ON SEMICONDUCTOR CORP (ON)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our audited historical consolidated financial statements, including the notes thereto, which are included elsewhere in this Form 10-K. Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties, and other factors and speak only as of the filing date. Actual results could differ materially because of the factors discussed in "Risk Factors" and elsewhere in this Form 10-K.

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Executive Overview

This executive overview presents summarized information regarding our business and operating trends only. For further details, please read "Management's Discussion and Analysis of Financial Condition and Results of Operations" in its entirety.

onsemi Results

Our revenue for the year ended December 31, 2024 was $7,082.3 million, representing a decrease of 14.2% from $8,253.0 million for the year ended December 31, 2023. During 2024, we reported net income attributable to onsemi of $1,572.8 million compared to $2,183.7 million in 2023. Our operating income totaled $1,767.7 million during 2024 compared to $2,538.7 million during 2023. Our gross margin decreased by approximately 170 basis points to 45.4% in 2024 from 47.1% in 2023. The decrease in our operating results was primarily due to decreased demand in our automotive and industrial end-markets resulting in lower sales volumes and the corresponding underutilization of our manufacturing facilities. See discussion under "Results of Operations" for the reasons for the fluctuations year-over-year.

Business and Macroeconomic Environment

The semiconductor industry has traditionally been highly cyclical, has often experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions. During 2024, the semiconductor industry continued to experience a softening demand and uncertainty due to macroeconomic factors and the geopolitical environment. We are monitoring the economic environment and related forecasts for indicators that would suggest the global economic slowdown could continue for an extended period. Given the current conditions, we are actively managing and have taken corrective actions in our manufacturing capacity and spending to align with the forecasted demand. We intend to continue these actions during 2025; however, we believe the current volatility in general economic conditions is not expected to have a significant impact on our long-term strategic and growth initiatives.

We continue to evaluate cost-saving initiatives to be able to align our overall cost structure, capital investments and other expenditures with our expected revenue, spending and capacity levels to help offset softening demand, increased manufacturing and operating costs. We have taken, and continue to take actions, including but not limited to, exiting product lines that do not enhance gross margin or satisfy strategic objectives and aligning internal manufacturing capacity and resources to external demand.

See Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for information relating to our most recent cost-saving initiatives.

Results of Operations

A discussion of our results of operations for the year ended December 31, 2024 compared to December 31, 2023 is included below. For a discussion and comparison of the results of our operations for the year ended December 31, 2023 with the year ended December 31, 2022, refer to "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Form 10-K for the year ended December 31, 2023 filed with the SEC on February 5, 2024.

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Operating Results

The following table summarizes certain information relating to our operating results that has been derived from our audited consolidated financial statements (in millions):

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The following table summarizes certain information relating to our segment results (in millions):

(1)During the first quarter of 2024, the Company reorganized certain reporting units and its segment reporting structure. As a result of the reorganization of divisions within PSG and AMG, the prior-period amounts have been reclassified to conform to current-period presentation.

(2)Gross profit margin as a percent of respective segment revenue balances

Revenue

Revenue was $7,082.3 million and $8,253.0 million for 2024 and 2023, respectively. The decrease from 2023 to 2024 of $1,170.7 million, or 14.2%, was attributable to lower sales volumes across all segments, which are further explained below. We had one customer, a distributor, whose revenue accounted for approximately 10% of our total revenue for the year ended December 31, 2024. There was no customer whose revenue exceeded 10% of total revenue for the year ended December 31, 2023.

Revenue from PSG

Revenue from PSG decreased by $532.2 million, or approximately 13.7%, during 2024 compared to 2023. Revenue from our Multi-Market Power Division, Industrial Power Division and Automotive Power Division decreased by $250.8 million, $162.2 million and $119.1 million, respectively, primarily driven by a decrease in demand in the automotive and industrial end-markets.

Revenue from AMG

Revenue from AMG decreased by $448.0 million, or approximately 14.7%, during 2024 compared to 2023. Revenue from our Power Management Division, Sensor Interface Division and Integrated Circuit Division decreased by $269.1 million, $101.5 million and $77.4 million, respectively, also due to the decrease in demand in the automotive and industrial end-markets.

Revenue from ISG

Revenue from ISG decreased by $190.5 million, or approximately 14.5%, during 2024 compared to 2023, which was driven by a decrease in revenue from our Industrial and Consumer Solutions Division and Automotive Sensing Division of $107.8 million and $82.7 million, respectively, primarily due to the decrease in demand in the automotive and industrial end-markets.

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Revenue by Geographic Location

Revenue by geographic location, based on sales billed from the respective country or regions, was as follows (dollars in millions):

(1)Certain of the amounts may not total due to rounding of individual amounts.

Gross Profit and Gross Margin

Gross profit was $3,216.1 million and $3,883.5 million for 2024 and 2023, respectively, representing a decrease of $667.4 million or approximately 17.2%. This was primarily due to the decline in sales volume in both our existing products and new products which negatively impacted gross profit by approximately $630 million and $122 million, respectively. This was partially offset by a reduction in the lower-margin manufacturing services revenue at our EFK location which favorably impacted gross profit by approximately $85 million.

Our gross margin decreased by 1.7 percentage points from 47.1% for the year ended December 31, 2023 to 45.4% for the year ended December 31, 2024, primarily due to the impact of the factors explained in the segment gross margin sections below.

PSG gross profit decreased by $437.4 million, primarily driven by the decline in sales volume in both existing products and new products which negatively impacted gross profit by approximately $316 million and $121 million, respectively. PSG gross margin decreased by 5.6 percentage points to 41.3% from 47.0%, primarily as a result of the decline in volume, underutilization of our manufacturing facilities, and the related impact of unfavorable product mix.

AMG gross profit decreased by $115.1 million, primarily driven by the decline in sales volume from existing products, which negatively impacted gross profit by approximately $200 million, partially offset by improved gross profit of approximately $85 million from the lower-margin manufacturing services at our EFK location. AMG gross margin increased by 3.6 percentage points to 50.1% from 46.5%, primarily due to the reduction in the lower-margin manufacturing services revenue at our EFK location.

ISG gross profit decreased by $114.9 million, primarily driven by the decline in sales volume from existing products. ISG gross margin decreased 2.0 percentage points to 46.7% from 48.7%, primarily driven by lower sales volumes and the related impact of the underutilization of our manufacturing facilities, along with unfavorable changes in product mix.

Operating Expenses

Research and Development

Research and development expenses were $612.7 million and $577.3 million, or approximately 9% and 7% of revenue for 2024 and 2023, respectively, representing an increase of $35.4 million, or approximately 6% year-over-year. The increase was primarily due to an increase in payroll-related expenses and production supplies, partially offset by a decrease in variable compensation.

Selling and Marketing

Selling and marketing expenses were $273.5 million and $279.1 million, or approximately 4% and 3% of revenue for 2024 and 2023, respectively, representing a decrease of $5.6 million, or approximately 2% year-over-year. The decrease was primarily related to a decrease in sales commissions and variable compensation.

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General and Administrative

General and administrative expenses were $376.3 million and $362.4 million, or approximately 5% and 4% of revenue for 2024 and 2023, respectively, representing an increase of $13.9 million, or approximately 4% year-over-year. The increase was primarily due to increased consulting fees associated with information technology initiatives partially offset by a decrease in the bad debt provision with a strategic business partner which was recorded in the prior year.

Amortization of Acquisition-Related Intangible Assets

Amortization of acquisition-related intangible assets was $52.0 million and $51.1 million for 2024 and 2023, respectively, representing an increase of $0.9 million, or approximately 2%, year-over-year. Expenses were consistent between periods as there were no significant acquisitions or divestitures.

Restructuring, Asset Impairments and Other Charges, net

Restructuring, asset impairments and other charges, net was $133.9 million and $74.9 million for 2024 and 2023, respectively, representing an increase of $59.0 million. Amounts incurred during 2024 primarily represent severance and asset impairment charges associated with the 2024 business realignment efforts. Charges in 2023 related primarily to the business realignment efforts during 2023. For additional information, see Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Other Income and Expenses

Interest Expense

Interest expense decreased by $12.5 million, or approximately 17%, to $62.3 million during 2024 compared to $74.8 million in 2023. The decrease was primarily due to the pay down of higher variable-rate debt and replacement by the 0.50% Notes in 2023. Our average gross amount of long-term debt balance (including current maturities) during 2024 and 2023 was $3,379.9 million and $3,304.1 million, respectively. Our weighted average interest rate on our gross amount of long-term debt (including current maturities) was 1.8% and 2.3% per annum in 2024 and 2023, respectively.

Interest income

Interest income increased by $18.3 million, or approximately 20%, to $111.4 million during 2024 compared to $93.1 million in 2023, primarily due to higher interest rates and increased balances in interest-bearing accounts.

See "Key Financing and Capital Events" below and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a description of our indebtedness and our refinancing activities.

Loss on Debt Refinancing and Prepayment

There were no debt refinancing or prepayment transactions during 2024. We recorded a loss on debt refinancing and prepayment of $13.3 million during 2023, due to the write-off relating to the repayment of the Term Loan "B" Facility. See "Key Financing and Capital Events" below and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a description of our indebtedness and our refinancing activities.

Other income (expense), net

Other income (expense), net was income of $20.6 million in 2024, compared to expense of $7.2 million in 2023. We received $9.5 million of dividend income in 2024 with no corresponding amounts in 2023. Actuarial gains on pension plans were $12.2 million compared to losses of $4.0 million during 2023 and fluctuations in foreign currencies resulting in increased transaction gains.

Income Tax Provision

We recorded an income tax provision of $262.8 million and $350.2 million in 2024 and 2023, respectively, representing effective tax rates of 14.3% and 13.8%.

For additional information, see Note 16: ''Income Taxes'' in the notes to the audited consolidated financial statements included elsewhere in this Form 10-K.

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Liquidity and Capital Resources

Overview

Our principal sources of liquidity are cash on hand, cash generated from operations, available borrowings under our Revolving Credit Facility as well as new debt and/or equity issuances. In the near term, we expect to fund our cash requirements by utilizing any or a combination of these principal sources. Our cash and cash equivalents and short-term investments were approximately $2,691.3 million and $300.0 million, respectively, as of December 31, 2024 and our Revolving Credit Facility had approximately $1.1 billion available for future borrowings as of December 31, 2024.

We require cash to: (i) fund our operating expenses, working capital requirements, outlays for strategic acquisitions and investments; (ii) service our debt, including principal and interest; (iii) incur capital expenditures; and (iv) repurchase our common stock. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures to reflect the current market conditions and our projected sales and demand. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.

We believe that the key factors that could adversely affect our internal and external sources of cash include:

•changes in demand for our products, competitive pricing pressures, supply chain constraints, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, our ability to make progress on the achievement of our business strategy and sustainability goals, the impact of our restructuring programs on our production and cost efficiency and our ability to make the research and development expenditures required to remain competitive in our business; and

•the debt and equity capital markets could impact our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing and our ability to maintain compliance with covenants under our debt agreements in effect from time to time.

Sources and Uses of Cash

The following are the significant sources and uses of cash during 2024:

•Cash flows from operating activities of $1,906.4 million.

•Purchase of property, plant & equipment of $694.0 million.

•Repurchases of approximately 9.1 million shares of common stock for an aggregate purchase price of approximately $650 million under the Share Repurchase Program.

Operating Activities

Our long-term cash generation is dependent on our ability to generate cash from our operations. Our cash flows from operating activities were $1,906.4 million, $1,977.5 million and $2,633.1 million for the years ended December 31, 2024, 2023 and 2022, respectively. Our operating cash flows for the year ended December 31, 2024 decreased by $71.1 million, or 3.6%, compared to the year ended December 31, 2023 and was primarily attributable to a reduction in net income driven by lower end-market demand for our products partially offset by the timing of cash receipts and payments related to working capital balances.

Our ability to maintain positive operating cash flows is dependent on, among other factors, our success in achieving our revenue goals and meeting manufacturing and operating cost targets. Management of our assets and liabilities, including both working capital and long-term assets and liabilities, also influences our operating cash flows.

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Investing Activities

Our cash flows used in investing activities were $1,009.8 million, $1,737.9 million and $705.4 million for the years ended December 31, 2024, 2023 and 2022, respectively. The decrease of $728.1 million for the year ended December 31, 2024 compared to the year ended December 31, 2023 was primarily attributable to a decrease in capital expenditures and payments for the acquisition of our EFK location during the year ended 2023, partially offset by the net impact of purchases and maturities of short-term investments. During the years ended December 31, 2024, 2023 and 2022, we paid $694.0 million, $1,539.1 million and $1,036.0 million, respectively, for capital expenditures. Our capital expenditures as a percent of revenue for the years ended December 31, 2024, 2023 and 2022 was approximately 10%, 19% and 12%, respectively. In 2025, based on current plans, we expect capital expenditures to be approximately 5% of revenue.

Financing Activities

Our cash flows used in financing activities were $683.8 million, $686.5 million and $370.0 million for the years ended December 31, 2024, 2023 and 2022, respectively. We used cash for share repurchases of $654.1 million for the year ended December 31, 2024 compared to $564.2 million in 2023. Additionally, during the year ended December 31, 2023, we had net cash outflows related to the establishment of our new Credit Agreement.

