are the reporting units) prior to the reorganization and no impairments were identified. Goodwill assigned to AUT, MCC and ISD was reallocated to PMD and SID based on the relative fair value of the businesses transferred. There were no changes to the presentation of operating and reportable segments due to this reorganization.
Revenue and gross profit for the operating and reportable segments are as follows (in millions):
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| For the quarter ended June 30, 2023: | |||||||||||||||||||||||
| Revenue from external customers | $ | 1,119.8 | $ | 649.5 | $ | 325.1 | $ | 2,094.4 | |||||||||||||||
| Gross profit | $ | 536.7 | $ | 301.5 | $ | 155.2 | $ | 993.4 | |||||||||||||||
| For the quarter ended July 1, 2022: | |||||||||||||||||||||||
| Revenue from external customers | $ | 1,057.0 | $ | 716.7 | $ | 311.3 | $ | 2,085.0 | |||||||||||||||
| Gross profit | $ | 511.2 | $ | 380.3 | $ | 145.6 | $ | 1,037.1 | |||||||||||||||
| For the six months ended June 30, 2023: | |||||||||||||||||||||||
| Revenue from external customers | $ | 2,132.6 | $ | 1,242.3 | $ | 679.2 | $ | 4,054.1 | |||||||||||||||
| Gross profit | $ | 1,017.0 | $ | 561.6 | $ | 332.3 | $ | 1,910.9 | |||||||||||||||
| For the six months ended July 1, 2022: | |||||||||||||||||||||||
| Revenue from external customers | $ | 2,043.7 | $ | 1,406.0 | $ | 580.3 | $ | 4,030.0 | |||||||||||||||
| Gross profit | $ | 985.9 | $ | 747.0 | $ | 265.5 | $ | 1,998.4 |
The Company had one customer, a distributor, whose revenue accounted for approximately 10.9% and 12% of the total revenue for the quarters ended June 30, 2023 and July 1, 2022, respectively, and 10.1% and 12% of the total revenue for the six months ended June 30, 2023 and July 1, 2022, respectively.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Revenue for the operating and reportable segments disaggregated into geographic locations based on sales billed from the respective country and sales channels are as follows (in millions):
| Quarter Ended June 30, 2023 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Hong Kong | $ | 325.6 | $ | 144.6 | $ | 60.0 | $ | 530.2 | |||||||||||||||
| Singapore | 331.2 | 138.4 | 49.7 | 519.3 | |||||||||||||||||||
| United Kingdom | 227.0 | 130.7 | 91.7 | 449.4 | |||||||||||||||||||
| United States | 159.7 | 144.8 | 76.4 | 380.9 | |||||||||||||||||||
| Other | 76.3 | 91.0 | 47.3 | 214.6 | |||||||||||||||||||
| Total | $ | 1,119.8 | $ | 649.5 | $ | 325.1 | $ | 2,094.4 | |||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | 682.6 | $ | 292.4 | $ | 152.7 | $ | 1,127.7 | |||||||||||||||
| Direct customers | 437.2 | 357.1 | 172.4 | 966.7 | |||||||||||||||||||
| Total | $ | 1,119.8 | $ | 649.5 | $ | 325.1 | $ | 2,094.4 | |||||||||||||||
| Six Months Ended June 30, 2023 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Hong Kong | $ | 612.5 | $ | 284.3 | $ | 123.8 | $ | 1,020.6 | |||||||||||||||
| Singapore | 607.6 | 254.5 | 107.9 | 970.0 | |||||||||||||||||||
| United Kingdom | 431.1 | 258.8 | 172.8 | 862.7 | |||||||||||||||||||
| United States | 326.0 | 266.1 | 177.9 | 770.0 | |||||||||||||||||||
| Other | 155.4 | 178.6 | 96.8 | 430.8 | |||||||||||||||||||
| Total | $ | 2,132.6 | $ | 1,242.3 | $ | 679.2 | $ | 4,054.1 | |||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | 1,311.9 | $ | 515.2 | $ | 339.8 | $ | 2,166.9 | |||||||||||||||
| Direct customers | 820.7 | 727.1 | 339.4 | 1,887.2 | |||||||||||||||||||
| Total | $ | 2,132.6 | $ | 1,242.3 | $ | 679.2 | $ | 4,054.1 |
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
| Quarter Ended July 1, 2022 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Hong Kong | $ | 326.5 | $ | 181.7 | $ | 76.2 | $ | 584.4 | |||||||||||||||
| Singapore | 292.3 | 221.0 | 42.4 | 555.7 | |||||||||||||||||||
| United Kingdom | 182.7 | 109.4 | 67.7 | 359.8 | |||||||||||||||||||
| United States | 180.1 | 107.0 | 74.1 | 361.2 | |||||||||||||||||||
| Other | 75.4 | 97.6 | 50.9 | 223.9 | |||||||||||||||||||
| Total | $ | 1,057.0 | $ | 716.7 | $ | 311.3 | $ | 2,085.0 | |||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | 696.4 | $ | 372.8 | $ | 164.5 | $ | 1,233.7 | |||||||||||||||
| Direct customers | 360.6 | 343.9 | 146.8 | 851.3 | |||||||||||||||||||
| Total | $ | 1,057.0 | $ | 716.7 | $ | 311.3 | $ | 2,085.0 | |||||||||||||||
| Six Months Ended July 1, 2022 | |||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||
| Hong Kong | $ | 629.6 | $ | 355.6 | $ | 128.8 | $ | 1,114.0 | |||||||||||||||
| Singapore | 572.8 | 454.8 | 83.9 | 1,111.5 | |||||||||||||||||||
| United Kingdom | 369.5 | 216.0 | 119.7 | 705.2 | |||||||||||||||||||
| United States | 325.0 | 199.3 | 148.7 | 673.0 | |||||||||||||||||||
| Other | 146.8 | 180.3 | 99.2 | 426.3 | |||||||||||||||||||
| Total | $ | 2,043.7 | $ | 1,406.0 | $ | 580.3 | $ | 4,030.0 | |||||||||||||||
| Sales Channel | |||||||||||||||||||||||
| Distributors | $ | 1,330.3 | $ | 729.7 | $ | 315.0 | $ | 2,375.0 | |||||||||||||||
| Direct customers | 713.4 | 676.3 | 265.3 | 1,655.0 | |||||||||||||||||||
| Total | $ | 2,043.7 | $ | 1,406.0 | $ | 580.3 | $ | 4,030.0 |
