ON Semiconductor Reports Second Quarter 2020 Results

ON Semiconductor and the ON Semiconductor logo are registered trademarks of Semiconductor Components Industries, LLC. All other brand and product names appearing in this document are registered trademarks or trademarks of their respective holders. Although the Company references its website in this news release, information on the website is not to be incorporated herein.

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, 2020. Forward-looking statements are often characterized by the use of words such as “believes,” “estimates,” “expects,” “projects,” “may,” “will,” “intends,” “plans” or “anticipates” or 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; 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, and other customers, 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 significant 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, continuing political unrest in markets in which we do significant business, including Hong Kong, as well as man-made and/or natural disasters and public health and safety outbreaks affecting our operations or financial results, including as a result of the outbreak of the novel coronavirus disease 2019 (COVID-19) pandemic; 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 2019 Annual Report on Form 10-K filed with the SEC on February 19, 2020 (our "2019 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 2019 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 STATEMENTS OF OPERATIONS
(in millions, except per share data)
	Quarters Ended									Six Months Ended
	July 3, 2020			April 3, 2020			June 28, 2019			July 3, 2020			June 28, 2019
Revenue	$	1,213.5		$	1,277.9		$	1,347.7		$	2,491.4		$	2,734.3
Cost of revenue (exclusive of amortization shown below)	839.2			875.2			848.7			1,714.4			1,721.6
Gross profit	374.3			402.7			499.0			777.0			1,012.7
Gross margin	30.8		%	31.5		%	37.0		%	31.2		%	37.0		%
Operating expenses:
Research and development	156.1			171.0			147.0			327.1			298.8
Selling and marketing	65.6			76.8			73.6			142.4			150.7
General and administrative	62.9			71.2			74.1			134.1			147.0
Amortization of acquisition-related intangible assets	29.1			32.3			27.5			61.4			53.2
Restructuring, asset impairments and other charges, net	16.2			32.8			18.1			49.0			23.7
Intangible asset impairment	1.3			—			0.4			1.3			1.6
Total operating expenses	331.2			384.1			340.7			715.3			675.0
Operating income	43.1			18.6			158.3			61.7			337.7
Other income (expense), net:
Interest expense	(41.9		)	(42.5		)	(33.7		)	(84.4		)	(65.4		)
Interest income	1.5			1.9			3.0			3.4			5.5
Loss on debt refinancing and prepayment	—			—			(0.4		)	—			(0.4		)
Other income (expense)	(2.8		)	0.1			(1.0		)	(2.7		)	1.1
Other income (expense), net	(43.2		)	(40.5		)	(32.1		)	(83.7		)	(59.2		)
Income (loss) before income taxes	(0.1		)	(21.9		)	126.2			(22.0		)	278.5
Income tax (provision) benefit	(0.8		)	8.2			(23.3		)	7.4			(61.5		)
Net income (loss)	(0.9		)	(13.7		)	102.9			(14.6		)	217.0
Less: Net income attributable to non-controlling interest	(0.5		)	(0.3		)	(1.1		)	(0.8		)	(1.1		)
Net income (loss) attributable to ON Semiconductor Corporation	$	(1.4	)	$	(14.0	)	$	101.8		$	(15.4	)	$	215.9
