ON Semiconductor Reports Second Quarter 2018 Results


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

	Quarter Ended									Six Months Ended
	June 29, 2018			March 30, 2018			June 30, 2017			June 29, 2018			June 30, 2017
Revenue	$	1,455.9		$	1,377.6		$	1,338.0		$	2,833.5		$	2,774.7
Cost of revenue (exclusive of amortization shown below)	900.9			860.2			846.0			1,761.1			1,779.6
Gross profit	555.0			517.4			492.0			1,072.4			995.1
Gross margin	38.1		%	37.6		%	36.8		%	37.8		%	35.9		%
Operating expenses:
Research and development	167.1			155.2			145.6			322.3			285.7
Selling and marketing	81.7			77.8			79.5			159.5			157.0
General and administrative	74.6			70.9			76.6			145.5			145.0
Amortization of acquisition-related intangible assets	27.9			27.4			28.6			55.3			57.7
Restructuring, asset impairments and other, net	3.2			0.4			5.9			3.6			6.4
Goodwill and intangible asset impairment	3.3			—			1.8			3.3			6.2
Total operating expenses	357.8			331.7			338.0			689.5			658.0
Operating income	197.2			185.7			154.0			382.9			337.1
Other income (expense), net:
Interest expense	(32.6		)	(31.5		)	(34.7		)	(64.1		)	(73.1		)
Interest income	1.1			0.9			0.5			2.0			1.1
Loss on debt refinancing and prepayment	(4.0		)	—			—			(4.0		)	(26.2		)
Gain on divestiture of business	4.6			—			—			4.6			—
Licensing income	28.1			3.8			23.9			31.9			23.9
Other expense	(1.0		)	(2.0		)	(0.5		)	(3.0		)	(4.6		)
Other income (expense), net	(3.8		)	(28.8		)	(10.8		)	(32.6		)	(78.9		)
Income before income taxes	193.4			156.9			143.2			350.3			258.2
Income tax provision	(37.1		)	(16.4		)	(48.8		)	(53.5		)	(85.1		)
Net income	156.3			140.5			94.4			296.8			173.1
Less: Net income attributable to non-controlling interest	(1.0		)	(0.9		)	(0.5		)	(1.9		)	(1.0		)
Net income attributable to ON Semiconductor Corporation	$	155.3		$	139.6		$	93.9		$	294.9		$	172.1
Net income per common share attributable to ON Semiconductor Corporation:
Basic	$	0.36		$	0.33		$	0.22		$	0.69		$	0.41
Diluted	$	0.35		$	0.31		$	0.22		$	0.66		$	0.40
Weighted average common shares outstanding:
Basic	427.0			425.9			420.8			426.5			420.4
Diluted	444.3			444.2			425.9			444.4			426.0


ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS (in millions)

	June 29, 2018			March 30, 2018			December 31, 2017
Assets
Cash and cash equivalents	$	850.2		$	924.9		$	949.2
Receivables, net	698.8			696.9			701.5
Inventories	1,204.4			1,160.0			1,089.5
Other current assets	173.6			185.2			193.0
Total current assets	2,927.0			2,967.0			2,933.2
Property, plant and equipment, net	2,387.2			2,336.4			2,279.1
Goodwill	928.8			916.9			916.9
Intangible assets, net	627.9			600.9			628.3
Deferred tax assets	298.9			333.3			339.1
Other assets	127.5			108.6			98.5
Total assets	$	7,297.3		$	7,263.1		$	7,195.1
Liabilities, Non-Controlling Interest and Stockholders’ Equity
Accounts payable	$	584.7		$	612.0		$	548.0
Accrued expenses	563.9			585.8			612.8
Current portion of long-term debt	746.4			747.2			248.1
Total current liabilities	1,895.0			1,945.0			1,408.9
Long-term debt	2,020.4			2,084.4			2,703.7
Deferred tax liabilities	63.6			57.1			55.1
Other long-term liabilities	221.5			225.1			226.4
Total liabilities	4,200.5			4,311.6			4,394.1
ON Semiconductor Corporation stockholders’ equity:
Common stock	5.6			5.5			5.5
Additional paid-in capital	3,646.1			3,615.5			3,593.5
Accumulated other comprehensive loss	(34.9		)	(34.4		)	(40.6		)
Accumulated earnings	646.9			491.7			351.5
Less: Treasury stock, at cost	(1,191.0		)	(1,149.9		)	(1,131.1		)
Total ON Semiconductor Corporation stockholders’ equity	3,072.7			2,928.4			2,778.8
Non-controlling interest in consolidated subsidiary	24.1			23.1			22.2
Total stockholders' equity	3,096.8			2,951.5			2,801.0
Total liabilities and stockholders' equity	$	7,297.3		$	7,263.1		$	7,195.1


