You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included in the 2021 Form 10-K and our unaudited consolidated financial statements for the fiscal quarter ended
April 1, 2022, which are included elsewhere in this Form 10-Q. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks, uncertainties and other factors. Actual results could differ materially because of the factors discussed below or elsewhere in this Form 10-Q. See Part II, Item 1A. "Risk Factors" of this Form 10-Q and Part I, Item 1A. "Risk Factors" of the 2021 Form 10-K. Executive Overview onsemi Overview We provide industry leading intelligent power and sensing solutions to help our customers solve the most challenging problems and create cutting edge products for a better future. Our intelligent power technologies enable the electrification of the automotive industry that allows for lighter and longer-range electric vehicles, empowers efficient fast-charging systems and propels sustainable energy for the highest efficiency solar strings, industrial power and storage systems. Our intelligent sensing technologies support the next-generation industry, allowing for smarter factories and buildings while also enhancing the automotive mobility experience with imaging and depth sensing that make advanced vehicle safety and automated driving systems possible. onsemi's intelligent power allows our customers to exceed range targets with lower weight and reduce system cost through efficiency. With our sensing integration, we believe onsemi's intelligent power solutions achieve higher efficiencies compared to our peers and allow lower temperature operation, reducing cooling requirements, saving costs and minimizing weight while delivering the required power with less die per module and achieving higher range for a given battery capacity. onsemi's intelligent sensing solutions offer proprietary features in smaller packages that support customers' use cases. We believe our intelligent sensing technology offers advanced features to achieve optimal results and our product integration drives improved efficiency. This performance is delivered in a smaller footprint while reducing system latency to increase safety and throughput by providing a proprietary feature set to solve different use cases. We serve a broad base of end-user markets, including automotive, industrial and others which include communications, computing and consumer. We believe the evolution of automotive, with advancements in autonomous driving, ADAS, vehicle electrification and the increase in electronics content for vehicle platforms, is reshaping the boundaries of transportation. With our extensive portfolio of AEC-qualified products, onsemi helps customers design high reliability solutions while delivering top performance. Within the industrial space, onsemi is helping OEMs develop innovative products to navigate the ongoing transformation across energy infrastructure, factory automation and power conversion.
Commercial strategy developments
Our primary focus continues to be on gross margin and operating margin expansion, while at the same time achieving revenue growth in our focused end-markets of automotive, industrial and communications infrastructure as well as being opportunistic in other end-markets, including obtaining longer-term supply arrangements with strategic end-customers. We are also focused on achieving efficiencies in our operating expenditures. While we believe we have made significant progress on gross margin and operating margin expansion, we continue to rationalize our product portfolio and have allocated capital, research and development investments and resources to accelerate growth in high-margin products and end-markets by moving away from non-differentiated products, which have had historically lower gross margins. During the first quarter, we divested our six-inch front-end wafer manufacturing facility in Oudenaarde,
Belgiumand entered into a definitive agreement to sell our eight-inch front-end wafer manufacturing facility in South Portland, Maine, which is expected to close during the second quarter of 2022. We are also exploring the sale of certain other manufacturing facilities. We believe these actions, among others, will allow us to transition to a lighter internal fabrication model where our financial performance will be less volatile and not as heavily influenced by our internal manufacturing volumes. As actions are initiated to achieve our business strategy goals, we could incur accounting charges in the future. We are focused on sustainability as we drive a common theme across all markets. During 2021, onsemi announced its commitment to achieving net zero emissions by 2040. As we initiate steps to achieve our sustainability goals, additional 24 --------------------------------------------------------------------------------
Table of Contents Investments may be required in the future under such actions, although the timing and amounts of such investments are uncertain at this time.