The Company operates in various geographic locations. Sales to external customers have little correlation to where products are manufactured or the location of the end-customers. It is, therefore, not meaningful to present operating profit by geographical location. The Company does not discretely allocate assets to its operating segments, nor does management evaluate operating segments using discrete asset information. The consolidated assets used in manufacturing are generally shared across and are not specifically ascribed to operating and reportable segments.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Property, plant and equipment, net by geographic location, is summarized below (in millions):
| As of | |||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| United States | $ | 1,380.0 | $ | 1,329.2 | |||||||
| South Korea | 1,133.1 | 871.0 | |||||||||
| Czech Republic | 448.5 | 279.3 | |||||||||
| Philippines | 273.5 | 296.8 | |||||||||
| China | 239.9 | 215.3 | |||||||||
| Malaysia | 199.2 | 190.2 | |||||||||
| Japan | 125.7 | 133.2 | |||||||||
| Other | 191.5 | 135.7 | |||||||||
| Total | $ | 3,991.4 | $ | 3,450.7 |
Note 3: Acquisition and Divestitures
Acquisition:
During the quarter ended June 30, 2023, the Company finalized its determination relating to the fair value of assets acquired and liabilities assumed from the EFK acquisition, which was completed on December 31, 2022. The final allocation of the purchase price, which is materially consistent with the preliminary allocation disclosed in the 2022 Form 10-K, is as follows (in millions):
| Purchase Price Allocation | ||||||||
| Inventory | $ | 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 |
All other assumptions and disclosures are materially consistent with the amounts included in the 2022 Form 10-K. The Company paid the remaining acquisition consideration of $236.3 million on January 3, 2023, which is disclosed under investing activities in the Consolidated Statement of Cash Flows.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 4: Restructuring, Asset Impairments and Other Charges, Net
Details of restructuring, asset impairments and other charges, net are as follows (in millions):
| Restructuring | Asset Impairments | Other Charges | Total | ||||||||||||||||||||||||||||||||||||||
| Quarter ended June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| 2023 Business Realignment | $ | 3.1 | $ | — | $ | — | $ | 3.1 | |||||||||||||||||||||||||||||||||
| Other | — | — | (0.5) | (0.5) | |||||||||||||||||||||||||||||||||||||
| Total | $ | 3.1 | $ | — | $ | (0.5) | $ | 2.6 | |||||||||||||||||||||||||||||||||
| Restructuring | Asset Impairments | Other Charges | Total | ||||||||||||||||||||||||||||||||||||||
| Six months ended June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| 2023 Business Realignment | $ | 39.2 | $ | 2.5 | $ | 2.8 | $ | 44.5 | |||||||||||||||||||||||||||||||||
| QCS wind down | — | — | (2.4) | (2.4) | |||||||||||||||||||||||||||||||||||||
| Other | — | 10.2 | (1) | 1.8 | 12.0 | ||||||||||||||||||||||||||||||||||||
| Total | $ | 39.2 | $ | 12.7 | $ | 2.2 | $ | 54.1 |
(1)Relates to property, plant and equipment and ROU asset impairment charges associated with site consolidation efforts in the U.S.
A summary of changes in accrued restructuring balance is as follows (in millions):
| As of | As of | |||||||||||||||||||||||||||||||
| December 31, 2022 | Charges | Usage | June 30, 2023 | |||||||||||||||||||||||||||||
| Employee separation charges | $ | 4.4 | $ | 39.2 | $ | (14.6) | $ | 29.0 | ||||||||||||||||||||||||
| Total | $ | 4.4 | $ | 39.2 | $ | (14.6) | $ | 29.0 |
2023 Business Realignment
During the first quarter of 2023, the Company announced the elimination of approximately 400 jobs in an effort to realign its operating models, drive organizational effectiveness and efficiencies, and increase collaboration primarily within its ASG operating segment and IT support organizations. As a result, ASG ceased its design and test operations in certain Asia and U.S.-based locations and initiated a plan to exit its Toulouse, France design center location. The announcement also included changes in the IT operating model by transferring selected IT functions to strategic service providers. During the second quarter of 2023, an additional 60 employees were notified of their employment termination for similar reasons.
In connection with these actions, severance costs, related benefit expenses and other ancillary charges of $39.2 million were recognized with an insignificant amount expected to be recorded during the remainder of 2023. The Company paid approximately $11.5 million of the aggregate expense for the 293 terminated employees and had $27.7 million accrued as of June 30, 2023. The remaining employees subject to this realignment are expected to be terminated and paid any applicable severance and related benefit payments over the next nine months.
The Company continues to evaluate employee positions and locations for potential operating improvements and efficiencies, and may incur additional severance and related charges in the future.
QCS wind down
As of June 30, 2023, $0.7 million of severance costs and other benefits originally accrued under the QCS wind down plan 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 June 30, 2023. Goodwill is tested for impairment annually on the first day of the fourth quarter or more frequently if events or changes in circumstances (each, a "triggering event") would more likely-than-not reduce the fair value of a reporting unit below its carrying value. Management did not identify any triggering events during the quarter ended June 30, 2023 that would require an interim impairment analysis.
