ON Semiconductor Reports Second Quarter 2019 Results

This document contains “forward-looking statements,” as that term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included or incorporated in this document could be deemed forward-looking statements, particularly statements about the future financial performance of ON Semiconductor, including financial guidance for the year ending December 31, 2019. Forward-looking statements are often characterized by the use of words such as “believes,” “estimates,” “expects,” “projects,” “may,” “will,” “intends,” “plans” or “anticipates” by discussions of strategy, plans or intentions. All forward-looking statements in this document are made based on our current expectations, forecasts, estimates and assumptions and involve risks, uncertainties and other factors that could cause results or events to differ materially from those expressed in the forward-looking statements. Among these factors are our revenue and operating performance; economic conditions and markets (including current financial conditions); risks related to our ability to meet our assumptions regarding outlook for revenue and gross margin as a percentage of revenue; effects of exchange rate fluctuations; the cyclical nature of the semiconductor industry; changes in demand for our products; changes in inventories at our customers and distributors; risks associated with restructuring actions and workforce reductions; technological and product development risks; enforcement and protection of our intellectual property rights and related risks; related to the security of our information systems and secured network; availability of raw materials, electricity, gas, water and other supply chain uncertainties; our ability to effectively shift production to other facilities when required in order to maintain supply continuity for our customers; variable demand and the aggressive pricing environment for semiconductor products; our ability to successfully manufacture in increasing volumes on a cost-effective basis and with acceptable quality for our current products; risks associated with our acquisitions and dispositions generally, including our ability to realize the anticipated benefits of our acquisitions and dispositions, including our acquisition of Quantenna; risks that acquisitions or dispositions may disrupt our current plans and operations, (including the risk of unexpected costs, charges or expenses resulting from acquisitions or dispositions and difficulties arising from integrating and consolidating acquired businesses, our timely filing of financial information with the Securities and Exchange Commission (“SEC”) for acquired businesses and our ability to accurately predict the future financial performance of acquired businesses); competitor actions, including the adverse impact of competitor product announcements; pricing and gross profit pressures; risks associated with the addition of Huawei Technologies Co., Ltd. and its non-U.S. affiliates and subsidiaries to the U.S. Department of Commerce, Bureau of Industry Security Entity List; loss of key customers; risks associated with restructuring actions and workforce reductions; order cancellations or reduced bookings; changes in manufacturing yields; control of costs and expenses and realization of cost savings and synergies from restructurings; the costs to defend against or pursue litigation and the potential costs associated with adverse litigation outcomes; risks associated with decisions to expend cash reserves for various uses in accordance with our capital allocation policy such as debt prepayment, stock repurchases or acquisitions rather than to retain such cash for future needs; risks associated with our substantial leverage and restrictive covenants in our debt agreements that may be in place from time to time; risks associated with our worldwide operations, including changes in trade policies, foreign employment and labor matters associated with unions and collective bargaining arrangements as well as man-made and/or natural disasters affecting our operations or financial results; the threat or occurrence of international armed conflict and terrorist activities both in the United States and internationally; risks of changes in U.S. or international tax rates or legislation; risks and costs associated with increased and new regulation of corporate governance and disclosure standards; risks related to new legal requirements; and risks and expenses involving environmental or other governmental regulation. Additional factors that could affect our future results or events are described under Part I, Item 1A “Risk Factors” in our 2018 Annual Report on Form 10-K filed with the SEC on February 20, 2019 (our "2018 Form 10-K") and from time to time in our other SEC reports. Readers are cautioned not to place undue reliance on forward-looking statements. We assume no obligation to update such information, except as may be required by law. You should carefully consider the trends, risks and uncertainties described in this document, our 2018 Form 10-K and other reports filed with or furnished to the SEC before making any investment decision with respect to our securities. If any of these trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline and you could lose all or part of your investment. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this cautionary statement.