Impact of the novel coronavirus disease 2019 (“COVID-19”) pandemic on our business
We have implemented proactive preventative protocols and updated our business practices in response to the ongoing COVID-19 pandemic. These changes are intended to safeguard our employees, contractors, suppliers and communities. While all of our global manufacturing sites and most of our distribution centers are currently operational, government mandates may order us to curtail production levels or temporarily suspend manufacturing or distribution operations in response to further outbreaks or new COVID-19 variants. 25
The following table summarizes certain information relating to our results of operations that has been derived from our unaudited consolidated financial statements (in millions):
April 1, 2022 April 2, 2021 Dollar Change Revenue $
Revenue cost (excluding depreciation shown below)
983.7 960.5 23.2 Gross profit 961.3 521.2 440.1 Operating expenses: Research and development 156.8 173.6 (16.8) Selling and marketing 71.1 78.9 (7.8) General and administrative 77.9 72.4 5.5 Amortization of acquisition-related intangible assets 21.3 25.0 (3.7) Restructuring, asset impairments and other charges, net (13.0) 42.5 (55.5) Intangible asset impairment - 2.9 (2.9) Total operating expenses 314.1 395.3 (81.2) Operating income 647.2 125.9 521.3 Other income (expense), net: Interest expense (21.6) (33.4) 11.8 Interest income 0.4 0.4 - Other income (expense) 2.1 4.5 (2.4) Other income (expense), net (19.1) (28.5) 9.4 Income before income taxes 628.1 97.4 530.7 Income tax provision (97.1) (7.1) (90.0) Net income 531.0 90.3 440.7 Less: Net income attributable to non-controlling interest (0.8) (0.4) (0.4) Net income attributable to ON Semiconductor Corporation
$ 530.2$ 89.9 $ 440.3Revenue Revenue was $1,945.0 millionand $1,481.7 millionfor the quarters ended April 1, 2022and April 2, 2021, respectively, representing an increase of $463.3 million, or approximately 31%. We had one customer, a distributor, whose revenue accounted for approximately 12.4% and 10.6% of our total revenue for the quarters ended April 1, 2022and April 2, 2021, respectively. Revenue by operating and reportable segments was as follows (dollars in millions): Quarter Ended As a % of Quarter Ended As a % of April 1, 2022 Total Revenue (1) April 2, 2021 Total Revenue (1) PSG $ 986.750.7 % $ 747.050.4 % ASG 689.3 35.4 % 531.5 35.9 % ISG 269.0 13.8 % 203.2 13.7 % Total revenue $ 1,945.0 $ 1,481.7
(1) Some amounts may not total due to rounding of individual amounts.
Revenue from PSG increased by
$239.7 million, or approximately 32%, for the quarter ended April 1, 2022compared to the quarter ended April 2, 2021. The revenue from our Advanced Power Division and our Integrated Circuits, Protection and Signal Division increased by $170.6 millionand $69.1 million, respectively, primarily due to our strategy to focus on a product mix 26 --------------------------------------------------------------------------------
TOC driving higher margins and higher average selling prices due to improved economic conditions, compared to the quarter ended
Revenue from ASG increased by
$157.8 million, or approximately 30%, for the quarter ended April 1, 2022compared to the quarter ended April 2, 2021. The revenue from our Automotive Division, Industrial Solutions Division and Mobile, Computing and Cloud Division increased by $55.2 million, $53.4 millionand $43.2 million, respectively. The increases were primarily due to our strategy to focus on a product mix that yields higher margins and increase in average selling prices driven by strong market demand, compared to the quarter ended April 2, 2021. Revenue from ISG increased by $65.8 million, or approximately 32%, for the quarter ended April 1, 2022compared to the quarter ended April 2, 2021, largely driven by an increase in revenue from our Automotive Sensing Division of $62.2 million. The increase was due to our strategy to focus on a product mix that yields higher margins, better demand and an increase in average selling prices.
