ON SEMICONDUCTOR CORPORATION 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 endedJuly 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 costs 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.
As of
Business 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 and industrial infrastructure, as well as focusing on profitable growth opportunities 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. We believe we have made significant progress on gross margin and operating margin expansion by focusing our capital allocation on research and development investments and resources to accelerate growth in high-margin products and end-markets. Additionally, we continue to rationalize our product portfolio by moving away from non-differentiated products, which have had historically lower gross margins. During the first half of 2022, we divested our six-inch front-end wafer manufacturing facility in Oudenaarde,Belgium , for an aggregate consideration of approximately$19.9 million and our eight-inch front-end wafer manufacturing facility inSouth Portland, Maine , for an aggregate consideration of approximately$80.0 million . Additionally, we have signed wafer supply agreements with the buyers of theBelgium andSouth Portland, Maine manufacturing facilities to ensure that there is no disruption in our ability to meet customer demand for our products. Also, during the second quarter of 2022, we divested our non-strategic GTAT Sapphire business inSalem, Massachusetts for a nominal consideration. 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 26 -------------------------------------------------------------------------------- Table of Contents manufacturing volumes. As actions are initiated to achieve our business strategy goals, we could incur accounting charges in the future. As part of our ongoing strategy, we continue to focus on sustainability. During 2021, we announced our commitment to achieving net zero emissions by 2040. As we initiate steps to achieve our sustainability goals, additional investments may be required in the future in connection with 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, the ongoing COVID-19 pandemic and its effects are
impacting and will likely continue to impact market conditions and operations
worldwide, including the operations of our company; 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.
27--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Quarter Ended
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
July 1, 2022 July 2, 2021 Dollar Change
Revenue $
2,085.0
1,047.9 1,029.8 18.1
Gross profit 1,037.1 640.1 397.0
Operating expenses:
Research and development 161.6 166.3 (4.7)
Selling and marketing 73.1 76.1 (3.0)
General and administrative 83.2 73.2 10.0
Amortization of acquisition-related intangible assets 21.9 24.8 (2.9)
Restructuring, asset impairments and other, net (1.7) 17.5 (19.2)
Goodwill and intangible asset impairment 115.0 - 115.0
Total operating expenses 453.1 357.9 95.2
Operating income 584.0 282.2 301.8
Other income (expense), net:
Interest expense (22.1) (33.1) 11.0
Interest income 1.1 0.2 0.9
Loss on debt refinancing and prepayment (7.3) (26.2) 18.9
Gain on divestiture of business 1.9 - 1.9
Other income (expense) 6.4 (1.1) 7.5
Other income (expense), net (20.0) (60.2) 40.2
Income before income taxes 564.0 222.0 342.0
Income tax provision (107.4) (37.9) (69.5)
Net income 456.6 184.1 272.5
Less: Net income attributable to non-controlling interest (0.8) - (0.8)
Net income attributable to ON Semiconductor Corporation $ 455.8 $ 184.1 $ 271.7
Revenue
Revenue was $2,085.0 million and $1,669.9 million for the quarters ended July 1,
2022 and July 2, 2021 , respectively, representing an increase of $415.1 million ,
or approximately 25%. We had one customer, a distributor, whose revenue
accounted for approximately 12% and 14% of our total revenue for the quarters
ended July 1, 2022 and July 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
July 1, 2022 Total Revenue (1) July 2, 2021 Total Revenue (1)
PSG $ 1,057.0 50.7 % $ 846.6 50.7 %
ASG 716.7 34.4 % 607.6 36.4 %
ISG 311.3 14.9 % 215.7 12.9 %
Total revenue $ 2,085.0 $ 1,669.9 (1) Certain amounts may not total due to rounding of individual amounts.
28
--------------------------------------------------------------------------------
Table of Contents
Revenue from PSG increased by $210.4 million , or approximately 25%, for the
quarter ended July 1, 2022 compared to the quarter ended July 2, 2021 . The
revenue from our Advanced Power Division and our Integrated Circuits, Protection
and Signal Division increased by $166.8 million and $43.6 million , respectively,
primarily due to our strategy to focus on a product mix that yields higher
margins and an increase in average selling prices driven by strong market
demand, compared to the quarter ended July 2, 2021 .
Revenue from ASG increased by $109.1 million , or approximately 18%, for the
quarter ended July 1, 2022 compared to the quarter ended July 2, 2021 . The
revenue from our Automotive Division, Mobile, Computing and Cloud Division and
Industrial Solutions Division increased by $41.2 million , $39.7 million and
$34.9 million , respectively. The increases were primarily due to our strategy to
focus on a product mix that yields higher margins, and an increase in average
selling prices driven by strong market demand, compared to the quarter ended
July 2, 2021 .
