Press release

ON Semiconductor Reports First Quarter 2019 Results

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ON Semiconductor Corporation (Nasdaq: ON)
today announced that revenue in first quarter of 2019 was
$1,386.6 million, up approximately one percent compared to revenue in
first quarter of 2018. First quarter 2019 revenue was down approximately
eight percent as compared to revenue in fourth quarter of 2018.

“Our execution continues to be strong, despite soft business conditions.
While we are facing near-term headwinds, key secular drivers powering
our business remain intact, and we are well positioned to benefit from
increasing semiconductor content in automotive, industrial, and
cloud-power applications,” said Keith Jackson, president and CEO of ON
Semiconductor. “We are prudently managing our business, and we intend to
deliver strong operational results to mitigate the impact of slowing
demand environment.”

“We remain upbeat about our future, and we are making prudent long term
investments to strengthen our position in our strategic markets and to
further improve our industry-leading cost structure.”

                 

First Quarter Results (GAAP)

 
(in millions, except per share data) 1Q 2019     1Q 2018

Year-Over-
Year Change

4Q 2018 Sequential

Change

Revenue $1,386.6 $1,377.6 1 % $1,503.1 (8 )%
Gross Profit $513.7 $517.4 (1 )% $569.7 (10 )%
Operating Income $179.4 $185.7 (3 )% $222.7 (19 )%
Net Income Attributable to ON Semiconductor Corporation $114.1 $139.6 (18 )% $165.6 (31 )%
Diluted Earnings Per Share $0.27 $0.31 (13 )% $0.39 (31 )%
Diluted Share Count 417.7 444.2 (6 )% 420.0 (1 )%
 

First Quarter Results (Non-GAAP)

                 
(in millions, except per share data) 1Q 2019     1Q 2018 Year-Over-
Year Change
4Q 2018 Sequential

Change

Revenue $1,386.6 $1,377.6 1 % $1,503.1 (8 )%
Gross Profit $513.7 $517.4 (1 )% $570.3 (10 )%
Operating Income $215.2 $216.7 (1 )% $253.0 (15 )%
Net Income Attributable to ON Semiconductor Corporation $177.1 $170.7 4 % $222.0 (20 )%
Diluted Earnings Per Share $0.43 $0.40 8 % $0.53 (19 )%
Diluted Share Count 413.8 431.6 (4 )% 420.0 (1 )%
 

First Quarter Key Cash Flow Items

                 
(in millions) 1Q 2019     1Q 2018 Year-Over-
Year Change
4Q 2018 Sequential

Change

Cash Taxes, net of indemnification $15.2 $19.1 (20 )% $8.2 85 %
Operating Cash Flow $138.2 $226.5 (39 )% $421.0 (67 )%
Free Cash Flow ($18.8 ) $127.0 (115 )% $289.0 (107 )%
 

SECOND QUARTER 2019 OUTLOOK

Based on product booking trends, backlog levels, and estimated turns
levels, the Company anticipates revenue in second quarter of 2019 to be
approximately $1,360 to $1,410 million. Revenue outlook for second
quarter of 2019 includes revenue of approximately $15 million from
manufacturing services provided by ON Semiconductor Aizu Co., Ltd.
(“OSA”).

Gross margin for second quarter of 2019 is expected to be in range of
36.5 percent to 37.5 percent. Second quarter 2019 gross margin outlook
includes negative impact of 40 basis points from manufacturing services
provided by OSA.

The outlook for second quarter of 2019 also includes anticipated
stock-based compensation expense of approximately $26 million to $28
million. Net cash paid for income taxes is expected to be $12 million to
$16 million.

The following table outlines ON Semiconductor’s projected second quarter
of 2019 GAAP and non-GAAP outlook.