Inventory
Details of Inventory included in the Consolidated Balance Sheets are as follows (in millions):
| As of | |||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| Inventories: | |||||||||||
| Raw materials | $ | 336.9 | $ | 236.8 | |||||||
| Work in process | 1,177.9 | 951.0 | |||||||||
| Finished goods | 449.6 | 429.0 | |||||||||
| $ | 1,964.4 | $ | 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 June 30, 2023, the net assets for the over-funded plans totaled $12.9 million. The total accrued pension liability for underfunded plans was $68.8 million, of which the current portion of $1.3 million was classified as accrued expenses and other current liabilities. As of December 31, 2022, the net funded status for all the plans was a liability of $53.8 million, of which the current portion of $0.4 million was classified as accrued expenses and other current liabilities.
The components of the net periodic pension expense were as follows (in millions):
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | ||||||||||||||||||||
| Service cost | $ | 1.2 | $ | 2.2 | $ | 2.4 | $ | 4.4 | |||||||||||||||
| Interest cost | 1.6 | 1.0 | 3.2 | 2.1 | |||||||||||||||||||
| Expected return on plan assets | (1.2) | (1.1) | (2.4) | (2.3) | |||||||||||||||||||
| Total net periodic pension cost | $ | 1.6 | $ | 2.1 | $ | 3.2 | $ | 4.2 |
Leases
Operating lease arrangements are comprised primarily of real estate and equipment agreements. The components of lease expense were as follows (in millions):
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | ||||||||||||||||||||
| Operating lease | $ | 12.0 | $ | 11.7 | $ | 24.3 | $ | 22.9 | |||||||||||||||
| Variable lease | 1.0 | 4.1 | 2.8 | 5.7 | |||||||||||||||||||
| Short-term lease | 0.7 | 0.8 | 1.2 | 1.2 | |||||||||||||||||||
| Total lease expense | $ | 13.7 | $ | 16.6 | $ | 28.3 | $ | 29.8 |
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
The ROU assets and lease liabilities for operating leases recognized in the Consolidated Balance Sheets are as follows (in millions):
| As of | |||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| Operating lease liabilities included in: | |||||||||||
| Accrued expenses and other current liabilities | $ | 30.0 | $ | 35.2 | |||||||
| Other long-term liabilities | 233.1 | 246.5 | |||||||||
| Total | $ | 263.1 | $ | 281.7 | |||||||
| Operating ROU assets included in: | |||||||||||
| Other assets | $ | 247.2 | $ | 262.1 | |||||||
As of June 30, 2023, the weighted-average remaining lease-terms were 11.1 years and 18.5 years, and the weighted-average discount rates were 4.8% and 6.0%, for operating leases and financing leases, respectively.
Supplemental Disclosure of Cash Flow Information
Certain of the cash and non-cash activities were as follows (in millions):
| Six Months Ended | |||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | ||||||||||||||||||||||
| Non-cash investing activities: | |||||||||||||||||||||||
| Capital expenditures in accounts payable and other long-term liabilities | $ | 392.5 | $ | 259.9 | |||||||||||||||||||
| Operating ROU assets obtained in exchange of lease liabilities | 8.1 | 88.1 | |||||||||||||||||||||
| Cash paid for: | |||||||||||||||||||||||
| Interest expense | $ | 41.3 | $ | 35.6 | |||||||||||||||||||
| Income taxes | 227.6 | 202.8 | |||||||||||||||||||||
| Operating lease payments in operating cash flows | 22.1 | 22.5 |
Reconciliation of the captions in the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows (in millions):
| As of | ||||||||||||||||||||||||||
| June 30, 2023 | December 31, 2022 | July 1, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Consolidated Balance Sheets: | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 2,622.2 | $ | 2,919.0 | $ | 1,791.6 | $ | 1,352.6 | ||||||||||||||||||
| Restricted cash (included in other current assets) | 11.0 | 14.0 | 18.0 | 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 | $ | 2,633.2 | $ | 2,933.0 | $ | 1,814.6 | $ | 1,377.7 |
As of June 30, 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
Long-term debt consists of the following (in millions, with annualized interest rates):
| As of | |||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| New Credit Agreement: | |||||||||||
| Revolving Credit Facility due 2028, interest payable monthly at 6.43% | $ | 375.0 | $ | — | |||||||
| Existing Credit Agreement: | |||||||||||
| Revolving Credit Facility due 2024, interest payable monthly at 5.67% | — | 500.0 | |||||||||
| Term Loan "B" Facility due 2026, interest payable monthly at 6.42% | — | 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) | 119.6 | 137.3 | |||||||||
| Gross long-term debt, including current maturities | $ | 3,499.6 | $ | 3,228.3 | |||||||
| Less: Debt discount (4) | (4.5) | (9.2) | |||||||||
| Less: Debt issuance costs (5) | (43.4) | (25.6) | |||||||||
| Net long-term debt, including current maturities | $ | 3,451.7 | $ | 3,193.5 | |||||||
| Less: Current maturities | (912.1) | (147.8) | |||||||||
| Net long-term debt | $ | 2,539.6 | $ | 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 $4.5 million and $5.0 million for the 3.875% Notes, in each case as of June 30, 2023 and December 31, 2022, respectively.
(5)Debt issuance costs of $0.0 million and $9.7 million for the Term Loan "B" Facility, $29.4 million and $0.0 million for the 0.50% Notes, $12.4 million and $13.9 million for the 0% Notes, $1.5 million and $1.7 million for the 3.875% Notes and $0.1 million and $0.3 million for the 1.625% Notes, in each case as of June 30, 2023 and December 31, 2022, respectively.