Revenue from ISG increased by $95.6 million , or approximately 44%, for the
quarter ended July 1, 2022 compared to the quarter ended July 2, 2021 , largely
driven by an increase in revenue from our Automotive Sensing Division of $99.5
million . The increase was due to our strategy to focus on a product mix that
yields higher margins, and an increase in average selling prices driven by
strong market demand, compared to the quarter ended July 2, 2021 .
Revenue by geographic location, based on sales billed from the respective country or region, was as follows (dollars in millions):
Quarter Ended As a % of Quarter Ended As a % of
July 1, 2022 Total Revenue (1) July 2, 2021 Total Revenue (1)
Singapore $ 555.7 26.7 % $ 533.0 31.9 %
Hong Kong 584.4 28.0 % 449.3 26.9 %
United Kingdom 359.8 17.3 % 276.5 16.6 %
United States 361.2 17.3 % 225.6 13.5 %
Other 223.9 10.7 % 185.5 11.1 %
Total revenue $ 2,085.0 $ 1,669.9 (1) Certain amounts may not total due to rounding of individual amounts.
Gross Profit and Gross Margin (exclusive of amortization of acquisition-related intangible assets)
Our gross profit by operating and reportable segments was as follows (dollars in
millions):
Quarter Ended As a % of Quarter Ended As a % of
July 1, 2022 Segment Revenue (1) July 2, 2021 Segment Revenue (1)
PSG $ 511.2 48.4 % $ 314.3 37.1 %
ASG 380.3 53.1 % 252.3 41.5 %
ISG 145.6 46.8 % 73.5 34.1 %
Total gross profit $ 1,037.1 49.7 % $ 640.1 38.3 %
(1)Certain amounts may not total due to rounding of individual amounts.
Our gross profit increased by$397.0 million , or approximately 62%, from$640.1 million for the quarter endedJuly 2, 2021 to$1,037.1 million for the quarter endedJuly 1, 2022 . Our gross margin increased to 49.7% for the quarter endedJuly 1, 2022 from 38.3% for the quarter endedJuly 2, 2021 . The significant increase in both gross profit and gross margin was primarily driven by higher revenue, particularly in the automotive and industrial end-markets, a favorable product mix, and manufacturing efficiencies in our internal factories. Operating Expenses Research and development expenses were$161.6 million for the quarter endedJuly 1, 2022 , as compared to$166.3 million for the quarter endedJuly 2, 2021 , representing a decrease of$4.7 million , or approximately 3%. The decrease was primarily due to a reduction in payroll-related expenses as a result of the restructuring programs implemented during 2021. 29 -------------------------------------------------------------------------------- Table of Contents Selling and marketing expenses were$73.1 million for the quarter endedJuly 1, 2022 , as compared to$76.1 million for the quarter endedJuly 2, 2021 , representing a decrease of$3.0 million , or approximately 4%. The decrease was primarily due to a reduction in payroll-related expenses as a result of the restructuring programs implemented during 2021. General and administrative expenses were$83.2 million for the quarter endedJuly 1, 2022 , as compared to$73.2 million for the quarter endedJuly 2, 2021 , representing an increase of$10.0 million , or approximately 14%. The increase was primarily due to higher variable compensation and payroll-related expenses.
Other Operating Expenses
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets was$21.9 million for the quarter endedJuly 1, 2022 , as compared to$24.8 million for the quarter endedJuly 2, 2021 , representing a decrease of$2.9 million , or approximately 12%. 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 Other, Net
Restructuring, asset impairments and other, net was a credit of$1.7 million for the quarter endedJuly 1, 2022 , as compared to$17.5 million for the quarter endedJuly 2, 2021 . There were no new restructuring programs implemented during the quarter endedJuly 1, 2022 . The credit includes a gain from the sale of an office building. Amounts incurred for the quarter endedJuly 2, 2021 primarily 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.
