ON Semiconductor Corp. (NASDAQ:ON)

The period under review demonstrates significant fluctuations in financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) experienced considerable volatility, while invested capital consistently increased. The cost of capital also exhibited an upward trend, impacting overall economic profit.

NOPAT Trend

NOPAT decreased from US$340.562 million in 2019 to US$262.790 million in 2020. A substantial increase followed, with NOPAT reaching US$1,214.151 million in 2021 and further growing to US$1,991.931 million in 2022. While remaining high, NOPAT experienced a modest increase to US$2,073.654 million in 2023.

Cost of Capital Trend

The cost of capital rose steadily from 19.58% in 2019 to 25.28% in 2022. In 2023, the cost of capital decreased slightly to 24.82%, but remained significantly higher than in earlier years.

Invested Capital Trend

Invested capital showed a consistent upward trend throughout the period, increasing from US$6,857.500 million in 2019 to US$10,925.400 million in 2023. This represents a substantial cumulative increase in capital employed by the entity.

Economic Profit Trend

Economic profit was negative throughout the entire period. Losses widened from US$1,002.085 million in 2019 to US$1,312.772 million in 2020. While the loss decreased to US$612.482 million in 2021 and further to US$376.830 million in 2022, it increased again in 2023 to US$637.674 million. The increasing invested capital, coupled with a rising cost of capital, contributed to these persistent negative economic profits, despite the growth in NOPAT.

The observed pattern suggests that while the entity has been able to increase its operating profits, it has not generated returns exceeding its cost of capital. The continued investment in capital, while potentially supporting future growth, currently exacerbates the economic loss.

Net income attributable to ON Semiconductor Corporation

The net income shows a consistent upward trend over the five-year period. Starting from approximately 211.7 million US dollars in 2019, it increased modestly to 234.2 million in 2020. A significant jump occurred in 2021, with net income more than quadrupling to around 1.009 billion. This strong growth continued through 2022 and 2023, reaching about 1.902 billion and 2.184 billion US dollars respectively, indicating robust profitability improvement and operational performance over time.

Net operating profit after taxes (NOPAT)

NOPAT values display some fluctuations initially but then show a marked increase from 2021 onward. In 2019, NOPAT was approximately 340.6 million US dollars but declined to 262.8 million in 2020. Starting 2021, there was a substantial rise to around 1.214 billion US dollars. The upward trajectory continued into 2022 and 2023 with NOPAT reaching roughly 1.992 billion and 2.074 billion US dollars respectively. This pattern suggests improved operational efficiency and effective tax management contributing to growing operating profitability.

The financial data reveals notable fluctuations in both the provision for income taxes and cash operating taxes over the five-year period ending December 31, 2023.

Provision (benefit) for income taxes

This item shows significant volatility throughout the periods. In 2019, the provision was a positive value of 62,700 thousand US dollars, indicating income tax expense recognition for that year. In 2020, there was a reversal to a tax benefit of 59,800 thousand US dollars, suggesting the company recognized a tax benefit rather than an expense. Following this, 2021 experienced a sharp increase in tax provision to 146,600 thousand US dollars, more than doubling the 2019 figure. The upward trend continued markedly in 2022, reaching 458,400 thousand US dollars, the highest in the period under review. In 2023, the provision decreased somewhat to 350,200 thousand US dollars, although it remained substantially higher than the values reported in 2019 through 2021.

Cash operating taxes

Cash operating taxes demonstrate an overall increasing trend over the five years. Beginning at 79,994 thousand US dollars in 2019, the amount increased modestly to 90,557 thousand US dollars in 2020. In 2021, there was a slight decline to 84,769 thousand US dollars. However, a pronounced upward shift occurred in 2022, with cash operating taxes escalating dramatically to 457,073 thousand US dollars. This elevated level sustained into 2023 with a further slight increase to 470,018 thousand US dollars.

In summary, both the provision for income taxes and cash operating taxes experienced considerable growth from 2021 onwards, with particularly sharp increases in 2022 and 2023. The provision for income taxes fluctuated between an expense and a benefit in the early years but settled into a notably higher expense level in later years. The cash operating taxes overall trend upward, with a pronounced rise starting in 2022, possibly aligning with the increases in the provision for income taxes, indicating higher taxable income or changes in tax positions and payments during those years.

