ON SEMICONDUCTOR CORPORATION 
You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included in the 2020 Form 10-K and our unaudited consolidated financial statements for the fiscal quarter endedJuly 2, 2021 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 2020 Form 10-K. Executive Overview ON Semiconductor Overview ON Semiconductor is driving innovation in energy-efficient electronics. We believe that our extensive portfolio of sensors, power management, connectivity, custom and SoC, analog, logic, timing and discrete devices helps customers efficiently solve their design challenges in advanced electronic systems and products. Our power management and motor driver semiconductor components control, convert, protect and monitor the supply of power to the different elements within a wide variety of electronic devices. Our ASICs and SoC devices use analog, MCU, DSP, mixed-signal and advanced logic capabilities to enable the application and uses of many of our automotive, consumer and industrial customers' products. Our signal management semiconductor components provide high-performance clock management and data flow management for precision computing, communications and industrial systems. Our portfolio of sensors, including image sensors, radar and LiDAR, provides advanced solutions for automotive, industrial and IoT applications. Our high performance Wi-Fi solution creates a strong platform for addressing connectivity solutions for industrial IoT applications. Our standard semiconductor components serve as "building blocks" within virtually all types of electronic devices. We serve a broad base of end-user markets, including automotive, communications, computing, consumer and industrial. Our portfolio of devices, which are found in a wide variety of end-products, enables us to offer advanced ICs and the "building block" components that deliver system-level functionality and design solutions. We offer micro packages, which provide increased performance characteristics while reducing the critical board space inside today's ever-shrinking electronic devices and power modules, delivering improved energy efficiency and reliability for a wide variety of medium and high power applications. As ofJuly 2, 2021 , we were organized into the following three operating and reportable segments: PSG, ASG and ISG.
Business Strategy Developments
Our primary focus continues to be on gross 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 certain end-customers. We are also focused on achieving efficiencies in our operating expenditures. We completed the process of rationalizing a significant portion of our product portfolio during the first half of 2021 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. We believe these actions, among others, will also allow us to transition to a lighter internal fabrication model where our gross margins will be less volatile and not as heavily influenced by our internal manufacturing volumes. We are also rationalizing our manufacturing footprint to align with our investment priorities and corporate strategy. Our goal is to reduce volatility in our gross margins and maximize return on our manufacturing investments with the intention of having our product strategy drive our manufacturing footprint and capital investments. In order to realign investments to focus on growth drivers and key markets and to streamline our operations and achieve efficiencies, during the first half of 2021, we implemented the ISP and notified approximately 720 employees of their employment termination and incurred severance charges and other benefits of approximately$55.0 million during this period. During the second quarter of 2021, we completed the offering of$805.0 million aggregate principal amount of our 0% Notes and utilized the net proceeds along with cash generated from operations to i) repurchase or exchange$372.4 million in aggregate principal amount of our 1.625% Notes for a total consideration of$506.5 million in cash and 5.4 million shares of our common stock ii) pay$66.5 million for the net cost of the convertible note hedges and iii) repay the entire remaining outstanding balance of$550.0 million of our Revolving Credit Facility. For additional information, see Note 6: ''Long-Term Debt'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q. 25 --------------------------------------------------------------------------------
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As actions are initiated to achieve our business strategy goals, we could incur accounting charges in the future in connection with such actions.
Impact of the Novel Coronavirus Disease 2019 ("COVID-19") Pandemic on our Business
In response to the impact of the ongoing COVID-19 pandemic on our business and
industry, we have proactively implemented preventative protocols, which we
continuously assess and update for current local conditions and emerging trends.
These are intended to safeguard our employees, contractors, customers, suppliers
and communities, and to ensure business continuity in case of further government
restrictions or if severe outbreaks impact operations at certain of our
facilities.
While substantially all of our global manufacturing sites are currently
operational, our facilities could be required to temporarily curtail production
levels or temporarily cease operations based on government mandates in response
to further outbreaks. The ultimate extent to which the COVID-19 pandemic will
impact our operations depends on future developments, which are highly uncertain
and difficult to predict, including the effectiveness and utilization of
vaccines for COVID-19 and its variants, new information that may emerge
concerning the severity and longevity of the COVID-19 pandemic and efforts
undertaken by various governments to contain the spread of COVID-19 and its
variants.