During January 2025, we acquired 1.6 million shares for $100.0 million under the Share Repurchase Program, subject to a 10b5-1 trading arrangement. We expect to continue to opportunistically repurchase under our Share Repurchase Program subject to market conditions, the price of our shares and other factors (including liquidity needs). However, the Share Repurchase Program may be modified, suspended or terminated by the Board of Directors at any time without prior notice.

See Part I, Item 1A "Risk Factors" included elsewhere in this Form 10-K for additional information related to liquidity matters.

Debt

As of December 31, 2024, we were in compliance with the indentures relating to our 0% Notes, 0.50% Notes and 3.875% Notes and with the financial covenants included in the Credit Agreement. The 0% Notes, 0.50% Notes and 3.875% Notes are senior to the existing and future subordinated indebtedness of onsemi and its guarantor subsidiaries, rank equally in right of payment to all of our existing and future senior debt and, as unsecured obligations, are subordinated to all of our existing and future secured debt to the extent of the assets securing such debt. Failure to comply with any of our covenants or any other terms of our Credit Agreement could result in higher interest rates in our borrowings or the acceleration of the maturities of our outstanding debt. In order to remain in compliance with the various financial covenants contained in our debt agreements and to fund working capital, our capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance, as well as financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control.

As of December 31, 2024, there was outstanding $804.9 million aggregate principal amount of the 0% Notes, $1,500.0 million aggregate principal amount of the 0.50% Notes and $700.0 million aggregate principal amount of 3.875% Notes. The associated interest expense related to our indebtedness will continue to have a significant impact on our results of operations.

See Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Key Financing and Capital Events

Overview

We continually evaluate our debt and capital structure and, when appropriate, we have completed various measures to secure liquidity, repurchase shares of our common stock, reduce interest costs, amend or replace existing key financing arrangements and, in some cases, extend a portion of our debt maturities to continue to provide us additional operating flexibility.

2024 Financing Events

•Repurchases of approximately 9.1 million shares of common stock for an aggregate purchase price of approximately $650 million under the Share Repurchase Program.

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2023 Financing Events

•Issuance of $1.5 billion of 0.50% Notes on February 28, 2023, the net proceeds of which were used to repay $1,086.0 million of the existing indebtedness under the Term Loan "B" Facility, the related transaction fees and expenses and to pay approximately $171.5 million net cost of the related convertible note hedges.

•Entering into a new Credit Agreement consisting of a $1.5 billion Revolving Credit Facility and draw-down of $375.0 million to repay the entire outstanding balance under the Revolver due 2024 in the second quarter of 2023.

•Repurchases of approximately 7.6 million shares of common stock for an aggregate purchase price of approximately $564 million under the Share Repurchase Program.

•Repayment of the 1.625% Notes amounting to $119.6 million in cash upon maturity and issuance of approximately 4.5 million shares of common stock to settle the excess over the principal.

2022 Financing Events

•Draw down of $500.0 million on the Revolver due 2024 and partial repayment of the outstanding balance on the Term Loan "B" Facility and corresponding write off of $7.3 million of unamortized debt discount and issuance costs.

•Repurchases of approximately 4.0 million shares of common stock for an aggregate purchase price of approximately $260 million under the previous share repurchase program.

•Settlement with certain holders of the 1.625% Notes to repurchase or exchange, as applicable, $16.0 million in aggregate principal amount of the 1.625% Notes for a total consideration of $16.0 million in cash and 552,000 shares of common stock.

•Entry into the Tenth Amendment to the Prior Credit Agreement to transition the interest rate base from LIBOR to Term SOFR.

See Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Critical Accounting Policies and Estimates

The accompanying discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. We utilize the following critical accounting policies in the preparation of our financial statements. In addition to our critical accounting policies below, see Note 2: ''Significant Accounting Policies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Use of Estimates. The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. We evaluate these estimates and judgments on an ongoing basis and base our estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that we believe are reasonable under the circumstances. Significant estimates have been used by management in conjunction with the following: (i) calculation of future payouts for customer incentives and amounts subject to allowances and returns; (ii) valuation and obsolescence relating to inventories; (iii) measurement of valuation allowances against deferred tax assets, and evaluations of uncertain tax positions; (iv) assumptions used in business combinations; and (v) testing for impairment of long-lived assets and goodwill. Actual results may differ from the estimates and assumptions used in the consolidated financial statements.

Revenue Recognition. We generate revenue from sales of our semiconductor products to direct customers and distributors. We also generate revenue, to a much lesser extent, from product development agreements and manufacturing services provided to customers. We apply a five-step approach in determining the amount and timing of revenue to be recognized: (i) identifying the contract with a customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations in the contract; and (v) recognizing revenue when the

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performance obligation is satisfied. We allocate the transaction price to each distinct product based on its relative stand-alone selling price. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled.

We recognize revenue when we satisfy a performance obligation in an amount reflecting the consideration to which we expect to be entitled. Substantially all of our revenue is recognized at the time control of the products transfers to the customer. For sales agreements, we have identified the promise to transfer products, each of which is distinct, to be the performance obligation. For product development agreements, we have identified the completion of a service defined in the agreement to be the performance obligation. We recognize revenue from manufacturing services when we satisfy the performance obligation by transferring the promised goods or services to the customer. Depending on the terms of the applicable contractual agreement with the customer, revenue is recognized at the point in time when the customer obtains control of the promised goods or service, or over time when the created asset has no alternate use to us and there is an enforceable right to payment for the performance to date.

Sales to certain distributors, primarily those with ship and credit rights, can be subject to price adjustment on certain products. We develop an estimate of their expected claims under the ship and credit program based on the historical claims data submitted by product and customer and expected future claims, which requires the use of estimates and assumptions related to the amount of each claim as well as the historical period used to develop the estimate. Although payment terms vary, most distributor agreements require payment within 30 days.

Our direct customers do not have the right to return products other than pursuant to the provisions of our standard warranty. Sales to distributors, however, are typically made pursuant to agreements that provide return rights and stock rotation provisions permitting limited levels of product returns. Provisions for discounts and rebates to customers, estimated returns and allowances, ship and credit claims and other adjustments are provided for in the same period the related revenue is recognized, and are netted against revenue. For non-quality related returns, we recognize a related asset for the right to recover returned products with a corresponding reduction to cost of goods sold. Payment terms for direct customers generally require payment within 30 days but can extend up to 90 days. We record a reserve for cash discounts as a reduction to accounts receivable and a reduction to revenue, based on the experience with each customer.

Inventories. We carry our inventories at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or net realizable value and record provisions for potential excess and obsolete inventories based upon a regular analysis of inventory on hand compared to historical and projected end-user demand. The determination of projected end-user demand requires the use of estimates and assumptions related to projected unit sales for each product. These provisions can influence our results from operations. For example, when demand falls for a given part, all or a portion of the related inventory that is considered to be in excess of anticipated demand is reserved, impacting our cost of revenue and gross profit. The majority of product inventory that has been previously reserved is ultimately discarded. Although we do sell some products that have previously been written down, such sales have historically been consistently insignificant and the related impact on our margins has also been insignificant.

Income Taxes. Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which we cannot conclude that it is more likely than not that such deferred tax assets will be realized.

In determining the amount of the valuation allowance, estimated future taxable income, feasible tax planning strategies, future reversals of existing temporary differences and taxable income in prior carryback years, if a carryback is permitted, are considered. If we determine it is more likely than not that all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if we determine it is more likely than not to be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be recorded as a reduction to income tax expense.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax positions will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. No tax benefit is recognized for tax

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positions that are not more likely than not to be sustained. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Significant judgment is required to evaluate uncertain tax positions. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of tax audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense in the period in which the change is made, which could have a material impact on our effective tax rate.

Business Combinations. We use estimates and assumptions in allocating the purchase price of acquired business by utilizing established valuation techniques appropriate for the technology industry to record the acquired assets and liabilities at fair value. We utilize the income approach, cost approach or market approach, depending upon which approach is the most appropriate based on the nature and reliability of available data. If the income approach is used, the fair value determination is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life and involves significant assumptions as to cash flows, associated expenses, long-term growth rates and discount rates. The cost approach takes into account the cost to replace (or reproduce) the asset and involves assumptions relating to the asset's value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date. Determining the fair value of acquired technology assets is judgmental in nature and requires the use of significant estimates and assumptions, including the discount rate, revenue growth rates, projected gross margins, and estimated research and development expenses.

Impairment of Goodwill and Long-Lived Assets. We evaluate our goodwill for potential impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Our impairment evaluation consists of a qualitative assessment, and if deemed necessary, a quantitative test is performed which compares the fair value of a reporting unit with its carrying amount, including goodwill.

Determining the fair value of our reporting units is subjective in nature and involves the use of significant estimates and assumptions, including projected net cash flows, discount and long-term growth rates. We determine the fair value of our reporting units based on an income approach, whereby the fair value of the reporting unit is derived from the present value of estimated future cash flows. The assumptions about estimated cash flows include factors such as future revenue, gross profit, operating expenses, and industry trends. We consider historical rates and current market conditions when determining the discount and long-term growth rates to use in its analysis. We consider other valuation methods, such as the cost approach or market approach, if it is determined that these methods provide a more representative approximation of fair value.

We evaluate the recoverability of the carrying amount of our property, plant and equipment and intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fully recoverable. Impairment is first assessed when the undiscounted expected cash flows derived for an asset group are less than its carrying amount. Impairment losses, if applicable, are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. We continually apply our best judgment when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an impaired asset group. The dynamic economic environment in which we operate and the resulting assumptions used to estimate future cash flows impact the outcome of our impairment tests. As we continue to implement our business strategy to rationalize products and manufacturing locations to transition to a lighter internal fabrication model, there could be divestiture transactions that result in a portion of goodwill or other assets being de-recognized and result in accounting charges.

Contingencies. We are involved in a variety of legal matters that arise in the normal course of business. Based on the available information, we evaluate the relevant range and likelihood of potential outcomes and we record the appropriate liability when the amount is deemed probable and reasonably estimable.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 4: ''Recent Accounting Pronouncements and Other Developments'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our audited historical consolidated financial statements, including the notes thereto, which are included elsewhere in this Form 10-K. Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties, and other factors and speak only as of the filing date. Actual results could differ materially because of the factors discussed in "Risk Factors" and elsewhere in this Form 10-K.

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Executive Overview

This executive overview presents summarized information regarding our business and operating trends only. For further information relating to the information summarized herein, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in its entirety.

onsemi Results

Our revenue for the year ended December 31, 2023 was $8,253.0 million, representing a nominal decrease of 0.9% from $8,326.2 million for the year ended December 31, 2022. During 2023, we reported net income attributable to onsemi of $2,183.7 million compared to $1,902.2 million in 2022. Our operating income totaled $2,538.7 million during 2023 compared to $2,360.0 million during 2022. The increases in our operating income and net income were primarily due to goodwill and intangible asset impairment charges related to our QCS wind down in 2022 amounting to $386.8 million, which did not reoccur in 2023. Our gross margin decreased by approximately 190 basis points to 47.1% in 2023 from 49.0% in 2022. See discussion under "Results of Operations" for the reasons for the fluctuations year over year.

Business and Macroeconomic Environment

The semiconductor industry has traditionally been highly cyclical, has often experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions, and may experience uncertainty and volatility in the future.

During 2023, the semiconductor industry experienced a slow down due to softening demand. We are monitoring the economic environment and related forecasts, and for indicators that would suggest the global economic slowdown could continue. Given the current conditions, we are actively managing and have taken corrective actions in our manufacturing capacity and spending to align with the forecasted 2024 demand. We believe the current volatility in general economic conditions is not expected to have a significant impact on our long-term strategic and growth initiatives.

We expect to continue to evaluate cost-saving initiatives to be able to align our overall cost structure, capital investments and other expenditures with our expected revenue, spending and capacity levels to help offset increased manufacturing and operating costs. We have taken, and continue to take actions, including but not limited to, exiting product lines that do not support our gross margin improvements and strategic objectives and aligning internal manufacturing capacity and resources to external demand.

See Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for information relating to our most recent cost-saving initiatives.

Results of Operations

A discussion of our results of operations for the year ended December 31, 2023 compared to December 31, 2022 is included below. For a discussion and comparison of the results of our operations for the year ended December 31, 2022 with the year ended December 31, 2021, refer to "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Form 10-K for the year ended December 31, 2022 filed with the SEC on February 6, 2023.

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Operating Results

The following table summarizes certain information relating to our operating results that has been derived from our audited consolidated financial statements (in millions):

Revenue

Revenue was $8,253.0 million and $8,326.2 million for 2023 and 2022, respectively. The decrease from 2022 to 2023 of $73.2 million, or 0.9%, was attributable to a 12.4% decrease in revenue in ASG, partially offset by a 5.7% and 3.0% increase in revenue in PSG and ISG, respectively, which are further explained below. There were no customers whose revenue exceeded 10% or more of total revenue for the year ended December 31, 2023.

Revenue by operating and reportable segments was as follows (dollars in millions):

_______________________

(1)Certain of the amounts may not total due to rounding of individual amounts.

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Revenue from PSG

Revenue from PSG increased by $240.8 million, or approximately 5.7%, during 2023 compared to 2022. The revenue from our Advanced Power Division increased by $527.9 million, offset by a decrease of $287.1 million in our Integrated Circuits, Protection and Signal Division. This increase was primarily driven by our continued ramp up in SiC and other power automotive solutions, while the decrease was primarily driven by planned customer product exits and reduced demand driven by lower end-market requirements for these products.

