Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included in the 2023 Form 10-K and our unaudited consolidated financial statements for the fiscal quarter ended March 29, 2024, which are included elsewhere in this Form 10-Q. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks, uncertainties and other factors. Actual results could differ materially because of the factors discussed below or elsewhere in this Form 10-Q. See Part II, Item 1A. "Risk Factors" of this Form 10-Q and Part I, Item 1A. "Risk Factors" of the 2023 Form 10-K.

Executive Overview

onsemi Overview

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

We believe the evolution of the automotive industry, with advancements in autonomous driving, ADAS, vehicle electrification, and the increase in electronics content for vehicle platforms, is reshaping the boundaries of transportation. Through sensing integration, we believe our intelligent power solutions achieve superior efficiencies compared to our peers. This integration allows lower temperature operation and reduced cooling requirements while saving costs and minimizing weight. In addition, our power solutions deliver power with less die per module, achieving higher range for a given battery capacity.

During the quarter ended March 29, 2024, we renamed our Advanced Solutions Group ("ASG") reportable segment to Analog and Mixed-Signal Group ("AMG") and reorganized the existing divisions within PSG and AMG. See Note 2: ''Revenue and Segment Information'' in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information regarding the segment reorganization. As of March 29, 2024, we were organized into the three operating and reportable segments of PSG, AMG and ISG.

Business Strategy Developments

Our primary focus continues to be on profitable revenue with stable gross margin and operating income by capturing high-growth megatrends in our focused end-markets of automotive and industrial infrastructure. We are designing products in highly-differentiated markets focused on customer needs while optimizing and right-sizing our manufacturing footprint to support growth and maintain gross margins through efficiencies and new product development. We are focused on achieving efficiencies in our operating and capital expenditures, capital allocation on research and development investments and resources to accelerate growth in high-margin products.

Warrants Settlement and Share Repurchases

During the quarter ended March 29, 2024, we settled the remaining outstanding warrants related to the 1.625% Notes by issuing 4.0 million shares of our common stock on a net-share basis. We also repurchased approximately 1.3 million shares of common stock for an aggregate purchase price of $100.0 million. For additional information, see Note 6: ''Earnings Per Share and Equity'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.

Results of Operations

Quarter Ended March 29, 2024 compared to the Quarter Ended March 31, 2023

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

			Quarters Ended
			March 29, 2024						March 31, 2023						Dollar Change
Revenue			$	1,862.7					$	1,959.7					$	(97.0)
Cost of revenue			1,009.1						1,042.2						(33.1)
Gross profit			853.6						917.5						(63.9)
Operating expenses:
Research and development			150.0						138.4						11.6
Selling and marketing			69.1						71.8						(2.7)
General and administrative			95.3						75.9						19.4
Amortization of acquisition-related intangible assets			12.6						15.0						(2.4)
Restructuring, asset impairments and other charges, net			1.4						51.5						(50.1)
Total operating expenses			328.4						352.6						(24.2)
Operating income			525.2						564.9						(39.7)
Other income (expense), net:
Interest expense			(15.6)						(26.4)						10.8
Interest income			27.6						17.1						10.5
Loss on debt prepayment			—						(13.3)						13.3
Loss on divestiture of business			—						(1.1)						1.1
Other income			1.0						4.7						(3.7)
Other income (expense), net			13.0						(19.0)						32.0
Income before income taxes			538.2						545.9						(7.7)
Income tax provision			(84.5)						(83.7)						(0.8)
Net income			453.7						462.2						(8.5)
Less: Net income attributable to non-controlling interest			(0.7)						(0.5)						(0.2)
Net income attributable to ON Semiconductor Corporation			$	453.0					$	461.7					$	(8.7)

Revenue

Revenue was $1,862.7 million and $1,959.7 million for the quarters ended March 29, 2024 and March 31, 2023, respectively, representing a decrease of $97.0 million, or approximately 5%, year over year. We had one customer, a distributor, whose revenue accounted for approximately 10% of our total revenue for the quarters ended March 29, 2024 and March 31, 2023, respectively. Revenue by operating and reportable segments was as follows (dollars in millions):

			Quarter Ended March 29, 2024						As a % of Total Revenue (1)						Quarter Ended March 31, 2023						As a % of Total Revenue (1)
PSG			$	874.2					46.9		%				$	860.9					43.9		%
AMG			697.0						37.4		%				744.7						38.0		%
ISG			291.5						15.6		%				354.1						18.1		%
Total revenue			$	1,862.7											$	1,959.7

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

Revenue from PSG increased by $13.3 million, or approximately 2%, for the quarter ended March 29, 2024 compared to the quarter ended March 31, 2023. Revenue from our Automotive Power Division increased by $82.6 million primarily driven by

our continued ramp up in SiC and other power automotive solutions. This was partially offset by decreases in revenue from our Multi-Market Power Division and Industrial Power Division of $48.6 million and $20.5 million, respectively, which was primarily driven by a decrease in demand in the industrial and communications end-markets.