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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 2, 2021 July 3, 2020 Dollar Change
Revenue $
1,669.9
1,029.8 839.2 190.6
Gross profit 640.1 374.3 265.8
Operating expenses:
Research and development 166.3 156.1 10.2
Selling and marketing 76.1 65.6 10.5
General and administrative 73.2 62.9 10.3
Amortization of acquisition-related intangible assets 24.8 29.1 (4.3)
Restructuring, asset impairments and other charges, net 17.5 16.2 1.3
Intangible asset impairment - 1.3 (1.3)
Total operating expenses 357.9 331.2 26.7
Operating income 282.2 43.1 239.1
Other income (expense), net:
Interest expense (33.1) (41.9) 8.8
Interest income 0.2 1.5 (1.3)
Loss on debt refinancing and prepayment (26.2) - (26.2)
Other income (expense) (1.1) (2.8) 1.7
Other income (expense), net (60.2) (43.2) (17.0)
Income (loss) before income taxes 222.0 (0.1) 222.1
Income tax provision (37.9) (0.8) (37.1)
Net income (loss) 184.1 (0.9) 185.0
Less: Net income attributable to non-controlling interest - (0.5) 0.5
Net income (loss) attributable to
184.1$ (1.4) $ 185.5 Revenue Revenue was$1,669.9 million and$1,213.5 million for the quarters endedJuly 2, 2021 andJuly 3, 2020 , respectively, representing an increase of$456.4 million , or approximately 38%. We had one customer, a distributor, whose purchases accounted for approximately 14% of our total revenue for the quarter endedJuly 2, 2021 . Revenue by operating and reportable segments was as follows (dollars in millions): Quarter Ended As a % of Quarter Ended As a % of July 2, 2021 Total Revenue (1) July 3, 2020 Total Revenue (1) PSG$ 846.6 50.7 %$ 618.4 51.0 % ASG 607.6 36.4 % 426.7 35.2 % ISG 215.7 12.9 % 168.4 13.9 % Total revenue$ 1,669.9 $ 1,213.5
(1) Certain amounts may not total due to rounding of individual amounts.
Revenue from PSG increased by
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Division increased by $139.5 million and $88.6 million , respectively, due to
improving economic conditions resulting in significantly increased demand for
our products and an increase in average selling prices compared to the quarter
ended July 3, 2020 . During the second quarter of 2020, we experienced delays in
fulfilling certain customer orders due to supply chain constraints and certain
of our factories operating at significantly reduced capacity levels as a result
of the COVID-19 pandemic, neither of which were experienced during the second
quarter of 2021.
Revenue from ASG increased by $180.9 million , or approximately 42%, for the
quarter ended July 2, 2021 compared to the quarter ended July 3, 2020 . The
revenue from our Automotive Division, Mobile, Computing and Cloud Division and
Industrial and Offline Power Division increased by $73.0 million , $53.5 million
and $42.3 million , respectively. The increases were primarily due to increased
demand experienced in the Automotive Division and significantly improved
economic conditions, which drove up demand for our products in other end-markets
along with an increase in average selling prices. Additionally, as discussed
above, during the second quarter of 2020, we experienced delays in fulfilling
certain customer orders due to supply chain constraints and certain of our
factories operating at significantly reduced capacity levels as a result of the
COVID-19 pandemic, neither of which were experienced during the second quarter
of 2021.
Revenue from ISG increased by $47.3 million , or approximately 28%, for the
quarter ended July 2, 2021 compared to the quarter ended July 3, 2020 . The
revenue from our Automotive Sensing Division increased by $36.9 million due to
the significant improvement of economic conditions, specifically with automotive
component manufacturers and the automotive industry overall, resulting in
increased demand for these products along with an increase in average selling
prices.