Net income (loss) per common share attributable to ON Semiconductor Corporation:
Basic	$	—		$	(0.03	)	$	0.25		$	(0.04	)	$	0.52
Diluted	$	—		$	(0.03	)	$	0.24		$	(0.04	)	$	0.52
Weighted average common shares outstanding:
Basic	410.1			410.6			411.9			410.3			411.3
Diluted	410.1			410.6			417.7			410.3			417.8

ON SEMICONDUCTOR CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in millions)
	July 3, 2020			April 3, 2020			December 31, 2019
Assets
Cash and cash equivalents	$	2,060.4		$	1,982.0		$	894.2
Receivables, net	667.4			652.0			705.0
Inventories	1,285.4			1,251.9			1,232.4
Other current assets	131.2			146.4			188.4
Total current assets	4,144.4			4,032.3			3,020.0
Property, plant and equipment, net	2,566.5			2,579.9			2,591.6
Goodwill	1,663.4			1,663.4			1,659.2
Intangible assets, net	527.8			558.2			590.5
Deferred tax assets	325.2			331.0			307.8
Other assets	300.5			256.0			256.4
Total assets	$	9,527.8		9,420.8			$	8,425.5
Liabilities, Non-Controlling Interest and Stockholders’ Equity
Accounts payable	$	522.9		503.9			$	543.6
Accrued expenses and other current liabilities	546.1			542.6			538.8
Current portion of long-term debt	695.6			689.6			736.0
Total current liabilities	1,764.6			1,736.1			1,818.4
Long-term debt	4,044.8			4,043.0			2,876.5
Deferred tax liabilities	61.5			60.8			60.2
Other long-term liabilities	397.6			343.3			346.3
Total liabilities	6,268.5			6,183.2			5,101.4
ON Semiconductor Corporation stockholders’ equity:
Common stock	5.7			5.7			5.7
Additional paid-in capital	3,854.6			3,830.3			3,809.5
Accumulated other comprehensive loss	(67.6		)	(66.5		)	(54.3		)
Accumulated earnings	1,175.9			1,177.3			1,191.3
Less: Treasury stock, at cost	(1,732.5		)	(1,731.9		)	(1,650.5		)
Total ON Semiconductor Corporation stockholders’ equity	3,236.1			3,214.9			3,301.7
Non-controlling interest	23.2			22.7			22.4
Total stockholders' equity	3,259.3			3,237.6			3,324.1
Total liabilities and stockholders' equity	$	9,527.8		9,420.8			$	8,425.5

ON SEMICONDUCTOR CORPORATION
UNAUDITED RECONCILIATION OF NET INCOME (LOSS) TO ADJUSTED EBITDA AND
NET CASH PROVIDED BY OPERATING ACTIVITIES
(in millions)
	Quarters Ended									Six Months Ended
	July 3, 2020			April 3, 2020			June 28, 2019			July 3, 2020			June 28, 2019
Net income (loss)	$	(0.9	)	$	(13.7	)	$	102.9		$	(14.6	)	$	217.0
Adjusted for:
Restructuring, asset impairments and other, net	16.2			32.8			18.1			49.0			23.7
Intangible asset impairment	1.3			—			0.4			1.3			1.6
Interest expense	41.9			42.5			33.7			84.4			65.4
Interest income	(1.5		)	(1.9		)	(3.0		)	(3.4		)	(5.5		)
Loss on debt refinancing and prepayment	—			—			0.4			—			0.4
Income tax provision (benefit)	0.8			(8.2		)	23.3			(7.4		)	61.5
Net income attributable to non-controlling interest	(0.5		)	(0.3		)	(1.1		)	(0.8		)	(1.1		)
Depreciation and amortization	153.9			161.2			144.0			315.1			279.8
Amortization of fair market value step-up of inventory	—			—			0.6			—			0.6
Third party acquisition and divestiture related costs	—			0.3			6.5			0.3			9.8
Indemnification gain	—			—			—			—			(4.9		)
Adjusted EBITDA	211.2			212.7			325.8			423.9			648.3
Increase (decrease):
Restructuring, asset impairments and other, net	(16.2		)	(32.8		)	(18.1		)	(49.0		)	(23.7		)