Expected maturities of gross long-term debt (including current portion - see sections regarding 1.625% Notes and 0% Notes) as of June 30, 2023 were as follows (in millions):
| Period | Expected Maturities | |||||||
| Remainder of 2023 | $ | 924.6 | ||||||
| 2024 | — | |||||||
| 2025 | — | |||||||
| 2026 | — | |||||||
| 2027 | — | |||||||
| Thereafter | 2,575.0 | |||||||
| Total | $ | 3,499.6 |
The Company was in compliance with its covenants under all debt agreements as of June 30, 2023, and expects to remain in compliance with all covenants over at least the next 12 months.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
New Credit Agreement
On June 22, 2023, the Company entered into the New Credit Agreement by and among the Company, JP Morgan Chase Bank, N.A., as Administrative Agent (the “Agent”), and the other financial institutions party thereto as Lenders (collectively, the “Lenders” and individually each a “Lender”), consisting of the $1.5 billion Revolving Credit Facility due 2028, to be used for general corporate purposes including working capital, capital expenditures, and acquisitions, including $25.0 million available for the issuance of letters of credit and a foreign currency sub-limit of $75.0 million. The Company drew down $375.0 million under this facility and repaid the entire outstanding balance under the Revolver due 2024.
The maturity date for the borrowings under the New Credit Agreement is June 22, 2028. Interest is payable based on either Secured Overnight Financing Rate (“SOFR”) or base rate options, as established at the commencement of each borrowing period, plus an applicable rate that varies based on the total leverage ratio. Lenders are owed certain fees, including a commitment fee that varies based on the total leverage ratio. The Company may prepay loans at any time, in whole or in part, upon payment of accrued interest and break funding payments, if applicable.
The obligations are guaranteed by certain of the Company’s domestic subsidiaries and SCI LLC and are collateralized by, among other things, a pledge of the equity interests in certain of the Company’s and SCI LLC’s domestic subsidiaries and material first tier foreign subsidiaries. The affirmative and negative covenants are customary for credit agreements of this nature. The New Credit Agreement contains customary events of default, the occurrence of which could result in the acceleration of the associated obligations. The financial covenant relates to a maximum total net leverage ratio of 4.00 to 1.00 calculated using the consolidated total indebtedness to consolidated earnings before interest, taxes, depreciation and amortization and other adjustments for the trailing four consecutive quarters.
Included in other assets as of June 30, 2023 was $6.8 million of debt issuance costs incurred for the Revolving Credit Facility which, along with the existing debt issuance costs, will be amortized through June 22, 2028. As of June 30, 2023, the Company had approximately $1,125.0 million available under the Revolving Credit Facility for future borrowings, except for amounts utilized for the letters of credit.
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") and received net proceeds of approximately $1,470 million after deducting the initial purchasers' discount. The Company used the net proceeds to repay $1,086.0 million of the existing outstanding indebtedness under the Term Loan “B” Facility, the related transaction fees and expenses, to pay approximately $171.5 million net cost of the related convertible note hedges after such costs were offset by the proceeds from the sale of warrants, and for general corporate purposes. The 0.50% Notes were issued under an indenture (the "0.50% Indenture"), dated as of February 28, 2023, by and among the Company, the guarantors (as defined therein) and Computershare Trust Company, National Association, as trustee, which provides, among other things, that the 0.50% Notes will mature on March 1, 2029, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. On or after December 1, 2028, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 0.50% Notes may convert all or a portion of their 0.50% Notes at any time. The 0.50% Notes are senior unsecured obligations and are fully and unconditionally guaranteed, on a joint and several basis, by each of the Company’s subsidiaries that is a borrower or guarantor under the Existing Credit Agreement. The Company may satisfy any conversion elections by paying cash up to the aggregate principal amount of the 0.50% Notes to be converted, and paying or delivering, as the case may be, cash, shares of common stock or a combination thereof, at the Company’s election, in respect of the remainder, if any, of its conversion obligation in excess of the aggregate principal amount of the 0.50% Notes to be converted.
The initial conversion rate of the 0.50% Notes is 9.6277 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $103.87 per share of common stock. The Company may redeem for cash all or any portion of the 0.50% Notes, at the Company’s option, on or after March 6, 2026, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides the related notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Prior to December 1, 2028, the holders may convert their 0.50% Notes at their option only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2023 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
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 costs of approximately $1.3 million, all of which was capitalized as debt issuance costs. The effective interest rate, including the impact of the debt discount and debt issuance costs is 0.85% over the contractual term of the 0.50% Notes.
In addition, the Company entered into convertible note hedge transactions with respect to the common stock with the initial purchasers or their affiliates and certain other financial institutions. The Company will exercise the note hedges simultaneously when the 0.50% Notes are settled. The convertible note hedges cover, subject to customary anti-dilution adjustments, the number of shares of common stock that initially underlie the 0.50% Notes and are expected to reduce the potential dilution to the common stock and/or offset potential cash payments in excess of the principal amount upon conversion of the 0.50% Notes. The Company paid approximately $414.0 million in cash for the convertible note hedges, which was recorded to stockholders’ equity.
The Company also entered into warrant transactions with certain other financial institutions, whereby the Company sold warrants to acquire 14.4 million shares of the Company's common stock, which is the same number of shares of the Company’s common stock covered by the convertible note hedges at an initial strike price of $156.78 per share, which represents a 100% premium over the closing price of the Company's common stock of $78.39 per share on February 23, 2023, subject to anti-dilution adjustments. The warrants expire on June 1, 2029. The maximum number of shares of common stock issuable in connection with the warrants is approximately 28.9 million. The Company received $242.5 million in cash for the sale of warrants, which was recorded to stockholders’ equity.