Revenue by geographic location, based on sales billed from the respective country or regions, was as follows (dollars in millions):
Quarter Ended As a % of Quarter Ended As a % of
July 2, 2021 Total Revenue (1) July 3, 2020 Total Revenue (1)
Singapore $ 533.0 31.9 % $ 439.4 36.2 %
Hong Kong 449.3 26.9 % 323.3 26.6 %
United Kingdom 276.5 16.6 % 140.9 11.6 %
United States 225.6 13.5 % 151.8 12.5 %
Other 185.5 11.1 % 158.1 13.0 %
Total $ 1,669.9 $ 1,213.5 (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 2, 2021 Segment Revenue (1) April 3, 2020 (2) Segment Revenue (1)
PSG $ 314.3 37.1 % $ 172.4 27.9 %
ASG 252.3 41.5 % 151.4 35.5 %
ISG 73.5 34.1 % 50.5 30.0 %
Total gross profit $ 640.1 38.3 % $ 374.3 30.8 %
(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 increased by $265.8 million , or approximately 71%, from $374.3
million for the quarter ended July 3, 2020 to $640.1 million for the quarter
ended July 2, 2021 . Our overall gross margin increased to approximately 38% for
the quarter ended July 2, 2021 from approximately 31% for the quarter ended
July 3, 2020 .
The favorable economic environment and significant improvement in demand from
automotive component manufacturers and the automotive industry overall
contributed to increased demand for many of our products. The increase in gross
profit and
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gross margin was due to an increase in sales volume, combined with an increase
in average selling prices for some of our products, increased utilization and a
better mix in the portfolio of products sold. Also, during the quarter ended
July 3, 2020 , we recorded approximately $13 million of fixed overhead charges to
cost of revenues, representing under-absorbed inventory costs, primarily due to
the COVID-19 pandemic, which adversely impacted our gross margin for that
period.
Operating Expenses
Research and development expenses were$166.3 million for the quarter endedJuly 2, 2021 , as compared to$156.1 million for the quarter endedJuly 3, 2020 , representing an increase of$10.2 million , or approximately 7%. The increase was primarily due to the variable compensation recorded during the quarter endedJuly 2, 2021 . Selling and marketing expenses were$76.1 million for the quarter endedJuly 2, 2021 , as compared to$65.6 million for the quarter endedJuly 3, 2020 , representing an increase of$10.5 million , or approximately 16%. The increase was primarily due to the increase in payroll expense and variable compensation recorded during the quarter endedJuly 2, 2021 . General and administrative expenses were$73.2 million for the quarter endedJuly 2, 2021 , as compared to$62.9 million for the quarter endedJuly 3, 2020 , representing an increase of$10.3 million , or approximately 16%. The increase was primarily due to the increase in variable and share-based compensation recorded during the quarter endedJuly 2, 2021 .
Other Operating Expenses
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets was$24.8 million for the quarter endedJuly 2, 2021 , as compared to$29.1 million for the quarter endedJuly 3, 2020 , representing a decrease of$4.3 million , or approximately 15%. The decrease was primarily due to full amortization of certain of our technology-related assets during 2020.
Restructuring, Asset Impairments and Other, Net
Restructuring, asset impairments and other, net was$17.5 million for the quarter endedJuly 2, 2021 , as compared to$16.2 million for the quarter endedJuly 3, 2020 . The expenses related primarily to the restructuring programs in effect during the relevant quarter, which were the ISP during the second quarter of 2021 and the involuntary separation program during the second quarter of 2020. For additional information, see Note 4: ''Restructuring, Asset Impairments and Other, Net'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Interest Expense
Interest expense decreased by$8.8 million to$33.1 million during the quarter endedJuly 2, 2021 , as compared to$41.9 million during the quarter endedJuly 3, 2020 . The decrease was primarily due to the partial repurchase or exchange of the 1.625% Notes and repayment of the Revolving Credit Facility. Our average gross long-term debt balance (including current maturities) for the quarter endedJuly 2, 2021 was$3,374.7 million at a weighted-average interest rate of 3.9%, as compared to$4,855.4 million at a weighted-average interest rate of 3.5% for the quarter endedJuly 3, 2020 .
Loss on Debt Refinancing and Prepayment
Loss on debt refinancing and prepayment relating to the partial repurchase or exchange of the 1.625% Notes was$26.2 million during the quarter endedJuly 2, 2021 , as compared to zero for the quarter endedJuly 3, 2020 .
