ON Semiconductor Reports First Quarter 2018 Results

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

	Quarter Ended
	March 30, 2018			December 31, 2017			March 31, 2017
Revenues	$	1,377.6		$	1,377.5		$	1,436.7
Cost of revenues (exclusive of amortization shown below)	860.2			861.0			933.6
Gross profit	517.4			516.5			503.1
Gross margin	37.6		%	37.5		%	35.0		%
Operating expenses:
Research and development	155.2			158.0			140.1
Selling and marketing	77.8			81.0			77.5
General and administrative	70.9			71.1			68.4
Amortization of acquisition-related intangible assets	27.4			28.8			29.1
Restructuring, asset impairments and other, net	0.4			4.7			0.5
Intangible asset impairment	—			5.4			4.4
Total operating expenses	331.7			349.0			320.0
Operating income	185.7			167.5			183.1
Other income (expense), net:
Interest expense	(31.5		)	(33.2		)	(38.4		)
Interest income	0.9			1.2			0.6
Loss on debt refinancing and prepayment	—			(14.3		)	(26.2		)
Licensing income	3.8			2.2			—
Other expense	(2.0		)	(2.4		)	(4.1		)
Other income (expense), net	(28.8		)	(46.5		)	(68.1		)
Income before income taxes	156.9			121.0			115.0
Income tax benefit (provision)	(16.4		)	410.0			(36.3		)
Net income	140.5			531.0			78.7
Less: Net income attributable to non-controlling interest	(0.9		)	(1.1		)	(0.5		)
Net income attributable to ON Semiconductor Corporation	$	139.6		$	529.9		$	78.2
Net income per common share attributable to ON Semiconductor Corporation:
Basic	$	0.33		$	1.25		$	0.19
Diluted	$	0.31		$	1.22		$	0.18
Weighted average common shares outstanding:
Basic	425.9			424.3			419.8
Diluted	444.2			433.3			425.8

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

	March 30, 2018			December 31, 2017			March 31, 2017
Assets
Cash and cash equivalents	$	924.9		$	949.2		$	728.9
Receivables, net	696.9			701.5			678.2
Inventories	1,160.0			1,089.5			1,011.4
Other current assets	185.2			193.0			190.6
Total current assets	2,967.0			2,933.2			2,609.1
Property, plant and equipment, net	2,336.4			2,279.1			2,156.1
Goodwill	916.9			916.9			924.7
Intangible assets, net	600.9			628.3			730.5
Deferred tax assets	333.3			339.1			143.9
Other assets	108.6			98.5			73.1
Total assets	$	7,263.1		$	7,195.1		$	6,637.4
Liabilities, Non-Controlling Interest and Stockholders’ Equity
Accounts payable	$	612.0		$	548.0		$	464.0
Accrued expenses	585.8			612.8			475.2
Current portion of long-term debt	747.2			248.1			272.8
Total current liabilities	1,945.0			1,408.9			1,212.0
Long-term debt	2,084.4			2,703.7			2,986.8
Deferred tax liabilities	57.1			55.1			246.0
Other long-term liabilities	225.1			226.4			194.3
Total liabilities	4,311.6			4,394.1			4,639.1
ON Semiconductor Corporation stockholders’ equity:
Common stock	5.5			5.5			5.5
Additional paid-in capital	3,615.5			3,593.5			3,510.6
Accumulated other comprehensive loss	(34.4		)	(40.6		)	(43.1		)
Accumulated earnings (deficit)	491.7			351.5			(381.0		)
Less: Treasury stock, at cost	(1,149.9		)	(1,131.1		)	(1,116.0		)
Total ON Semiconductor Corporation stockholders’ equity	2,928.4			2,778.8			1,976.0
Non-controlling interest in consolidated subsidiary	23.1			22.2			22.3
Total stockholders' equity	2,951.5			2,801.0			1,998.3
Total liabilities and stockholders' equity	$	7,263.1		$	7,195.1		$	6,637.4