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

	Quarter Ended									Six Months Ended
	June 29, 2018			March 30, 2018			June 30, 2017			June 29, 2018			June 30, 2017
Net income	$	156.3		$	140.5		$	94.4		$	296.8		$	173.1
Adjusted for:
Licensing income	(28.1		)	(3.8		)	(23.9		)	(31.9		)	(23.9		)
R&D costs related to licensing income	3.7			2.8			4.1			6.5			4.1
Restructuring, asset impairments and other, net	3.2			0.4			5.9			3.6			6.4
Goodwill and intangible asset impairment	3.3			—			1.8			3.3			6.2
Interest expense	32.6			31.5			34.7			64.1			73.1
Interest income	(1.1		)	(0.9		)	(0.5		)	(2.0		)	(1.1		)
Loss on debt refinancing and prepayment	4.0			—			—			4.0			26.2
Income tax provision	37.1			16.4			48.8			53.5			85.1
Net income attributable to non-controlling interest	(1.0		)	(0.9		)	(0.5		)	(1.9		)	(1.0		)
Depreciation and amortization	125.5			119.9			116.5			245.4			230.8
Amortization of fair market value step-up of inventory	0.2			—			1.3			0.2			11.1
Sell-through to sell-in adjustment	—			—			—			—			(59.0		)
Gain on divestiture of business	(4.6		)	—			—			(4.6		)	—
Adjustment to contingent consideration	—			(2.1		)	0.8			(2.1		)	2.3
Third party acquisition and divestiture related costs	2.1			0.4			0.7			2.5			1.7
Adjusted EBITDA	333.2			304.2			284.1			637.4			535.1
Increase (decrease):
Licensing income	28.1			3.8			23.9			31.9			23.9
R&D costs related to licensing income	(3.7		)	(2.8		)	(4.1		)	(6.5		)	(4.1		)
Restructuring, asset impairments and other, net	(3.2		)	(0.4		)	(5.9		)	(3.6		)	(6.4		)
Interest expense	(32.6		)	(31.5		)	(34.7		)	(64.1		)	(73.1		)
Interest income	1.1			0.9			0.5			2.0			1.1
Income tax provision	(37.1		)	(16.4		)	(48.8		)	(53.5		)	(85.1		)
Net income attributable to non-controlling interest	1.0			0.9			0.5			1.9			1.0
Amortization of fair market value step-up of inventory	(0.2		)	—			(1.3		)	(0.2		)	(11.1		)
Sell-through to sell-in adjustment	—			—			—			—			59.0
Adjustment to contingent consideration	—			2.1			(0.8		)	2.1			(2.3		)
Third party acquisition and divestiture related costs	(2.1		)	(0.4		)	(0.7		)	(2.5		)	(1.7		)
Loss (gain) on sale or disposal of fixed assets	1.1			1.3			(1.1		)	2.4			1.8
Amortization of debt discount and issuance costs	3.4			3.3			3.9			6.7			8.4
Payments for term debt modification	(1.1		)	—			—			(1.1		)	(2.4		)
Write-down of excess inventories	14.4			9.4			21.4			23.8			35.6