Other Income (Expense)
Other expense decreased by$1.7 million from$2.8 million during the quarter endedJuly 3, 2020 to$1.1 million during the quarter endedJuly 2, 2021 , which 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) Benefit
We recorded an income tax provision of
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The income tax provision for the quarter ended July 2, 2021 consisted primarily
of $36.1 million for income and withholding taxes of certain of our foreign and
domestic operations, $3.9 million related to a discrete foreign rate change and
$1.9 million of other discrete items, partially offset by discrete benefits of
$2.9 million relating to the release of reserves and interest for uncertain tax
positions in foreign jurisdictions for which the statute has lapsed and $1.1
million relating to net equity award windfalls.
The income tax provision for the quarter ended July 3, 2020 consisted primarily
of $0.9 million for income and withholding taxes of certain of our foreign and
domestic operations, offset by $0.1 million of discrete benefits.
For additional information, see Note 12: ''Income Taxes'' 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 2, 2021 July 3, 2020 Dollar Change
Revenue $
3,151.6
1,990.3 1,714.4 275.9
Gross profit 1,161.3 777.0 384.3
Operating expenses:
Research and development 339.9 327.1 12.8
Selling and marketing 155.0 142.4 12.6
General and administrative 145.6 134.1 11.5
Amortization of acquisition-related intangible assets 49.8 61.4 (11.6)
Restructuring, asset impairments and other charges, net 60.0 49.0 11.0
Intangible asset impairment 2.9 1.3 1.6
Total operating expenses 753.2 715.3 37.9
Operating income 408.1 61.7 346.4
Other income (expense), net:
Interest expense (66.5) (84.4) 17.9
Interest income 0.6 3.4 (2.8)
Loss on debt refinancing and prepayment (26.2) - (26.2)
Other income (expense) 3.4 (2.7) 6.1
Other income (expense), net (88.7) (83.7) (5.0)
Income (loss) before income taxes 319.4 (22.0) 341.4
Income tax benefit (provision) (45.0) 7.4 (52.4)
Net income (loss) 274.4 (14.6) 289.0
Less: Net income attributable to non-controlling interest (0.4) (0.8) 0.4
Net income (loss) attributable to
Revenue Revenue was$3,151.6 million and$2,491.4 million for the six months endedJuly 2, 2021 and six months endedJuly 3, 2020 , respectively, representing an increase of$660.2 million , or 26.5%. We had one customer, a distributor, whose purchases accounted for approximately 12% of our total revenue for the six months endedJuly 2, 2021 .
Revenue by operating and reportable segments was as follows (dollars in millions):
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Six Months Ended As a % of Six Months Ended As a % of
July 2, 2021 Total Revenue (1) July 3, 2020 Total Revenue (1)
PSG $ 1,593.6 50.6 % $ 1,242.3 49.9 %
ASG 1,139.1 36.1 % 893.8 35.9 %
ISG 418.9 13.3 % 355.3 14.3 %
Total revenue $ 3,151.6 $ 2,491.4 (1) Certain amounts may not total due to rounding of individual amounts.
Revenue from PSG increased by$351.3 million , or approximately 28%, for the six months endedJuly 2, 2021 compared to the six months endedJuly 3, 2020 . The revenue from our Advanced Power Division and Integrated Circuits, Protection and Signal Division increased by$215.5 million and$140.4 million , respectively. These increases were primarily driven by better economic conditions resulting in increased demand for our products along with an increase in average selling prices. During the first half of 2020, we experienced delays in fulfilling certain customer orders due to supply chain constraints and certain of our factories operating at significantly reduced capacity levels as a result of the COVID-19 pandemic, neither of which were experienced during 2021. Revenue from ASG increased by$245.3 million , or approximately 27%, for the six months endedJuly 2, 2021 compared to the six months endedJuly 3, 2020 . The revenue from our Automotive Division, Mobile, Computing and Cloud Division and our Industrial and Offline Power Division increased by$92.7 million ,$90.9 million and$64.6 million , respectively. The increases were primarily due to the increased demand experienced in the Automotive Division and significantly improved economic conditions resulting in increased demand for our products in other end-markets along with an increase in average selling prices. Also during the first half of 2020, we experienced delays in fulfilling certain customer orders due to supply chain constraints and certain of our factories operating at significantly reduced capacity levels as a result of the COVID-19 pandemic, neither of which were experienced during 2021. Revenue from ISG increased by$63.6 million , or approximately 18%, for the six months endedJuly 2, 2021 compared to the six months endedJuly 3, 2020 . The revenue from our Automotive Solutions Division and Industrial and Consumer Division increased by$50.9 million and$36.1 million , respectively, and was partially offset by a decrease of$23.5 million from the exited CCD business. The increase in revenue was due to the significant improvement in economic conditions, specifically with automotive component manufacturers and the automotive industry overall, resulting in increased demand for these products along with an increase in average selling prices.