ON SEMICONDUCTOR CORPORATION UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS (in millions, except per share data)

	Quarters Ended									Six Months Ended
	June 28, 2019			March 29, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Revenue	$	1,347.7		$	1,386.6		$	1,455.9		$	2,734.3		$	2,833.5
Cost of revenue (exclusive of amortization shown below)	848.7			872.9			900.9			1,721.6			1,761.1
Gross profit	499.0			513.7			555.0			1,012.7			1,072.4
Gross margin	37.0		%	37.0		%	38.1		%	37.0		%	37.8		%
Operating expenses:
Research and development	147.0			151.8			167.1			298.8			322.3
Selling and marketing	73.6			77.1			81.7			150.7			159.5
General and administrative	74.1			72.9			74.6			147.0			145.5
Amortization of acquisition-related intangible assets	27.5			25.7			27.9			53.2			55.3
Restructuring, asset impairments and other, net	18.1			5.6			3.2			23.7			3.6
Goodwill and intangible asset impairment	0.4			1.2			3.3			1.6			3.3
Total operating expenses	340.7			334.3			357.8			675.0			689.5
Operating income	158.3			179.4			197.2			337.7			382.9
Other income (expense), net:
Interest expense	(33.7		)	(31.7		)	(32.6		)	(65.4		)	(64.1		)
Interest income	3.0			2.5			1.1			5.5			2.0
Loss on debt refinancing and prepayment	(0.4		)	—			(4.0		)	(0.4		)	(4.0		)
Gain on divestiture of business	—			—			4.6			—			4.6
Licensing income	—			—			28.1			—			31.9
Other income (expense)	(1.0		)	2.1			(1.0		)	1.1			(3.0		)
Other income (expense), net	(32.1		)	(27.1		)	(3.8		)	(59.2		)	(32.6		)
Income before income taxes	126.2			152.3			193.4			278.5			350.3
Income tax provision	(23.3		)	(38.2		)	(37.1		)	(61.5		)	(53.5		)
Net income	102.9			114.1			156.3			217.0			296.8
Less: Net income attributable to non-controlling interest	(1.1		)	—			(1.0		)	(1.1		)	(1.9		)
Net income attributable to ON Semiconductor Corporation	$	101.8		$	114.1		$	155.3		$	215.9		$	294.9
Net income per common share attributable to ON Semiconductor Corporation:
Basic	$	0.25		$	0.28		$	0.36		$	0.52		$	0.69
Diluted	$	0.24		$	0.27		$	0.35		$	0.52		$	0.66
Weighted average common shares outstanding:
Basic	411.9			410.6			427.0			411.3			426.5
Diluted	417.7			417.7			444.3			417.8			444.4

ON SEMICONDUCTOR CORPORATION UNAUDITED CONSOLIDATED BALANCE SHEET (in millions)

	June 28, 2019			March 29, 2019			December 31, 2018
Assets
Cash and cash equivalents	$	885.2		$	939.6		$	1,069.6
Receivables, net	713.2			704.0			686.0
Inventories	1,273.8			1,225.2			1,225.2
Other current assets	192.0			177.9			187.0
Total current assets	3,064.2			3,046.7			3,167.8
Property, plant and equipment, net	2,620.0			2,585.0			2,549.6
Goodwill	1,552.5			932.5			932.5
Intangible assets, net	778.0			539.5			566.4
Deferred tax assets	242.0			238.2			266.2
Other assets	267.8			222.4			105.1
Total assets	$	8,524.5		$	7,564.3		$	7,587.6
Liabilities, Non-Controlling Interest and Stockholders’ Equity
Accounts payable	$	542.9		$	583.3		$	671.7
Accrued expenses and other current liabilities	618.2			603.4			659.1
Current portion of long-term debt	105.7			130.8			138.5
Total current liabilities	1,266.8			1,317.5			1,469.3
Long-term debt	3,550.8			2,639.0			2,627.6
Deferred tax liabilities	58.9			54.1			54.8
Other long-term liabilities	350.1			333.0			241.8
Total liabilities	5,226.6			4,343.6			4,393.5
ON Semiconductor Corporation stockholders’ equity:
Common stock	5.6			5.6			5.6
Additional paid-in capital	3,757.6			3,722.5			3,702.3
Accumulated other comprehensive loss	(53.4		)	(43.7		)	(37.9		)
Accumulated earnings	1,195.5			1,093.7			979.6
Less: Treasury stock, at cost	(1,631.0		)	(1,579.9		)	(1,478.0		)
Total ON Semiconductor Corporation stockholders’ equity	3,274.3			3,198.2			3,171.6
Non-controlling interest	23.6			22.5			22.5
Total stockholders' equity	3,297.9			3,220.7			3,194.1
Total liabilities and stockholders' equity	$	8,524.5		$	7,564.3		$	7,587.6