Goodwill and intangible asset impairment was$115.0 million for the quarter endedJuly 1, 2022 , as compared to zero for the quarter endedJuly 2, 2021 . During the the quarter endedJuly 1, 2022 , the Company recorded a goodwill impairment charge of$115.0 million , which represented a portion of the goodwill assigned to a reporting unit within ASG as a result of a shift in our focus on long-term product mix in our strategic markets. For additional information, see Note 6: Balance Sheet Information and Other in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Interest Expense
Interest expense decreased by$11.0 million to$22.1 million during the quarter endedJuly 1, 2022 , as compared to$33.1 million during the quarter endedJuly 2, 2021 . The decrease was primarily due to a lack of amortization of debt discount on our convertible notes due to the adoption of ASU 2020-06, lower interest rates as a result of interest rate swap contracts, and a decrease in our long-term debt. Our average gross long-term debt balance (including current maturities) for the quarter endedJuly 1, 2022 was$3,253.0 million at a weighted-average interest rate of 2.7%, as compared to$3,374.7 million at a weighted-average interest rate of 3.9% for the quarter endedJuly 2, 2021 .
Loss on Debt Refinancing and Prepayment
Loss on debt refinancing and prepayment was$7.3 million for the quarter endedJuly 1, 2022 , as compared to$26.2 million for the quarter endedJuly 2, 2021 . The loss on debt refinancing and prepayment for the quarter endedJuly 2, 2021 related to the partial prepayment of the Term Loan "B" Facility.
Gain on Divestiture of Business
Gain on divestiture of a business was$1.9 million during the quarter endedJuly 1, 2022 , as compared to zero for the quarter endedJuly 2, 2021 . The gain relates to the divestiture of theSouth Portland, Maine manufacturing facility and the sale of the non-strategic GTAT Sapphire business inSalem, Massachusetts . See Note 4: ''Acquisition and Divestitures'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information. 30
-------------------------------------------------------------------------------- Table of Contents Other Income (Expense) Other income (expense) was an income of$6.4 million during the quarter endedJuly 1, 2022 , compared to an expense of$1.1 million during the quarter endedJuly 2, 2021 . The increase was primarily due to the fluctuations in foreign currencies resulting in increased transaction gains offset by losses on hedges that were realized. Income Tax Provision We recorded an income tax provision of$107.4 million and$37.9 million for the quarters endedJuly 1, 2022 andJuly 2, 2021 , respectively, representing effective tax rates of 19.0% and 17.1%. The increase in our effective tax rate was substantially driven by the impact of goodwill impairments, which are not deductible for tax purposes.
For additional information, see Note 13: ''Income Taxes'' and Note 6: ''Balance Sheet Information and Other'' in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Results of Operations
Six Months Ended
The following table summarizes certain information relating to our operating results that has been derived from our unaudited consolidated financial statements (in millions):
Six Months Ended
July 1, 2022 July 2, 2021 Dollar Change
Revenue $
4,030.0
2,031.6 1,990.3 41.3
Gross profit 1,998.4 1,161.3 837.1
Operating expenses:
Research and development 318.4 339.9 (21.5)
Selling and marketing 144.2 155.0 (10.8)
General and administrative 161.1 145.6 15.5
Amortization of acquisition-related intangible assets 43.2 49.8 (6.6)
Restructuring, asset impairments and other, net (14.7) 60.0 (74.7)
Goodwill and intangible asset impairment 115.0 2.9 112.1
Total operating expenses 767.2 753.2 14.0
Operating income 1,231.2 408.1 823.1
Other income (expense), net:
Interest expense (43.7) (66.5) 22.8
Interest income 1.5 0.6 0.9
Loss on debt refinancing and prepayment (7.3) (26.2) 18.9
Gain on divestiture of business 1.9 - 1.9
Other income (expense) 8.5 3.4 5.1
Other income (expense), net (39.1) (88.7) 49.6
Income before income taxes 1,192.1 319.4 872.7
Income tax provision (204.5) (45.0) (159.5)
Net income 987.6 274.4 713.2
Less: Net income attributable to non-controlling interest (1.6) (0.4) (1.2)
Net income attributable to ON Semiconductor Corporation $ 986.0 $ 274.0 $ 712.0
31-------------------------------------------------------------------------------- Table of Contents Revenue Revenue was$4,030.0 million and$3,151.6 million for the six months endedJuly 1, 2022 and six months endedJuly 2, 2021 , respectively, representing an increase of$878.4 million , or approximately 28%. We had one customer, a distributor, whose revenue accounted for approximately 12% of our total revenue for the six months endedJuly 1, 2022 , andJuly 2, 2021 . Revenue by operating and reportable segments was as follows (dollars in millions): Six Months Ended As a % of Six Months Ended As a % of July 1, 2022 Total Revenue (1) July 2, 2021 Total Revenue (1) PSG$ 2,043.7 50.7 %$ 1,593.6 50.6 % ASG 1,406.0 34.9 % 1,139.1 36.1 % ISG 580.3 14.4 % 418.9 13.3 % Total revenue$ 4,030.0 $ 3,151.6
(1) Certain amounts may not total due to rounding of individual amounts.