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

	Quarter Ended
	March 30, 2018			December 31, 2017			March 31, 2017
Net income	$	140.5		$	531.0		$	78.7
Adjusted for:
Licensing income	(3.8		)	(2.2		)	—
R&D costs related to licensing income	2.8			3.7			—
Restructuring, asset impairments and other, net	0.4			4.7			0.5
Intangible asset impairment	—			5.4			4.4
Interest expense	31.5			33.2			38.4
Interest income	(0.9		)	(1.2		)	(0.6		)
Loss on debt refinancing and prepayment	—			14.3			26.2
Income tax (benefit) provision	16.4			(410.0		)	36.3
Net income attributable to non-controlling interest	(0.9		)	(1.1		)	(0.5		)
Depreciation and amortization	119.9			123.4			114.3
Amortization of fair market value step-up of inventory	—			—			9.8
Sell-through to sell-in adjustment	—			—			(59.0		)
Adjustment to contingent consideration	(2.1		)	(0.2		)	1.5
Actuarial losses on pension plans and other pension benefits	—			1.9			—
Third party acquisition and divestiture related costs	0.4			1.0			1.0
Adjusted EBITDA	304.2			303.9			251.0
Increase (decrease):
Licensing income	3.8			2.2			—
R&D costs related to licensing income	(2.8		)	(3.7		)	—
Restructuring, asset impairments and other, net	(0.4		)	(4.7		)	(0.5		)
Interest expense	(31.5		)	(33.2		)	(38.4		)
Interest income	0.9			1.2			0.6
Income tax benefit (provision)	(16.4		)	410.0			(36.3		)
Net income attributable to non-controlling interest	0.9			1.1			0.5
Amortization of fair market value step-up of inventory	—			—			(9.8		)
Sell-through to sell-in adjustment	—			—			59.0
Adjustment to contingent consideration	2.1			0.2			(1.5		)
Actuarial losses on pension plans and other pension benefits	—			(1.9		)	—
Third party acquisition and divestiture related costs	(0.4		)	(1.0		)	(1.0		)
Loss on sale or disposal of fixed assets	1.3			1.1			2.9
Amortization of debt discount and issuance costs	3.3			3.8			4.5
Payments for term debt modification	—			(1.4		)	(2.4		)
Write-down of excess inventories	9.4			10.2			14.2
Non-cash share-based compensation expense	18.4			17.1			15.1
Non-cash interest on convertible notes	8.7			8.9			4.7
Non-cash asset impairment charges	—			0.6			—
Change in deferred taxes	7.5			(444.4		)	36.2
Other	(1.2		)	(0.4		)	1.5
Changes in operating assets and liabilities	(81.3		)	(45.3		)	(91.8		)
Net cash provided by operating activities	$	226.5		$	224.3		$	208.5
Cash flows from investing activities:
Purchases of property, plant and equipment	$	(99.5	)	$	(175.7	)	$	(52.7	)
Proceeds from sales of property, plant and equipment	5.6			12.2			0.2
Deposits utilized for purchases of property, plant and equipment	(11.6		)	(6.1		)	(0.2		)
Purchase of business, net of cash acquired	—			—			(0.8		)
Purchases of held-to-maturity securities	—			—			(1.6		)
Other	—			(1.0		)	—
Net cash used in investing activities	$	(105.5	)	$	(170.6	)	$	(55.1	)
Cash flows from financing activities:
Proceeds from issuance of common stock under the ESPP	$	—		$	12.2		$	5.9
Proceeds from exercise of stock options	3.6			7.1			7.5
Payments of tax withholding for restricted shares	(18.8		)	(3.1		)	(13.0		)
Repurchase of common stock	—			—			(25.0		)
Proceeds from debt issuance	5.3			405.0			689.8
Payments of debt issuance and other financing costs	—			—			(0.8		)
Repayment of long-term debt	(135.9		)	(419.8		)	(1,054.4		)
Purchases of convertible note hedges	—			—			(144.7		)
Proceeds from issuance of warrants	—			—			85.2
Payment of capital lease obligations	(1.1		)	(1.2		)	(5.4		)
Payment of contingent consideration	—			(3.9		)	—
Dividend to non-controlling shareholder of consolidated subsidiary	—			(1.9		)	—
Net cash used in financing activities	$	(146.9	)	$	(5.6	)	$	(454.9	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	$	1.6		$	(0.1	)	$	2.3
Net increase (decrease) in cash, cash equivalents and restricted cash	$	(24.3	)	$	48.0		$	(299.2	)
Cash, cash equivalents and restricted cash, beginning of period	$	966.6		$	918.6		$	1,045.8
Cash, cash equivalents and restricted cash, end of period	$	942.3		$	966.6		$	746.6