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 2, 2021 Total Revenue (1) July 3, 2020 Total Revenue (1)
Singapore $ 1,042.0 33.1 % $ 847.7 34.0 %
Hong Kong 791.5 25.1 % 639.5 25.7 %
United Kingdom 545.4 17.3 % 367.9 14.8 %
United States 409.9 13.0 % 336.3 13.5 %
Other 362.8 11.5 % 300.0 12.0 %
Total $ 3,151.6 $ 2,491.4 (1) Certain amounts may not total due to rounding of individual amounts.
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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 2, 2021 Segment Revenue (1) July 3, 2020 (2) Segment Revenue (1)
PSG $ 560.8 35.2 % $ 355.0 28.6 %
ASG 459.1 40.3 % 309.2 34.6 %
ISG 141.4 33.8 % 112.8 31.7 %
Total gross profit $ 1,161.3 36.8 % $ 777.0 31.2 %
(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 $1,161.3 million for the six months ended July 2, 2021
compared to $777.0 million for the six months ended July 3, 2020 . Gross profit
increased by $384.3 million , or approximately 49%. Gross profit as a percentage
of revenue increased to approximately 37% for the six months ended July 2, 2021
from approximately 31% for the six months ended July 3, 2020 .
The significant increase in gross profit and gross margin was due to a
significant increase in sales volume, combined with an increase in average
selling prices for some of our products, increased utilization and a better mix
in the portfolio of the products sold. The favorable economic environment and
significant improvement in demand from automotive component manufacturers and
the automotive industry overall contributed to increased demand for our
products. Additionally, during the six months ended July 3, 2020 , we recorded
approximately $33 million of fixed overhead charges to cost of revenues,
representing under-absorbed inventory costs, primarily due to the COVID-19
pandemic, which adversely impacted our gross margin for that period.
Operating Expenses
Research and development expenses were$339.9 million for the six months endedJuly 2, 2021 , as compared to$327.1 million for the six months endedJuly 3, 2020 , representing an increase of$12.8 million , or approximately 4%. This increase was primarily due to an increase in variable and share-based compensation partially offset by a decrease in payroll costs due to the restructuring programs and a decrease in the cost of external consultants.
Selling and marketing expenses were
General and administrative expenses were$145.6 million for the six months endedJuly 2, 2021 , as compared to$134.1 million for the six months endedJuly 3, 2020 , representing an increase of$11.5 million , or approximately 9%. The increase was primarily due to an increase in variable and share-based compensation partially offset by a decrease in the cost of external consultants.
Other Operating Expenses
Amortization of Acquisition-Related Intangible Assets
Amortization of acquisition-related intangible assets was$49.8 million and$61.4 million for the six months endedJuly 2, 2021 and six months endedJuly 3, 2020 , respectively, representing a decrease of$11.6 million , or approximately 19%. The decrease was primarily due to full amortization of certain of our technology-related assets during 2020. 32 -------------------------------------------------------------------------------- Table of Contents Restructuring, Asset Impairments and Other, Net Restructuring, asset impairments and other, net was$60.0 million for the six months endedJuly 2, 2021 , as compared to$49.0 million for the six months endedJuly 3, 2020 , representing an increase of$11.0 million . The increase was primarily due to the magnitude of the restructuring programs in effect during the relevant period. For additional information, see Note 4: ''Restructuring, Asset Impairments and Other, Net'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q.
Interest Expense
Interest expense decreased by$17.9 million to$66.5 million during the six months endedJuly 2, 2021 , as compared to$84.4 million during the six months endedJuly 3, 2020 . The decrease was primarily due to the partial repurchase or exchange of the 1.625% Notes and the repayment of the Revolving Credit Facility. Our average gross long-term debt balance (including current maturities) for the six months endedJuly 2, 2021 was$3,451.8 million at a weighted-average interest rate of 3.9%, as compared to$4,301.2 million at a weighted-average interest rate of 3.9% for the six months endedJuly 3, 2020 .