Revenue from AMG decreased by $47.7 million, or approximately 6%, for the quarter ended March 29, 2024 compared to the quarter ended March 31, 2023. Revenue from our Integrated Circuit Division and Power Management Division decreased by $42.3 million and $29.5 million, respectively, primarily due to a decrease in demand in the industrial and consumer end-markets. This was partially offset by an increase in revenue in our Sensor Interface Division of $24.1 million.

Revenue from ISG decreased by $62.6 million, or approximately 18%, for the quarter ended March 29, 2024 compared to the quarter ended March 31, 2023, largely driven by a decrease in revenue from our Industrial and Consumer Solutions Division and Automotive Sensing Division of $31.0 million and $31.7 million, respectively, primarily due to the decrease in demand for these products in the industrial and automotive end-markets.

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

			Quarter Ended March 29, 2024						As a % of Total Revenue (1)						Quarter Ended March 31, 2023						As a % of Total Revenue (1)
Hong Kong			$	405.4					21.8		%				$	490.4					25.0		%
Singapore			433.2						23.3		%				450.7						23.0		%
United Kingdom			444.0						23.8		%				413.3						21.1		%
United States			419.0						22.5		%				389.1						19.9		%
Other			161.1						8.6		%				216.2						11.0		%
Total revenue			$	1,862.7											$	1,959.7

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

Gross Profit and Gross Margin

Gross profit decreased by $63.9 million to $853.6 million for the quarter ended March 29, 2024 compared to $917.5 million for the quarter ended March 31, 2023. This was primarily due to the decline in existing product revenue which negatively impacted gross profit by approximately $142 million, partially offset by increased gross profit of approximately $45 million from new product sales, and a reallocation of $34 million from manufacturing costs at our EFK location, related to our foundry business, to the existing product revenue category within PSG.

Our gross margin decreased by approximately 1% quarter over quarter, primarily due to changes as explained in the segment gross margin sections below.

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

			Quarter Ended March 29, 2024						As a % of Total Revenue (1)						Quarter Ended March 31, 2023						As a % of Total Revenue (1)
PSG			$	365.4					41.8		%				$	396.4					46.0		%
AMG			338.8						48.6		%				344.0						46.2		%
ISG			149.4						51.3		%				177.1						50.0		%
Total gross profit			$	853.6					45.8		%				$	917.5					46.8		%

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

Explanation for the fluctuation in gross profit amounts and gross margin percentages for the quarter ended March 29, 2024 compared to the quarter ended March 31, 2023 is provided below:

PSG gross profit decreased by $31.0 million, primarily driven by a decline in existing business which negatively impacted gross profit by approximately $76 million, partially offset by an increase in new product sales which contributed gross profit of approximately $45 million. PSG gross margin decreased by 4.2% to 41.8% from 46.0% primarily as a result of the decline in existing business and the related impact of unfavorable product mix.

AMG gross profit decreased by $5.2 million, primarily driven by a decline in existing business which negatively impacted gross profit by approximately $39 million, partially offset by the reallocation of $34 million of manufacturing costs at our EFK location to the new product revenue category under PSG. AMG gross margin increased by approximately 2.4% to 48.6% from 46.2%, primarily due to improved product mix and the reduction in foundry business.

ISG gross profit decreased by $27.7 million, primarily driven by a decline in existing business. ISG gross margin increased by 1.3%, primarily driven by improved product mix.

Operating Expenses

Research and development expenses were $150.0 million for the quarter ended March 29, 2024, as compared to $138.4 million for the quarter ended March 31, 2023, representing an increase of $11.6 million, or approximately 8%.

Selling and marketing expenses were $69.1 million for the quarter ended March 29, 2024, as compared to $71.8 million for the quarter ended March 31, 2023, representing a decrease of $2.7 million, or approximately 4%.

General and administrative expenses were $95.3 million for the quarter ended March 29, 2024, as compared to $75.9 million for the quarter ended March 31, 2023, representing an increase of $19.4 million, or approximately 26%. The increase was primarily attributable to an adjustment to variable compensation during the quarter ended March 31, 2023.

Other Operating Expenses

Amortization of Acquisition-Related Intangible Assets

Amortization of acquisition-related intangible assets was $12.6 million for the quarter ended March 29, 2024, as compared to $15.0 million for the quarter ended March 31, 2023, representing a decrease of $2.4 million, or approximately 16%. The decrease was due to a reduction in amortization expense as certain intangible assets became fully amortized.