Revenue from PSG increased by$450.1 million , or approximately 28%, for the six months endedJuly 1, 2022 compared to the six months endedJuly 2, 2021 . The revenue from our Advanced Power Division and our Integrated Circuits, Protection and Signal Division increased by$337.4 million and$112.7 million , respectively, primarily due to our strategy to focus on product mix hat yields higher margins, and an increase in average selling prices driven by strong market demand, compared to the six months endedJuly 2, 2021 . Revenue from ASG increased by$266.9 million , or approximately 23%, for the six months endedJuly 1, 2022 compared to the six months endedJuly 2, 2021 . The revenue from our Automotive Division, Industrial Solutions Division and Mobile, Computing and Cloud Division increased by$96.4 million ,$88.3 million and$82.8 million , respectively. The increases were primarily due to our strategy to focus on a product mix that yields higher margins, and an increase in average selling prices driven by strong market demand, compared to the six months endedJuly 2, 2021 . Revenue from ISG increased by$161.4 million , or approximately 39%, for the six months endedJuly 1, 2022 compared to the six months endedJuly 2, 2021 . The increase was largely due to an increase in revenue from our Automotive Sensing Division of$161.7 million . The increase was primarily due to our strategy to focus on a product mix that yields higher margins, and an increase in average selling prices driven by strong market demand, compared to the six months endedJuly 2, 2021 .
Revenue by geographic location, including local sales made by operations within each area, based on sales billed from the respective region, was as follows (dollars in millions):
Six Months Ended As a % of Six Months Ended As a % of
July 1, 2022 Total Revenue (1) July 2, 2021 Total Revenue (1)
Singapore $ 1,111.5 27.6 % $ 1,042.0 33.1 %
Hong Kong 1,114.0 27.6 % 791.5 25.1 %
United Kingdom 705.2 17.5 % 545.4 17.3 %
United States 673.0 16.7 % 409.9 13.0 %
Other 426.3 10.6 % 362.8 11.5 %
Total revenue $ 4,030.0 $ 3,151.6 (1) Certain amounts may not total due to rounding of individual amounts.
32
--------------------------------------------------------------------------------
Table of Contents
Gross Profit and Gross Margin (exclusive of amortization of acquisition-related
intangible assets described below)
Our gross profit by operating and reportable segments was as follows (dollars in
millions):
Six Months Ended As a % of Six Months Ended As a % of
July 1, 2022 Segment Revenue (1) July 2, 2021 (2) Segment Revenue (1)
PSG $ 985.9 48.2 % $ 560.8 35.2 %
ASG 747.0 53.1 % 459.1 40.3 %
ISG 265.5 45.8 % 141.4 33.8 %
Total gross profit $ 1,998.4 49.6 % $ 1,161.3 36.8 %
(1)Certain amounts may not total due to rounding of individual amounts.
(2)Beginning in the first quarter of 2021, unallocated manufacturing costs were
included as part of segment operating results to determine segment gross profit.
As a result, the prior-period amounts have been reclassified to conform to
current-period presentation.
Our gross profit was $1,998.4 million for the six months ended July 1, 2022
compared to $1,161.3 million for the six months ended July 2, 2021 . Gross profit
increased by $837.1 million , or approximately 72%. Gross margin increased to
49.6% for the six months ended July 1, 2022 from 36.8% for the six months ended
July 2, 2021 .
The significant increase in both gross profit and gross margin was primarily driven by higher revenue, particularly in the automotive and industrial end-markets, a favorable product mix, and manufacturing efficiencies in our internal factories.
Operating Expenses
Research and development expenses were$318.4 million for the six months endedJuly 1, 2022 , as compared to$339.9 million for the six months endedJuly 2, 2021 , representing a decrease of$21.5 million , or approximately 6%. The decrease was primarily due to a reduction in payroll-related expenses as a result of the restructuring programs implemented during 2021.
Selling and marketing expenses were
General and administrative expenses were$161.1 million for the six months endedJuly 1, 2022 , as compared to$145.6 million for the six months endedJuly 2, 2021 , representing an increase of$15.5 million , or approximately 11%. The increase was primarily due higher variable compensation and stock compensation.