Loss on Debt Refinancing and Prepayment
Loss on debt refinancing and prepayment relating to the partial repurchase or exchange of the 1.625% Notes was$26.2 million for the six months endedJuly 2, 2021 , as compared to zero for the six months endedJuly 3, 2020 .
Other Income (Expense)
Other income (expense) was an income of$3.4 million for the six months endedJuly 2, 2021 as compared to an expense of$2.7 million for the six months endedJuly 3, 2020 , which was primarily due to the fluctuations in foreign currencies resulting in increased transaction gains partially offset by losses on hedges that were realized.
Income Tax (Provision) Benefit
We recorded an income tax provision of
The income tax provision for the six months endedJuly 2, 2021 consisted primarily of$53.9 million for income and withholding taxes of certain of our foreign and domestic operations and$3.9 million related to a discrete foreign tax rate change, partially offset by discrete benefits of$6.9 million relating to uncertain tax positions in foreign jurisdictions for which the statute has lapsed,$5.3 million relating to net equity award windfalls and$0.6 million of other discrete benefits. The income tax benefit for the six months endedJuly 3, 2020 consisted primarily of a benefit of$7.5 million for income and withholding taxes of certain of our foreign and domestic operations, offset by$0.1 million of discrete expenses.
For additional information, see Note 12: ''Income Taxes'' 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, off-balance sheet arrangements, contingencies, sources and uses of cash, operations, working capital and long-term assets and liabilities.
Contractual Obligations
As ofJuly 2, 2021 , there were no material changes outside the ordinary course of business to our contractual obligations table, including the notes thereto, contained in the 2020 Form 10-K.
Off-Balance Sheet Arrangements
In the ordinary course of business, we provide standby letters of credit or
other guarantee instruments to certain parties in connection with certain
transactions, including, but not limited to: material purchase commitments,
agreements to mitigate collection risk, leases, utilities or customs guarantees.
As of
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$0.9 million letters of credit outstanding under our Revolving Credit Facility
as of July 2, 2021 , which reduced our borrowing capacity dollar-for-dollar. As
of July 2, 2021 , we also had outstanding guarantees and letters of credit
outside of our Revolving Credit Facility in the amount of $8.6 million .
As part of securing financing in the ordinary course of business, we have issued
guarantees related to certain of our subsidiaries, which totaled $0.9 million as
of July 2, 2021 . Based on historical experience and information currently
available, we believe that we will not be required to make payments under the
standby letters of credit or guarantee arrangements for the foreseeable future.
We have not recorded any liability in connection with these letters of credit
and guarantee arrangements. See Note 6: ''Long-Term Debt'' and Note 9:
''Commitments and Contingencies'' in the notes to our unaudited consolidated
financial statements found elsewhere in this Form 10-Q for additional
information.
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 parties against 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. 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.