Revenue from ASG

Revenue from ASG decreased by $352.8 million, or approximately 12.4%, during 2023 compared to 2022, due to a decrease in revenue from our Power Management Division of $354.7 million, primarily driven by the planned end of life for targeted products as well as a general decline in demand in the computing and consumer end-markets.

Revenue from ISG

Revenue from ISG increased by $38.8 million, or approximately 3.0%, during 2023 compared to 2022, which was largely driven by an increase in revenue from our Automotive Sensing Division of $117.4 million primarily due to the reallocation of internal capacity to products yielding higher average selling prices. This was partially offset by a decrease of $78.7 million in our Industrial and Consumer Solutions Division due to capacity reallocation and planned product exits.

Revenue by Geographic Location

Revenue by geographic location, based on sales billed from the respective country or regions, are as follows (dollars in millions):

_______________________

(1)Certain of the amounts may not total due to rounding of individual amounts.

Gross Profit and Gross Margin

Gross profit was $3,883.5 million and $4,077.2 million for 2023 and 2022, respectively, representing a decrease of $193.7 million or approximately 5%.

For the overall Company, the decline in existing product revenue negatively impacted gross profit by approximately $400 million, and higher manufacturing costs at our EFK location, which include start up and ramp up costs, along with an unfavorable impact from our foundry business, negatively impacted gross profit by approximately $160 million. This decrease was partially offset by the gross profit of approximately $320 million from new product sales.

Our gross margin decreased by 1.9% from 49.0% for the year ended December 31, 2022 to 47.1% for the year ended December 31, 2023, due to the impact of the factors explained above.

Our gross profit and gross margin percentages by operating and reportable segment were as follows (dollars in millions):

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_______________________

(1)Certain of the amounts may not total due to rounding of individual amounts.

Explanation for the increase or decrease in gross profit amounts and gross margin percentages for the year ended December 31, 2023, compared to the year ended December 31, 2022 is provided below:

PSG gross profit and gross margin increased by $117 million and 0.1%, respectively, primarily driven by increased revenue from new product sales, which contributed approximately $320 million, and was partially offset by the impact of the decrease in revenue from existing products amounting to approximately $180 million.

ASG gross profit and gross margin decreased by $342.6 million and 6.4%, respectively, primarily driven by the decline in existing product revenue which impacted gross profit by approximately $250 million, as well as the higher manufacturing costs at our EFK location, which includes the unfavorable impact of our foundry business of approximately $120 million.

ISG gross profit and gross margin increased by $31.9 million and 1%, respectively, primarily driven by increased revenue in existing products due to favorable pricing and product mix.

Operating Expenses

Research and Development

Research and development expenses were $577.3 million and $600.2 million, or approximately 7% and 7% of revenue for 2023 and 2022, respectively, representing a decrease of $22.9 million, or approximately 4% year-over-year. The decrease was primarily due to a reduction in variable compensation expense, partially offset by an increase in new product development costs.

Selling and Marketing

Selling and marketing expenses were $279.1 million and $287.9 million, or approximately 3% and 3% of revenue for 2023 and 2022, respectively, representing a decrease of $8.8 million, or approximately 3% year-over-year, primarily due to a reduction in variable compensation expense.

General and Administrative

General and administrative expenses were $362.4 million and $343.2 million, or approximately 4% and 4% of revenue for 2023 and 2022, respectively, representing an increase of $19.2 million, or approximately 6% year-over-year. The increase was primarily due to expenses associated with information technology initiatives and a bad debt provision on outstanding receivable balances generated under an agreement with a business partner, which was partially offset by a decrease in variable compensation expense.

Amortization of Acquisition-Related Intangible Assets

Amortization of acquisition-related intangible assets was $51.1 million and $81.2 million for 2023 and 2022, respectively, representing a decrease of $30.1 million, or approximately 37.1%, year-over-year. The decrease was due to the impairment of intangible assets associated with the QCS wind down during 2022, and a reduction in amortization expense as certain intangible assets became fully amortized.

Restructuring, Asset Impairments and Other Charges, net

Restructuring, asset impairments and other charges, net was $74.9 million and $17.9 million for 2023 and 2022, respectively,

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representing an increase of $57.0 million. Charges in 2023 related primarily to the business realignment efforts during 2023. For additional information, see Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Goodwill and Intangible Asset Impairment

Goodwill and intangible asset impairment charges were zero and $386.8 million for 2023 and 2022, respectively. During 2022, we recorded goodwill impairment charges of $330.0 million and intangible asset impairment charges of $56.8 million related to the QCS wind down. See Note 6: ''Goodwill and Intangible Assets'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Other Income and Expenses

Interest Expense

Interest expense decreased by $20.1 million, or approximately 21.2%, to $74.8 million during 2023 compared to $94.9 million in 2022. The decrease was primarily due to the repayment of the balance under the Term Loan "B" Facility, which was repaid with proceeds from the 0.50% Notes. Additionally, the 1.625% Notes matured and were repaid during October 2023. Our average gross amount of long-term debt balance (including current maturities) during 2023 and 2022 was $3,304.1 million and $3,243.3 million, respectively. Our weighted average interest rate on our gross amount of long-term debt (including current maturities) was 2.3% and 2.9% per annum in 2023 and 2022, respectively.

Interest income

Interest income increased by $77.6 million, or approximately 500.6%, to $93.1 million during 2023 compared to $15.5 million in 2022, primarily due to the increase in interest rates during 2023 along with a strategic shift in our investment strategy.

See "Liquidity and Capital Resources—Key Financing and Capital Events" below and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a description of our indebtedness and our refinancing activities.

Gain (loss) on divestiture of businesses

Loss on divestiture of business was $0.7 million in 2023, compared to a gain of $67.0 million in 2022. During 2022, we divested the wafer manufacturing facilities in Niigata, Japan, Pocatello, Idaho, South Portland, Maine and Oudenaarde, Belgium and recognized the gain relating to such divestitures.

Loss on Debt Refinancing and Prepayment

We recorded loss on debt refinancing and prepayment of $13.3 million during 2023 compared to $7.1 million during 2022. The 2023 loss was due to the write-off relating to the repayment of the Term Loan "B" Facility, and the 2022 loss was primarily related to the partial prepayment of the Term "B" Facility. See "Liquidity and Capital Resources—Key Financing and Capital Events" below and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a description of our indebtedness and our refinancing activities.

Other income (expense), net

Other income (expense), net was an expense of $7.2 million in 2023, compared to an income of $21.7 million in 2022. During 2023 we recognized actuarial losses on pension plans of $4.0 million, whereas we recognized actuarial gains on pension plans of $22.1 million during 2022.

Income Tax Provision

We recorded an income tax provision of $350.2 million and $458.4 million in 2023 and 2022, respectively, representing effective tax rates of 13.8% and 19.4%. The decrease in our effective tax rate was due to the goodwill impairments in the prior year, which were not deductible for tax purposes, and a current year benefit due to the net release of unrecognized tax benefits.

For additional information, see Note 16: ''Income Taxes'' and Note 6: ''Goodwill and Intangible Assets'' in the notes to the audited consolidated financial statements included elsewhere in this Form 10-K.

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Liquidity and Capital Resources

Overview

Our principal sources of liquidity are cash on hand, cash generated from operations, available borrowings under our Revolving Credit Facility as well as new debt and/or equity issuances. In the near term, we expect to fund our cash requirements by utilizing any or a combination of these principal sources, including any amounts required to satisfy our current portion of long-term debt. Our cash and cash equivalents were $2,483.0 million as of December 31, 2023 and our Revolving Credit Facility has approximately $1.1 billion available for future borrowings as of December 31, 2023.

We require cash to: (i) fund our operating expenses, working capital requirements, outlays for strategic acquisitions and investments; (ii) service our debt, including principal and interest; (iii) incur capital expenditures; and (iv) repurchase our common stock.

During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures to reflect the current market conditions and our projected sales and demand. Our capital expenditures are primarily directed towards manufacturing equipment and can materially influence our available cash for other initiatives. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.

We believe that the key factors that could adversely affect our internal and external sources of cash include:

•changes in demand for our products, competitive pricing pressures, supply chain constraints, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, our ability to make progress on the achievement of our business strategy and sustainability goals, the impact of our restructuring programs on our production and cost efficiency and our ability to make the research and development expenditures required to remain competitive in our business; and

•the debt and equity capital markets could impact our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing and our ability to maintain compliance with covenants under our debt agreements in effect from time to time.

Sources and Uses of Cash

The following are the significant sources and uses of cash during 2023:

•Cash flows from operating activities of $1,977.5 million.

•Purchase of property, plant & equipment of $1,575.6 million.

•Issuance of $1.5 billion of 0.50% Notes, the net proceeds of which were used to repay the existing indebtedness under the Term Loan "B" Facility, net cost of the related convertible note hedges, the related transaction fees and general corporate purposes.

•Repayment of $125 million under the Revolver due 2024 in the first quarter of 2023.

•Entering into the New Credit Agreement consisting of a $1.5 billion Revolving Credit Facility and draw down of $375 million to repay the entire outstanding balance under the Revolver due 2024 in the second quarter of 2023.

•Repurchases of approximately 7.6 million shares of common stock for an aggregate purchase price of $564.0 million under the Share Repurchase Program.

•Repayment of the 1.625% Notes amounting to $119.6 million in cash upon maturity and issuance of approximately 4.5 million shares of common stock to settle the excess over the principal.

Operating Activities

Our long-term cash generation is dependent on the ability of our operations to generate cash. Our cash flows from operating activities were $1,977.5 million, $2,633.1 million and $1,782.0 million for the years ended December 31, 2023, 2022 and 2021,

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respectively. Our operating cash flows for the year ended December 31, 2023 decreased by $655.6 million, or 24.9%, compared to the year ended December 31, 2022 and was primarily attributable to increased working capital requirements related to our strategic investments in SiC inventory and our strategic investments in inventory for fab transitions, and payments related to the 2022 variable compensation.

Our ability to maintain positive operating cash flows is dependent on, among other factors, our success in achieving our revenue goals and in meeting LTSA commitments and manufacturing and operating cost targets. Management of our assets and liabilities, including both working capital and long-term assets and liabilities, also influences our operating cash flows.

Investing Activities

Our cash flows used in investing activities were $1,737.9 million, $705.4 million and $915.1 million for the years ended December 31, 2023, 2022 and 2021, respectively. The increase of $1,032.5 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily attributable to an increase in capital expenditures, the absence of any divestiture activities in 2023 and the remaining payment of $236.3 million related to the acquisition of our EFK location. During the years ended December 31, 2023, 2022 and 2021, we paid $1,575.6 million, $1,005.0 million and $444.6 million, respectively, for capital expenditures. Our capital expenditures as a percent of revenue increased in 2023 to 19%, primarily as a result of investments to expand SiC manufacturing capacity. In 2024, we expect capital expenditures to be in the range of 10% - 12% of revenue as these investments along with other capital initiatives are expected to decrease.

Financing Activities

Our cash flows used in financing activities were $686.5 million, $370.0 million and $569.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. The increase of $316.5 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily attributable to proceeds and payments related to long-term borrowings and share repurchase activity. During 2023, we replaced the Revolver due 2024 maturing on June 28, 2024 with the Revolving Credit Facility. We do not have any meaningful debt maturing during the next 12 months. Our 0% Notes are classified as a current liability based on share price trigger provisions. We expect to continue repurchases under our Share Repurchase Program subject to market conditions, the price of our shares and other factors (including liquidity needs). However, the Share Repurchase Program may be modified, suspended or terminated by the Board of Directors at any time without prior notice.

See Part I, Item 1A "Risk Factors" included elsewhere in this Form 10-K for additional information related to liquidity matters.

Debt

As of December 31, 2023, we were in compliance with the indentures relating to our 0% Notes, 0.50% Notes and 3.875% Notes and with the financial covenants included in the New Credit Agreement. The 0% Notes, 0.50% Notes and 3.875% Notes are senior to the existing and future subordinated indebtedness of onsemi and its guarantor subsidiaries, rank equally in right of payment to all of our existing and future senior debt and, as unsecured obligations, are subordinated to all of our existing and future secured debt to the extent of the assets securing such debt. Failure to comply with any of our covenants or any other terms of our New Credit Agreement could result in higher interest rates in our borrowings or the acceleration of the maturities of our outstanding debt. In order to remain in compliance with the various financial covenants contained in our debt agreements and to fund working capital, our capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance, as well as financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control.

As of December 31, 2023, there was $804.9 million aggregate principal amount of the 0% Notes, $1,500.0 million aggregate principal amount of the 0.50% Notes and $700.0 million aggregate principal amount of 3.875% Notes. The aggregate principal amount of outstanding 0% Notes, net of unamortized discount and issuance costs, has been reclassified as a current portion of long-term debt based on the share price trigger provisions. The associated interest expense related to our indebtedness will continue to have a significant impact on our results of operations.