NON-GAAP MEASURES

			Quarter Ended
			March 30 2018			December 31, 2017			March 31, 2017
Reconciliation of GAAP revenue to non-GAAP revenue:
GAAP revenue			$	1,377.6		$	1,377.5		$	1,436.7
	Special items:
	a)	Sell-through to sell-in adjustment	—			—			(155.1		)
		Total special items	—			—			(155.1		)
Non-GAAP revenue			$	1,377.6		$	1,377.5		$	1,281.6
Reconciliation of GAAP gross profit to non-GAAP gross profit:
GAAP gross profit			$	517.4		$	516.5		$	503.1
	Special items:
	a)	Sell-through to sell-in adjustment	—			—			(59.0		)
	b)	Expensing of appraised inventory at fair market value step-up	—			—			9.8
		Total special items	—			—			(49.2		)
Non-GAAP gross profit			$	517.4		$	516.5		$	453.9
Reconciliation of GAAP gross margin to non-GAAP gross margin:
GAAP gross margin			37.6		%	37.5		%	35.0		%
	Special items:
	a)	Sell-through to sell-in adjustment	—		%	—		%	(0.3		)%
	b)	Expensing of appraised inventory at fair market value step-up	—		%	—		%	0.7		%
		Total special items	—		%	—		%	0.4		%
Non-GAAP gross margin			37.6		%	37.5		%	35.4		%
Reconciliation of GAAP operating expenses to non-GAAP operating expenses:
GAAP operating expenses			$	331.7		$	349.0		$	320.0
	Special items:
	a)	Amortization of acquisition-related intangible assets	(27.4		)	(28.8		)	(29.1		)
	b)	Restructuring, asset impairments and other, net	(0.4		)	(4.7		)	(0.5		)
	c)	Intangible asset impairment	—			(5.4		)	(4.4		)
	d)	Third party acquisition and divestiture related costs	(0.4		)	(1.0		)	(1.0		)
	e)	R&D costs related to licensing income	(2.8		)	(3.7		)	—
		Total special items	(31.0		)	(43.6		)	(35.0		)
Non-GAAP operating expenses			$	300.7		$	305.4		$	285.0
Reconciliation of GAAP operating income to non-GAAP operating income:
GAAP operating income			$	185.7		$	167.5		$	183.1
	Special items:
	a)	Sell-through to sell-in adjustment	—			—			(59.0		)
	b)	Expensing of appraised inventory at fair market value step-up	—			—			9.8
	c)	Amortization of acquisition-related intangible assets	27.4			28.8			29.1
	d)	Restructuring, asset impairments and other, net	0.4			4.7			0.5
	f)	Intangible asset impairment	—			5.4			4.4
	g)	Third party acquisition and divestiture related costs	0.4			1.0			1.0
	h)	R&D costs related to licensing income	2.8			3.7			—
		Total special items	31.0			43.6			(14.2		)
Non-GAAP operating income			$	216.7		$	211.1		$	168.9
*Reconciliation of GAAP operating margin to non-GAAP operating margin (operating income / revenues)* :**
GAAP operating margin			13.5		%	12.2		%	12.7		%
	Special items:
	a)	Sell-through to sell-in adjustment	—		%	—		%	(2.7		)%
	b)	Expensing of appraised inventory at fair market value step-up	—		%	—		%	0.7		%
	c)	Amortization of acquisition-related intangible assets	2.0		%	2.1		%	2.0		%
	d)	Restructuring, asset impairments and other, net	—		%	0.3		%	—		%
	f)	Intangible asset impairment	—		%	0.4		%	0.3		%
	g)	Third party acquisition and divestiture related costs	—		%	0.1		%	0.1		%
	h)	R&D costs related to licensing income	0.2		%	0.3		%	—		%
		Total special items	2.2		%	3.2		%	0.4		%
Non-GAAP operating margin			15.7		%	15.3		%	13.2		%
Reconciliation of GAAP income before income taxes to non-GAAP income before income taxes:
GAAP income before income taxes			$	156.9		$	121.0		$	115.0
	Special items:
	a)	Sell-through to sell-in adjustment	—			—			(59.0		)
	b)	Expensing of appraised inventory at fair market value step-up	—			—			9.8