     
Total ON Semiconductor

GAAP

  Special

Items ***

  Total ON Semiconductor

Non-GAAP****

Revenue $1,360 to $1,410 $1,360 to $1,410
Gross Margin 36.5% to 37.5% 36.5% to 37.5%
Operating Expenses $322 to $340 million $27 to $31 million $295 to $309 million
Other Income and Expense (including interest expense), net $31 to $34 million $9 to $10 million* $22 to $24 million
Diluted Share Count ** 418 million 4 million 414 million
*   Convertible Notes, Non-cash Interest Expense is calculated pursuant
to FASB’s Accounting Standards Codification Topic 470: Debt.
 
** Diluted share count can vary as a result of, among other things, the
actual exercise of options or vesting of restricted stock units, the
incremental dilutive shares from the Company’s convertible senior
subordinated notes, and the repurchase or the issuance of stock or
convertible notes or the sale of treasury shares. In periods in
which the quarterly average stock price per share exceeds $18.50,
the non-GAAP diluted share count and non-GAAP net income per share
includes the impact of the Company’s hedge transactions issued
concurrently with our 1.00% convertible notes. As such, at an
average stock price per share between $18.50 and $25.96, the hedging
activity offsets the potentially dilutive effect of the 1.00%
convertible notes. In periods when the quarterly average stock price
per share exceeds $20.72, the non-GAAP diluted share count and
non-GAAP net income per share includes the anti-dilutive impact of
the Company’s hedge transactions issued concurrently with the 1.625%
convertible notes. At an average stock price per share between
$20.72 and $30.70, the hedging activity offsets the potentially
dilutive effect of the 1.625% convertible notes. Both GAAP and
non-GAAP diluted share counts are based on the Company’s stock price
as of March 29, 2019.
 
*** Special items may include: amortization of acquisition-related
intangibles; expensing of appraised inventory fair market value
step-up; purchased in-process research and development expenses;
restructuring, asset impairments and other, net; goodwill impairment
charges; gains and losses on debt prepayment; non-cash interest
expense; actuarial (gains) losses on pension plans and other pension
benefits; and certain other special items, as necessary. These
special items are out of our control and could change significantly
from period to period. As a result, we are not able to reasonably
estimate and separately present the individual impact or probable
significance of these special items, and we are similarly unable to
provide a reconciliation of the non-GAAP measures. The
reconciliation that is unavailable would include a forward-looking
income statement, balance sheet and statement of cash flows in
accordance with GAAP. For this reason, we use a projected range of
the aggregate amount of special items in order to calculate our
projected non-GAAP operating expense outlook.
 
**** We believe these non-GAAP measures provide important supplemental
information to investors. We use these measures, together with GAAP
measures, for internal managerial purposes and as a means to
evaluate period-to-period comparisons. However, we do not, and you
should not, rely on non-GAAP financial measures alone as measures of
our performance. We believe that non-GAAP financial measures reflect
an additional way of viewing aspects of our operations that, when
taken together with GAAP results and the reconciliations to
corresponding GAAP financial measures that we also provide in our
releases, provide a more complete understanding of factors and
trends affecting our business. Because non-GAAP financial measures
are not standardized, it may not be possible to compare these
financial measures with other companies’ non-GAAP financial
measures, even if they have similar names.

TELECONFERENCE

ON Semiconductor will host a conference call for the financial community
at 9 a.m. Eastern Daylight Time (EDT) on April 29, 2019 to discuss this
announcement and ON Semiconductor’s results for first quarter of 2019.
The Company will also provide a real-time audio webcast of the
teleconference on the Investor Relations page of its website at http://www.onsemi.com.
The webcast replay will be available at this site approximately one hour
following the live broadcast and will continue to be available for
approximately 30 days following the conference call. Investors and
interested parties can also access the conference call through a
telephone call by dialing (877) 356-3762 (U.S./Canada) or (262) 558-6155
(International). In order to join this conference call, you will be
required to provide the Conference ID Number, which is 2874546.