See Note 5: ''Acquisitions and Divestitures'' and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Key Financing and Capital Events

Overview

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We continually evaluate our debt and capital structure and when appropriate, we have completed various measures to secure liquidity, repurchase shares of our common stock, reduce interest costs, amend or replace existing key financing arrangements and, in some cases, extend a portion of our debt maturities to continue to provide us additional operating flexibility. We took certain of these actions in 2023, which included the issuance of $1.5 billion of 0.50% Convertible Senior Notes to repay our Term Loan "B" facility and the termination and replacement of the Prior Credit Agreement with the New Credit Agreement. See Note 9: ''Long-Term Debt'' and for further discussion on the Share Repurchase Program, see Note 10: ''Earnings Per Share and Equity'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

2023 Financing Events

•Issuance of $1.5 billion of 0.50% Notes on February 28, 2023, the net proceeds of which were used to repay $1,086.0 million of the existing indebtedness under the Term Loan "B" Facility, the related transaction fees and expenses and to pay approximately $171.5 million net cost of the related convertible note hedges.

•Repayment of $125 million under the Revolver due 2024 in the first quarter of 2023.

•Entering into the New Credit Agreement consisting of a $1.5 billion Revolving Credit Facility and draw down of $375 million to repay the entire outstanding balance under the Revolver due 2024 in the second quarter of 2023.

•Repurchases of approximately 7.6 million shares of common stock for an aggregate purchase price of $564.0 million under the Share Repurchase Program.

•Repayment of the 1.625% Notes amounting to $119.6 million in cash upon maturity and issuance of approximately 4.5 million shares of common stock to settle the excess over the principal.

2022 Financing Events

•Draw down of $500.0 million on the Revolver due 2024 and partial repayment of the outstanding balance on the Term Loan "B" facility and corresponding write off of $7.3 million of unamortized debt discount and issuance costs.

•Repurchases of approximately 4.0 million shares of common stock for an aggregate purchase price of $259.8 million under the previous share repurchase program.

•Settlement with certain holders of the 1.625% Notes to repurchase or exchange, as applicable, $16.0 million in aggregate principal amount of the 1.625% Notes for a total consideration of $16.0 million in cash and 552,000 shares of common stock.

•Entry into the Tenth Amendment to the Prior Credit Agreement to transition the interest rate base from the LIBO Rate to Term SOFR.

2021 Financing Events

•Issuance of $805.0 million aggregate principal amount of 0% Notes, after paying $160.3 million in cash for the convertible note hedges and receipt of $93.8 million in cash for the sale of warrants.

•Settlement with certain holders of the 1.625% Notes to repurchase or exchange, as applicable, $372.4 million in aggregate principal amount of the 1.625% Notes for a total consideration of $506.5 million in cash and 5.4 million shares of common stock. Settlement with certain holders of 1.625% Notes in December 2021 of $47.4 million of the 1.625% Notes for $47.4 million in cash and 1.6 million shares of common stock.

•Repayment of the outstanding balance of $700.0 million under the Revolver due 2024 using a portion of the net proceeds from the issuance of the 0% Notes and cash on hand.

See Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

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Critical Accounting Policies and Estimates

The accompanying discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. We utilize the following critical accounting policies in the preparation of our financial statements. In addition to our critical accounting policies below, see Note 2: ''Significant Accounting Policies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Use of Estimates. The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. We evaluate these estimates and judgments on an ongoing basis and base our estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that we believe are reasonable under the circumstances. Significant estimates have been used by management in conjunction with the following: (i) calculation of future payouts for customer incentives and amounts subject to allowances and returns; (ii) valuation and obsolescence relating to inventories; (iii) measurement of valuation allowances against deferred tax assets, and evaluations of uncertain tax positions; (iv) assumptions used in business combinations; and (v) testing for impairment of long-lived assets and goodwill. Actual results may differ from the estimates and assumptions used in the consolidated financial statements.

Revenue Recognition. We generate revenue from sales of our semiconductor products to direct customers and distributors. We also generate revenue, to a much lesser extent, from product development agreements and manufacturing services provided to customers. We apply a five-step approach in determining the amount and timing of revenue to be recognized: (i) identifying the contract with a customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations in the contract; and (v) recognizing revenue when the performance obligation is satisfied. We allocate the transaction price to each distinct product based on its relative stand-alone selling price. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled.

We recognize revenue when we satisfy a performance obligation in an amount reflecting the consideration to which we expect to be entitled. Substantially all of our revenue is recognized at the time control of the products transfers to the customer. For sales agreements, we have identified the promise to transfer products, each of which is distinct, to be the performance obligation. For product development agreements, we have identified the completion of a service defined in the agreement to be the performance obligation. We recognize revenue from manufacturing services when we satisfy the performance obligation by transferring the promised goods or services to the customer. Depending on the terms of the applicable contractual agreement with the customer, revenue is recognized at the point in time when the customer obtains control of the promised goods or service, or over time when the created asset has no alternate use to us and there is an enforceable right to payment for the performance to date.

Sales to certain distributors, primarily those with ship and credit rights, can be subject to price adjustment on certain products. We develop an estimate of their expected claims under the ship and credit program based on the historical claims data submitted by product and customer and expected future claims, which requires the use of estimates and assumptions related to the amount of each claim as well as the historical period used to develop the estimate.

Our direct customers do not have the right to return products, other than pursuant to the provisions of our standard warranty. Sales to distributors, however, are typically made pursuant to agreements that provide return rights and stock rotation provisions permitting limited levels of product returns. Provisions for discounts and rebates to customers, estimated returns and allowances, ship and credit claims and other adjustments are provided for in the same period the related revenue are recognized, and are netted against revenue. For non-quality related returns, we recognize a related asset for the right to recover returned products with a corresponding reduction to cost of goods sold. We record a reserve for cash discounts as a reduction to accounts receivable and a reduction to revenue, based on the experience with each customer.

Inventories. We carry our inventories at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or net realizable value and record provisions for potential excess and obsolete inventories based upon a regular analysis of inventory on hand compared to historical and projected end-user demand. The determination of projected end-user demand requires the use of estimates and assumptions related to projected unit sales for each product. These provisions can influence our results from operations. For example, when demand falls for a given part, all or a portion of the related inventory that is considered to be in excess of anticipated demand is reserved, impacting our cost of revenue and gross profit. The majority of

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product inventory that has been previously reserved is ultimately discarded. However, we do sell some products that have previously been written down, such sales have historically been consistently insignificant and the related impact on our margins has also been insignificant.

Income Taxes. Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which we cannot conclude that it is more likely than not that such deferred tax assets will be realized.

In determining the amount of the valuation allowance, estimated future taxable income, feasible tax planning strategies, future reversals of existing temporary differences and taxable income in prior carryback years, if a carryback is permitted are considered. If we determine it is more likely than not that all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if we determine it is more likely than not to be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be recorded as a reduction to income tax expense.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that is it more likely than not that the tax positions will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. No tax benefit is recognized for tax positions that are not more likely than not to be sustained. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Significant judgment is required to evaluate uncertain tax positions. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of tax audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense in the period in which the change is made, which could have a material impact to our effective tax rate.

Business Combination. We use estimates and assumptions in allocating the purchase price of acquired business by utilizing established valuation techniques appropriate for the technology industry to record the acquired assets and liabilities at fair value. We utilize the income approach, cost approach or market approach, depending upon which approach is the most appropriate based on the nature and reliability of available data. If the income approach is used, the fair value determination is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life and involves significant assumptions as to cash flows, associated expenses, long-term growth rates and discount rates. The cost approach takes into account the cost to replace (or reproduce) the asset and involves assumptions relating to the asset's value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date. Determining the fair value of acquired technology assets is judgmental in nature and requires the use of significant estimates and assumptions, including the discount rate, revenue growth rates, projected gross margins, and estimated research and development expenses.

Impairment of Goodwill and Long-Lived Assets. We evaluate our goodwill for potential impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Our impairment evaluation consists of a qualitative assessment, and if deemed necessary, a quantitative test is performed which compares the fair value of a reporting unit with its carrying amount, including goodwill.

Determining the fair value of our reporting units is subjective in nature and involves the use of significant estimates and assumptions, including projected net cash flows, discount and long-term growth rates. We determine the fair value of our reporting units based on an income approach, whereby the fair value of the reporting unit is derived from the present value of estimated future cash flows. The assumptions about estimated cash flows include factors such as future revenue, gross profit, operating expenses, and industry trends. We consider historical rates and current market conditions when determining the discount and long-term growth rates to use in its analysis. We consider other valuation methods, such as the cost approach or market approach, if it is determined that these methods provide a more representative approximation of fair value.

We evaluate the recoverability of the carrying amount of our property, plant and equipment and intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fully recoverable.

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Impairment is first assessed when the undiscounted expected cash flows derived for an asset group are less than its carrying amount. Impairment losses, if applicable, are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. We continually apply our best judgment when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an impaired asset group. The dynamic economic environment in which we operate and the resulting assumptions used to estimate future cash flows impact the outcome of our impairment tests. As we continue to implement our business strategy to rationalize products and manufacturing locations to transition to a lighter internal fabrication model, there could be divestiture transactions resulting in a portion of goodwill or other assets being de-recognized, and which may or may not result in accounting charges.

Contingencies. We are involved in a variety of legal matters that arise in the normal course of business. Based on the available information, we evaluate the relevant range and likelihood of potential outcomes and we record the appropriate liability when the amount is deemed probable and reasonably estimable.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 4: ''Recent Accounting Pronouncements and Other Developments'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our audited historical consolidated financial statements, including the notes thereto, which are included elsewhere in this Form 10-K. Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties, and other factors. Actual results could differ materially because of the factors discussed in "Risk Factors" and elsewhere in this Form 10-K.

Executive Overview

This executive overview presents summarized information regarding our business and operating trends only. For further information relating to the information summarized herein, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in its entirety.

onsemi Results

Our revenue for the year ended December 31, 2022 was $8,326.2 million, an increase of 23.5% from $6,739.8 million for the year ended December 31, 2021. The increase was attributable to our strategy to focus on a product mix that yields higher margins, and an increase in average selling prices driven by strong market demand. During 2022, we reported net income attributable to onsemi of $1,902.2 million compared to $1,009.6 million in 2021. Our operating income totaled $2,360.0 million during 2022 compared to $1,287.6 million during 2021. The increase in our operating income and net income was due to significantly better gross margins primarily driven by higher revenue in focused end-markets, favorable product mix, increase in average selling prices and savings from restructuring activities. Our gross margin increased by approximately 870 basis points to 49.0% in 2022 from 40.3% in 2021. See discussion under "Results of Operations" for additional discussion on the reasons for the fluctuations year over year.

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Business and Macroeconomic Environment

The semiconductor industry has traditionally been highly cyclical, has often experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions, and may experience uncertainty and volatility in the future.

During the year ended December 31, 2022, our product demand remained strong as we achieved record annual revenues. However, we are aware of and are monitoring the economic environment and related forecasts, which suggest global economic slowdowns could continue and potentially result in certain economies entering a recessionary period, which could include the United States. Given the current conditions, we are actively managing our manufacturing activity and spending to align with our forecasted demand. We believe the current volatility in general economic conditions is not expected to have a significant impact on our long-term strategic and growth initiatives.

During 2022, we achieved revenue growth as well as expanded our gross margin and operating margin. The semiconductor industry conditions have resulted in increased costs throughout our supply chain. In some cases, we have been able to increase our prices and pass these increased costs along to our customers, which also partially contributed to higher revenue for 2022. We expect to continue to evaluate cost-saving initiatives to be able to align our overall cost structure, capital investments and other expenditures with our expected revenue, spending and capacity levels to help offset increased costs. We have taken, and continue to take actions, including but not limited to, exiting product lines, that do not support our gross margin improvements and strategic objectives.

See Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for information relating to our most recent cost-saving initiatives.

Results of Operations

A discussion of our results of operations for the year ended December 31, 2022 compared to December 31, 2021 is included below. For a discussion and comparison of the results of our operations for the year ended December 31, 2021 with the year ended December 31, 2020, refer to "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Form 10-K for the year ended December 31, 2021 filed with the SEC on February 14, 2022.

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Operating Results

The following table summarizes certain information relating to our operating results that has been derived from our audited consolidated financial statements (in millions):

Revenue

Revenue was $8,326.2 million and $6,739.8 million for 2022 and 2021, respectively. The increase from 2021 to 2022 of $1,586.4 million, or 23.5%, was attributable to a 22.4%, 18.4% and 41.7% increase in revenue in PSG, ASG and ISG, respectively, which is further explained below.

We had one customer, a distributor, whose revenue accounted for approximately 12% of the total revenue for the year ended December 31, 2022.

Revenue by operating and reportable segments was as follows (dollars in millions):

_______________________

(1)Certain of the amounts may not total due to rounding of individual amounts.

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Revenue from PSG

Revenue from PSG increased by $769.1 million, or approximately 22.4%, during 2022 compared to 2021. The revenue from our Advanced Power Division and our Integrated Circuits, Protection and Signal Division increased by $672.7 million and $96.4 million, respectively. These increases primarily were driven by our strategy to focus on SiC, a product mix that yields higher margins and an increase in average selling prices driven by strong market demand.

Revenue from ASG

Revenue from ASG increased by $441.4 million, or approximately 18.4%, during 2022 compared to 2021. The revenue from our Automotive Division, Industrial Solutions Division and Mobile, Computing and Cloud Division increased by $224.2 million, $173.8 million and $77.1 million, respectively. The increases primarily were due to our strategy to focus on a product mix that yields higher margins, and an increase in average selling prices driven by strong market demand.

Revenue from ISG

Revenue from ISG increased by $375.9 million, or approximately 41.7%, during 2022 compared to 2021. The revenue from our Automotive Sensing Division and our Industrial and Consumer Solutions Division increased by $357.3 million and $18.7 million, respectively. The increase in revenue was due to our strategy to focus on a product mix that yields higher margins, and an increase in average selling prices driven by strong market demand.