ON SEMICONDUCTOR CORPORATION UNAUDITED RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA AND NET CASH PROVIDED BY OPERATING ACTIVITIES (in millions)

	Quarters Ended									Six Months Ended
	June 28, 2019			March 29, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Net income	$	102.9		$	114.1		$	156.3		$	217.0		$	296.8
Adjusted for:
Licensing income	—			—			(28.1		)	—			(31.9		)
R&D costs related to licensing income	—			—			3.7			—			6.5
Restructuring, asset impairments and other, net	18.1			5.6			3.2			23.7			3.6
Goodwill and intangible asset impairment	0.4			1.2			3.3			1.6			3.3
Interest expense	33.7			31.7			32.6			65.4			64.1
Interest income	(3.0		)	(2.5		)	(1.1		)	(5.5		)	(2.0		)
Loss on debt refinancing and prepayment	0.4			—			4.0			0.4			4.0
Income tax provision	23.3			38.2			37.1			61.5			53.5
Net income attributable to non-controlling interest	(1.1		)	—			(1.0		)	(1.1		)	(1.9		)
Depreciation and amortization	144.0			135.8			125.5			279.8			245.4
Amortization of fair market value step-up of inventory	0.6			—			0.2			0.6			0.2
Gain on divestiture of business	—			—			(4.6		)	—			(4.6		)
Adjustment to contingent consideration	—			—			—			—			(2.1		)
Third party acquisition and divestiture related costs	6.5			3.3			2.1			9.8			2.5
Indemnification gain	—			(4.9		)	—			(4.9		)	—
Adjusted EBITDA	325.8			322.5			333.2			648.3			637.4
Increase (decrease):
Licensing income	—			—			28.1			—			31.9
R&D costs related to licensing income	—			—			(3.7		)	—			(6.5		)
Restructuring, asset impairments and other, net	(18.1		)	(5.6		)	(3.2		)	(23.7		)	(3.6		)
Interest expense	(33.7		)	(31.7		)	(32.6		)	(65.4		)	(64.1		)
Interest income	3.0			2.5			1.1			5.5			2.0
Income tax provision	(23.3		)	(38.2		)	(37.1		)	(61.5		)	(53.5		)
Net income attributable to non-controlling interest	1.1			—			1.0			1.1			1.9
Amortization of fair market value step-up of inventory	(0.6		)	—			(0.2		)	(0.6		)	(0.2		)
Adjustment to contingent consideration	—			—			—			—			2.1
Third party acquisition and divestiture related costs	(6.5		)	(3.3		)	(2.1		)	(9.8		)	(2.5		)
Indemnification gain	—			4.9			—			4.9			—
Loss on sale or disposal of fixed assets	—			0.4			1.1			0.4			2.4
Amortization of debt discount and issuance costs	3.4			3.2			3.4			6.6			6.7
Payments for term debt modification	—			—			(1.1		)	—			(1.1		)