About ON Semiconductor

ON Semiconductor (Nasdaq: ON) is driving energy efficient innovations,
empowering customers to reduce global energy use. The Company is a
leading supplier of semiconductor-based solutions, offering a
comprehensive portfolio of energy efficient power management, analog,
sensors, logic, timing, connectivity, discrete, SoC and custom devices.
The Company’s products help engineers solve their unique design
challenges in automotive, communications, computing, consumer,
industrial, medical, aerospace and defense applications. ON
Semiconductor operates a responsive, reliable, world-class supply chain
and quality program, a robust compliance and ethics program and a
network of manufacturing facilities, sales offices and design centers in
key markets throughout North America, Europe and the Asia Pacific
regions. For more information, visit http://www.onsemi.com.

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, 2019. 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;
risks that acquisitions or dispositions may disrupt our current plans
and operations, 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; loss of key customers
or distributors; order cancellations or reduced bookings; changes in
manufacturing yields; control of costs and expenses and realization of
cost savings and synergies from restructurings; significant litigation;
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 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 us or persons acting on our
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
March 29, 2019   December 31, 2018   March 30, 2018
Revenue $ 1,386.6 $ 1,503.1 $ 1,377.6
Cost of revenue (exclusive of amortization shown below) 872.9   933.4   860.2  
Gross profit 513.7 569.7 517.4
Gross margin 37.0 % 37.9 % 37.6 %
Operating expenses:
Research and development 151.8 162.2 155.2
Selling and marketing 77.1 82.1 77.8
General and administrative 72.9 74.5 70.9
Amortization of acquisition-related intangible assets 25.7 28.4 27.4
Restructuring, asset impairments and other, net 5.6 (3.7 ) 0.4
Intangible asset impairment 1.2   3.5    

Total operating expenses

334.3   347.0   331.7  
Operating income 179.4   222.7   185.7  
Other income (expense), net:
Interest expense (31.7 ) (32.9 ) (31.5 )
Interest income 2.5 2.8 0.9
Licensing income 3.7 3.8
Other income (expense) 2.1   (7.6 ) (2.0 )
Other income (expense), net (27.1 ) (34.0 ) (28.8 )
Income before income taxes 152.3 188.7 156.9
Income tax provision (38.2 ) (22.7 ) (16.4 )
Net income 114.1 166.0 140.5
Less: Net income attributable to non-controlling interest   (0.4 ) (0.9 )
Net income attributable to ON Semiconductor Corporation $ 114.1   $ 165.6   $ 139.6  
Net income per common share attributable to ON Semiconductor
Corporation:
Basic $ 0.28   $ 0.40   $ 0.33  
Diluted $ 0.27   $ 0.39   $ 0.31  
Weighted average common shares outstanding:
Basic 410.6   416.9   425.9  
Diluted 417.7   420.0   444.2  
 
 
ON SEMICONDUCTOR CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS

(in millions)

           
March 29, 2019   December 31, 2018   March 30, 2018
Assets
Cash and cash equivalents $ 939.6 $ 1,069.6 $ 924.9
Receivables, net 704.0 686.0 696.9
Inventories 1,225.2 1,225.2 1,160.0
Other current assets 177.9   187.0   185.2  
Total current assets 3,046.7 3,167.8 2,967.0
Property, plant and equipment, net 2,585.0 2,549.6 2,336.4
Goodwill 932.5 932.5 916.9
Intangible assets, net 539.5 566.4 600.9
Deferred tax assets 238.2 266.2 333.3
Other assets 222.4   105.1   108.6  
Total assets $ 7,564.3   $ 7,587.6   $ 7,263.1  
Liabilities, Non-Controlling Interest and Stockholders’ Equity
Accounts payable $ 583.3 $ 671.7 $ 612.0
Accrued expenses and other current liabilities 603.4 659.1 585.8
Current portion of long-term debt 130.8   138.5   747.2  
Total current liabilities 1,317.5 1,469.3 1,945.0
Long-term debt 2,639.0 2,627.6 2,084.4
Deferred tax liabilities 54.1 54.8 57.1
Other long-term liabilities 333.0   241.8   225.1  
Total liabilities 4,343.6   4,393.5   4,311.6  
ON Semiconductor Corporation stockholders’ equity:
Common stock 5.6 5.6 5.5
Additional paid-in capital 3,722.5 3,702.3 3,615.5
Accumulated other comprehensive loss (43.7 ) (37.9 ) (34.4 )
Accumulated earnings 1,093.7 979.6 491.7
Less: Treasury stock, at cost (1,579.9 ) (1,478.0 ) (1,149.9 )
Total ON Semiconductor Corporation stockholders’ equity 3,198.2 3,171.6 2,928.4
Non-controlling interest 22.5   22.5   23.1  
Total stockholders’ equity 3,220.7   3,194.1   2,951.5  
Total liabilities and stockholders’ equity $ 7,564.3   $ 7,587.6   $ 7,263.1  
 