Other Operating Expenses
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets was$43.2 million and$49.8 million for the six months endedJuly 1, 2022 and six months endedJuly 2, 2021 , respectively, representing a decrease of$6.6 million , or approximately 13%. 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 Other, Net
Restructuring, asset impairments and other, net was a credit of$14.7 million for the six months endedJuly 1, 2022 , as compared to$60.0 million for the six months endedJuly 2, 2021 , representing a decrease of$74.7 million . There were no new restructuring programs implemented during the six months endedJuly 1, 2022 . The credit is primarily due to a gain from the sale of two office buildings and a reduction in workforce restructuring expenses, offset by an asset impairment of the GTAT Sapphire business. Amounts incurred for the six months endedJuly 2, 2021 primarily 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. 33 -------------------------------------------------------------------------------- Table of ContentsGoodwill and Intangible Asset ImpairmentGoodwill and intangible asset impairment was$115.0 million for the six months endedJuly 1, 2022 , as compared to$2.9 million for the six months endedJuly 2, 2021 . During the second quarter of 2022, the Company recorded a goodwill impairment charge of$115.0 million , which represented a portion of the goodwill assigned to a reporting unit within ASG as a result of a shift in our focus on long-term product mix in our strategic markets. See Note 6: ''Balance Sheet Information and Other'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Interest Expense
Interest expense decreased by$22.8 million to$43.7 million during the six months endedJuly 1, 2022 , as compared to$66.5 million during the six months endedJuly 2, 2021 . The decrease was primarily due to the lack of amortization of debt discount on our convertible notes due to the adoption of ASU 2020-06, lower interest rates as a result of interest rate swap contracts, and a decrease in our long-term debt. Our average gross long-term debt balance (including current maturities) for the six months endedJuly 1, 2022 was$3,255.0 million at a weighted-average interest rate of 2.7%, as compared to$3,451.8 million at a weighted-average interest rate of 3.9% for the six months endedJuly 2, 2021 .
Loss on Debt Refinancing and Prepayment
Loss on debt refinancing and prepayment was$7.3 million for the six months endedJuly 1, 2022 , as compared to$26.2 million for the six months endedJuly 2, 2021 . The loss on debt refinancing and prepayment for the six months endedJuly 2, 2021 primarily related to the partial prepayment of the Term Loan "B" Facility.
Gain on Divestiture of Business
Gain on divestiture of a business was$1.9 million during the six months endedJuly 1, 2022 , as compared to zero for the six months endedJuly 2, 2021 . The gain relates to the divestiture of theSouth Portland, Maine manufacturing facility and the sale of the non-strategic GTAT Sapphire business inSalem, Massachusetts . See Note 4: ''Acquisition and Divestitures'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information. Other Income (Expense)
Other income (expense) was income of
Income Tax Provision We recorded an income tax provision of$204.5 million and$45.0 million during the six months endedJuly 1, 2022 andJuly 2, 2021 , respectively, representing effective tax rates of 17.2% and 14.1%. The increase in our effective tax rate was substantially driven by the impact of goodwill impairments, which are not deductible for tax purposes.
For additional information, see Note 13: ''Income Taxes'' and Note 6: ''Balance Sheet Information and Other'' in the notes to the unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Liquidity and Capital Resources
This section includes a discussion and analysis of our cash requirements, contingencies, sources and uses of cash, operations, working capital and long-term assets and liabilities.
Contingencies
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 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.
34
--------------------------------------------------------------------------------Table of Contents
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 that indemnify our directors and officers against various liabilities, including certain liabilities under the Exchange Act that might be incurred by any director or officer in his or her 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 Cash
Our balance of cash and cash equivalents was
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$1.5 billion available for future borrowings.
We believe that the key 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 make progress on the
achievement of our business strategy and sustainability goals, the impact of our
restructuring programs on our production and cost efficiency, inflationary
pressures, 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.
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.
35
--------------------------------------------------------------------------------
Table of Contents
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 six months ended July 1, 2022 and July 2, 2021 , we
paid $391.9 million and $181.8 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.
Primary Cash Flow Sources
Our long-term cash generation is dependent on the ability of our operations to generate cash. Our cash flows from operating activities were$899.4 million and$706.5 million for the six months endedJuly 1, 2022 andJuly 2, 2021 , respectively. The increase of$192.9 million was 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
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$1,445.6 million as ofJuly 1, 2022 , and has fluctuated between$1,445.6 million and$885.0 million at 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$3,072.0 million as ofJuly 1, 2022 , and has fluctuated between$3,072.0 million and$1,457.6 million at 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 theEast Fishkill, New York fabrication facilities and certain related assets and liabilities on or aroundDecember 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.
Key Financing and Capital Events
Overview
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.
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.
36
--------------------------------------------------------------------------------Table of Contents
Debt Guarantees and Related Covenants
As ofJuly 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.
© Edgar Online, source