Deferred tax assets of $92.3 million were recorded to reflect the tax impact of the issuance of the 0.50% Notes and the convertible note hedge transactions.
Debt prepayments
During the first quarter of 2023, the Company used a portion of the proceeds of the 0.50% Notes to repay the remaining outstanding balance of $1,086.0 million under the Term Loan "B" Facility and expensed $13.3 million of unamortized debt discount and issuance costs as loss on debt prepayment. The Company also repaid $125.0 million of the outstanding balance under the Revolver due 2024 during the first quarter.
1.625% Notes due 2023
Pursuant to the indenture governing the 1.625% Notes, as of June 30, 2023, the $119.5 million remaining outstanding principal amount of the 1.625% Notes, net of unamortized issuance costs, continued to be classified as a current portion of long-term debt since the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on June 30, 2023 was greater than or equal to $26.94 (130% of the conversion price) on each applicable trading day. This condition gives holders the right to surrender any portion of their 1.625% Notes (in minimum denominations of $1,000 in principal amount or an integral multiple thereof) for conversion during the calendar quarter ending September 30, 2023. The 1.625% Notes mature on October 15, 2023 with the holders having the option to convert after July 15, 2023.
0% Notes due 2027
Pursuant to the indenture governing the 0% Notes, as of June 30, 2023, the $792.6 million remaining outstanding principal amount of the 0% Notes, net of unamortized issuance costs, was classified as a current portion of long-term debt since the last reported sale price of the Company’s common stock for at least 20 trading days during the period of 30 consecutive trading days ending on June 30, 2023 was greater than or equal to $68.86 (130% of the conversion price) on each applicable trading day. This condition gives holders the right to surrender any portion of their 0% Notes (in minimum denominations of $1,000 in principal amount or an integral multiple thereof) for conversion during the calendar quarter ending September 30, 2023, and only during such calendar quarter.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 7: Earnings Per Share and Equity
Earnings Per Share
Net income per share of common stock for calculating basic and diluted earnings per share is calculated as follows (in millions, except per share data):
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | ||||||||||||||||||||
| Net income for basic earnings per share of common stock | $ | 576.6 | $ | 455.8 | $ | 1,038.3 | $ | 986.0 | |||||||||||||||
| Add: Interest on 1.625% Notes | 0.4 | 0.5 | 0.8 | 1.0 | |||||||||||||||||||
| Net income for diluted earnings per share of common stock | $ | 577.0 | $ | 456.3 | $ | 1,039.1 | $ | 987.0 | |||||||||||||||
| Basic weighted-average shares of common stock outstanding | 431.7 | 434.2 | 431.8 | 433.8 | |||||||||||||||||||
| Dilutive effect of share-based awards | 1.0 | 1.3 | 1.2 | 1.9 | |||||||||||||||||||
| Dilutive effect of convertible notes and warrants | 16.0 | 11.5 | 15.6 | 12.4 | |||||||||||||||||||
| Diluted weighted-average shares of common stock outstanding | 448.7 | 447.0 | 448.6 | 448.1 | |||||||||||||||||||
| Net income per share of common stock attributable to ON Semiconductor Corporation: | |||||||||||||||||||||||
| Basic | $ | 1.34 | $ | 1.05 | $ | 2.40 | $ | 2.27 | |||||||||||||||
| Diluted | $ | 1.29 | $ | 1.02 | $ | 2.32 | $ | 2.20 |
Basic income per share of common stock is computed by dividing net income for basic earnings by the weighted-average number of shares of common stock outstanding during the period. To calculate the diluted weighted-average shares of common stock outstanding, the treasury stock method has been applied to calculate the number of incremental shares from the assumed issuance of shares relating to RSUs. The excluded number of anti-dilutive share-based awards was 0.1 million and 0.9 million for the quarters ended June 30, 2023 and July 1, 2022, respectively, and 0.2 million and 0.6 million for the six months ended June 30, 2023 and July 1, 2022, respectively.
The dilutive impacts related to the 0.50% Notes, 0% Notes and 1.625% Notes have been calculated using the if-converted method for the quarters and six months ended June 30, 2023 and July 1, 2022. 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. 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 its 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 share repurchase program announced on February 6, 2023 (the "Share Repurchase Program"), the Company may repurchase up to $3.0 billion (exclusive of fees, commissions and other expenses) of the Company's common stock through December 31, 2025. As of June 30, 2023, the authorized amount remaining under the Share Repurchase Program was approximately $2.8 billion.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Activity under the Share Repurchase Program and the Company's prior share repurchase program (which expired on December 31, 2022), during the quarters and six months ended June 30, 2023 and July 1, 2022, respectively, was as follows (in millions, except per share data):
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | ||||||||||||||||||||
| Number of repurchased shares (1) | 0.7 | 1.5 | 2.0 | 1.5 | |||||||||||||||||||
| Aggregate purchase price | $ | 60.0 | $ | 89.6 | $ | 164.1 | $ | 89.6 | |||||||||||||||
| Fees, commissions and excise tax | 0.3 | — | 0.3 | — | |||||||||||||||||||
| Total | $ | 60.3 | $ | 89.6 | $ | 164.4 | $ | 89.6 | |||||||||||||||
| Weighted-average purchase price per share (2) | $ | 86.49 | $ | 59.76 | $ | 81.29 | $ | 59.76 |
(1) None of these shares had been reissued or retired as of June 30, 2023 but may be reissued later.
(2) Exclusive of fees, commissions or other expenses.