 
ON SEMICONDUCTOR CORPORATION
UNAUDITED RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA AND
NET CASH PROVIDED BY OPERATING ACTIVITIES

(in millions)

 
Quarters Ended
March 29, 2019   December 31, 2018   March 30, 2018
Net income $ 114.1 $ 166.0 $ 140.5
Adjusted for:
Licensing income (3.7 ) (3.8 )
R&D costs related to licensing income 2.8
Restructuring, asset impairments and other, net 5.6 (3.7 ) 0.4
Intangible asset impairment 1.2 3.5
Interest expense 31.7 32.9 31.5
Interest income (2.5 ) (2.8 ) (0.9 )
Income tax provision 38.2 22.7 16.4
Net income attributable to non-controlling interest (0.4 ) (0.9 )
Depreciation and amortization 135.8 136.2 119.9
Amortization of fair market value step-up of inventory 0.6
Adjustment to contingent consideration (2.1 )
Actuarial losses on pension plans and other pension benefits 5.8
Third party acquisition and divestiture related costs 3.3 1.5 0.4
Indemnification gain (4.9 )    
Adjusted EBITDA 322.5   358.6   304.2  
Increase (decrease):
Licensing income 3.7 3.8
R&D costs related to licensing income (2.8 )
Restructuring, asset impairments and other, net (5.6 ) 3.7 (0.4 )
Interest expense (31.7 ) (32.9 ) (31.5 )
Interest income 2.5 2.8 0.9
Income tax provision (38.2 ) (22.7 ) (16.4 )
Net income attributable to non-controlling interest 0.4 0.9
Amortization of fair market value step-up of inventory (0.6 )
Adjustment to contingent consideration 2.1
Actuarial losses on pension plans and other pension benefits (5.8 )
Third party acquisition and divestiture related costs (3.3 ) (1.5 ) (0.4 )
Indemnification gain 4.9
Loss (gain) on sale or disposal of fixed assets 0.4 (1.2 ) 1.3
Amortization of debt discount and issuance costs 3.2 3.4 3.3
Share-based compensation expense 19.7 18.9 18.4
Non-cash interest on convertible notes 9.1 9.5 8.7
Change in deferred taxes 29.0 (10.7 ) 7.5
Other (4.3 ) 2.0 (1.2 )
Changes in operating assets and liabilities (170.0 ) 93.4   (71.9 )
Net cash provided by operating activities $ 138.2   $ 421.0   $ 226.5  
Cash flows from investing activities:
Purchase of property, plant and equipment $ (157.0 ) $ (132.0 ) $ (99.5 )
Proceeds from sales of property, plant and equipment 30.2 5.6
Deposits utilized (made) for purchase of property, plant and
equipment
(10.1 ) 9.7 (11.6 )
Purchase of equity interest and assets, net of cash acquired (4.8 )
Proceeds from divestiture of business, net of cash transferred 1.1
Other   2.2    
Net cash used in investing activities $ (167.1 ) $ (93.6 ) $ (105.5 )
Cash flows from financing activities:
Proceeds for the issuance of common stock under the ESPP 7.4 $ 6.3 $
Proceeds from exercise of stock options 0.5 1.3 3.6
Payment of tax withholding for RSUs (26.1 ) (2.4 ) (18.8 )
Repurchase of common stock (75.0 ) (200.3 )
Proceeds from debt issuance 4.5 7.1 5.3
Repayment of long-term debt (12.2 ) (18.5 ) (135.9 )
Payment of finance lease obligations (0.2 ) (0.3 ) (1.1 )
Dividend to non-controlling shareholder   (2.2 )  
Net cash used in financing activities $ (101.1 ) $ (209.0 ) $ (146.9 )
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
$   $ 0.2   $ 1.6  
Net (decrease) increase in cash, cash equivalents and restricted cash $ (130.0 ) $ 118.6 $ (24.3 )
Cash, cash equivalents and restricted cash, beginning of period $ 1,087.1   $ 968.5   $ 966.6  
Cash, cash equivalents and restricted cash, end of period $ 957.1   $ 1,087.1   $ 942.3  
 
