ON Semiconductor Corp. (NASDAQ:ON)

The period under review demonstrates significant fluctuations in economic profit alongside increases in net operating profit after taxes and invested capital. While NOPAT generally increased from 2019 to 2023, economic profit remained negative throughout the entire period, indicating that the company’s returns did not exceed its cost of capital.

Net Operating Profit After Taxes (NOPAT)

NOPAT experienced a decrease 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. This growth stabilized in 2023, with NOPAT reported at US$2,073.654 million, representing a modest increase year-over-year.

Cost of Capital

The cost of capital exhibited an upward trend from 19.53% in 2019 to 25.20% in 2022. In 2023, the cost of capital decreased slightly to 24.75%, but remained elevated compared to earlier years in the period. This increasing cost of capital likely contributed to the consistently negative economic profit.

Invested Capital

Invested capital steadily increased throughout the period, rising from US$6,857.500 million in 2019 to US$10,925.400 million in 2023. This consistent growth in invested capital, coupled with the increasing cost of capital, placed greater pressure on the company to generate sufficient NOPAT to achieve positive economic profit.

Economic Profit

Economic profit was negative for all five years. The largest negative economic profit occurred in 2020, at -US$1,308.308 million. While the negative economic profit decreased in 2021 and 2022, reaching -US$607,274 million and -US$370,090 million respectively, it increased again in 2023 to -US$629,916 million. This suggests that despite substantial growth in NOPAT, the company was unable to generate returns exceeding its cost of capital, and the increasing invested capital exacerbated this issue.

In summary, the company experienced growth in both NOPAT and invested capital. However, a rising cost of capital and the inability to generate returns exceeding that cost resulted in consistently negative economic profit throughout the analyzed period. The increase in economic profit negativity in 2023, despite continued NOPAT growth, warrants further investigation.

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. Invested capital consistently increased throughout the period, while economic profit remained negative each year, though with varying magnitudes.

Economic Spread Ratio

The economic spread ratio began at -14.56% in 2019 and deteriorated to -18.99% 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 -8.03%. This positive trend did not persist, as the ratio decreased to -3.95% in 2022 and further to -5.77% in 2023. The movement suggests periods of improved, but ultimately insufficient, capital allocation efficiency.

Economic Profit

Economic profit remained negative throughout the observed period. The largest negative value occurred in 2020 at -1,308,308 US$ in thousands, representing the year with the most substantial shortfall in generating returns exceeding the cost of capital. While economic profit improved in 2021 and 2022, it declined again in 2023 to -629,916 US$ in thousands. This consistent negative economic profit contributes to the negative economic spread ratio.

Invested Capital

Invested capital demonstrated a consistent upward trend, increasing from 6,857,500 US$ in thousands in 2019 to 10,925,400 US$ in thousands in 2023. This continuous growth in invested capital, coupled with consistently negative economic profit, suggests that the company continued to deploy capital despite not generating sufficient returns to cover its cost.

The combination of increasing invested capital and persistent negative economic profit resulted in the observed fluctuations in the economic spread ratio. While the ratio showed some improvement in 2021, the overall trend indicates a continuing challenge in generating returns that adequately compensate for the capital employed.

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 -18.09%. This margin deteriorated substantially in 2020, reaching -24.90%, representing the lowest point in the observed timeframe. A notable improvement occurred in 2021, with the margin increasing to -9.01%. However, this positive trend was not sustained, as the margin decreased to -4.44% in 2022 and further to -7.63% in 2023. This indicates a recent weakening in the company’s ability to generate economic profit relative to its revenue.

Relationship to Revenue

Revenue demonstrated an overall upward trend, increasing from US$5,517,900 thousand in 2019 to US$8,326,200 thousand in 2022, before experiencing a slight decrease to US$8,253,000 thousand in 2023. Despite this revenue growth, the consistently negative economic profit suggests that the cost of capital was not adequately covered by the returns generated from revenue. The widening gap between negative economic profit and increasing revenue from 2022 to 2023 further emphasizes this point.

The persistent negative economic profit margin across all years suggests potential issues with capital allocation or operational efficiency. While revenue increased over the period, the company did not generate sufficient returns to cover its cost of capital, resulting in value destruction. The recent decline in the economic profit margin, despite relatively stable revenue, warrants further investigation into the factors driving this trend.