ON SEMICONDUCTOR CORP

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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%.

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

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

Previous wording

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, respectively. Our operating cash flows for the year ended December 31, 2023 decreasedby $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.

Current wording

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 decreasedby $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.

Previous wording

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.

Current wording

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.

Previous wording

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 millionfor the year ended December 31, 2023 compared tothe 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.

Current wording

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 millionfor the year ended December 31, 2024 compared tothe 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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

•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.

Current wording

•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.

Previous wording

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

Current wording

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

Previous wording

•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.

Current wording

•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.

Previous wording

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

Current wording

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

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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 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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.