 
ON SEMICONDUCTOR CORPORATION
RECONCILIATION OF GAAP VERSUS NON-GAAP DISCLOSURES

(in millions, except per share and percentage data)

     
Quarters Ended
March 29, 2019   December 31, 2018   March 30, 2018
Reconciliation of GAAP gross profit to non-GAAP gross profit:
GAAP gross profit $ 513.7   $ 569.7   $ 517.4  
Special items:
a) Expensing of appraised inventory at fair market value step-up   0.6    
Total special items   0.6    
Non-GAAP gross profit $ 513.7   $ 570.3   $ 517.4  
Reconciliation of GAAP gross margin to non-GAAP gross margin:
GAAP gross margin 37.0 % 37.9 % 37.6 %
Special items:
a) Expensing of appraised inventory at fair market value step-up % % %
Total special items % % %
Non-GAAP gross margin 37.0 % 37.9 % 37.6 %
Reconciliation of GAAP operating expenses to non-GAAP operating
expenses:
GAAP operating expenses $ 334.3   $ 347.0   $ 331.7  
Special items:
a) Amortization of acquisition-related intangible assets (25.7 ) (28.4 ) (27.4 )
b) Restructuring, asset impairments and other, net (5.6 ) 3.7 (0.4 )
c) Intangible asset impairment (1.2 ) (3.5 )
d) Third party acquisition and divestiture related costs (3.3 ) (1.5 ) (0.4 )
e) R&D costs related to licensing income     (2.8 )
Total special items (35.8 ) (29.7 ) (31.0 )
Non-GAAP operating expenses $ 298.5   $ 317.3   $ 300.7  
Reconciliation of GAAP operating income to non-GAAP operating
income:
GAAP operating income $ 179.4   $ 222.7   $ 185.7  
Special items:
a) Expensing of appraised inventory at fair market value step-up 0.6
b) Amortization of acquisition-related intangible assets 25.7 28.4 27.4
c) Restructuring, asset impairments and other, net 5.6 (3.7 ) 0.4
d) Intangible asset impairment 1.2 3.5
e) Third party acquisition and divestiture related costs 3.3 1.5 0.4
f) R&D costs related to licensing income     2.8  
Total special items 35.8   30.3   31.0  
Non-GAAP operating income $ 215.2   $ 253.0   $ 216.7  
Reconciliation of GAAP operating margin to non-GAAP operating
margin (operating income / revenue):
GAAP operating margin 12.9 % 14.8 % 13.5 %
Special items:
a) Expensing of appraised inventory at fair market value step-up % % %
b) Amortization of acquisition-related intangible assets 1.9 % 1.9 % 2.0 %
c) Restructuring, asset impairments and other, net 0.4 % (0.2 )% %
d) Intangible asset impairment 0.1 % 0.2 % %
e) Third party acquisition and divestiture related costs 0.2 % 0.1 % %
f) R&D costs related to licensing income % % 0.2 %
Total special items 2.6 % 2.0 % 2.2 %
Non-GAAP operating margin 15.5 % 16.8 % 15.7 %
Reconciliation of GAAP income before income taxes to non-GAAP
income before income taxes:
GAAP income before income taxes $ 152.3   $ 188.7   $ 156.9  
Special items:
a) Expensing of appraised inventory at fair market value step-up 0.6
b) Amortization of acquisition-related intangible assets 25.7 28.4 27.4
c) Restructuring, asset impairments and other, net 5.6 (3.7 ) 0.4