Interest expense	(41.9		)	(42.5		)	(33.7		)	(84.4		)	(65.4		)
Interest income	1.5			1.9			3.0			3.4			5.5
Income tax (provision) benefit	(0.8		)	8.2			(23.3		)	7.4			(61.5		)
Net income attributable to non-controlling interest	0.5			0.3			1.1			0.8			1.1
Amortization of fair market value step-up of inventory	—			—			(0.6		)	—			(0.6		)
Third party acquisition and divestiture related costs	—			(0.3		)	(6.5		)	(0.3		)	(9.8		)
Indemnification gain	—			—			—			—			4.9
(Gain) loss on sale or disposal of fixed assets	(3.1		)	0.2			—			(2.9		)	0.4
Amortization of debt discount and issuance costs	3.0			3.0			3.4			6.0			6.6
Share-based compensation expense	18.0			15.7			27.3			33.7			47.0
Non-cash interest on convertible notes	9.8			9.5			9.3			19.3			18.4
Non-cash asset impairment charges	5.8			1.4			—			7.2			—
Change in deferred tax balances	6.7			(19.0		)	3.3			(12.3		)	32.3
Other	1.8			—			5.8			1.8			1.5
Changes in assets and liabilities	(41.8		)	7.7			(74.4		)	(34.1		)	(244.2		)
Net cash provided by operating activities	$	154.5		$	166.0		$	222.4		320.5			$	360.8
Cash flows from investing activities:
Purchase of property, plant and equipment	$	(73.3	)	$	(132.3	)	$	(153.5	)	$	(205.6	)	$	(310.5	)
Proceeds from sale of property, plant and equipment	0.9			—			1.4			0.9			1.4
Deposits utilized (made) for purchase of property, plant and equipment	(1.7		)	2.2			9.8			0.5			(0.3		)
Purchase of business, net of cash acquired	—			(4.5		)	(867.0		)	(4.5		)	(867.0		)
Settlement of purchase price from previous acquisition	—			26.0			—			26.0			—
Purchase of license and deposit made for manufacturing facility	—			—			(100.0		)	—			(100.0		)
Release of escrow related to divestiture	—			—			5.0			—			5.0
Net cash used in investing activities	$	(74.1	)	$	(108.6	)	$	(1,104.3	)	(182.7		)	$	(1,271.4	)
Cash flows from financing activities:
Proceeds for the issuance of common stock under the employee stock purchase plan	3.9			7.5			$	6.4		$	11.4		$	13.8
Proceeds from exercise of stock options	—			—			0.4			—			0.9
Payment of tax withholding for restricted stock units	(0.6		)	(16.0		)	(1.1		)	(16.6		)	(27.2		)
Repurchase of common stock	—			(65.4		)	(50.8		)	(65.4		)	(125.8		)
Borrowings under debt agreements	—			1,165.0			900.0			1,165.0			904.3
Payment of debt issuance and other financing costs	—			—			(4.7		)	—			(4.7		)
Repayment of long-term debt	(4.3		)	(56.0		)	(26.4		)	(60.3		)	(38.6		)
Acquisition related payments	(0.6		)	(4.9		)	—			(5.5		)	—
Payment of finance lease obligations	—			—			(0.2		)	—			(0.4		)
Net cash provided by (used in) financing activities	$	(1.6	)	$	1,030.2		$	823.6		1,028.6			$	722.3
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(0.1		)	0.2			0.3			0.1			0.3
Net increase (decrease) in cash, cash equivalents and restricted cash	$	78.7		$	1,087.8		$	(58.0	)	1,166.5			$	(188.0	)
Cash, cash equivalents and restricted cash, beginning of period	1,982.0			894.2			957.1			894.2			1,087.1
Cash, cash equivalents and restricted cash, end of period	$	2,060.7		$	1,982.0		$	899.1		2,060.7			$	899.1

ON SEMICONDUCTOR CORPORATION
RECONCILIATION OF GAAP VERSUS NON-GAAP DISCLOSURES
(in millions, except per share and percentage data)
			Quarters Ended									Six Months Ended