Revenue by Geographic Location

Revenue by geographic location, based on sales billed from the respective country or regions, are as follows (dollars in millions):

_______________________

(1)Certain of the amounts may not total due to rounding of individual amounts.

Gross Profit and Gross Margin

Our gross profit by operating and reportable segment was as follows (dollars in millions):

_______________________

(1)Certain of the amounts may not total due to rounding of individual amounts.

Our gross profit increased by $1,362.9 million, or approximately 50%, from $2,714.3 million during 2021 to $4,077.2 million during 2022. Gross margin increased to 49.0% during 2022 compared to 40.3% during 2021.

The significant increases in gross profit and gross margin were primarily driven by higher revenue, particularly in the

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automotive and industrial end-markets, and a favorable product mix, which included price increases to resolve price-to-value discrepancies for our products.

Operating Expenses

Research and Development

Research and development expenses were $600.2 million and $655.0 million, or approximately 7% and 10% of revenue for 2022 and 2021, respectively, representing a decrease of $54.8 million, or approximately 8% year-over-year. The decrease was primarily due to a reduction in payroll and other related expenses associated with the wind down of QCS.

Selling and Marketing

Selling and marketing expenses were $287.9 million and $293.6 million, or approximately 3% and 4% of revenue for 2022 and 2021, respectively, representing a decrease of $5.7 million, or approximately 2% year-over-year. The decrease was primarily due to a reduction in payroll-related expenses due to census declines from hiring delays and attrition.

General and Administrative

General and administrative expenses were $343.2 million and $304.8 million, or approximately 4% and 5% of revenue for 2022 and 2021, respectively, representing an increase of $38.4 million, or approximately 13% year-over-year. The increase was primarily due to higher variable compensation and stock compensation.

Amortization of Acquisition—Related Intangible Assets

Amortization of acquisition-related intangible assets was $81.2 million and $99.0 million for 2022 and 2021, respectively, representing a decrease of $17.8 million, or approximately 18.0%, year-over-year. The decrease was due to the reduction in amortization expense as certain intangible technology-related assets became fully amortized in 2021 and the full write-off of QCS intangibles.

Restructuring, Asset Impairments and Other Charges, net

Restructuring, asset impairments and other charges, net was $17.9 million and $71.4 million for 2022 and 2021, respectively. Charges in 2022 represent severance charges, contract termination costs and litigation expenses and primarily relate to the QCS wind down. Amounts incurred during 2021 primarily related to the involuntary severance plan. For additional information, see Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Goodwill and Intangible Asset Impairment

Goodwill and intangible asset impairment was $386.8 million and $2.9 million for 2022 and 2021, respectively. During 2022, we recorded a goodwill impairment charge of $330.0 million and an intangible asset impairment charge of $56.8 million, as a result of a shift in our focus on long-term product mix in our strategic markets and the QCS wind down. See Note 6: ''Goodwill and Intangible Assets'' in the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Other Income and Expenses

Interest Expense

Interest expense decreased by $35.5 million, or approximately 27.2%, to $94.9 million during 2022 compared to $130.4 million in 2021. The decrease was primarily due to the lack of amortization of debt discount on our convertible notes due to the adoption of ASU 2020-06, the effect of the issuance of the 0% Notes, as a majority of the proceeds were utilized to repay higher rate debt. Our average gross amount of long-term debt balance (including current maturities) during 2022 and 2021 was $3,243.3 million and $3,423.9 million, respectively. Our weighted average interest rate on our gross amount of long-term debt (including current maturities) was 2.9% and 3.8% per annum in 2022 and 2021, respectively.

See "Liquidity and Capital Resources—Key Financing and Capital Events" below and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a description of our indebtedness and

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our refinancing activities.

Gain on Divestiture of Businesses

Gain on divestiture of business was $67.0 million in 2022, compared to $10.2 million in 2021. The gain during 2022 relates to the divestiture of the wafer manufacturing facilities in Niigata, Japan, Pocatello, Idaho, South Portland, Maine and Oudenaarde, Belgium.

Loss on Debt Refinancing and Prepayment

We recorded loss on debt refinancing and prepayment of $7.1 million during 2022. This was primarily related to the partial prepayment of the Term Loan "B" Facility. See "Liquidity and Capital Resources—Key Financing and Capital Events" below and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a description of our indebtedness and our refinancing activities.

Other income, net

Other income, net was $18.0 million in 2021 compared to an income of $21.7 million in 2022, reflecting a change of approximately 20.6%. The increase was primarily due to the fluctuations in foreign currencies resulting in increased transaction gains offset by losses on hedges that were realized.

Income Tax Provision

We recorded an income tax provision of $458.4 million and $146.6 million in 2022 and 2021, respectively, representing effective tax rates of 19.4% and 12.7%. The increase in our effective tax rate was substantially driven by the impact of nondeductible goodwill and foreign operations.

For additional information, see Note 16: ''Income Taxes'' and Note 6: ''Goodwill and Intangible Assets'' in the notes to the audited consolidated financial statements included elsewhere in this Form 10-K.

Liquidity and Capital Resources

Overview

Our principal sources of liquidity are cash on hand, cash generated from operations, funds from external borrowings and debt and equity issuances. In the near term, we expect to fund our primary cash requirements through cash generated from operations and with cash and cash equivalents on hand. We also have the ability to utilize our Revolving Credit Facility, which has approximately $1.5 billion available for future borrowings. Our balance of cash and cash equivalents was $2,919.0 million as of December 31, 2022.

We require cash to: (i) fund our operating expenses, working capital requirements, outlays for strategic acquisitions and investments; (ii) service our debt, including principal and interest; (iii) conduct research and development; (iv) incur capital expenditures; and (v) repurchase our common stock. As part of our business strategy, we review acquisition and divestiture opportunities on a regular basis.

During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures to reflect the current market conditions and our projected sales and demand. Our capital expenditures are primarily directed towards manufacturing equipment, and can materially influence our available cash for other initiatives. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.

We believe that the key factors that could adversely affect our internal and external sources of cash include:

•Changes in demand for our products, competitive pricing pressures, supply chain constraints, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, our ability to make progress on the achievement of our business strategy and sustainability goals, the impact of our restructuring programs on our production and cost efficiency and our ability to make the research and development expenditures required to remain competitive in our business; and

•The debt and equity capital markets could impact our ability to obtain needed financing on acceptable terms or to

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respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing and our ability to maintain compliance with covenants under our debt agreements in effect from time to time.

Sources and Uses of Cash

As part of our business strategy, we review acquisition and divestiture opportunities on a regular basis. Excluded from the discussion below is the EFK facility, which we acquired on December 31, 2022 for $406.3 million in cash, of which approximately $236.3 million was paid in January 2023. See Note 5: ''Acquisitions and Divestitures'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

The following are the significant sources and uses of cash during 2022:

•Our cash flows from operating activities were $2,633.1 million.

•We paid approximately $1,005.0 million for capital expenditures.

•Borrowing of $500.0 million under the Revolving Credit Facility, the net proceeds of which were used to prepay the outstanding balance of $500.0 million under the Term Loan "B" Facility.

•Repurchased approximately 4.0 million shares of common stock for an aggregate purchase price of $259.8 million.

•Divestiture of manufacturing facilities in Oudenaarde, Belgium, South Portland, Maine, Pocatello, Idaho and Niigata, Japan for approximately $275.0 million in the aggregate. See Note 5: ''Acquisitions and Divestitures'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Operating Activities

Our long-term cash generation is dependent on the ability of our operations to generate cash. Our cash flows from operating activities were $2,633.1 million, $1,782.0 million and $884.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. Our operating cash flows for the year ended December 31, 2022 increased by $851.1 million, or 47.8%, compared to the year ended December 31, 2021 and was primarily attributable to a significant increase in net income due to our strategy to focus on a product mix that yields higher margins combined with increased demand and prices for our products.

Our ability to maintain positive operating cash flows is dependent on, among other factors, our success in achieving our revenue goals and manufacturing and operating cost targets. Management of our assets and liabilities, including both working capital and long-term assets and liabilities, also influences our operating cash flows.

Investing Activities

Our cash flows used in investing activities were $705.4 million, $915.1 million and $453.6 million for the years ended December 31, 2022, 2021 and 2020, respectively. The decrease of $209.7 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily attributable to capital expenditures offset by proceeds from the sale of real estate and divestitures. During the year ended December 31, 2022, 2021 and 2020, we paid $1,005.0 million, $444.6 million and $383.6 million, respectively, for capital expenditures. Our capital expenditures as a percent of revenue increased in 2022 to 12%, primarily as a result of the silicon carbide expansion and our facility expansion investments. In 2023, we expect capital expenditures to be approximately 20% of revenue as these investments along with other capital initiatives will increase.

Financing Activities

Our cash flows used in financing activities were $370.0 million, $569.4 million and $244.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. The decrease of $199.4 million for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily attributable to proceeds and payments related to long-term borrowings and share repurchase activity.

See Part I, Item 1A "Risk Factors" included elsewhere in this Form 10-K for additional information related to liquidity matters.

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Debt

Our ability to service our long-term debt, including our 0% Notes, 3.875% Notes, 1.625% Notes, the Revolving Credit Facility and the Term Loan "B" Facility, to remain in compliance with the various covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance, as well as to financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control.

As of December 31, 2022, there was $1,086.0 million outstanding under the Term Loan "B" Facility, in addition to $805.0 million aggregate principal amount of the 0% Notes, $700.0 million aggregate principal amount of 3.875% Notes and $137.3 million aggregate principal amount of the 1.625% Notes. The aggregate principal amount of outstanding 1.625% Notes, net of unamortized discount and issuance costs, has been reclassified as a current portion of long-term debt. The associated interest expense related to this indebtedness will continue to have a significant impact on our results of operations.

See Note 5: ''Acquisitions and Divestitures'' and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Key Financing and Capital Events

Overview

We continually evaluate our debt and capital structure and when appropriate, we have completed various measures to secure liquidity, repurchase shares of our common stock, reduce interest costs, amend existing key financing arrangements and, in some cases, extend a portion of our debt maturities to continue to provide us additional operating flexibility. Certain of these measures continued in 2022, which included the partial repayment of our Term Loan through borrowings of $500.0 million under our Revolving Credit Facility and the amendment of our credit agreement to eliminate the LIBO Rate as a borrowing alternative. For further discussion of our debt instruments, see Note 9: ''Long-Term Debt'' and for further discussion on the Share Repurchase Program (as defined below), see Note 10: ''Earnings Per Share and Equity'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

2022 Financing Events

•In connection with the Company’s $500.0 million draw down on the Revolving Credit Facility, we expensed $7.3 million of unamortized debt discount and issuance costs primarily attributed to a partial pay-down of debt as loss on debt refinancing and prepayment.

•Repurchases under the Share Repurchase Program amounted to $259.8 million during the year ended December 31, 2022.

•On November 9, 2022, we entered into separate privately negotiated transactions with certain holders of the 1.625% Notes to repurchase or exchange, as applicable, $16.0 million in aggregate principal amount of the 1.625% Notes for a total consideration of $16.0 million in cash and 552,000 shares of common stock.

•On November 16, 2022, we entered into the Tenth Amendment to the Amended Credit Agreement to transition the interest rate base from the LIBO Rate to Term SOFR.

2021 Financing Events

•In May 2021, we completed a private offering of $805.0 million aggregate principal amount of 0% Notes. In connection with the issuance of the 0% Notes, we entered into convertible note hedge transactions with the initial purchasers of the 0% Notes or their affiliates ("Counterparties") and paid $160.3 million in cash for the convertible note hedges. We also entered into warrant transactions with the Counterparties and received $93.8 million in cash for the sale of warrants.

•Contemporaneously with the issuance of the 0% Notes, we entered into separate privately negotiated transactions with certain holders of the 1.625% Notes to repurchase or exchange, as applicable, $372.4 million in aggregate principal amount of the 1.625% Notes for a total consideration of $506.5 million in cash and 5.4 million shares of common stock. In December 2021, we repurchased $47.4 million of the 1.625% Notes for $47.4 million in cash and 1.6 million

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shares of common stock.

•During the year ended December 31, 2021, we repaid the outstanding balance of $700.0 million under the Revolving Credit Facility using a portion of the net proceeds from the issuance of the 0% Notes and cash on hand.

2020 Financing Events

•The 1.00% Notes matured on December 1, 2020. The maturity of the notes resulted in us paying $690.0 million in cash, to holders of the 1.00% Notes using our available cash and cash equivalents. The excess over the principal amount was settled by issuing shares of common stock held in treasury. At the time of issuance of the 1.00% Notes, we concurrently entered into hedge transactions with certain of the initial purchasers of the 1.00% Notes, and accordingly, repurchased an equivalent number of shares of our common stock at fair market value, to effectively offset the issuance of shares. Also at the time of issuance of the 1.00% Notes, we sold warrants to certain bank counterparties whereby the holders of the warrants had the option to purchase from us the equivalent number of shares of our common stock at a price of $25.96 per share. All these warrants were exercised by the holders during the first and second quarters of 2021 and were settled by issuing an aggregate of 13.4 million shares of common stock.

•In August 2020, we completed a private offering of $700.0 million aggregate principal amount of the 3.875% Notes due 2028. In connection with the issuance, we incurred original issue discount and debt issuance costs amounting to $9.4 million.