Shares for Restricted Stock Units Tax Withholding
The amounts remitted for employee withholding taxes during the quarter and six months ended June 30, 2023 was $9.8 million and $57.4 million, respectively, for which the Company withheld approximately 0.1 million and 0.7 million shares of common stock, respectively, that were underlying the RSUs that vested. The amounts remitted for employee withholding taxes during the quarter and six months ended July 1, 2022 was $4.5 million and $63.3 million, respectively, for which the Company withheld approximately 0.1 million and 1.0 million shares of common stock, respectively, that were underlying the RSUs that vested. This tax withholding activity is separate from the Share Repurchase Program.
Non-Controlling Interest in Leshan-Phoenix Semiconductor Company Limited (“Leshan”)
The results of Leshan have been consolidated in the Company's financial statements. As of December 31, 2022, the non-controlling interest, which represents 20% of the Leshan balance, amounted to $18.5 million. This amount increased to $19.5 million as of June 30, 2023, after including the $1.0 million of earnings for the six months ending June 30, 2023.
Note 8: Share-Based Compensation
Total share-based compensation expense related to the RSUs, stock grant awards and the ESPP was recorded within the Consolidated Statements of Operations and Comprehensive Income as follows (in millions):
| Quarters Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | ||||||||||||||||||||
| Cost of revenue | $ | 4.9 | $ | 3.1 | $ | 8.6 | $ | 5.7 | |||||||||||||||
| Research and development | 5.2 | 5.2 | 9.7 | 9.6 | |||||||||||||||||||
| Selling and marketing | 5.0 | 4.3 | 9.1 | 8.1 | |||||||||||||||||||
| General and administrative | 16.5 | 14.5 | 31.9 | 26.2 | |||||||||||||||||||
| Share-based compensation expense | $ | 31.6 | $ | 27.1 | $ | 59.3 | $ | 49.6 | |||||||||||||||
| Income tax benefit | (6.6) | (5.7) | (12.5) | (10.4) | |||||||||||||||||||
| Share-based compensation expense, net of taxes | $ | 25.0 | $ | 21.4 | $ | 46.8 | $ | 39.2 |
As of June 30, 2023, total unrecognized expected share-based compensation expense, net of estimated forfeitures, related to non-vested RSUs with service, performance and market conditions was $176.1 million, which is expected to be recognized over a weighted-average period of 1.8 years. Upon vesting of RSUs, stock grant awards or completion of a purchase under the ESPP, new shares of common stock are issued. The annualized pre-vesting forfeiture rate for RSUs was estimated to be 8% for each of the quarters and six months ended June 30, 2023 and July 1, 2022.
Shares Available
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
As of June 30, 2023 and December 31, 2022, there was an aggregate of 37.2 million and 40.1 million shares of common stock, respectively, available for grant under the Amended and Restated SIP.
Restricted Stock Units
RSUs generally vest ratably over three years for awards with service conditions and over two or three years for awards with performance or market conditions, or a combination thereof, and are settled in shares of common stock upon vesting. A summary of the RSU transactions for the six months ended June 30, 2023 is as follows (in millions, except per share data):
| Number of Shares | Weighted-Average Grant Date Fair Value Per Share | |||||||||||||
| Non-vested RSUs at December 31, 2022 | 3.8 | $ | 46.56 | |||||||||||
| Granted | 1.8 | 79.51 | ||||||||||||
| Achieved | 0.3 | 54.16 | ||||||||||||
| Released | (2.1) | 41.04 | ||||||||||||
| Forfeited | (0.2) | 59.41 | ||||||||||||
| Non-vested RSUs at June 30, 2023 | 3.6 | 65.83 |
Note 9: Commitments and Contingencies
Environmental Contingencies
The Company has encountered and dealt with a number of environmental issues over time relating to the various locations that comprise its operations and has incurred certain costs related to clean-up activities and environmental remediation efforts. In certain instances, the Company has been indemnified for such costs, often from third parties who were the prior owners of such facilities. Any costs to the Company in connection with such environmental matters have generally not been, and, based on the information available, are not expected to be material.
Financing Contingencies
In the ordinary course of business, the Company provides standby letters of credit or other guarantee instruments to certain parties initiated by either the Company or its subsidiaries, as required for transactions, including, but not limited to, material purchase commitments, agreements to mitigate collection risk, leases, utilities or customs guarantees. The Revolving Credit Facility includes $25.0 million available for the issuance of letters of credit, of which $0.9 million was outstanding as of June 30, 2023, which reduced the borrowing capacity under such facility. As of June 30, 2023, the Company also had outstanding guarantees and letters of credit outside of its Revolving Credit Facility totaling $16.0 million.
As part of obtaining financing in the ordinary course of business, the Company issued guarantees related to certain of its subsidiaries, which totaled $0.9 million as of June 30, 2023. Based on historical experience and information currently available, the Company believes that it will not be required to make payments under the standby letters of credit or guarantee arrangements for the foreseeable future.
Indemnification Contingencies
The Company is a party to a variety of agreements entered into in the ordinary course of business, including acquisition agreements, pursuant to which it may be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by the Company require it to indemnify the other party against losses due to IP infringement, property damage (including environmental contamination), personal injury, failure to comply with applicable laws, the Company’s negligence or willful misconduct or breach of representations and warranties and covenants related to such matters as title to sold assets. In the case of certain acquisition agreements, these agreements may require us to maintain such indemnification provisions for the acquiree’s directors, officers and other employees and agents, in certain cases for a number of years following the acquisition.
While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under any of these indemnities have not had a material effect on the Company’s business, financial condition, results of operations or cash flows. Additionally, the Company does not believe that any amounts that it may be required to pay under these indemnities in the future will be material to the Company’s business, financial position, results of operations, or cash flows.
Legal Matters
The Company is currently involved in a variety of legal matters that arise in the ordinary course of business. Based on information currently available, the Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations or liquidity. The litigation process is inherently uncertain, and the Company cannot guarantee that the outcome of any litigation matter will be favorable to the Company.