	c)	Amortization of acquisition-related intangible assets	27.4			28.8			29.1
	d)	Restructuring, asset impairments and other, net	0.4			4.7			0.5
	e)	Intangible asset impairment	—			5.4			4.4
	f)	Third party acquisition and divestiture related costs	0.4			1.0			1.0
	g)	R&D costs related to licensing income	2.8			3.7			—
	h)	Actuarial losses on pension plans and other pension benefits	—			1.9			—
	i)	Loss on debt refinancing and prepayment	—			14.3			26.2
	j)	Non-cash interest on convertible notes	8.7			8.9			4.7
	k)	Adjustment to contingent consideration	(2.1		)	(0.2		)	1.5
	l)	Licensing income	(3.8		)	(2.2		)	—
		Total special items	33.8			66.3			18.2
Non-GAAP income before income taxes			$	190.7		$	187.3		$	133.2
Reconciliation of GAAP net income to non-GAAP net income:
GAAP net income attributable to ON Semiconductor Corporation			$	139.6		$	529.9		$	78.2
	Special items:
	a)	Sell-through to sell-in adjustment	—			—			(59.0		)
	b)	Expensing of appraised inventory at fair market value step-up	—			—			9.8
	c)	Amortization of acquisition-related intangible assets	27.4			28.8			29.1
	d)	Restructuring, asset impairments and other, net	0.4			4.7			0.5
	e)	Intangible asset impairment	—			5.4			4.4
	f)	Third party acquisition and divestiture related costs	0.4			1.0			1.0
	g)	R&D costs related to licensing income	2.8			3.7			—
	h)	Actuarial losses on pension plans and other pension benefits	—			1.9			—
	i)	Loss on debt refinancing and prepayment	—			14.3			26.2
	j)	Non-cash interest on convertible notes	8.7			8.9			4.7
	k)	Adjustment to contingent consideration	(2.1		)	(0.2		)	1.5
	l)	Licensing income	(3.8		)	(2.2		)	—
	m)	Adjustment of income taxes	(2.7		)	(428.9		)	17.9
		Total special items	31.1			(362.6		)	36.1
Non-GAAP net income attributable to ON Semiconductor Corporation			$	170.7		$	167.3		$	114.3
Adjustment of income taxes:
Tax adjustment for Special Items (1)			$	(7.1	)	$	(23.2	)	$	(6.4	)
Other non-GAAP tax adjustment (2)			4.4			44.2			24.3
Non-cash impact of U.S. tax reform (3)			—			(449.9		)	—
Total			$	(2.7	)	$	(428.9	)	$	17.9
Reconciliation of GAAP diluted share count to non-GAAP diluted share count:
GAAP diluted share count			444.2			433.3			425.8
	Special items:
	a)	Dilutive share count attributable to convertible notes	(12.6		)	(3.4		)	—
		Total special items	(12.6		)	(3.4		)	—
Non-GAAP diluted share count			431.6			429.9			425.8
Non-GAAP diluted earnings per share:
Non-GAAP net income attributable to ON Semiconductor Corporation			$	170.7		$	167.3		$	114.3
Non-GAAP diluted share count			431.6			429.9			425.8
Non-GAAP diluted earnings per share			$	0.40		$	0.39		$	0.27
Reconciliation of net cash provided by operating activities to free cash flow:
Net cash provided by operating activities			$	226.5		$	224.3		$	208.5
	Special items:
	a)	Purchases of property, plant and equipment	(99.5		)	(175.7		)	(52.7		)
		Total special items	(99.5		)	(175.7		)	(52.7		)
Free cash flow			$	127.0		$	48.6		$	155.8

(1)		Tax impact of non-GAAP Special Items (a)-(l), calculated using the federal statutory rate of 21%, 35%, and 35% for the quarters ended March 30, 2018, December 31, 2017, and March 31, 2017, respectively.
(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.
(3)		Non-cash tax impacts of U.S. tax reform legislation, H.R.1, commonly referred to as the Tax Cuts and Jobs Act.

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