10-Q 1 onnnsemiconductorq31110-q.htm FORM 10-Q ONNN Semiconductor Q3 11.10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________ 
FORM 10-Q
_________________________________________  
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
(Commission File Number) 000-30419
_________________________________________ 
ON SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
_________________________________________  
Delaware
 
36-3840979
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
_________________________________________  
5005 E. McDowell Road
Phoenix, AZ 85008
(602) 244-6600
(Address and telephone number, including area code, of principal executive offices)
_________________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
  
Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting company)
  
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of shares outstanding of the issuer’s class of common stock as of the close of business on October 28, 2011:
 
Title of Each Class
 
Number of Shares
Common Stock, par value $0.01 per share
 
449,767,545
 


INDEX
 


PART I: FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited)

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions, except share and per share data)
(unaudited) 
 
September 30,
2011
 
December 31,
2010
Assets
 
 
 
Cash and cash equivalents
$
659.3

 
$
623.3

Short-term investments
178.4

 

Receivables, net
539.0

 
294.6

Inventories
706.6

 
360.8

Other current assets
90.3

 
63.6

Deferred income taxes, net of allowances
14.6

 
15.7

Total current assets
2,188.2

 
1,358.0

Restricted cash

 
142.1

Property, plant and equipment, net
1,130.8

 
864.3

Deferred income taxes, net of allowances
72.2

 

Goodwill
199.2

 
191.2

Intangible assets, net
348.3

 
303.0

Other assets
73.2

 
60.6

Total assets
$
4,011.9

 
$
2,919.2

Liabilities, Minority Interests and Stockholders’ Equity
 
 
 
Accounts payable
$
472.6

 
$
256.9

Accrued expenses
218.6

 
162.6

Income taxes payable
13.8

 
5.1

Accrued interest
4.0

 
0.8

Deferred income on sales to distributors
188.4

 
149.5

Deferred income taxes, net of allowances
69.7

 

Current portion of long-term debt
288.2

 
136.0

Total current liabilities
1,255.3

 
710.9

Long-term debt
948.8

 
752.8

Other long-term liabilities
261.0

 
49.3

Deferred income taxes, net of allowances
21.1

 
18.2

Total liabilities
2,486.2

 
1,531.2

Commitments and contingencies (See Note 10)


 


ON Semiconductor Corporation stockholders’ equity:
 
 
 
Common stock ($0.01 par value, 750,000,000 shares authorized, 500,273,356 and 485,904,100 shares issued, 449,602,339 and 436,774,177 shares outstanding, respectively)
5.0

 
4.9

Additional paid-in capital
3,102.5

 
3,016.1

Accumulated other comprehensive loss
(48.5
)
 
(59.1
)
Accumulated deficit
(1,159.8
)
 
(1,213.9
)
Less: treasury stock, at cost; 50,671,017 and 49,129,923 shares, respectively
(397.4
)
 
(382.0
)
Total ON Semiconductor Corporation stockholders’ equity
1,501.8

 
1,366.0

Minority interests in consolidated subsidiaries
23.9

 
22.0

Total equity
1,525.7

 
1,388.0

Total liabilities and equity
$
4,011.9

 
$
2,919.2


See accompanying notes to consolidated financial statements

1


ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in millions, except per share data)
(unaudited)
 
Quarter Ended
 
Nine Months Ended
 
September 30,
2011
 
October 1,
2010
 
September 30,
2011
 
October 1,
2010
Revenues
$
898.0

 
$
600.7

 
$
2,674.4

 
$
1,734.2

Cost of product revenues
636.9

 
354.2

 
1,904.8

 
1,015.8

Gross profit
261.1

 
246.5

 
769.6

 
718.4

Operating expenses:
 
 
 
 
 
 
 
Research and development
91.5

 
63.3

 
271.8

 
188.6

Selling and marketing
48.4

 
35.5

 
149.0

 
107.6

General and administrative
51.9

 
31.2

 
151.3

 
98.0

Amortization of acquisition-related intangible assets
10.6

 
7.9

 
31.7

 
23.8

Restructuring, asset impairments and other, net
65.4

 
0.9

 
82.9

 
7.0

Total operating expenses
267.8

 
138.8

 
686.7

 
425.0

Operating income (loss)
(6.7
)
 
107.7

 
82.9

 
293.4

Other income (expenses), net:
 
 
 
 
 
 
 
Interest expense
(16.9
)
 
(14.1
)
 
(52.5
)
 
(45.0
)
Interest income
0.3

 
0.2

 
0.8

 
0.4

Other
(3.1
)
 
(0.8
)
 
(6.6
)
 