The agreement and plan of merger relating to the acquisition of Fairchild (the "Fairchild Agreement") provides for indemnification and insurance rights in favor of Fairchild's then-current and former directors, officers and employees. Specifically, we have agreed that, for no fewer than six years following the Fairchild acquisition, we will: (a) indemnify and hold harmless each such indemnitee against losses and expenses (including advancement of attorneys' fees and expenses) in connection with any proceeding asserted against the indemnified party in connection with such person's serving as a director, officer, employee or other fiduciary of Fairchild or its subsidiaries prior to the effective time of the acquisition; (b) maintain in effect all provisions of the certificate of incorporation or bylaws of Fairchild or any of its subsidiaries or any other agreements of Fairchild or any of its subsidiaries with any indemnified party regarding elimination of liability, indemnification of officers, directors and employees and advancement of expenses in existence on the date of the Fairchild Agreement for acts or omissions occurring prior to the effective time of the acquisition; and (c) subject to certain qualifications, provide to Fairchild's then-current directors and officers an insurance and indemnification policy that provides coverage for events occurring prior to the effective time of the acquisition that is no less favorable than Fairchild's then-existing policy, or, if insurance coverage that is no less favorable is unavailable, the best available coverage. Similarly, the agreement and plan of merger relating to the acquisition ofQuantenna (the "Quantenna Agreement") provides for indemnification and insurance rights in favor ofQuantenna's then-current and former directors, officers, employees and agents. Specifically, the Company has agreed that, for no fewer than six years following theQuantenna acquisition, the Company will: (a) indemnify and hold harmless each such indemnified party to the fullest extent permitted byDelaware law in the event of any threatened or actual claim, suit, action, proceeding or investigation against the indemnified party based in whole or in part on, or pertaining to, such person's serving as a director, officer, employee or agent ofQuantenna or its subsidiaries or predecessors prior to the effective time of the acquisition or in connection with the Quantenna Agreement; (b) maintain in effect provisions of the certificate of incorporation and bylaws ofQuantenna and each of its subsidiaries regarding the elimination of liability of directors and indemnification of officers, directors and employees that are no less advantageous to the intended beneficiaries than the corresponding provisions in the certificate of incorporation and bylaws ofQuantenna and each of its subsidiaries in existence on the date of theQuantenna Agreement; and (c) obtain and fully pay the premium for a non-cancelable extension of directors' and officers' liability coverage ofQuantenna's directors' and officers' policies andQuantenna's fiduciary liability insurance policies in effect as of the date of the Quantenna Agreement. 34 -------------------------------------------------------------------------------- Table of Contents 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 9: ''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 2020 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$1.97 billion available for future borrowings.
We believe that the key factors that could affect our internal and external sources of cash include:
•Geopolitical and macroeconomic factors caused by the COVID-19 pandemic, which has had, and is expected to continue to have, negative impacts on the economies of the majority of countries and industries. The ultimate effect of the COVID-19 pandemic and its variants and the responses of various governmental entities and industries thereto, the duration and severity and the possibility of the re-emergence of the pandemic in future months and the anticipated recovery period are uncertain. •Factors that affect our results of operations and cash flows include the impact on our business and operations as a result of 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, 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. •Factors that affect 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 include interest rate fluctuations, macroeconomic conditions (including as a result of the COVID-19 pandemic), 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 the 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, regulatory and other conditions, some or all 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 when we access the capital markets 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 six months endedJuly 2, 2021 andJuly 3, 2020 , we paid$181.8 million and 35 -------------------------------------------------------------------------------- Table of Contents$205.6 million , respectively, for capital expenditures. Our current minimum contractual capital expenditure commitment for the remainder of 2021 and 2022 and thereafter is approximately$125.0 million and$44.9 million , respectively. Our estimated purchases of property, plant and equipment during the second half of 2021 are expected to be 10% to 11% of the revenue during that period, or 8% to 9% on an annualized basis for 2021. 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$706.5 million and$320.5 million for the six months endedJuly 2, 2021 andJuly 3, 2020 , respectively. The increase of$386.0 million was primarily attributable to a significant increase in net income due to better economic conditions resulting in increased demand for our products and better 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, 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$885.0 million as ofJuly 2, 2021 , and has fluctuated between$1,057.1 million and$879.3 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$1,774.8 million as ofJuly 2, 2021 , and has fluctuated between$2,379.8 million and$1,071.4 million at the end of each of our last eight fiscal quarters. The significant fluctuation was due to the withdrawal and repayment on our Revolving Credit Facility during 2020 and 2021 as well as the reclassification of the 1.625% Notes as a current liability. During the six months endedJuly 2, 2021 , our working capital was positively impacted by reduced capital expenditures. We expect an increase in capital expenditures and also expect to pay a significant portion of the remaining severance obligations incurred in connection with the ISP during the second half of 2021.
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 certain measures to add manufacturing capacity in connection 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 . 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 5: ''Balance Sheet Information and Other'' and Note 12: ''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 and financial flexibility. During the quarter endedJuly 2, 2021 , we executed the Ninth Amendment to the Amended Credit Agreement, issued our 0% Notes, repurchased or exchanged a significant portion of the 1.625% Notes and repaid the remaining outstanding balance on our Revolving Credit Facility. 36 -------------------------------------------------------------------------------- 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 Covenants
As ofJuly 2, 2021 , 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 ON Semiconductor 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 2020 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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