Share-based compensation expense	23.1			18.4			20.8			41.5			35.9
Non-cash interest on convertible notes	8.9			8.7			8.6			17.6			13.3
Change in deferred taxes	35.7			7.5			21.0			43.2			57.2
Other	0.2			(1.2		)	0.5			(1.0		)	2.0
Changes in operating assets and liabilities	(101.7		)	(81.3		)	45.4			(183.0		)	(46.4		)
Net cash provided by operating activities	$	268.5		$	226.5		$	333.2		495.0			$	541.7
Cash flows from investing activities:
Purchases of property, plant and equipment	$	(152.9	)	$	(99.5	)	$	(69.0	)	$	(252.4	)	$	(121.7	)
Proceeds from sales of property, plant and equipment	0.4			5.6			1.6			6.0			1.8
Deposits made (utilized) for purchases of property, plant and equipment	(2.1		)	(11.6		)	1.3			(13.7		)	1.1
Purchase of business, net of cash acquired	(70.7		)	—			—			(70.7		)	(0.8		)
Proceeds from divestiture of business, net of cash transferred	5.6			—			—			5.6			—
Proceeds from repayment of note receivable	10.2			—			—			10.2			—
Equity method investment	(19.8		)	—			—			(19.8		)	—
Purchase of held-to-maturity securities	—			—			—			—			(1.6		)
Net cash used in investing activities	$	(229.3	)	$	(105.5	)	$	(66.1	)	$	(334.8	)	$	(121.2	)
Cash flows from financing activities:
Proceeds from issuance of common stock under the ESPP	6.9			$	—		$	5.4		$	6.9		$	11.3
Proceeds from exercise of stock options	0.7			3.6			1.7			4.3			9.2
Payment of tax withholding for restricted shares	(1.1		)	(18.8		)	(0.6		)	(19.9		)	(13.6		)
Repurchase of common stock	(40.0		)	—			—			(40.0		)	(25.0		)
Proceeds from debt issuance	2.2			5.3			6.9			7.5			695.9
Repayment of long-term debt	(79.5		)	(135.9		)	(136.9		)	(215.4		)	(1,191.3		)
Purchases of convertible note hedges	—			—			—			—			(144.7		)
Proceeds from issuance of warrants	—			—			—			—			85.2
Payment of capital lease obligations	(2.1		)	(1.1		)	(1.1		)	(3.2		)	(6.5		)
Net cash used in financing activities	$	(112.9	)	$	(146.9	)	$	(124.6	)	$	(259.8	)	$	(579.5	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	$	(0.9	)	$	1.6		$	(0.1	)	0.7			$	2.2
Net increase (decrease) in cash, cash equivalents and restricted cash	$	(74.6	)	$	(24.3	)	$	142.4		$	(98.9	)	$	(156.8	)
Cash, cash equivalents and restricted cash, beginning of period	$	942.3		$	966.6		$	746.6		$	966.6		$	1,045.8
Cash, cash equivalents and restricted cash, end of period	$	867.7		$	942.3		$	889.0		$	867.7		$	889.0