(7.0
)
Loss on debt repurchase
(5.3
)
 

 
(5.3
)
 
(0.7
)
Gain on SANYO Semiconductor acquisition

 

 
58.0

 

Other income (expenses), net
(25.0
)
 
(14.7
)
 
(5.6
)
 
(52.3
)
Income (loss) before income taxes
(31.7
)
 
93.0

 
77.3

 
241.1

Income tax provision
(17.3
)
 
(4.6
)
 
(21.3
)
 
(9.4
)
Net income (loss)
(49.0
)
 
88.4

 
56.0

 
231.7

Less: Net income attributable to minority interests
(0.4
)
 
(0.6
)
 
(1.9
)
 
(2.2
)
Net income (loss) attributable to ON Semiconductor Corporation
$
(49.4
)
 
$
87.8

 
$
54.1

 
$
229.5

Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
(49.0
)
 
$
88.4

 
$
56.0

 
$
231.7

Foreign currency translation adjustments
6.0

 
3.5

 
10.4

 
5.3

Amortization of prior service costs of defined benefit plan

 

 
0.2

 

Comprehensive income (loss)
(43.0
)
 
91.9

 
66.6

 
237.0

Comprehensive income attributable to minority interests
(0.4
)
 
(0.6
)
 

 
(2.2
)
Comprehensive income (loss) attributable to ON Semiconductor Corporation
$
(43.4
)
 
$
91.3

 
$
66.6

 
$
234.8

Net income (loss) per common share attributable to ON Semiconductor Corporation:
 
 
 
 
 
 
 
Basic
$
(0.11
)
 
$
0.20

 
$
0.12

 
$
0.53

Diluted
$
(0.11
)
 
$
0.20

 
$
0.12

 
$
0.52

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
448.8

 
431.6

 
445.5

 
430.0

Diluted
448.8

 
439.8

 
454.3

 
439.8


See accompanying notes to consolidated financial statements

2


ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)
 
 
Nine Months Ended
 
September 30,
2011
 
October 1,
2010
Cash flows from operating activities:
 
 
 
Net income
$
56.0

 
$
231.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
166.8

 
122.4

Gain on sale and disposal of fixed assets
(6.9
)
 
(5.2
)
Non-cash manufacturing expenses associated with favorable supply agreement
80.4

 

Non-cash portion of loss on debt repurchase
5.3

 
0.7

Gain on acquisition of SANYO Semiconductor
(58.0
)
 

Amortization of debt issuance costs and debt discount
1.8

 
1.9

Provision for excess inventories
18.7

 
2.7

Non-cash stock compensation expense
26.9

 
41.3

Non-cash interest
26.5

 
25.3

Non-cash asset impairment charges
61.2

 

Non-cash intangible asset impairment charges
0.5

 

Deferred income taxes
(7.2
)
 
5.3

Other
0.5

 
(1.5
)
Changes in assets and liabilities (exclusive of the impact of acquisitions):
 
 
 
Receivables
9.7

 
(43.0
)
Inventories
85.9

 
(66.8
)
Other assets
(2.7
)
 
(1.4
)
Accounts payable
(98.9
)
 
32.8

Accrued expenses
(44.6
)
 
9.9

Income taxes payable
8.7

 
(2.6
)
Accrued interest
3.2

 
3.6

Deferred income on sales to distributors
38.9

 
35.7

Other long-term liabilities
8.1

 
(0.8
)
Net cash provided by operating activities
380.8

 
392.0

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(259.3
)
 
(145.9
)
Purchase of businesses, net of cash acquired
(17.9
)
 
(91.1
)
Deposits utilized for purchases of property, plant and equipment
1.0

 
1.2

Proceeds from sales of property, plant and equipment
3.3

 

Proceeds from held-to-maturity securities

 
45.5

Purchase of held-to-maturity securities
(178.4
)
 

Uses of restricted cash
142.1

 

Net cash used in investing activities
(309.2
)
 
(190.3
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock under the employee stock purchase plan
6.1

 
5.1

Proceeds from debt issuance
64.0

 
79.0

Proceeds from exercise of stock options
58.3

 
7.9

Payment of capital lease obligation
(28.1
)
 
(24.8
)
Purchase of treasury stock
(15.4
)
 
(10.2
)
Repurchase of 2.625% convertible senior subordinated notes due 2026
(56.2
)
 

Repayment of long-term debt
(71.0
)
 
(222.5
)
Net cash used in financing activities
(42.3
)
 