•In March 2020, we borrowed $1,165.0 million under the Revolving Credit Facility as a precautionary measure in order to increase our cash position and provide financial flexibility in light of the uncertainty resulting from the impact of the COVID-19 pandemic. Due to better macroeconomic and business conditions, we used the net proceeds from the issuance of the 3.875% Notes along with cash on hand to repay $1,200.0 million of outstanding borrowings with the remaining $65.0 million balance we repaid $65.0 million on December 31, 2020.

•During 2020, we repurchased 3.6 million shares of our common stock for an aggregate purchase price of $65.3 million pursuant to the Share Repurchase Program.

Debt Guarantees and Related Covenants

As of December 31, 2022, we were in compliance with the indentures relating to our 0% Notes, 3.875% Notes and 1.625% Notes and with covenants relating to our Term Loan "B" Facility and Revolving Credit Facility. Our 0% Notes, 3.875% Notes and 1.625% Notes are senior to the existing and future subordinated indebtedness of onsemi and our guarantor subsidiaries and rank equally in right of payment to all of our existing and future senior debt and as unsecured obligations and are subordinated to all of our existing and future secured debt to the extent of the assets securing such debt. Failure to comply with any of our covenants or any other terms of our Term Loan "B" Facility and Revolving Credit Facility could result in higher interest rates on our borrowings or the acceleration of the maturities of our outstanding debt.

See Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Critical Accounting Policies and Estimates

The accompanying discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. We utilize the following critical accounting policies in the preparation of our financial statements. In addition to our critical accounting policies below, see Note 2: ''Significant Accounting Policies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Use of Estimates. The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. We evaluate these estimates and judgments on an ongoing basis and base our estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that we believe are reasonable under the circumstances. Significant estimates have been used by management in conjunction with the following: (i) future payouts for customer incentives and amounts subject to allowances and returns; (ii) valuation and obsolescence relating to inventories; (iii) measurement of valuation allowances against deferred tax assets, and

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evaluations of uncertain tax positions; (iv) assumptions used in business combinations; and (v) testing for impairment of long-lived assets and goodwill. Additionally, during periods where it becomes applicable, significant estimates will be used by management in determining the future cash flows used to assess and test for impairment of long-lived assets and goodwill. Actual results may differ from the estimates and assumptions used in the consolidated financial statements.

Revenue Recognition. We generate revenue from sales of our semiconductor products to direct customers and distributors. We also generate revenue, to a much lesser extent, from product development agreements and manufacturing services provided to customers. We recognize revenue when we satisfy a performance obligation in an amount reflecting the consideration to which we expect to be entitled. For sales agreements, we have identified the promise to transfer products, each of which is distinct, to be the performance obligation. For product development agreements, we have identified the completion of a service defined in the agreement to be the performance obligation. We apply a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when the performance obligation is satisfied. We allocate the transaction price to each distinct product based on its relative stand-alone selling price. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. Substantially all of our revenue is recognized at the time control of the products transfers to the customer.

Sales to certain distributors, primarily those with ship and credit rights, can be subject to price adjustment on certain products. We develop an estimate of their expected claims under the ship and credit program based on the historical claims data submitted by product and customer and expected future claims, which requires the use of estimates and assumptions related to the amount of each claim as well as the historical period used to develop the estimate.

Our direct customers do not have the right to return products, other than pursuant to the provisions of our standard warranty. Sales to distributors, however, are typically made pursuant to agreements that provide return rights and stock rotation provisions permitting limited levels of product returns. Provisions for discounts and rebates to customers, estimated returns and allowances, ship and credit claims and other adjustments are provided for in the same period the related revenue are recognized, and are netted against revenue. For non-quality related returns, we recognize a related asset for the right to recover returned products with a corresponding reduction to cost of goods sold. We record a reserve for cash discounts as a reduction to accounts receivable and a reduction to revenue, based on the experience with each customer.

Inventories. We carry our inventories at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or net realizable value and record provisions for potential excess and obsolete inventories based upon a regular analysis of inventory on hand compared to historical and projected end-user demand. The determination of projected end-user demand requires the use of estimates and assumptions related to projected unit sales for each product. These provisions can influence our results from operations. For example, when demand falls for a given part, all or a portion of the related inventory that is considered to be in excess of anticipated demand is reserved, impacting our cost of revenue and gross profit. The majority of product inventory that has been previously reserved is ultimately discarded. However, we do sell some products that have previously been written down, such sales have historically been consistently insignificant and the related impact on our margins has also been insignificant.

Income Taxes. Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which we cannot conclude that it is more likely than not that such deferred tax assets will be realized.

In determining the amount of the valuation allowance, estimated future taxable income, feasible tax planning strategies, future reversals of existing temporary differences and taxable income in prior carryback years, if a carryback is permitted are considered. If we determine it is more likely than not that all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if we determine it is more likely than not to be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be recorded as a reduction to income tax expense.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that is it more

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likely than not that the tax positions will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. No tax benefit is recognized for tax positions that are not more likely than not to be sustained. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Significant judgment is required to evaluate uncertain tax positions. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of tax audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense in the period in which the change is made, which could have a material impact to our effective tax rate.

Business Combination. We use estimates and assumptions in allocating the purchase price of acquired business by utilizing established valuation techniques appropriate for the technology industry to record the acquired assets and liabilities at fair value. We utilize the income approach, cost approach or market approach, depending upon which approach is the most appropriate based on the nature and reliability of available data. If the income approach is used, the fair value determination is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life and involves significant assumptions as to cash flows, associated expenses, long-term growth rates and discount rates. The cost approach takes into account the cost to replace (or reproduce) the asset and involves assumptions relating to the asset's value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date. Determining the fair value of acquired technology assets is judgmental in nature and requires the use of significant estimates and assumptions, including the discount rate, revenue growth rates, projected gross margins, and estimated research and development expenses.

Impairment of Goodwill and Long-Lived Assets. We evaluate our goodwill for potential impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Our impairment evaluation consists of a qualitative assessment, and if deemed necessary, a quantitative test is performed which compares the fair value of a reporting unit with its carrying amount, including goodwill.

Determining the fair value of our reporting units is subjective in nature and involves the use of significant estimates and assumptions, including projected net cash flows, discount and long-term growth rates. We determine the fair value of our reporting units based on an income approach, whereby the fair value of the reporting unit is derived from the present value of estimated future cash flows. The assumptions about estimated cash flows include factors such as future revenue, gross profit, operating expenses, and industry trends. We consider historical rates and current market conditions when determining the discount and long-term growth rates to use in its analysis. We consider other valuation methods, such as the cost approach or market approach, if it is determined that these methods provide a more representative approximation of fair value.

We evaluate the recoverability of the carrying amount of our property, plant and equipment and intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fully recoverable. Impairment is first assessed when the undiscounted expected cash flows derived for an asset group are less than its carrying amount. Impairment losses, if applicable, are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. We continually apply our best judgment when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an impaired asset group. The dynamic economic environment in which we operate and the resulting assumptions used to estimate future cash flows impact the outcome of our impairment tests. As we continue to implement our business strategy to rationalize products and manufacturing locations to transition to a lighter internal fabrication model, there could be divestiture transactions resulting in a portion of goodwill or other assets being de-recognized, and which may or may not result in accounting charges.

Contingencies. We are involved in a variety of legal matters that arise in the normal course of business. Based on the available information, we evaluate the relevant range and likelihood of potential outcomes and we record the appropriate liability when the amount is deemed probable and reasonably estimable.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 4: ''Recent Accounting Pronouncements and Other Developments'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our audited historical consolidated financial statements, including the notes thereto, which are included elsewhere in this Form 10-K. Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties, and other factors. Actual results could differ materially because of the factors discussed in "Risk Factors" included elsewhere in this Form 10-K.

Executive Overview

This executive overview presents summarized information regarding our business and operating trends only. For further information relating to the information summarized herein, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in its entirety.

onsemi Results

Our revenue for the year ended December 31, 2021 was $6,739.8 million, an increase of 28.3% from $5,255.0 million for the year ended December 31, 2020. The increase was attributable to the improving economic conditions and an exceptionally strong market for semiconductor products resulting in a significant increase in demand across PSG, ASG and ISG. During 2021, we reported net income attributable to onsemi of $1,009.6 million compared to $234.2 million in 2020. Our operating income totaled $1,287.6 million during 2021 compared to $348.7 million during 2020. The increase in operating income and net income attributable to onsemi was due to significantly better gross margins from higher sales volume, favorable mix, increase in average selling prices, better utilization in factories and savings from restructuring activities. Our gross margin increased by approximately 760 basis points to 40.3% in 2021 from 32.7% in 2020. See discussion under "Results of Operations" for additional discussion on the reasons for the fluctuations year over year.

Business and Macroeconomic Environment

The COVID-19 pandemic has had, and continues to have, a significant impact around the world, prompting governments and businesses to take unprecedented measures including restrictions on travel, business operations and temporary closures of facilities. However, during 2021, economic conditions began to improve and business conditions became stronger during the second half of the year. During 2021, we achieved revenue growth in our focused end-markets of automotive, industrial and communications infrastructure as well as expand our gross margin and operating margin as a result of cost-saving initiatives, product rationalization, favorable mix and price increases, among other actions. While the semiconductor industry conditions have resulted in increased costs throughout our supply chain, we have been able to pass a majority of such increases to our customers, which also contributed to higher revenue for 2021. We expect to continue to pursue cost-saving initiatives to be able to align our overall cost structure, capital investments and other expenditures with our expected revenue, spending and capacity levels to help offset increased costs. We have taken, and continue to take, significant cost containment efforts, including, but

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not limited to, workforce reductions and reducing discretionary spending.

The ongoing impact of the COVID-19 pandemic on the Company’s operational and financial performance is uncertain and will depend on many factors outside the Company’s control, including the timing, extent, trajectory and duration of the pandemic, the emergence of new variants, the development, availability, distribution and effectiveness of vaccines and treatments, the imposition of protective public safety measures, and the impact of the pandemic on the global economy and demand for products. While all our global manufacturing sites are currently operational, our facilities could be required to temporarily curtail production levels or temporarily cease operations based on government mandates due to the COVID-19 pandemic. There can be no assurances that we will adequately forecast the magnitude or duration of the adverse economic conditions on our business or that we will effectively align our cost structure, capital investments and other expenditures with our revenue, spending and capacity levels in the future.

See Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for information relating to our most recent cost-saving initiatives.

Results of Operations

A discussion of our results of operations for the year ended December 31, 2021 compared to December 31, 2020 is included below. For a discussion and comparison of the results of our operations for the year ended December 31, 2020 with the year ended December 31, 2019, refer to "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Form 10-K for the year ended December 31, 2020 filed with the SEC on February 16, 2021.

Operating Results

The following table summarizes certain information relating to our operating results that has been derived from our audited consolidated financial statements (in millions):

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Revenue

Revenue was $6,739.8 million and $5,255.0 million for 2021 and 2020, respectively. The increase from 2020 to 2021 of $1,484.8 million, or 28.3%, was attributable to a 32.0%, 25.6% and 22.0% increase in revenue in PSG, ASG and ISG, respectively, which is further explained below.

We had one customer, a distributor, whose revenue accounted for approximately 13% of the total revenue for the year ended December 31, 2021.

Revenue by operating and reportable segments was as follows (dollars in millions):

_______________________

(1)Certain of the amounts may not total due to rounding of individual amounts.

Revenue from PSG

Revenue from PSG increased by $833.0 million, or approximately 32%, during 2021 compared to 2020. The revenue from our

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Advanced Power Division and our Integrated Circuits, Protection and Signal Division increased by $521.7 million and $317.6 million, respectively. These increases primarily were driven by better economic conditions resulting in increased demand for our products along with a favorable mix in the products sold and an increase in average selling prices. Although we experienced supply chain constraints during 2021, they were offset by increased demand for our products, however in 2020, we experienced decreased demand, delays in fulfilling certain customer orders and certain of our factories operating at significantly reduced capacity levels as a result of the COVID-19 pandemic.

Revenue from ASG

Revenue from ASG increased by $489.5 million, or approximately 25.6%, during 2021 compared to 2020. The revenue from our Mobile, Computing and Cloud Division, our Automotive Division and our Industrial Solutions Division, increased by $230.3 million, $155.0 million and $110.2 million, respectively. The increases primarily were due to improved economic conditions resulting in increased demand for our products in other end-markets along with a favorable mix in the products sold and an increase in average selling prices. Although we experienced supply chain constraints during 2021, they were offset by increased demand for our products, however in 2020, we experienced decreased demand, delays in fulfilling certain customer orders and certain of our factories operating at significantly reduced capacity levels as a result of the COVID-19 pandemic.

Revenue from ISG

Revenue from ISG increased by $162.3 million, or approximately 22%, during 2021 compared to 2020. The revenue from our Automotive Sensing Division and our Industrial and Consumer Solutions Division increased by $152.5 million and $70.7 million, respectively, and was partially offset by a decrease of $61.0 million from the exited CCD business. The increase in revenue was due to the improvement in economic conditions, specifically with automotive component manufacturers and the automotive industry overall, resulting in increased demand for these products along with a favorable mix in the products sold and an increase in average selling prices.

Revenue by Geographic Location

Revenue by geographic location, based on sales billed from the respective country or regions, are as follows (dollars in millions):

_______________________

(1)Certain of the amounts may not total due to rounding of individual amounts.