d) Intangible asset impairment 1.2 3.5
e) Third party acquisition and divestiture related costs 3.3 1.5 0.4
f) R&D costs related to licensing income 2.8
g) Actuarial losses on pension plans and other pension benefits 5.8
h) Non-cash interest on convertible notes 9.1 9.5 8.7
i) Indemnification gain (4.9 )
j) Adjustment to contingent consideration (2.1 )
k) Licensing income   (3.7 ) (3.8 )
Total special items 40.0   41.9   33.8  
Non-GAAP income before income taxes $ 192.3   $ 230.6   $ 190.7  
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 $ 114.1   $ 165.6   $ 139.6  
Special items:
a) Expensing of appraised inventory at fair market value step-up 0.6
b) Amortization of acquisition-related intangible assets 25.7 28.4 27.4
c) Restructuring, asset impairments and other, net 5.6 (3.7 ) 0.4
d) Intangible asset impairment 1.2 3.5
e) Third party acquisition and divestiture related costs 3.3 1.5 0.4
f) R&D costs related to licensing income 2.8
g) Actuarial losses on pension plans and other pension benefits 5.8
h) Non-cash interest on convertible notes 9.1 9.5 8.7
i) Indemnification gain (4.9 )
j) Adjustment to contingent consideration (2.1 )
k) Licensing income (3.7 ) (3.8 )
l) Adjustment of income taxes 23.0   14.5   (2.7 )
Total special items 63.0   56.4   31.1  
Non-GAAP net income attributable to ON Semiconductor Corporation $ 177.1   $ 222.0   $ 170.7  
Adjustment of income taxes:
Tax adjustment for special items (1) $ (8.4 ) $ (8.8 ) $ (7.1 )
Other non-GAAP tax adjustment (2) 31.0 36.4 4.4
Non-cash impact of U.S. tax reform (3) 35.1
Impact of U.S. tax method changes (48.2 )
Tax indemnified by third parties 0.4      
Total adjustment of income taxes $ 23.0   $ 14.5   $ (2.7 )
Reconciliation of GAAP diluted share count to non-GAAP diluted
share count:
GAAP diluted share count 417.7 420.0 444.2
Special items:
a) Dilutive share count attributable to convertible notes (3.9 )   (12.6 )
Total special items (3.9 )   (12.6 )
Non-GAAP diluted share count 413.8   420.0   431.6  
Non-GAAP diluted earnings per share:
Non-GAAP net income attributable to ON Semiconductor Corporation $ 177.1 $ 222.0 $ 170.7
Non-GAAP diluted share count 413.8   420.0   431.6  
Non-GAAP diluted earnings per share $ 0.43   $ 0.53   $ 0.40  
Reconciliation of net cash provided by operating activities to
free cash flow:
Net cash provided by operating activities $ 138.2 $ 421.0 $ 226.5
Special items:
a) Purchase of property, plant and equipment (157.0 ) (132.0 ) (99.5 )
Total special items (157.0 ) (132.0 ) (99.5 )
Free cash flow $ (18.8 ) $ 289.0   $ 127.0  
 
(1) Tax impact of non-GAAP special items (a-k) 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.
(3) Tax impacts of U.S. tax reform legislation, H.R.1, commonly referred
to as the “Tax Cuts and Jobs Act,” and related provisional impacts
recorded pursuant to Staff Accounting Bulletin (SAB) No. 118, Income
Tax Accounting Implications of the Tax Cuts and Jobs Act.

