ON Semiconductor Corp. (NASDAQ:ON)

The financial performance, as measured by economic profit, exhibits a fluctuating pattern over the five-year period. While net operating profit after taxes (NOPAT) generally increased, economic profit remained negative throughout, indicating the company did not generate returns exceeding its cost of capital during this time.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrated a significant increase from 2019 to 2021, rising from US$340.562 million to US$1,214.151 million. This growth continued into 2022, reaching US$1,991.931 million, and remained relatively stable in 2023 at US$2,073.654 million. This suggests improving operational efficiency and/or increased revenue generation.

Cost of Capital

The cost of capital experienced a consistent upward trend from 19.53% in 2019 to 25.22% in 2022. It decreased slightly in 2023 to 24.76%, but remained substantially higher than its 2019 level. This increase likely reflects changes in market interest rates, risk premiums, or the company’s capital structure.

Invested Capital

Invested capital steadily increased throughout the period, growing from US$6,857.5 million in 2019 to US$10,925.4 million in 2023. This indicates ongoing investment in the business, potentially through capital expenditures or acquisitions. The rate of increase accelerated between 2021 and 2023.

Economic Profit

Economic profit was negative in each year analyzed. The largest negative economic profit occurred in 2020, at -US$1,308.998 million. While the negative economic profit decreased in 2021 and 2022, it increased again in 2023 to -US$631.115 million. This suggests that despite the growth in NOPAT, the cost of capital consistently exceeded the returns generated from invested capital. The increasing invested capital, coupled with a rising cost of capital, contributed to the sustained negative economic profit.

In summary, the company experienced growth in both NOPAT and invested capital. However, the increasing cost of capital and the inability to generate returns exceeding that cost resulted in consistently negative economic profit throughout the observed period.

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 -14.57% in 2019 and deteriorated to -19.00% 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 -8.04%. This positive trend did not persist, as the ratio decreased to -3.96% in 2022 and further to -5.78% 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 -1,308,998 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 to -608,079 US$ in thousands, it subsequently worsened to -631,115 US$ in thousands in 2023, despite the increase in invested capital.

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 indicates a continuous reinvestment of capital into the business. However, the concurrent negative economic profit suggests that these investments have not yet generated sufficient returns to cover the cost of capital.

The combination of increasing invested capital and consistently negative economic profit, coupled with the fluctuating economic spread ratio, suggests a need for further investigation into the efficiency of capital allocation and the underlying drivers of profitability.

The economic profit margin exhibited significant fluctuation between 2019 and 2023. Initially negative, the margin worsened considerably before showing improvement, and 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 -18.10%. This margin deteriorated substantially in 2020, reaching -24.91%, indicating a widening gap between returns and the cost of capital. A notable improvement occurred in 2021, with the margin increasing to -9.02%, suggesting enhanced profitability relative to capital employed. However, this positive trend was not sustained. The margin decreased to -4.46% in 2022, and further declined to -7.65% in 2023, indicating a renewed weakening in economic profitability.

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 revenue increases were insufficient to offset the cost of capital, or that costs increased disproportionately to revenue. The worsening economic profit margin in 2020, despite a revenue decrease, reinforces this point.

The persistent negative economic profit values across all years indicate that the company’s returns did not cover its cost of capital during the period. While the margin improved in 2021, the subsequent decline in 2022 and 2023 suggests that the factors contributing to the 2021 improvement were not sustained, and the company continues to destroy economic value.