Gross Profit and Gross Margin (exclusive of amortization of acquisition-related intangible assets)

Our gross profit by operating and reportable segment was as follows (dollars in millions):

_______________________

(1)Certain of the amounts may not total due to rounding of individual amounts.

(2)Beginning in 2021, unallocated manufacturing costs were included as part of segment operating results to determine

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segment gross profit. As a result, the prior-period amounts have been reclassified to conform to current-period presentation.

Our gross profit increased by $998.5 million, or approximately 58%, from $1,715.8 million during 2020 to $2,714.3 million during 2021. Gross margin increased to 40.3% during 2021 compared to 32.7% during 2020.

The increases in gross profit and gross margin were due to increases in sales volume, increased utilization and a better mix in the portfolio of the products sold combined with an increase in average selling prices for many of our products. The favorable economic environment and significant improvement in demand in all end-markets and specifically from automotive and industrial end-markets contributed to increased demand and better pricing for our products. We were also able to pass a majority of the increased cost from our suppliers to our customers.

Operating Expenses

Research and Development

Research and development expenses were $655.0 million and $642.9 million, or approximately 10% and 12% of revenue for 2021 and 2020, respectively, representing an increase of $12.1 million, or approximately 2% year-over-year. The increase in variable compensation was partially offset by a decrease in payroll expenses due to restructuring activities, and costs associated with third-party consultants.

Selling and Marketing

Selling and marketing expenses were $293.6 million and $278.7 million, or approximately 4% and 5% of revenue for 2021 and 2020, respectively, representing an increase of $14.9 million, or approximately 5% year-over-year. The increase was primarily due to an increase in variable compensation.

General and Administrative

General and administrative expenses were $304.8 million and $258.7 million, or approximately 5% and 5% of revenue for 2021 and 2020, respectively, representing an increase of $46.1 million, or approximately 18% year-over-year. The increase was primarily due to an increase in variable compensation and stock compensation.

Amortization of Acquisition—Related Intangible Assets

Amortization of acquisition-related intangible assets was $99.0 million and $120.3 million for 2021 and 2020, respectively. The decrease of $21.3 million, or approximately 17.7%, was primarily due to the full amortization of certain of our technology-related intangible assets during 2020.

Restructuring, Asset Impairments and Other Charges, net

Restructuring, asset impairments and other charges, net was $71.4 million and $65.2 million for 2021 and 2020, respectively. Amounts incurred during 2021 primarily related to the involuntary severance plan. Amounts incurred during 2020 related to the voluntary and involuntary severance plans and certain general workforce reductions. Included in 2020 was also asset impairment charges of $17.5 million.

For additional information, see Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Other Income and Expenses

Interest Expense

Interest expense decreased by $38.0 million, or approximately 22.6%, to $130.4 million during 2021 compared to $168.4 million in 2020, primarily due to the decrease in our long-term debt and a decrease in interest rates on our variable rate debt. Our average gross amount of long-term debt balance (including current maturities) during 2021 and 2020 was $3,423.9 million and $3,669.4 million, respectively. Our weighted average interest rate on our gross amount of long-term debt (including current maturities) was 3.8% and 4.6% per annum in 2021 and 2020, respectively.

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See "Liquidity and Capital Resources—Key Financing and Capital Events" below and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a description of our indebtedness and our refinancing activities.

Gain on Divestiture of Business

Gain on divestiture of business was $10.2 million in 2021, compared to zero in 2020, due to the divestiture of a business entity engaged in research and development.

Loss on Debt Refinancing and Prepayment

We recorded loss on debt refinancing and prepayment of $29.0 million during 2021 related to the partial repurchase or exchange of certain of the outstanding 1.625% Notes. See "Liquidity and Capital Resources—Key Financing and Capital Events" below and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a description of our indebtedness and our refinancing activities. No such expenses were incurred during 2020.

Other Income (Expense)

Other income (expense) was an expense of $8.6 million in 2020 compared to an income of $18.0 million in 2021, reflecting a change of approximately 309.3%. During 2021, we recognized actuarial gains on our pension obligations of $21.4 million which was partially offset by miscellaneous adjustments of $4.6 million, compared to an actuarial loss of $4.0 million during 2020.

Income Tax Provision

We recorded an income tax provision of $146.6 million and a benefit of $59.8 million in 2021 and 2020, respectively.

The income tax provision for the year ended December 31, 2021 consisted primarily of $179.4 million for income and withholding taxes of certain of our foreign and domestic operations, $3.6 million related to a discrete foreign tax rate change, $2.9 million related to return to provision adjustments and $3.4 million related to additional valuation allowance, partially offset by discrete benefits of $24.3 million relating to the release of uncertain tax positions in foreign jurisdictions for favorable audit results and lapse of statue, $6.9 million relating to net equity award windfalls and $11.5 million primarily relating to an increase in deferred tax assets expected to be realized in the foreseeable future due to the liquidation of a foreign subsidiary.

The income tax benefit for the year ended December 31, 2020 consisted of discrete benefits of $63.0 million primarily due to the recognition of certain deferred tax assets, net of deferred tax liabilities, related to the domestication of certain foreign subsidiaries and a benefit of $49.4 million related to the release of valuation allowance against certain state deferred tax assets. These benefits were partially offset by a provision of $43.9 million for income and withholding taxes of certain of our foreign and domestic operations, a $2.3 million discrete provision relating to prior year uncertain tax positions, a discrete provision of $5.5 million relating to additional foreign valuation allowance, and $0.9 million of other discrete items.

For additional information, see Note 16: ''Income Taxes'' in the notes to the audited consolidated financial statements included elsewhere in this Form 10-K.

Liquidity and Capital Resources

This section includes a discussion and analysis of our cash requirements, contingencies, sources and uses of cash, operations, working capital and long-term assets and liabilities.

Contingencies

We are a party to a variety of agreements entered into in the ordinary course of business pursuant to which we may be obligated to indemnify other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by us require us to indemnify the other party against losses, including, but not limited to, losses due to IP infringement, environmental contamination and other property damage, personal injury, our failure to comply with applicable laws, our negligence or willful misconduct or our breach of representations, warranties or covenants related to such matters as title to sold assets.

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We face risk of exposure to warranty and product liability claims in the event that our products fail to perform as expected or such failure of our products results, or is alleged to result, in economic damage, bodily injury or property damage. In addition, if any of our designed products are alleged to be defective, we may be required to participate in their recall. Depending on the significance of any particular customer and other relevant factors, we may agree to provide more favorable rights to such customer for valid defective product claims. We maintain directors’ and officers’ insurance policies that indemnify our directors and officers against various liabilities, including certain liabilities under the Exchange Act that might be incurred by any director or officer in his or her capacity as such.

While our future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under any of these indemnities have not had a material effect on our business, financial condition, results of operations or cash flows, and we do not believe that any amounts that we may be required to pay under these indemnities in the future will be material to our business, financial condition, results of operations or cash flows.

See Note 13: ''Commitments and Contingencies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for possible contingencies related to legal matters. See also "Business—Government Regulation" for information on certain environmental matters.

Sources and Uses of Cash

Our balance of cash and cash equivalents was $1,352.6 million as of December 31, 2021. We require cash to: (i) fund our operating expenses, working capital requirements, outlays for strategic acquisitions and investments, (ii) service our debt, including principal and interest; (iii) conduct research and development; (iv) incur capital expenditures; and (v) repurchase our common stock. As part of our business strategy, we review acquisition and divestiture opportunities on a regular basis. During 2021, we completed the acquisition of GTAT. See Note 5: ''Acquisitions and Divestitures'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

We believe that the key factors that could affect our internal and external sources of cash include:

•Changes in demand for our products, including as a result of the COVID-19 pandemic, competitive pricing pressures, supply chain constraints, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, our ability to make progress on the achievement of our business strategy and sustainability goals, the impact of our restructuring programs on our production and cost efficiency and our ability to make the research and development expenditures required to remain competitive in our business

•Our access to bank financing and the debt and equity capital markets that could impair our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing and our ability to maintain compliance with covenants under our debt agreements in effect from time to time.

The following are some of the significant sources and uses of cash during 2021 outside of our operating activities and regular capital expenditures:

•Issuance of $805.0 million aggregate principal amount of 0% Convertible Senior Notes due 2027, the net proceeds of which were used to repurchase $372.4 million in aggregate principal amount of our outstanding 1.625% Notes for a total consideration of $506.5 million in cash and 5.4 million shares of the Company's common stock.

•Payment of $160.3 million for convertible note hedges and receipt of $93.8 million for the sale of warrants, both in relation to the issuance of the 0% Notes.

•Repayment of the outstanding balance of $700.0 million under the Revolving Credit Facility.

•Repurchase of $47.4 million in aggregate principal amount of our outstanding 1.625% Notes for $47.4 million in cash and 1.6 million shares of the Company's common stock.

•Acquisition of GTAT for $424.6 million in cash.

•Net purchases of available-for-sale securities for $44.7 million.

Our ability to service our long-term debt, including our 0% Notes, 3.875% Notes, 1.625% Notes, the Revolving Credit Facility and the Term Loan "B" Facility, to remain in compliance with the various covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance and the timing of the full economic recovery from the COVID-19 pandemic, as well as to financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control.

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If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer-term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us. We believe that cash flow from operating activities coupled with existing cash and cash equivalents and existing credit facilities will be adequate to fund our operating, debt repayment and capital needs, as well as enable us to maintain compliance with our various debt agreements, through at least the next 12 months. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.

During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures for inventory, operating expenditures and capital expenditures to reflect the current market conditions and our projected sales and demand. Our capital expenditures are primarily directed towards manufacturing equipment, and can materially influence our available cash for other initiatives. Our capital expenditure levels can materially influence our available cash for other initiatives. For example, during 2021, we paid approximately $444.6 million for capital expenditures, while in 2020 we paid approximately $383.6 million. While our capital expenditures have historically been approximately 6% to 7% of annual revenue, we expect to incur capital expenditures in the range of 11% to 12% of revenue in 2022 to expand our manufacturing capabilities to meet the market demands and further improve our manufacturing cost structure.

As of December 31, 2021, there was $1,598.2 million outstanding under the Term Loan "B" Facility, in addition to $805 million aggregate principal amount of the 0% Notes, $700 million aggregate principal amount of 3.875% Notes and $155.1 million aggregate principal amount of the 1.625% Notes. The aggregate principal amount of outstanding 1.625% Notes, net of unamortized discount and issuance costs, has been reclassified as a current portion of long-term debt. The associated interest expense related to this indebtedness will continue to have a significant impact on our results of operations.

See Note 5: ''Acquisitions and Divestitures'' and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Cash Management

Our ability to manage cash is limited, as our primary cash inflows and outflows are dictated by the terms of our sales and supply agreements, contractual obligations, debt instruments and legal and regulatory requirements. While we have some flexibility with respect to the timing of capital equipment purchases, we must invest in capital equipment on a timely basis to allow us to maintain our manufacturing efficiency and support our platforms for new products.

Primary Cash Flow Sources

Our long-term cash generation is dependent on the ability of our operations to generate cash. Our cash flows from operating activities were $1,782.0 million, $884.3 million, and $694.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. Our operating cash flows for the year ended December 31, 2021 increased by $897.7 million, or 101.5%, compared to the year ended December 31, 2020, which was primarily due to better economic conditions resulting in significantly increased demand for our products, increase in average selling prices, better mix in the products sold, cash savings from restructuring activities and better working capital management.

Our ability to maintain positive operating cash flows is dependent on, among other factors, our success in achieving our revenue goals and manufacturing and operating cost targets. Management of our assets and liabilities, including both working capital and long-term assets and liabilities, also influences our operating cash flows, and each of these components is discussed below.

Working Capital

Working capital, calculated as total current assets less total current liabilities, fluctuates depending on end-market demand and our effective management of certain items such as receivables, inventory and payables. In times of escalating demand, our working capital requirements may be affected as we purchase additional manufacturing materials and increase production. Our working capital may also be affected by restructuring programs, which may require us to use cash for severance payments, asset transfers and contract termination costs. In addition, our working capital may be affected by acquisitions and transactions involving our convertible notes and other debt instruments. Although investments made to fund working capital will reduce our cash balances, these investments are necessary to support business and operating initiatives.

Our working capital, excluding cash and cash equivalents and the current portion of long-term debt, was $1,046.3 million as of December 31, 2021 and has fluctuated between $885.0 million and $1,057.1 million at the end of each of our last eight fiscal quarters. Our working capital, including cash and cash equivalents and the current portion of long-term debt, was $2,238.2

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million as of December 31, 2021 and has fluctuated between $1,457.6 million and $2,379.8 million at the end of each of our last eight fiscal quarters. The significant fluctuation was due to the withdrawal and repayment on our Revolving Credit Facility during 2020 and 2021 as well as the reclassification of the 1.625% Notes as a current liability. We expect a significant increase in capital expenditures during 2022.

Long-Term Assets and Liabilities

Our long-term assets consist primarily of property, plant and equipment, intangible assets, deferred taxes and goodwill. Our manufacturing rationalization plans have included efforts to utilize our existing manufacturing assets and supply arrangements more efficiently. We believe that near-term access to additional manufacturing capacity, should it be required, could be readily obtained on reasonable terms through manufacturing agreements with third parties. We will continue to look for opportunities to make strategic purchases in the future for additional capacity.