Certain of the amounts in the above tables may not total due to rounding
of individual amounts.

Total share-based compensation expense related to the Company’s stock
options, restricted stock units, stock grant awards and employee stock
purchase plan is included below.

   
Quarters Ended
March 29, 2019   December 31, 2018   March 30, 2018
Cost of revenue $ 1.9 $ 1.9 $ 1.6
Research and development 3.6 3.7 3.2
Selling and marketing 3.8 3.6 3.2
General and administrative 10.4   9.7   10.4
Total share-based compensation expense $ 19.7   $ 18.9   $ 18.4
 

NON-GAAP MEASURES

To supplement the consolidated financial results prepared in accordance
with GAAP, ON Semiconductor uses certain non-GAAP measures, which are
adjusted from the most directly comparable GAAP measures to exclude
items related to the amortization of intangible assets, amortization of
acquisition-related intangibles, expensing of appraised inventory fair
market value step-up, inventory valuation adjustments,
purchased in-process research and development expenses, restructuring,
asset impairments and other, net, goodwill impairment charges, gains and
losses on debt prepayment, non-cash interest expense, actuarial (gains)
losses on pension plans and other pension benefits, third party
acquisition and divestiture related costs, tax impact of these items and
certain other non-recurring items, as necessary. Management does not
consider the effects of these items in evaluating the core operational
activities of ON Semiconductor. Management uses these non-GAAP measures
internally to make strategic decisions, forecast future results and
evaluate ON Semiconductor’s current performance. In addition, we believe
that most analysts covering ON Semiconductor use the non-GAAP measures
to evaluate ON Semiconductor’s performance. Given management’s and other
relevant use of these non-GAAP measures, ON Semiconductor believes these
measures are important to investors in understanding ON Semiconductor’s
current and future operating results as seen through the eyes of
management. In addition, management believes these non-GAAP measures are
useful to investors in enabling them to better assess changes in ON
Semiconductor’s core business across different time periods.
These non-GAAP measures are not prepared in accordance with, and should
not be considered alternatives or necessarily superior to, GAAP
financial data and may be different from non-GAAP measures used by other
companies. Because non-GAAP financial measures are not standardized, it
may not be possible to compare these financial measures with other
companies’ non-GAAP financial measures, even if they have similar names.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that represents net
income before interest expense, interest income, provision for income
taxes, depreciation and amortization expense and special items. We use
the adjusted EBITDA measure for internal managerial evaluation purposes,
as a means to evaluate period-to-period comparisons and as a performance
metric for the vesting and release of certain of our performance-based
equity awards. SEC Regulation G and other federal securities laws
regulate the use of financial measures that are not prepared in
accordance with generally accepted accounting principles. We believe
this measure provides important supplemental information to investors.
However, we do not, and you should not, rely on non-GAAP financial
measures alone as measures of our performance.

Non-GAAP Revenue

The use of non-GAAP revenue allows management to evaluate, among other
things, the revenue from the Company’s core businesses and trends across
different reporting periods on a consistent basis, independent of
special items. In addition, non-GAAP Revenue it is an important
component of management’s internal performance measurement and incentive
and reward process as it is used to assess the current and historical
financial results of the business and for strategic decision making,
preparing budgets, obtaining targets and forecasting future results.
Management presents this non-GAAP financial measure to enable investors
and analysts to evaluate our revenue generation performance relative to
the direct costs of operations of ON Semiconductor’s core businesses.