Share-based compensation expense	27.3			19.7			23.1			47.0			41.5
Non-cash interest on convertible notes	9.3			9.1			8.9			18.4			17.6
Change in deferred taxes	3.3			29.0			35.7			32.3			43.2
Other	5.8			(4.3		)	0.2			1.5			(1.0		)
Changes in assets and liabilities	(74.4		)	(169.8		)	(87.3		)	(244.2		)	(159.2		)
Net cash provided by operating activities	$	222.4		$	138.4		$	268.5		360.8			$	495.0
Cash flows from investing activities:
Purchase of property, plant and equipment	$	(153.5	)	$	(157.0	)	$	(152.9	)	$	(310.5	)	$	(252.4	)
Proceeds from sales of property, plant and equipment	1.4			—			0.4			1.4			6.0
Deposits utilized (made) for purchase of property, plant and equipment	9.8			(10.1		)	(2.1		)	(0.3		)	(13.7		)
Purchase of business, net of cash acquired	(867.0		)	—			(70.7		)	(867.0		)	(70.7		)
Purchase of license and deposit made for manufacturing facility	(100.0		)	—			—			(100.0		)	—
Proceeds from divestiture of business and release of escrow	5.0			—			5.6			5.0			5.6
Proceeds from repayment of note receivable	—			—			10.2			—			10.2
Equity method investment	—			—			(19.8		)	—			(19.8		)
Net cash used in investing activities	$	(1,104.3	)	$	(167.1	)	$	(229.3	)	$	(1,271.4	)	$	(334.8	)
Cash flows from financing activities:
Proceeds for the issuance of common stock under the ESPP	6.4			$	7.4		$	6.9		$	13.8		$	6.9
Proceeds from exercise of stock options	0.4			0.5			0.7			0.9			4.3
Payment of tax withholding for RSUs	(1.1		)	(26.1		)	(1.1		)	(27.2		)	(19.9		)
Repurchase of common stock	(50.8		)	(75.0		)	(40.0		)	(125.8		)	(40.0		)
Borrowings under debt agreements	900.0			4.3			2.2			904.3			7.5
Payment of debt issuance and other financing costs	(4.7		)	—			—			(4.7		)	—
Repayment of long-term debt	(26.4		)	(12.2		)	(79.5		)	(38.6		)	(215.4		)
Payment of finance lease obligations	(0.2		)	(0.2		)	(2.1		)	(0.4		)	(3.2		)
Net cash provided by (used in) financing activities	$	823.6		$	(101.3	)	$	(112.9	)	$	722.3		$	(259.8	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	$	0.3		$	—		$	(0.9	)	0.3			$	0.7
Net decrease in cash, cash equivalents and restricted cash	$	(58.0	)	$	(130.0	)	$	(74.6	)	$	(188.0	)	$	(98.9	)
Cash, cash equivalents and restricted cash, beginning of period	$	957.1		$	1,087.1		$	942.3		$	1,087.1		$	966.6
Cash, cash equivalents and restricted cash, end of period	$	899.1		$	957.1		$	867.7		$	899.1		$	867.7