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

	Quarter Ended									Six Months Ended
	June 29, 2018			March 30, 2018			June 30, 2017			June 29, 2018			June 30, 2017
Reconciliation of GAAP revenue to non-GAAP revenue:
GAAP revenue	$	1,455.9		$	1,377.6		$	1,338.0		$	2,833.5		$	2,774.7
Special items:
a) Sell-through to sell-in adjustment	—			—			—			—			(155.1		)
Total special items	—			—			—			—			(155.1		)
Non-GAAP revenue	$	1,455.9		$	1,377.6		$	1,338.0		$	2,833.5		$	2,619.6
Reconciliation of GAAP gross profit to non-GAAP gross profit:
GAAP gross profit	$	555.0		$	517.4		$	492.0		$	1,072.4		$	995.1
Special items:
a) Sell-through to sell-in adjustment	—			—			—			—			(59.0		)
b) Expensing of appraised inventory at fair market value step-up	0.2			—			1.3			0.2			11.1
Total special items	0.2			—			1.3			0.2			(47.9		)
Non-GAAP gross profit	$	555.2		$	517.4		$	493.3		$	1,072.6		$	947.2
Reconciliation of GAAP gross margin to non-GAAP gross margin:
GAAP gross margin	38.1		%	37.6		%	36.8		%	37.8		%	35.9		%
Special items:
a) Sell-through to sell-in adjustment	—		%	—		%	—		%	—		%	(0.1		)%
b) Expensing of appraised inventory at fair market value step-up	—		%	—		%	0.1		%	—		%	0.4		%
Total special items	—		%	—		%	0.1		%	—		%	0.3		%
Non-GAAP gross margin	38.1		%	37.6		%	36.9		%	37.9		%	36.2		%
Reconciliation of GAAP operating expenses to non-GAAP operating expenses:
GAAP operating expenses	$	357.8		$	331.7		$	338.0		$	689.5		$	658.0
Special items:
a) Amortization of acquisition-related intangible assets	(27.9		)	(27.4		)	(28.6		)	(55.3		)	(57.7		)
b) Restructuring, asset impairments and other, net	(3.2		)	(0.4		)	(5.9		)	(3.6		)	(6.4		)
c) Goodwill and intangible asset impairment	(3.3		)	—			(1.8		)	(3.3		)	(6.2		)
d) Third party acquisition and divestiture related costs	(2.1		)	(0.4		)	(0.7		)	(2.5		)	(1.7		)
e) R&D costs related to licensing income	(3.7		)	(2.8		)	(4.1		)	(6.5		)	(4.1		)
Total special items	(40.2		)	(31.0		)	(41.1		)	(71.2		)	(76.1		)
Non-GAAP operating expenses	$	317.6		$	300.7		$	296.9		$	618.3		$	581.9
Reconciliation of GAAP operating income to non-GAAP operating income:
GAAP operating income	$	197.2		$	185.7		$	154.0		$	382.9		$	337.1
Special items:
a) Sell-through to sell-in adjustment	—			—			—			—			(59.0		)
b) Expensing of appraised inventory at fair market value step-up	0.2			—			1.3			0.2			11.1
c) Amortization of acquisition-related intangible assets	27.9			27.4			28.6			55.3			57.7
d) Restructuring, asset impairments and other, net	3.2			0.4			5.9			3.6			6.4
e) Goodwill and intangible asset impairment	3.3			—			1.8			3.3			6.2
f) Third party acquisition and divestiture related costs	2.1			0.4			0.7			2.5			1.7
g) R&D costs related to licensing income	3.7			2.8			4.1			6.5			4.1
Total special items	40.4			31.0			42.4			71.4			28.2
Non-GAAP operating income	$	237.6		$	216.7		$	196.4		$	454.3		$	365.3
*Reconciliation of GAAP operating margin to non-GAAP operating margin (operating income / revenues)* :**
GAAP operating margin	13.5		%	13.5		%	11.5		%	13.5		%	12.1		%
Special items:
a) Sell-through to sell-in adjustment	—		%	—		%	—		%	—		%	(1.3		)%
b) Expensing of appraised inventory at fair market value step-up	—		%	—		%	0.1		%	—		%	0.4		%
c) Amortization of acquisition-related intangible assets	1.9		%	2.0		%	2.1		%	2.0		%	2.1		%
d) Restructuring, asset impairments and other, net	0.2		%	—		%	0.4		%	0.1		%	0.2		%
e) Goodwill and intangible asset impairment	0.2		%	—		%	0.1		%	0.1		%	0.2		%
f) Third party acquisition and divestiture related costs	0.1		%	—		%	0.1		%	0.1		%	0.1		%
g) R&D costs related to licensing income	0.3		%	0.2		%	0.3		%	0.2		%	0.1		%
Total special items	2.8		%	2.2		%	3.2		%	2.5		%	1.8		%
Non-GAAP operating margin	16.3		%	15.7		%	14.7		%	16.0		%	13.9		%
Reconciliation of GAAP income before income taxes to non-GAAP income before income taxes:
GAAP income before income taxes	$	193.4		$	156.9		$	143.2		$	350.3		$	258.2