Non-GAAP Gross Profit and Gross Margin

The use of non-GAAP gross profit and gross margin allows management to
evaluate, among other things, the gross margin and gross profit of the
Company’s core businesses and trends across different reporting periods
on a consistent basis, independent of non-cash items including,
generally speaking, expensing of appraised inventory fair market
value step-up, the impact from the change in revenue recognition on
distributor sales. In addition, it is an important component of
management’s internal performance measurement and incentive and reward
process as it is used to assess the current and historical financial
results of the business and for strategic decision making, preparing
budgets, obtaining targets and forecasting future results. Management
presents this non-GAAP financial measure to enable investors and
analysts to evaluate our revenue generation performance relative to the
direct costs of revenue of ON Semiconductor’s core businesses.

Non-GAAP Operating Income and Operating Margin

The use of non-GAAP operating income and operating margin allows
management to evaluate, among other things, the operating margin and
operating income of the Company’s core businesses and trends across
different reporting periods on a consistent basis, independent
of non-cash items including, generally speaking, expensing of appraised
inventory fair market value step-up, the impact from the change in
revenue recognition on distributor sales, amortization and impairments
of intangible assets, third party acquisition and divestiture related
costs, restructuring charges and certain other special items as
necessary. In addition, it is an important component of management’s
internal performance measurement and incentive and reward process as it
is used to assess the current and historical financial results of the
business and for strategic decision making, preparing budgets, obtaining
targets and forecasting future results. Management presents
this non-GAAP financial measure to enable investors and analysts to
evaluate our revenue generation performance relative to the direct costs
of operations of ON Semiconductor’s core businesses.

Non-GAAP Net Income Attributable to ON Semiconductor Corporation
and Non-GAAP Diluted Earnings Per Share

The use of non-GAAP net income attributable to ON Semiconductor
Corporation and non-GAAP diluted earnings per share allows management to
evaluate the operating results of ON Semiconductor’s core businesses and
trends across different reporting periods on a consistent basis,
independent of non-cash items including, generally, the amortization and
impairments of intangible assets, expensing of appraised inventory fair
market value step-up, the impact from the change in revenue recognition
on distributor sales, restructuring, gains and losses on debt
prepayment, non-cash interest expense, actuarial (gains) losses on
pension plans and other pension benefits, third party acquisition and
divestiture related costs, tax indemnification by third parties, tax
impact of these items and other non-GAAP adjustments and certain other
special items, as necessary. In addition, these items are important
components of management’s internal performance measurement and
incentive and reward process, as they are used to assess the current and
historical financial results of the business and for strategic decision
making, preparing budgets, setting targets and forecasting future
results. Management presents these non-GAAP financial measures to enable
investors and analysts to understand the results of operations of ON
Semiconductor’s core businesses and, to the extent comparable, to
compare our results of operations on a more consistent basis against
that of other companies in our industry.

Free Cash Flow

The use of free cash flow allows management to evaluate, among other
things, the ability of the Company to make interest or principal
payments on its debt. Free cash flow is defined as the difference
between cash flow from operating activities and capital expenditures
disclosed under investing activities in the consolidated statement of
cash flows. Free cash flow is not an alternate to cash flow from
operating activities as a measure of liquidity. It is an important
component of management’s internal performance measurement and incentive
and reward process as it is used to assess the current and historical
financial results of the business and for strategic decision making,
preparing budgets, obtaining targets and forecasting future results.
Management presents this non-GAAP financial measure to enable investors
and analysts to evaluate our revenue generation performance relative to
the direct costs of operations of ON Semiconductor’s core businesses.

Diluted Share Count

In periods when the quarterly average stock price per share exceeds
$18.50, the non-GAAP diluted share count includes the anti-dilutive
impact of the Company’s hedge transactions issued concurrently with the
1.00% convertible notes. As such, at an average stock price per share
between $18.50 and $25.96, the hedging activity offsets the potentially
dilutive effect of the 1.00% convertible notes.

In periods when the quarterly average stock price per share exceeds
$20.72, the non-GAAP diluted share count includes the anti-dilutive
impact of the Company’s hedge transactions issued concurrently with the
1.625% convertible notes. As such, at an average stock price per share
between $20.72 and $30.70, the hedging activity offsets the potentially
dilutive effect of the 1.625% convertible notes.