Intellectual Property Matters
The Company faces risk of exposure from claims of infringement of the IP rights of others. In the ordinary course of business, the Company receives letters asserting that the Company’s products or components breach another party’s rights. Such letters may request royalty payments from the Company, that the Company cease and desist using certain IP, and/or request other remedies.
Note 10: Fair Value Measurements
Fair Value of Financial Instruments
The Company invests portions of its excess cash in different marketable securities, which are classified as available-for-sale. The following tier level hierarchy is used to determine fair values of the financial instruments:
-
Level 1: based on observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
-
Level 2: based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.
-
Level 3: based on the use of unobservable inputs for the assets and liabilities and other types of analyses.
The carrying value of cash and cash equivalents which includes money market funds, corporate bonds and commercial paper approximates fair value because of the short-term maturity of these instruments. Demand deposits and money market funds are classified as Level 1 within the fair value hierarchy, while corporate bonds and commercial paper are classified as Level 2. The carrying amount of other current assets and liabilities, such as accounts receivable and accounts payable approximates fair value due to the short-term maturity of the amounts and are considered Level 2 in the fair value hierarchy.
The following table summarizes financial assets and liabilities, excluding pension assets, disaggregated by the security type, measured at fair value on a recurring basis (in millions):
| As of June 30, 2023 | Fair Value Level | |||||||||||||||||||||||||||||||||||||||||||
| Description | Amortized Cost | Unrealized gains | Unrealized losses | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||||||||||||||||||||
| Demand and time deposits | $ | 3.1 | $ | — | $ | — | $ | 3.1 | $ | 3.1 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Money market funds | 38.9 | — | — | 38.9 | 38.9 | — | — | |||||||||||||||||||||||||||||||||||||
| Other current assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Corporate bonds | $ | 11.2 | $ | — | $ | — | $ | 11.2 | $ | — | $ | 11.2 | $ | — | ||||||||||||||||||||||||||||||
| Certificate of deposit | 0.2 | — | — | 0.2 | — | 0.2 | — | |||||||||||||||||||||||||||||||||||||
| Commercial paper | 0.2 | — | — | 0.2 | 0.2 | — | — | |||||||||||||||||||||||||||||||||||||
| U.S. Treasury bonds | 0.9 | — | — | 0.9 | — | 0.9 | — | |||||||||||||||||||||||||||||||||||||
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
All investments are included in other current assets and have maturity dates of one year or less.
| As of December 31, 2022 | Fair Value Level | |||||||||||||||||||||||||||||||||||||||||||
| Description | Amortized Cost | Unrealized gains | Unrealized losses | Fair value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||||||||||||||||||||
| Demand and time deposits | $ | 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 | — | |||||||||||||||||||||||||||||||||||||
| U.S. 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
The carrying amounts and fair values of the long-term borrowings were as follows (in millions):
| As of | |||||||||||||||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Long-term debt, including current portion (1) | |||||||||||||||||||||||
| 0% Notes | $ | 792.6 | $ | 1,480.8 | $ | 791.1 | $ | 1,057.8 | |||||||||||||||
| 0.50% Notes | 1,470.6 | 1,697.0 | — | — | |||||||||||||||||||
| 1.625% Notes | 119.5 | 545.2 | 137.0 | 417.8 | |||||||||||||||||||
| 3.875% Notes | 694.0 | 638.9 | 693.3 | 618.3 | |||||||||||||||||||
| Other long-term debt | 375.0 | 376.9 | 1,572.1 | 1,549.2 |
(1) Carrying amounts shown are net of debt discount, if applicable, and debt issuance costs.
Fair values of the 0% Notes, 0.50% Notes, 1.625% Notes and 3.875% Notes were estimated based on market prices in active markets (Level 1). Other long-term debt, which includes the fair value of the Term Loan "B" Facility as of December 31, 2022, was estimated based on discounting the remaining principal and interest payments using current market rates for similar debt (Level 2).
Note 11: Financial Instruments
Foreign Currencies
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
As a multinational business, the Company engages in transactions that are denominated in a variety of currencies. When appropriate, the Company uses forward foreign currency contracts to reduce its overall exposure to the effects of currency fluctuations on its results of operations and cash flows. The Company’s policy prohibits trading in currencies for which there are no underlying exposures and entering into trades for any currency to intentionally increase the underlying exposure. The Company primarily hedges existing assets and liabilities associated with transactions currently on its balance sheet, which are undesignated hedges for accounting purposes. The Company is exposed to credit-related losses if counterparties to hedge contracts fail to perform their obligations.
As of June 30, 2023 and December 31, 2022, the Company had net outstanding foreign exchange contracts with notional amounts of $300.4 million and $272.0 million, respectively. Such contracts were obtained through financial institutions and were scheduled to mature within 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 | ||||||||||||||||||||||||||
| June 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Buy (Sell) | Notional Amount | Buy (Sell) | Notional Amount | |||||||||||||||||||||||
| Japanese Yen | 59.0 | 59.0 | 27.0 | 27.0 | ||||||||||||||||||||||
| Philippine Peso | 48.7 | 48.7 | 63.9 | 63.9 | ||||||||||||||||||||||
| Czech Koruna | 45.0 | 45.0 | 41.7 | 41.7 | ||||||||||||||||||||||
| Euro | 51.9 | 51.9 | 26.0 | 26.0 | ||||||||||||||||||||||
| Korean Won | 31.2 | 31.2 | 35.7 | 35.7 | ||||||||||||||||||||||
| Other Currencies - Buy | 48.9 | 48.9 | 66.5 | 66.5 | ||||||||||||||||||||||
| Other Currencies - Sell | (15.7) | 15.7 | (11.2) | 11.2 | ||||||||||||||||||||||
| $ | 269.0 | $ | 300.4 | $ | 249.6 | $ | 272.0 |
Amounts receivable or payable under the contracts were not material as of June 30, 2023 or December 31, 2022. During the quarters ended June 30, 2023 and July 1, 2022, net of the impact of the hedge positions, the realized and unrealized foreign currency transactions totaled a loss of $0.7 million and a gain of $6.3 million, respectively. During the six months ended June 30, 2023 and July 1, 2022, net of the impact of the hedge positions, the realized and unrealized foreign currency transactions totaled a loss of $2.7 million and a gain of $8.2 million, respectively. The realized and unrealized foreign currency transactions are included in other income (expense) in the Consolidated Statements of Operations and Comprehensive Income.