Special items:
a) Sell-through to sell-in adjustment	—			—			—			—			(59.0		)
b) Expensing of appraised inventory at fair market value step-up	0.2			—			1.3			0.2			11.1
c) Amortization of acquisition-related intangible assets	27.9			27.4			28.6			55.3			57.7
d) Restructuring, asset impairments and other, net	3.2			0.4			5.9			3.6			6.4
e) Goodwill and intangible asset impairment	3.3			—			1.8			3.3			6.2
f) Third party acquisition and divestiture related costs	2.1			0.4			0.7			2.5			1.7
g) R&D costs related to licensing income	3.7			2.8			4.1			6.5			4.1
h) Loss on debt refinancing and prepayment	4.0			—			—			4.0			26.2
i) Non-cash interest on convertible notes	8.9			8.7			8.6			17.6			13.3
j) Adjustment to contingent consideration	—			(2.1		)	0.8			(2.1		)	2.3
k) Licensing income	(28.1		)	(3.8		)	(23.9		)	(31.9		)	(23.9		)
l) Gain on divestiture of business	(4.6		)	—			—			(4.6		)	—
Total special items	20.6			33.8			27.9			54.4			46.1
Non-GAAP income before income taxes	$	214.0		$	190.7		$	171.1		$	404.7		$	304.3
Reconciliation of GAAP net income to non-GAAP net income:
GAAP net income attributable to ON Semiconductor Corporation	$	155.3		$	139.6		$	93.9		$	294.9		$	172.1
Special items:
a) Sell-through to sell-in adjustment	—			—			—			—			(59.0		)
b) Expensing of appraised inventory at fair market value step-up	0.2			—			1.3			0.2			11.1
c) Amortization of acquisition-related intangible assets	27.9			27.4			28.6			55.3			57.7
d) Restructuring, asset impairments and other, net	3.2			0.4			5.9			3.6			6.4
e) Goodwill and intangible asset impairment	3.3			—			1.8			3.3			6.2
f) Third party acquisition and divestiture related costs	2.1			0.4			0.7			2.5			1.7
g) R&D costs related to licensing income	3.7			2.8			4.1			6.5			4.1
h) Loss on debt refinancing and prepayment	4.0			—			—			4.0			26.2
i) Non-cash interest on convertible notes	8.9			8.7			8.6			17.6			13.3
j) Adjustment to contingent consideration	—			(2.1		)	0.8			(2.1		)	2.3
k) Licensing income	(28.1		)	(3.8		)	(23.9		)	(31.9		)	(23.9		)
l) Gain on divestiture of business	(4.6		)	—			—			(4.6		)	—
m) Adjustment of income taxes	23.8			(2.7		)	31.7			21.1			49.6
Total special items	44.4			31.1			59.6			75.5			95.7
Non-GAAP net income attributable to ON Semiconductor Corporation	$	199.7		$	170.7		$	153.5		$	370.4		$	267.8
Adjustment of income taxes:
Tax adjustment for Special Items (1)	$	(4.3	)	$	(7.1	)	$	(9.8	)	$	(11.4	)	$	(16.1	)
Other non-GAAP tax adjustment (2)	28.1			4.4			41.5			32.5			65.7
Total	$	23.8		$	(2.7	)	$	31.7		$	21.1		$	49.6
Reconciliation of GAAP diluted share count to non-GAAP diluted share count:
GAAP diluted share count	444.3			444.2			425.9			444.4			426.0
Special items:
a) Dilutive share count attributable to convertible notes	(12.7		)	(12.6		)	—			(12.7		)	—
Total special items	(12.7		)	(12.6		)	—			(12.7		)	—
Non-GAAP diluted share count	431.6			431.6			425.9			431.7			426.0
Non-GAAP diluted earnings per share:
Non-GAAP net income attributable to ON Semiconductor Corporation	$	199.7		$	170.7		$	153.5		$	370.4		$	267.8
Non-GAAP diluted share count	431.6			431.6			425.9			431.7			426.0
Non-GAAP diluted earnings per share	$	0.46		$	0.40		$	0.36		$	0.86		$	0.63
Reconciliation of net cash provided by operating activities to free cash flow:
Net cash provided by operating activities	$	268.5		$	226.5		$	333.2		$	495.0		$	541.7
Special items:
a) Purchases of property, plant and equipment	(152.9		)	(99.5		)	(69.0		)	(252.4		)	(121.7		)
Total special items	(152.9		)	(99.5		)	(69.0		)	(252.4		)	(121.7		)
Free cash flow	$	115.6		$	127.0		$	264.2		$	242.6		$	420.0

(1)			Tax impact of non-GAAP Special Items (a) - (l) is calculated using the federal statutory rate of 21%, 21% and 35% for the quarters and six months ended June 29, 2018, March 30, 2018, and June 30, 2017, respectively.
(1)
(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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