ON SEMICONDUCTOR CORPORATION RECONCILIATION OF GAAP VERSUS NON-GAAP DISCLOSURES (in millions, except per share and percentage data)

				Quarters Ended									Six Months Ended
				June 28, 2019			March 29, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Reconciliation of GAAP gross profit to non-GAAP gross profit:
GAAP gross profit				$	499.0		$	513.7		$	555.0		$	1,012.7		$	1,072.4
	Special items:
	a)		Expensing of appraised inventory at fair market value step-up	0.6			—			0.2			0.6			0.2
			Total special items	0.6			—			0.2			0.6			0.2
Non-GAAP gross profit				$	499.6		$	513.7		$	555.2		$	1,013.3		$	1,072.6
Reconciliation of GAAP gross margin to non-GAAP gross margin:
GAAP gross margin				37.0		%	37.0		%	38.1		%	37.0		%	37.8		%
	Special items:
	a)		Expensing of appraised inventory at fair market value step-up	0.1		%	—		%	—		%	—		%	—		%
			Total special items	0.1		%	—		%	—		%	—		%	—		%
Non-GAAP gross margin				37.1		%	37.0		%	38.1		%	37.1		%	37.9		%
Reconciliation of GAAP operating expenses to non-GAAP operating expenses:
GAAP operating expenses				$	340.7		$	334.3		$	357.8		$	675.0		$	689.5
	Special items:
	a)		Amortization of acquisition-related intangible assets	(27.5		)	(25.7		)	(27.9		)	(53.2		)	(55.3		)
	b)		Restructuring, asset impairments and other, net	(18.1		)	(5.6		)	(3.2		)	(23.7		)	(3.6		)
	c)		Goodwill and intangible asset impairment	(0.4		)	(1.2		)	(3.3		)	(1.6		)	(3.3		)
	d)		Third party acquisition and divestiture related costs	(6.5		)	(3.3		)	(2.1		)	(9.8		)	(2.5		)
	e)		R&D costs related to licensing income	—			—			(3.7		)	—			(6.5		)
			Total special items	(52.5		)	(35.8		)	(40.2		)	(88.3		)	(71.2		)
Non-GAAP operating expenses				$	288.2		$	298.5		$	317.6		$	586.7		$	618.3
Reconciliation of GAAP operating income to non-GAAP operating income:
GAAP operating income				$	158.3		$	179.4		$	197.2		$	337.7		$	382.9
	Special items:
	a)		Expensing of appraised inventory at fair market value step-up	0.6			—			0.2			0.6			0.2
	b)		Amortization of acquisition-related intangible assets	27.5			25.7			27.9			53.2			55.3
	c)		Restructuring, asset impairments and other, net	18.1			5.6			3.2			23.7			3.6
	d)		Goodwill and intangible asset impairment	0.4			1.2			3.3			1.6			3.3
	e)		Third party acquisition and divestiture related costs	6.5			3.3			2.1			9.8			2.5
	f)		R&D costs related to licensing income	—			—			3.7			—			6.5
			Total special items	53.1			35.8			40.4			88.9			71.4
Non-GAAP operating income				$	211.4		$	215.2		$	237.6		$	426.6		$	454.3
*Reconciliation of GAAP operating margin to non-GAAP operating margin (operating income / revenue)* :**
GAAP operating margin				11.7		%	12.9		%	13.5		%	12.4		%	13.5		%
	Special items:
	a)		Expensing of appraised inventory at fair market value step-up	0.1		%	—		%	—		%	—		%	—		%
	b)		Amortization of acquisition-related intangible assets	2.0		%	1.9		%	1.9		%	1.9		%	2.0		%
	c)		Restructuring, asset impairments and other, net	1.3		%	0.4		%	0.2		%	0.9		%	0.1		%
	d)		Goodwill and intangible asset impairment	—		%	0.1		%	0.2		%	0.1		%	0.1		%
	e)		Third party acquisition and divestiture related costs	0.5		%	0.2		%	0.1		%	0.4		%	0.1		%
	f)		R&D costs related to licensing income	—		%	—		%	0.3		%	—		%	0.2		%
			Total special items	4.0		%	2.6		%	2.8		%	3.2		%	2.5		%
Non-GAAP operating margin				15.7		%	15.5		%	16.3		%	15.6		%	16.0		%
Reconciliation of GAAP income before income taxes to non-GAAP income before income taxes:
GAAP income before income taxes				$	126.2		$	152.3		$	193.4		$	278.5		$	350.3
	Special items:
	a)		Expensing of appraised inventory at fair market value step-up	0.6			—			0.2			0.6			0.2
	b)		Amortization of acquisition-related intangible assets	27.5			25.7			27.9			53.2			55.3
	c)		Restructuring, asset impairments and other, net	18.1			5.6			3.2			23.7			3.6
	d)		Goodwill and intangible asset impairment	0.4			1.2			3.3			1.6			3.3
	e)		Third party acquisition and divestiture related costs	6.5			3.3			2.1			9.8			2.5