Revenues by geographic location, based on sales billed from the respective country or region, were as follows (in millions of dollars):
Quarter Ended As a % of Quarter Ended As a % of April 1, 2022 Total Revenue (1) April 2, 2021 Total Revenue (1) Singapore
$ 555.728.6 % $ 509.034.4 % Hong Kong 529.6 27.2 % 342.2 23.1 % United Kingdom 345.5 17.8 % 268.9 18.1 % United States 311.7 16.0 % 184.3 12.4 % Other 202.5 10.4 % 177.3 12.0 % Total revenue $ 1,945.0 $ 1,481.7
(1) Some amounts may not total due to rounding of individual amounts.
Gross profit and gross margin (excluding amortization of acquisition-related intangible assets)
Our gross profit by operating and reportable segments was as follows (dollars in millions): Quarter Ended As a % of Quarter Ended As a % of April 1, 2022 Segment Revenue (1) April 2, 2021 Segment Revenue (1) PSG
$ 474.748.1 % $ 246.533.0 % ASG 366.7 53.2 % 206.8 38.9 % ISG 119.9 44.6 % 67.9 33.4 % Total gross profit $ 961.349.4 % $ 521.235.2 %
(1) Some amounts may not total due to rounding of individual amounts.
Our gross profit increased by
$440.1 million, or approximately 84%, from $521.2 millionfor the quarter ended April 2, 2021to $961.3 millionfor the quarter ended April 1, 2022. Our overall gross margin increased to 49.4% for the quarter ended April 1, 2022from approximately 35.2% for the quarter ended April 2, 2021. The significant increases in gross profit and gross margin were due to an increase in average selling prices and a favorable product mix with higher gross margins and improved manufacturing efficiencies. The favorable economic environment and significant improvement in demand in all end-markets, specifically in the automotive and industrial end-markets, contributed to increased demand and better pricing for our products. We were also able to pass most of the increases in input cost of raw materials and external manufacturing services to our customers. Operating Expenses
Research and development expenses were
27 -------------------------------------------------------------------------------- Table of Contents Selling and marketing expenses were
$71.1 millionfor the quarter ended April 1, 2022, as compared to $78.9 millionfor the quarter ended April 2, 2021, representing a decrease of $7.8 million, or approximately 10%. The decrease was primarily due to a decrease in payroll-related expenses as a result of the restructuring programs implemented during 2021. General and administrative expenses were $77.9 millionfor the quarter ended April 1, 2022, as compared to $72.4 millionfor the quarter ended April 2, 2021, representing an increase of $5.5 million, or approximately 8%.
Other operating expenses
Amortization of acquisition-related intangible assets
Amortization of acquisition-related intangible assets was
$21.3 millionfor the quarter ended April 1, 2022, as compared to $25.0 millionfor the quarter ended April 2, 2021, representing a decrease of $3.7 million, or approximately 15%. The decrease in expense was primarily due to full amortization of certain of our technology-related assets from our previous acquisitions during 2021.
Restructuring, asset impairments and others, net
Restructuring, asset impairments and other, net was a credit of
$13.0 millionfor the quarter ended April 1, 2022, as compared to $42.5 millionfor the quarter ended April 2, 2021. There were no new restructuring programs implemented during the quarter ended April 1, 2022. The credit includes a gain from the sale of an office building. Amounts incurred for the quarter ended April 2, 2021primarily relate to the 2021 involuntary severance plan. For additional information, See Note 5: ''Restructuring, Asset Impairments and Other, Net'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Interest expense decreased by
$11.8 millionto $21.6 millionduring the quarter ended April 1, 2022, as compared to $33.4 millionduring the quarter ended April 2, 2021. The decrease was primarily due to a decrease in our long-term debt, repayment of interest bearing debt using the proceeds from 0% Notes and the lack of amortization of debt discount on our convertible notes due to the adoption of ASU 2020-06. Our average gross long-term debt balance (including current maturities) for the quarter ended April 1, 2022was $3,256.3 millionat a weighted-average interest rate of 2.7%, as compared to $3,512.5 millionat a weighted-average interest rate of 3.8% for the quarter ended April 2, 2021.