Our long-term liabilities, excluding long-term debt and deferred taxes, consist of liabilities under our foreign defined benefit pension plans, operating lease liabilities and contingent tax reserves. In regard to our foreign defined benefit pension plans, our annual funding of these obligations is equal to the minimum amount legally required in each jurisdiction in which the plans operate. This annual amount is dependent upon numerous actuarial assumptions. For additional information, see Note 12: ''Employee Benefit Plans'', "Note 8: ''Balance Sheet Information'' and Note 16: ''Income Taxes'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Key Financing and Capital Events

Overview

For the past several years, we have undertaken various measures to secure liquidity to pursue acquisitions, repurchase shares of our common stock, reduce interest costs, amend existing key financing arrangements and, in some cases, extend a portion of our debt maturities to continue to provide us additional operating flexibility. Certain of these measures continued in 2021. Set forth below is a summary of certain key financing events affecting our capital structure during the last three years. For further discussion of our debt instruments, see Note 9: ''Long-Term Debt'' and for further discussion on the Share Repurchase Program (as defined below), see Note 10: ''Earnings Per Share and Equity'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

2021 Financing Events

Issuance of 0% Convertible Senior Notes due 2027

On May 19, 2021, we completed a private offering of $805.0 million aggregate principal amount of 0% Notes, the proceeds of which were used to repurchase a portion of the 1.625% Notes in privately negotiated note repurchase or exchange transactions, repay a portion of the Revolving Credit Facility, pay the net cost of the related convertible note hedges after such costs were offset by the proceeds from the related sale of warrants (each described below), and general corporate purposes. The 0% Notes will mature on May 1, 2027, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms.

The initial conversion rate of the 0% Notes is 18.8796 shares of common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $52.97 per share of common stock. We may redeem all or any portion of the 0% Notes, the holders may convert their 0% Notes and the conversion rate is subject to adjustment, in each case upon the occurrence of certain specified events as set forth in the Indenture governing the 0% Notes. We incurred issuance costs of $19.0 million in connection with the issuance of the 0% Notes, of which $15.7 million was capitalized as debt issuance costs and $3.3 million was allocated to the conversion option and recorded to stockholders’ equity. The debt discount and debt issuance costs are being amortized at an effective interest rate of 3.2% over the contractual term of the 0% Notes.

In connection with the issuance of the 0% Notes, we entered into convertible note hedge transactions with respect to our common stock with the initial purchasers of the 0% Notes or their affiliates ("Counterparties") and paid $160.3 million in cash for the convertible note hedges, which was recorded to stockholders’ equity. We also entered into warrant transactions with the Counterparties and received $93.8 million in cash for the sale of warrants, which was recorded to stockholders’ equity.

Partial exchange or repurchase of the 1.625% Notes

On May 11, 2021, contemporaneously with the issuance of the 0% Notes, we entered into separate privately negotiated transactions with certain holders of the 1.625% Notes to repurchase or exchange, as applicable, $372.4 million in aggregate

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principal amount of the 1.625% Notes for a total consideration of $506.5 million in cash and 5.4 million shares of the Company’s common stock. On December 10, 2021, we repurchased $47.4 million of the 1.625% Notes for $47.4 million in cash and 1.6 million shares of common stock.

Repayments under the Revolving Credit Facility

During the year ended December 31, 2021, we repaid the outstanding balance of $700.0 million under the Revolving Credit Facility using a portion of the net proceeds from the issuance of the 0% Notes and cash generated from operations. As of December 31, 2021, we had approximately $1.97 billion available under the Revolving Credit Facility for future borrowings.

2020 Financing Events

Maturity and Settlement of 1.00% Notes due 2020

The 1.00% Notes matured on December 1, 2020. The maturity of the notes resulted in us paying $690.0 million in cash, representing the principal portion of the 1.00% Notes, to holders of the 1.00% Notes using our available cash and cash equivalents. The excess over the principal amount was settled by issuing shares of common stock held in treasury. At the time of issuance of the 1.00% Notes, we concurrently entered into hedge transactions with certain of the initial purchasers of the 1.00% Notes, and accordingly, repurchased an equivalent number of shares of our common stock at fair market value, to effectively offset the issuance of shares.

Also at the time of issuance of the 1.00% Notes, we sold warrants to certain bank counterparties whereby the holders of the warrants had the option to purchase from us the equivalent number of shares of our common stock at a price of $25.96 per share. All these warrants were exercised by the holders during the first and second quarters of 2021 and were settled by issuing an aggregate of 13.4 million shares of common stock.

Issuance of 3.875% Notes

On August 21, 2020, we completed a private offering of $700.0 million aggregate principal amount of the 3.875% Notes. The 3.875% Notes bear interest at a rate of 3.875% per year, payable semi-annually on March 1 and September 1 of each year, beginning on March 1, 2021, and will mature on September 1, 2028, unless earlier redeemed or repurchased by us. In connection with the issuance, we incurred original issue discount and debt issuance costs amounting to $9.4 million, which has been capitalized and will be amortized to interest expense through the maturity date of September 1, 2028. The net proceeds from the issuance of the 3.875% Notes were used entirely to repay borrowings under the Revolving Credit Facility.

Borrowing and repayment under the Revolving Credit Facility

On March 24, 2020, we borrowed $1,165.0 million under the Revolving Credit Facility as a precautionary measure in order to increase the Company’s cash position and provide financial flexibility in light of the uncertainty resulting from the impact of the COVID-19 pandemic. Due to better macroeconomic and business conditions, on August 21, 2020, we used the net proceeds from the issuance of the 3.875% Notes along with cash on hand to repay $1,200.0 million of outstanding borrowings. Additionally, on December 31, 2020, we repaid $65.0 million of outstanding borrowings under the Revolving Credit Facility.

Share Repurchase Program

During 2020, we repurchased 3.6 million shares of our common stock for an aggregate purchase price of $65.3 million pursuant to the Share Repurchase Program.

2019 Financing Events

Amendments to the Amended Credit Agreement

On June 12, 2019, we entered into the Fifth Amendment to the Amended Credit Agreement (the "Fifth Amendment") and on June 19, 2019, drew $900.0 million of the Revolving Credit Facility to partially fund the acquisition of Quantenna. On August 15, 2019, we entered into the Sixth Amendment to the Amended Credit Agreement (the "Sixth Amendment") which increased amounts that may be borrowed under the Revolving Credit Facility by $70.0 million to $1.97 billion. On September 19, 2019, we entered into the Seventh Amendment to the Amended Credit Agreement (the "Seventh Amendment") and utilized the additional borrowings pursuant to the Seventh Amendment to repay $500.5 million of the outstanding balance under the Revolving Credit Facility.

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Share Repurchase Program

During 2019, we repurchased 7.8 million shares of our common stock for an aggregate purchase price of $138.9 million pursuant to the Share Repurchase Program.

Debt Guarantees and Related Covenants

As of December 31, 2021, we were in compliance with the indentures relating to our 0% Notes, 3.875% Notes and 1.625% Notes and with covenants relating to our Term Loan "B" Facility and Revolving Credit Facility. Our 0% Notes, 3.875% Notes and 1.625% Notes are senior to the existing and future subordinated indebtedness of onsemi and our guarantor subsidiaries and rank equally in right of payment to all of our existing and future senior debt and as unsecured obligations and are subordinated to all of our existing and future secured debt to the extent of the assets securing such debt.

See Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Critical Accounting Policies and Estimates

The accompanying discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. We utilize the following critical accounting policies in the preparation of our financial statements.

Use of Estimates. The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. We evaluate these estimates and judgments on an ongoing basis and base our estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that we believe are reasonable under the circumstances. Significant estimates have been used by management in conjunction with the following: (i) future payouts for customer incentives and amounts subject to allowances and returns; (ii) valuation and obsolescence relating to inventories; (iii) measurement of valuation allowances against deferred tax assets, and evaluations of uncertain tax positions; and (iv) assumptions used in business combinations. Additionally, during periods where it becomes applicable, significant estimates will be used by management in determining the future cash flows used to assess and test for impairment of long-lived assets and goodwill. Actual results may differ from the estimates and assumptions used in the consolidated financial statements.

Revenue. We generate revenue from sales of our semiconductor products to direct customers and distributors. We also generate revenue, to a much lesser extent, from product development agreements and manufacturing services provided to customers. We recognize revenue when we satisfy a performance obligation in an amount reflecting the consideration to which we expect to be entitled. For sales agreements, we have identified the promise to transfer products, each of which is distinct, to be the performance obligation. For product development agreements, we have identified the completion of a service defined in the agreement to be the performance obligation. We apply a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when the performance obligation is satisfied. We allocate the transaction price to each distinct product based on its relative stand-alone selling price. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. Substantially all of our revenue is recognized at the time control of the products transfers to the customer.

Sales to certain distributors, primarily those with ship and credit rights, can be subject to price adjustment on certain products. We develop an estimate of their expected claims under the ship and credit program based on the historical claims data submitted by product and customer and expected future claims, which requires the use of estimates and assumptions related to the amount of each claim as well as the historical period used to develop the estimate.

Our direct customers do not have the right to return products, other than pursuant to the provisions of our standard warranty. Sales to distributors, however, are typically made pursuant to agreements that provide return rights and stock rotation provisions permitting limited levels of product returns. Provisions for discounts and rebates to customers, estimated returns and allowances, ship and credit claims and other adjustments are provided for in the same period the related revenue are recognized,

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and are netted against revenue. For non-quality related returns, we recognize a related asset for the right to recover returned products with a corresponding reduction to cost of goods sold. We record a reserve for cash discounts as a reduction to accounts receivable and a reduction to revenue, based on the experience with each customer.

Inventories. We carry our inventories at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or net realizable value and record provisions for potential excess and obsolete inventories based upon a regular analysis of inventory on hand compared to historical and projected end-user demand. The determination of projected end-user demand requires the use of estimates and assumptions related to projected unit sales for each product. These provisions can influence our results from operations. For example, when demand falls for a given part, all or a portion of the related inventory that is considered to be in excess of anticipated demand is reserved, impacting our cost of revenue and gross profit. The majority of product inventory that has been previously reserved is ultimately discarded. However, we do sell some products that have previously been written down, such sales have historically been consistently insignificant and the related impact on our margins has also been insignificant.

Income Taxes. Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which we cannot conclude that it is more likely than not that such deferred tax assets will be realized.

In determining the amount of the valuation allowance, estimated future taxable income, feasible tax planning strategies, future reversals of existing temporary differences and taxable income in prior carryback years, if a carryback is permitted are considered. If we determine it is more likely than not that all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if we determine it is more likely than not to be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be recorded as a reduction to income tax expense.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that is it more likely than not that the tax positions will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. No tax benefit is recognized for tax positions that are not more likely than not to be sustained. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Significant judgment is required to evaluate uncertain tax positions. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of tax audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense in the period in which the change is made, which could have a material impact to our effective tax rate.

Business Combination. We use estimates and assumptions in allocating the purchase price of acquired business by utilizing established valuation techniques appropriate for the technology industry to record the acquired assets and liabilities at fair value. We utilize the income approach, cost approach or market approach, depending upon which approach is the most appropriate based on the nature and reliability of available data. If the income approach is used, the fair value determination is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life and involves significant assumptions as to cash flows, associated expenses, long-term growth rates and discount rates. The cost approach takes into account the cost to replace (or reproduce) the asset and involves assumptions relating to the asset's value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date. Determining the fair value of acquired technology assets is judgmental in nature and requires the use of significant estimates and assumptions, including the discount rate, revenue growth rates, projected gross margins, and estimated research and development expenses.

Impairment of Goodwill and Long-Lived Assets. We evaluate our goodwill for potential impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Our impairment evaluation consists of a qualitative assessment, and if deemed necessary, a quantitative test is performed which compares the fair value of a reporting unit with its carrying amount, including goodwill.

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Determining the fair value of our reporting units is subjective in nature and involves the use of significant estimates and assumptions, including projected net cash flows, discount and long-term growth rates. We determine the fair value of our reporting units based on an income approach, whereby the fair value of the reporting unit is derived from the present value of estimated future cash flows. The assumptions about estimated cash flows include factors such as future revenue, gross profit, operating expenses, and industry trends. We consider historical rates and current market conditions when determining the discount and long-term growth rates to use in its analysis. We consider other valuation methods, such as the cost approach or market approach, if it is determined that these methods provide a more representative approximation of fair value.

We evaluate the recoverability of the carrying amount of our property, plant and equipment and intangible assets, whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fully recoverable. Impairment is first assessed when the undiscounted expected cash flows derived for an asset group are less than its carrying amount. Impairment losses, if applicable, are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. We continually apply our best judgment when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an impaired asset group. The dynamic economic environment in which we operate and the resulting assumptions used to estimate future cash flows impact the outcome of our impairment tests. As we continue to implement our business strategy to rationalize products and manufacturing locations to transition to a lighter internal fabrication model, there could be divestiture transactions resulting in a portion of goodwill or other assets being de-recognized, and which may or may not result in accounting charges.

Contingencies. We are involved in a variety of legal matters that arise in the normal course of business. Based on the available information, we evaluate the relevant range and likelihood of potential outcomes and we record the appropriate liability when the amount is deemed probable and reasonably estimable.

For a further listing and discussion of our accounting policies, see Note 2: ''Significant Accounting Policies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 4: ''Recent Accounting Pronouncements'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.