			July 3, 2020			April 3, 2020			June 28, 2019			July 3, 2020			June 28, 2019
Reconciliation of GAAP gross profit to non-GAAP gross profit:
GAAP gross profit			$	374.3		$	402.7		$	499.0		$	777.0		$	1,012.7
	Special items:
	a)	Amortization of fair market value step-up of inventory	—			—			0.6			—			0.6
		Total special items	—			—			0.6			—			0.6
Non-GAAP gross profit			$	374.3		$	402.7		$	499.6		$	777.0		$	1,013.3
Reconciliation of GAAP gross margin to non-GAAP gross margin:
GAAP gross margin			30.8		%	31.5		%	37.0		%	31.2		%	37.0		%
	Special items:
	a)	Amortization of fair market value step-up of inventory	—		%	—		%	0.1		%	—		%	—		%
		Total special items	—		%	—		%	0.1		%	—		%	0.1		%
Non-GAAP gross margin			30.8		%	31.5		%	37.1		%	31.2		%	37.1		%
Reconciliation of GAAP operating expenses to non-GAAP operating expenses:
GAAP operating expenses			$	331.2		$	384.1		$	340.7		$	715.3		$	675.0
	Special items:
	a)	Amortization of acquisition-related intangible assets	(29.1		)	(32.3		)	(27.5		)	(61.4		)	(53.2		)
	b)	Restructuring, asset impairments and other, net	(16.2		)	(32.8		)	(18.1		)	(49.0		)	(23.7		)
	c)	Intangible asset impairment	(1.3		)	—			(0.4		)	(1.3		)	(1.6		)
	d)	Third party acquisition and divestiture related costs	—			(0.3		)	(6.5		)	(0.3		)	(9.8		)
		Total special items	(46.6		)	(65.4		)	(52.5		)	(112.0		)	(88.3		)
Non-GAAP operating expenses			$	284.6		$	318.7		$	288.2		$	603.3		$	586.7
Reconciliation of GAAP operating income to non-GAAP operating income:
GAAP operating income			$	43.1		$	18.6		$	158.3		$	61.7		$	337.7
	Special items:
	a)	Amortization of fair market value step-up of inventory	—			—			0.6			—			0.6
	b)	Amortization of acquisition-related intangible assets	29.1			32.3			27.5			61.4			53.2
	c)	Restructuring, asset impairments and other, net	16.2			32.8			18.1			49.0			23.7
	d)	Intangible asset impairment	1.3			—			0.4			1.3			1.6
	e)	Third party acquisition and divestiture related costs	—			0.3			6.5			0.3			9.8
		Total special items	46.6			65.4			53.1			112.0			88.9
Non-GAAP operating income			$	89.7		$	84.0		$	211.4		$	173.7		$	426.6
*Reconciliation of GAAP operating margin to non-GAAP operating margin (operating income / revenue)* :**
GAAP operating margin			3.6		%	1.5		%	11.7		%	2.5		%	12.4		%
	Special items:
	a)	Amortization of fair market value step-up of inventory	—		%	—		%	0.1		%	—		%	—		%
	b)	Amortization of acquisition-related intangible assets	2.4		%	2.5		%	2.0		%	2.5		%	1.9		%
	c)	Restructuring, asset impairments and other, net	1.3		%	2.6		%	1.3		%	2.0		%	0.9		%
	d)	Intangible asset impairment	0.1		%	—		%	—		%	0.1		%	0.1		%
	e)	Third party acquisition and divestiture related costs	—		%	—		%	0.5		%	—		%	0.4		%
		Total special items	3.8		%	5.1		%	4.0		%	4.5		%	3.2		%
Non-GAAP operating margin			7.4		%	6.6		%	15.7		%	7.0		%	15.6		%
Reconciliation of GAAP income (loss) before income taxes to non-GAAP income before income taxes:
GAAP income (loss) before income taxes			$	(0.1	)	$	(21.9	)	$	126.2		$	(22.0	)	$	278.5
	Special items:
	a)	Amortization of fair market value step-up of inventory	—			—			0.6			—			0.6
	b)	Amortization of acquisition-related intangible assets	29.1			32.3			27.5			61.4			53.2
	c)	Restructuring, asset impairments and other, net	16.2			32.8			18.1			49.0			23.7