Other income (expenses)
Other income (expense) decreased by
$2.4 millionfrom an income of $4.5 millionduring the quarter ended April 2, 2021to an income of $2.1 millionduring the quarter ended April 1, 2022. Income Tax Provision We recorded an income tax provision of $97.1 millionand $7.1 millionfor the quarters ended April 1, 2022and April 2, 2021, respectively, representing effective tax rates of 15.5% and 7.3%. The increase in our effective tax rate was substantially driven by the impact of discrete tax benefits in the prior year, relative to prior year pre-tax income. The prior year discrete benefits primarily related to releases in uncertain tax positions and net equity award windfalls.
For more information, see Note 13: “Income Taxes” in the Notes to the Unaudited Consolidated Financial Statements included elsewhere in this Form 10-Q.
Cash and capital resources
This section includes a discussion and analysis of our cash needs, contingencies, sources and uses of cash, operations, working capital, and long-term assets and liabilities.
We are a party to a variety of agreements entered into in the ordinary course of business pursuant to which we may be obligated to indemnify 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 us require us to indemnify the other party against losses, including but not limited to, losses due to 28 -------------------------------------------------------------------------------- Table of Contents IP infringement, environmental contamination and other property damage, personal injury, our failure to comply with applicable laws, our negligence or willful misconduct or our breach of representations, warranties or covenants related to such matters as title to sold assets. We face risk of exposure to warranty and product liability claims in the event that our products fail to perform as expected or such failure of our products results, or is alleged to result, in economic damage, bodily injury or property damage. In addition, if any of our designed products are alleged to be defective, we may be required to participate in their recall. Depending on the significance of any particular customer and other relevant factors, we may agree to provide more favorable rights to such customer for valid defective product claims.
We maintain directors’ and officers’ insurance policies which indemnify our directors and officers against various liabilities, including certain liabilities under the Exchange Act which may be incurred by any director or officer in their capacity as such.
While our future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations, and under such agreements, it is not possible to predict the maximum potential amount of future payments due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under any of these indemnities have not had a material effect on our business, financial condition, results of operations or cash flows, and we do not believe that any amounts that we may be required to pay under these indemnities in the future will be material to our business, financial condition, results of operations or cash flows. See Note 10: ''Commitments and Contingencies'' in the notes to our unaudited consolidated financial statements under the heading "Legal Matters" included elsewhere in this Form 10-Q for possible contingencies related to legal matters. See also Part I, Item 1 "Business - Government Regulation" of the 2021 Form 10-K for information on certain environmental matters.
Sources and uses of species
Our balance of cash and cash equivalents was
$1,645.1 millionas of April 1, 2022. We require cash to: (i) fund our operating expenses, working capital requirements, outlays for strategic acquisitions and investments; (ii) service our debt, including principal and interest; (iii) conduct research and development; (iv) incur capital expenditures; and (v) repurchase our common stock. Our principal sources of liquidity are cash on hand, cash generated from operations, funds from external borrowings and equity issuances. In the near term, we expect to fund our primary cash requirements through cash generated from operations and with cash and cash equivalents on hand. We also have the ability to utilize our Revolving Credit Facility, which has approximately $1.97 billionavailable for future borrowings.
We believe that the main factors that could affect our internal and external sources of cash include:
•changes in demand for our products, including as a result of the COVID-19 pandemic, 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 •our access to bank financing and the debt and equity capital markets that could impair 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. Our ability to service our long-term debt, including our 0% Notes, 3.875% Notes, 1.625% Notes, the Revolving Credit Facility and the Term Loan "B" Facility, to remain in compliance with the various covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance and the timing of the full economic recovery from the COVID-19 pandemic, as well as financial, competitive, legislative, geopolitical, regulatory and other conditions, some of which may be beyond our control. 29 -------------------------------------------------------------------------------- Table of Contents If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer-term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures for inventory, operating expenditures and capital 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. During the quarters ended
April 1, 2022and April 2, 2021, we paid $173.8 millionand $77.0 million, respectively, for capital expenditures. We expect our capital expenditures to be in the range of 12% to 14% of revenue in 2022 to expand our manufacturing capabilities to meet the market demands and further improve our manufacturing cost structure. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.