	f)		R&D costs related to licensing income	—			—			3.7			—			6.5
	g)		Loss on debt refinancing and prepayment	0.4			—			4.0			0.4			4.0
	h)		Non-cash interest on convertible notes	9.3			9.1			8.9			18.4			17.6
	i)		Indemnification gain	—			(4.9		)	—			(4.9		)	—
	j)		Adjustment to contingent consideration	—			—			—			—			(2.1		)
	k)		Licensing income	—			—			(28.1		)	—			(31.9		)
	l)		Gain on divestiture of business	—			—			(4.6		)	—			(4.6		)
			Total special items	62.8			40.0			20.6			102.8			54.4
Non-GAAP income before income taxes				$	189.0		$	192.3		$	214.0		$	381.3		$	404.7
Reconciliation of GAAP net income attributable to ON Semiconductor Corporation to non-GAAP net income attributable to ON Semiconductor Corporation:
GAAP net income attributable to ON Semiconductor Corporation				$	101.8		$	114.1		$	155.3		$	215.9		$	294.9
	Special items:
	a)		Expensing of appraised inventory at fair market value step-up	0.6			—			0.2			0.6			0.2
	b)		Amortization of acquisition-related intangible assets	27.5			25.7			27.9			53.2			55.3
	c)		Restructuring, asset impairments and other, net	18.1			5.6			3.2			23.7			3.6
	d)		Goodwill and intangible asset impairment	0.4			1.2			3.3			1.6			3.3
	e)		Third party acquisition and divestiture related costs	6.5			3.3			2.1			9.8			2.5
	f)		R&D costs related to licensing income	—			—			3.7			—			6.5
	g)		Loss on debt refinancing and prepayment	0.4			—			4.0			0.4			4.0
	h)		Non-cash interest on convertible notes	9.3			9.1			8.9			18.4			17.6
	i)		Indemnification gain	—			(4.9		)	—			(4.9		)	—
	j)		Adjustment to contingent consideration	—			—			—			—			(2.1		)
	k)		Licensing income	—			—			(28.1		)	—			(31.9		)
	l)		Gain on divestiture of business	—			—			(4.6		)	—			(4.6		)
	m)		Adjustment of income taxes	10.4			23.0			23.8			33.4			21.1
			Total special items	73.2			63.0			44.4			136.2			75.5
Non-GAAP net income attributable to ON Semiconductor Corporation				$	175.0		$	177.1		$	199.7		$	352.1		$	370.4
Adjustment of income taxes:
Tax adjustment for special items (1)				$	(13.2	)	$	(8.4	)	$	(4.3	)	$	(21.6	)	$	(11.4	)
Other non-GAAP tax adjustment (2)				20.0			31.0			28.1			51.0			32.5
Tax indemnified by third parties				3.6			0.4			—			4.0			—
			Total adjustment of income taxes	$	10.4		$	23.0		$	23.8		$	33.4		$	21.1
Reconciliation of GAAP diluted share count to non-GAAP diluted share count:
GAAP diluted share count				417.7			417.7			444.3			417.8			444.4
	Special items:
	a)		Dilutive share count attributable to convertible notes	(3.9		)	(3.9		)	(12.7		)	(3.9		)	(12.7		)
			Total special items	(3.9		)	(3.9		)	(12.7		)	(3.9		)	(12.7		)
Non-GAAP diluted share count				413.8			413.8			431.6			413.9			431.7
Non-GAAP diluted earnings per share:
Non-GAAP net income attributable to ON Semiconductor Corporation				$	175.0		$	177.1		$	199.7		$	352.1		$	370.4
Non-GAAP diluted share count				413.8			413.8			431.6			413.9			431.7
Non-GAAP diluted earnings per share				$	0.42		$	0.43		$	0.46		$	0.85		$	0.86
Reconciliation of net cash provided by operating activities to free cash flow:
Net cash provided by operating activities				$	222.4		$	138.4		$	268.5		$	360.8		$	495.0
	Special items:
	a)		Purchase of property, plant and equipment	(153.5		)	(157.0		)	(152.9		)	(310.5		)	(252.4		)
			Total special items	(153.5		)	(157.0		)	(152.9		)	(310.5		)	(252.4		)
Free cash flow				$	68.9		$	(18.6	)	$	115.6		$	50.3		$	242.6

	(1	)	Tax impact of non-GAAP special items (a-l) is calculated using the federal statutory rate of 21% for all periods presented.
	(2	)	The income tax adjustment primarily represents the use of the net operating loss, non-cash impact of not asserting indefinite reinvestment on earnings of our foreign subsidiaries, deferred tax expense not affecting taxes payable, and non-cash expense (benefit) related to uncertain tax positions.

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