	d)	Intangible asset impairment	1.3			—			0.4			1.3			1.6
	e)	Third party acquisition and divestiture related costs	—			0.3			6.5			0.3			9.8
	f)	Loss on debt refinancing and prepayment	—			—			0.4			—			0.4
	g)	Non-cash interest on convertible notes	9.8			9.5			9.3			19.3			18.4
	h)	Indemnification gain	—			—			—			—			(4.9		)
		Total special items	56.4			74.9			62.8			131.3			102.8
Non-GAAP income before income taxes			$	56.3		$	53.0		$	189.0		$	109.3		$	381.3
Reconciliation of GAAP net income (loss) attributable to ON Semiconductor Corporation to non-GAAP net income attributable to ON Semiconductor Corporation:
GAAP net income (loss) attributable to ON Semiconductor Corporation			$	(1.4	)	$	(14.0	)	$	101.8		$	(15.4	)	$	215.9
	Special items:
	a)	Amortization of fair market value step-up of inventory	—			—			0.6			—			0.6
	b)	Amortization of acquisition-related intangible assets	29.1			32.3			27.5			61.4			53.2
	c)	Restructuring, asset impairments and other, net	16.2			32.8			18.1			49.0			23.7
	d)	Intangible asset impairment	1.3			—			0.4			1.3			1.6
	e)	Third party acquisition and divestiture related costs	—			0.3			6.5			0.3			9.8
	f)	Loss on debt refinancing and prepayment	—			—			0.4			—			0.4
	g)	Non-cash interest on convertible notes	9.8			9.5			9.3			19.3			18.4
	h)	Indemnification gain	—			—			—			—			(4.9		)
	i)	Adjustment of income taxes	(4.8		)	(18.1		)	10.4			(22.9		)	33.4
		Total special items	51.6			56.8			73.2			108.4			136.2
Non-GAAP net income attributable to ON Semiconductor Corporation			$	50.2		$	42.8		$	175.0		$	93.0		$	352.1
Adjustment of income taxes:
Tax adjustment for special items (1)			$	(11.8	)	$	(15.7	)	$	(13.2	)	$	(27.6	)	$	(21.6	)
Other non-GAAP tax adjustment (2)			7.0			(2.4		)	20.0			4.7			51.0
Tax indemnified by third parties			—			—			3.6			—			4.0
		Total adjustment of income taxes	$	(4.8	)	$	(18.1	)	$	10.4		$	(22.9	)	$	33.4
Reconciliation of GAAP diluted shares outstanding to non-GAAP diluted shares outstanding:
GAAP diluted shares outstanding			410.1			410.6			417.7			410.3			417.8
	Special items:
	a)	Less: dilutive shares attributable to convertible notes	—			—			(3.9		)	—			(3.9		)
	b)	Add: dilutive shares attributable to share-based awards	0.9			2.2			—			1.6			—
		Total special items	0.9			2.2			(3.9		)	1.6			(3.9		)
Non-GAAP diluted shares outstanding			411.0			412.8			413.8			411.9			413.9
Non-GAAP diluted earnings per share:
Non-GAAP net income attributable to ON Semiconductor Corporation			$	50.2		$	42.8		$	175.0		$	93.0		$	352.1
Non-GAAP diluted shares outstanding			411.0			412.8			413.8			411.9			413.9
Non-GAAP diluted earnings per share			$	0.12		$	0.10		$	0.42		$	0.23		$	0.85
Reconciliation of net cash provided by operating activities to free cash flow:
Net cash provided by operating activities			$	154.5		$	166.0		$	222.4		$	320.5		$	360.8
	Special items:
	a)	Purchase of property, plant and equipment	(73.3		)	(132.3		)	(153.5		)	(205.6		)	(310.5		)
		Total special items	(73.3		)	(132.3		)	(153.5		)	(205.6		)	(310.5		)
Free cash flow			$	81.2		$	33.7		$	68.9		$	114.9		$	50.3

(1)		Tax impact of non-GAAP special items (a-h) 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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