Main sources of cash flow
Our long-term cash generation is dependent on the ability of our operations to generate cash. Our cash flows from operating activities were
$478.6 millionand $218.5 millionfor the quarters ended April 1, 2022and April 2, 2021, respectively. The increase of $260.1 millionwas primarily attributable to a significant increase in net income due to our strategy to focus on a product mix that yields higher margins combined with better economic conditions resulting in increased demand for our products. Our ability to maintain positive operating cash flows is dependent on, among other factors, our success in achieving our revenue goals and manufacturing and operating cost targets. Management of our assets and liabilities, including both working capital and long-term assets and liabilities, also influences our operating cash flows, and each of these components is discussed below.
Working capital, calculated as total current assets less total current liabilities, fluctuates depending on end-market demand and our effective management of certain items such as receivables, inventory and payables. Our working capital, excluding cash and cash equivalents and the current portion of long-term debt, was
$1,326.6 millionas of April 1, 2022, and has fluctuated between $1,326.6 millionand $885.0 millionat the end of each of our last eight fiscal quarters. Our working capital, including cash and cash equivalents and the current portion of long-term debt, was $2,801.3 millionas of April 1, 2022, and has fluctuated between $2,801.3 millionand $1,457.6 millionat the end of each of our last eight fiscal quarters. We expect an increase in capital expenditures during 2022.
Long-term assets and liabilities
Our long-term assets consist primarily of property, plant and equipment, intangible assets, deferred taxes and goodwill. Our manufacturing rationalization plans have included efforts to utilize our existing manufacturing assets and supply arrangements more efficiently. We have taken actions to add manufacturing capacity with the acquisition of GTAT during 2021 and with the expected completion of the acquisition of the
East Fishkill, New Yorkfabrication facilities and certain related assets and liabilities on or around December 31, 2022. In connection with divestiture activities, we have wafer supply agreements in place for a period of time such that there is no disruption in our current ability to meet the demand for our products. Our long-term liabilities, excluding long-term debt and deferred taxes, consist of liabilities under our foreign defined benefit pension plans, operating lease liabilities and contingent tax reserves. With regard to our foreign defined benefit pension plans, our annual funding of these obligations is equal to the minimum amount legally required in each jurisdiction in which the plans operate. This annual amount is dependent upon numerous actuarial assumptions. For additional information, See Note 6: ''Balance Sheet Information and Other'' and Note 13: ''Income Taxes'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Main financings and capital events
Over the past several years, we have undertaken various measures to secure liquidity to pursue acquisitions, repurchase shares of our common stock, reduce interest costs, amend existing key financing arrangements and, in some cases, extend a portion of our debt maturities to continue to provide us additional operating flexibility. 30 -------------------------------------------------------------------------------- Table of Contents Cash Management Our ability to manage cash is limited, as our primary cash inflows and outflows are dictated by the terms of our sales and supply agreements, contractual obligations, debt instruments and legal and regulatory requirements. While we have some flexibility with respect to the timing of capital equipment purchases, we must invest in capital equipment on a timely basis to allow us to maintain our manufacturing efficiency and support our platforms for new products.
Debt guarantees and related commitments
April 1, 2022, we were in compliance with the indentures relating to our 0% Notes, 3.875% Notes and 1.625% Notes and with covenants relating to our Term Loan "B" Facility and Revolving Credit Facility. The 0% Notes, 3.875% Notes and 1.625% Notes are senior to the existing and future subordinated indebtedness of onsemi and its guarantor subsidiaries, rank equally in right of payment to all of our existing and future senior debt and, as unsecured obligations, are subordinated to all of our existing and future secured debt to the extent of the assets securing such debt.
Recent accounting pronouncements
For a discussion of recent accounting pronouncements, see our 2021 Form 10-K and Note 3: “Recent Accounting Pronouncements” in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.
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