Restructuring, Asset Impairments and Other, Net

Restructuring, asset impairments and other, net was $1.4 million for the quarter ended March 29, 2024, as compared to $51.5 million for the quarter ended March 31, 2023. There were no new restructuring programs implemented during the quarter ended March 29, 2024. Amounts incurred during the quarter ended March 31, 2023 related primarily to the ASG business realignment efforts during the first quarter of 2023.

Interest Expense

Interest expense decreased by $10.8 million to $15.6 million during the quarter ended March 29, 2024, as compared to $26.4 million during the quarter ended March 31, 2023. The decrease was primarily due to higher variable-rate debt that was paid down and replaced by the 0.50% Notes during the quarter ended March 31, 2023. Our average gross long-term debt for the quarter ended March 29, 2024 was $3,379.9 million at a weighted-average interest rate of 1.8%, as compared to $3,371.4 million at a weighted-average interest rate of 3.1% for the quarter ended March 31, 2023. The calculation of our weighted-average interest rates includes the effect of our interest rate swap agreements.

Interest income

Interest income increased by $10.5 million, or approximately 61%, to $27.6 million during the quarter ended March 29, 2024 compared to $17.1 million during the quarter ended March 31, 2023, primarily due to an increase in interest rates along with a strategic shift in our investment strategy with balances in higher interest bearing accounts.

Other Income

During the quarter ended March 29, 2024, other income was $1.0 million compared to $4.7 million during the quarter ended March 31, 2023.

Income Tax Provision

We recorded an income tax provision of $84.5 million and $83.7 million for the quarters ended March 29, 2024 and March 31, 2023, respectively, representing effective tax rates of 15.7% and 15.3%.

For additional information, see Note 11: ''Income Taxes'' in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q.

Liquidity and Capital Resources

Overview

Our principal sources of liquidity are cash on hand, cash generated from operations, available borrowings under our Revolving Credit Facility as well as new debt and/or equity issuances. In the near term, we expect to fund our cash requirements by utilizing any or a combination of these principal sources, including any amounts required to satisfy our current portion of long-term debt. Our cash and cash equivalents was approximately $2.6 billion as of March 29, 2024, and the Revolving Credit Facility has approximately $1.1 billion available for future borrowings.

We require cash to: (i) fund our operating expenses, working capital requirements, outlays for strategic acquisitions and investments; (ii) service our debt, including principal and interest; (iii) incur capital expenditures; and (iv) repurchase our common stock. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures to reflect the current market conditions and our projected sales and demand. Our capital expenditures are primarily directed towards manufacturing equipment and can materially influence our available cash for other initiatives. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.

We believe that our cash on hand, cash generated from our operations and the amounts available under the Revolving Credit Facility are adequate to meet our working capital requirements and other business needs for at least the next 12 months.

Operating Activities

Our cash flows from operating activities were $498.7 million and $408.9 million for the quarters ended March 29, 2024 and March 31, 2023, respectively. The increase of $89.8 million was primarily attributable to improved working capital management.

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

Investing Activities

Our cash flows used in investing activities were $235.3 million and $562.0 million for the quarters ended March 29, 2024 and March 31, 2023, respectively. The decrease of $326.7 million was primarily attributable to a decrease in capital expenditures and payments for the acquisition of our EFK location during the quarter ended March 31, 2023. Our capital expenditures as a percent of revenue was approximately 12%, and we expect capital expenditures to be in the range of 10% - 12% of revenue for the remainder of 2024.

Financing Activities

Our cash flows used in financing activities were $130.8 million and $63.4 million for the quarters ended March 29, 2024 and March 31, 2023, respectively. The increase of $67.4 million was primarily attributable to the funds provided by the refinancing activity during the quarter ended March 31, 2023.

We do not have any meaningful debt maturing during the next 12 months. Our 0% Notes are also classified as a current liability based on share price trigger provisions. We expect to continue our Share Repurchase Program subject to market conditions, the price of our shares and other factors (including liquidity needs). However, the Share Repurchase Program may be modified, suspended or terminated by the Board of Directors at any time without prior notice.

Key Factors Potentially Affecting Liquidity

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

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

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

Debt Guarantees and Related Covenants

As of March 29, 2024, we were in compliance with the indentures relating to our 0% Notes, 0.50% Notes and 3.875% Notes and with covenants included in the New Credit Agreement. The 0% Notes, 0.50% Notes and 3.875% Notes are senior to the existing and future subordinated indebtedness of onsemi and its guarantor subsidiaries, rank equally in right of payment to all of our existing and future senior debt and, as unsecured obligations, are subordinated to all of our existing and future secured debt to the extent of the assets securing such debt.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 3: ''Recent Accounting Pronouncements and Other Developments'' in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q and our 2023 Form 10-K.