Total Reported Debt & Leases

The total reported debt and leases showed a decreasing trend from 3,726,500 thousand USD at the end of 2019 to 3,272,400 thousand USD at the end of 2021. However, this downward trend reversed in the subsequent years, increasing to 3,512,400 thousand USD in 2022 and further to 3,623,800 thousand USD in 2023. Overall, the debt levels exhibit a moderate fluctuation with a reduction phase followed by a gradual increase.

Total ON Semiconductor Corporation Stockholders’ Equity

Stockholders' equity demonstrated consistent and considerable growth over the five-year period. Starting at 3,301,700 thousand USD in 2019, equity increased steadily each year, reaching 7,782,600 thousand USD by 2023. This reflects strong capital accumulation and possibly retained earnings or equity issuances that enhanced the company's net worth significantly over time.

Invested Capital

Invested capital showed a gradual upward trajectory throughout the period. Beginning at 6,857,500 thousand USD in 2019, it remained relatively stable through 2020 but increased notably to 7,560,500 thousand USD in 2021, followed by a sharper rise to 9,371,400 thousand USD in 2022 and 10,925,400 thousand USD in 2023. This trend indicates increasing investment in the company's operational assets, which may support business growth and expansion activities.

The economic spread ratio exhibited a fluctuating pattern over the five-year period. Initially negative, the ratio demonstrated improvement before declining again in the most recent year. Economic profit remained negative throughout the period, while invested capital consistently increased.

Economic Spread Ratio

The economic spread ratio began at -14.61% in 2019 and deteriorated to -19.05% in 2020, indicating a widening gap between the company’s return on invested capital and its cost of capital. A substantial improvement was then observed in 2021, with the ratio increasing to -8.10%. This positive trend continued into 2022, reaching -4.02%, the highest value within the observed timeframe. However, the ratio decreased again in 2023, settling at -5.84%, suggesting a renewed decline in the relative profitability of invested capital.

Economic Profit

Economic profit was negative for each year analyzed. The largest negative value occurred in 2020 at -1,312,772 US$ in thousands. While economic profit improved in 2021 and 2022, it remained negative. In 2023, economic profit decreased to -637,674 US$ in thousands, representing a worsening of economic profit compared to the prior year.

Invested Capital

Invested capital consistently increased throughout the period, rising from 6,857,500 US$ in thousands in 2019 to 10,925,400 US$ in thousands in 2023. This consistent growth in invested capital occurred alongside consistently negative economic profit, potentially contributing to the negative economic spread ratio.

The combination of increasing invested capital and consistently negative economic profit suggests that the company’s investments are not generating returns sufficient to cover the cost of capital. The temporary improvement in the economic spread ratio in 2021 and 2022 did not translate into positive economic profit, and the ratio’s subsequent decline in 2023 indicates a potential weakening of the company’s ability to generate value from its investments.

The economic profit margin exhibited considerable fluctuation between 2019 and 2023. Initially negative, the margin worsened significantly before showing improvement, then declining again. A review of the underlying figures reveals a consistent pattern of negative economic profit throughout the analyzed period.

Economic Profit Margin Trend

In 2019, the economic profit margin stood at -18.16%. This margin deteriorated substantially in 2020, reaching -24.98%, representing the lowest point in the observed timeframe. A notable improvement occurred in 2021, with the margin increasing to -9.09%. However, this positive trend was not sustained, as the margin decreased to -4.53% in 2022 and further to -7.73% in 2023. This indicates a recent weakening in the company’s ability to generate economic profit relative to its revenue.

Relationship between Revenue and Economic Profit

Revenue increased from US$5,517,900 thousand in 2019 to US$6,739,800 thousand in 2021, coinciding with the improvement in the economic profit margin during that period. However, despite continued high revenue levels of US$8,326,200 thousand in 2022 and US$8,253,000 thousand in 2023, the economic profit margin did not follow suit, suggesting that increases in revenue were not sufficient to offset costs and generate positive economic profit. The negative economic profit values across all years indicate that the company’s cost of capital consistently exceeded its generated profits.

The observed trend suggests that while revenue growth has occurred, the company has struggled to translate that growth into economic profit. Further investigation into the factors driving costs and capital allocation would be necessary to understand the underlying causes of the consistently negative economic profit and the recent decline in the economic profit margin.