Cash Flow Hedges
Foreign currency risk
During the second quarter of 2023, the Company entered into foreign currency forward contracts to hedge its exposure to foreign currency exchange rate risk related to future forecasted transactions denominated in certain currencies other than the U.S. Dollar. These contracts generally mature within 12 months and are designated as cash flow hedges for accounting purposes.
As of June 30, 2023, the notional value of outstanding foreign currency forward contracts designated as cash flow hedges was $131.0 million, with a fair value of $2.9 million recorded as accrued expenses and other current liabilities. A loss of $0.8 million was recognized as a component of cost of revenues for the quarter and six months ended June 30, 2023. The Company did not identify any ineffectiveness with respect to the notional amounts of the foreign currency forward contracts effective as of June 30, 2023.
Interest Rate Risk
During the first quarter of 2023, 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,
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
and recognized $6.9 million of other income related to the termination. Approximately $20.7 million was recorded in Accumulated Other Comprehensive Income, which will be recognized to other income through December 2024.
As of December 31, 2022, the Company had interest rate swap agreements for notional amounts of $750 million, $500 million and $500 million for fiscal years 2022, 2023 and 2024, respectively. The fair value of these swaps totaled $36.0 million as of December 31, 2022, and was classified based on each instrument’s maturity dates.
See Note 13: ''Changes in Accumulated Other Comprehensive Loss'' for the effective amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive loss and the Consolidated Statements of Operations
and Comprehensive Income for the six months ended June 30, 2023.
Convertible Note Hedges
The Company entered into convertible note hedges in connection with the issuance of the 0% Notes, 0.50% Notes and 1.625% Notes.
Other
As of June 30, 2023, the Company had no outstanding commodity derivatives, currency swaps, options, or equity investments held at subsidiaries or affiliated companies. The Company does not hedge the value of its equity investments in its subsidiaries or affiliated companies. The Company is exposed to credit-related losses if its hedge counterparties fail to perform their obligations.
As of June 30, 2023, the counterparties to the Company's hedge contracts are held at financial institutions which the Company believes to be highly rated, and no credit related losses are anticipated.
Note 12: Income Taxes
The Company recognizes interest and penalties related to uncertain tax positions in tax expense in the Consolidated Statements of Operations and Comprehensive Income. The Company had approximately $5.4 million and $2.7 million of net interest and penalties accrued as of June 30, 2023 and December 31, 2022, respectively. It is reasonably possible that $67.0 million of its uncertain tax positions will be reduced in the next 12 months due to settlement with tax authorities or expiration of the applicable statute of limitations.
The Company maintains a partial valuation allowance on its U.S. state deferred tax assets and a valuation allowance on foreign net operating losses and tax credits in certain foreign jurisdictions, a substantial portion of which relate to Japan and Hong Kong net operating losses, which are projected to expire prior to utilization.
The Company is currently under IRS examination for the 2017 and 2018 tax years. Tax years prior to 2017 are generally not subject to examination by the IRS. For state tax returns, the Company is generally not subject to income tax examinations for tax years prior to 2018. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates. With respect to jurisdictions outside the United States, the Company is generally not subject to examination for tax years prior to 2013. The Company believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the tax audits are resolved in a manner not consistent with expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)
Note 13: Changes in Accumulated Other Comprehensive Loss
Amounts comprising accumulated other comprehensive loss and reclassifications are as follows (in millions):
| Currency Translation Adjustments | Effects of Cash Flow Hedges and Other Adjustments | Total | |||||||||||||||||||||
| Balance as of December 31, 2022 | $ | (50.4) | $ | 27.2 | $ | (23.2) | |||||||||||||||||
| Other comprehensive income (loss) prior to reclassifications | (2.7) | 4.2 | 1.5 | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | (15.7) | (15.7) | ||||||||||||||||||||
| Net current period other comprehensive income (loss) (1) | (2.7) | (11.5) | (14.2) | ||||||||||||||||||||
| Balance as of June 30, 2023 | $ | (53.1) | $ | 15.7 | $ | (37.4) |
(1) Effects of cash flow hedges are net of tax impact of $0.7 million for the six months ended June 30, 2023.
Amounts reclassified from accumulated other comprehensive loss to the specific caption within Consolidated Statements of Operations and Comprehensive Income were as follows:
| Quarters Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| June 30, 2023 | July 1, 2022 | June 30, 2023 | July 1, 2022 | To caption | ||||||||||||||||||||||||||||
| Cash Flow Hedges | $ | (0.8) | $ | — | $ | (0.8) | $ | — | COGS | |||||||||||||||||||||||
| Interest rate swaps | (3.0) | (0.5) | (8.0) | 0.2 | Interest expense | |||||||||||||||||||||||||||
| Interest rate swaps terminations | — | — | (6.9) | — | Other Income | |||||||||||||||||||||||||||
| Total reclassifications | $ | (3.8) | $ | (0.5) | $ | (15.7) | $ | 0.2 |
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