(165.5
)
Effect of exchange rate changes on cash and cash equivalents
6.7

 
1.0

Net increase in cash and cash equivalents
36.0

 
37.2

Cash and cash equivalents, beginning of period
623.3

 
525.7

Cash and cash equivalents, end of period
$
659.3

 
$
562.9


See accompanying notes to consolidated financial statements

3


ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1:
Background and Basis of Presentation
ON Semiconductor Corporation (“ON Semiconductor”), together with its wholly and majority-owned subsidiaries (the “Company”), is a premier supplier of high performance, silicon solutions for energy efficient electronics. The Company’s broad portfolio of power and signal management, logic, discrete and custom devices helps customers efficiently solve their design challenges in automotive, communications, computing, consumer, industrial, LED lighting, medical, military/aerospace and power applications.
On January 1, 2011, the Company completed the purchase of SANYO Semiconductor Co. Ltd. (“SANYO Semiconductor”), a subsidiary of SANYO Electric Co. Ltd. (“SANYO Electric”), and certain other assets related to SANYO Electric’s semiconductor business, whereby SANYO Semiconductor became a wholly-owned subsidiary of the Company (see Note 2: “Acquisitions” for further discussion).
On February 27, 2011, the Company completed the purchase of the CMOS Image Sensor Business Unit (“ISBU”) from Cypress Semiconductor Corporation (“Cypress Semiconductor”) (see Note 2: “Acquisitions” for further discussion).
The accompanying unaudited financial statements as of September 30, 2011, and for the three and nine months ended September 30, 2011 and October 1, 2010, respectively, have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of the Company’s management, the interim information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The footnote disclosures related to the interim financial information included herein are also unaudited. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto for the year ended December 31, 2010, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (“2010 Form 10-K”). The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the full year.
The preparation of financial statements in accordance with generally accepted accounting principles requires management 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 revenues and expenses during the reporting period. Significant estimates have been used by management in conjunction with the measurement of valuation allowances relating to trade and tax receivables, inventories and deferred tax assets; estimates of future payouts for customer incentives, warranties, and restructuring activities; assumptions surrounding future pension obligations and related trust returns; the fair value of stock options and of financial instruments (including derivative financial instruments); and future cash flows associated with long-lived assets and goodwill impairment charges. Actual results could differ from these estimates.

Revision of Prior Period Financial Statements

In connection with the preparation of the Company's unaudited consolidated financial statements for the third quarter of 2011, the Company identified an error related to the amounts recognized for foreign exchange gains and losses reported during the quarters ended April 1, 2011 and July 1, 2011 that were associated with the SANYO Semiconductor business. These amounts are reported as other income and expense in the consolidated statement of operations. The effect of the error was that pre-tax (and net) income were overstated by $2.3 million and $6.7 million in the first and second quarters of 2011, respectively. In accordance with accounting guidance found in Accounting Standards Codification ("ASC") 250 "Accounting Changes and Error Corrections," the Company assessed the significance of the error and concluded that the error was not material to any of the Company's previously issued financial statements. Accordingly, management will revise in its subsequent quarterly filings on Form 10-Q, its previously reported Consolidated Statements of Operations for the quarters ended April 1, 2011 and July 1, 2011 . All comparisons to those periods will reflect the revised amounts. This non-cash revision does not impact the Company's previously reported consolidated cash flows from operations for any period and the impact on previously reported consolidated balance sheet amounts was not significant.

The following table presents the effects of this correction on the Company’s Consolidated Statements of Operations for all periods affected (in millions):


4

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

 
For Quarter Ended
 
For Quarter Ended
 
For Six Months Ended
 
April 1, 2011
 
July 1, 2011
 
July 1, 2011
 
As reported
As revised
 
As reported
As revised
 
As reported
As revised
Other income (expenses), net:
 
 
 
 
 
 
 
 
Other
$
(0.2
)
$
(2.5
)
 
$
5.7

$
(1.0
)
 
$
5.5

$
(3.5
)
Net income attributable to ON Semiconductor Corporation
$
74.8

$
72.5

 
$
41.0

$
34.3

 
$
123.6

$
114.6

 
 
 
 
 
 
 
 
 
Net income per common share attributable to ON Semiconductor Corporation:
 
 
 
 
 
 
 
 
Basic
$
0.17

$
0.16

 
$
0.09

$
0.08

 
$
0.28

$
0.26

Diluted
$
0.16

$
0.16

 
$
0.09

$
0.07

 
$
0.27

$
0.25


Note 2:
Acquisitions
Acquisition of SANYO Semiconductor Co., Ltd.
On January 1, 2011, the Company paid SANYO Electric $142.1 million in cash (using restricted cash as of December 31, 2010) and issued a $377.5 million note payable to SANYO Electric, through its subsidiary, Semiconductor Components, LLC ("SCI LLC"), whereby SANYO Semiconductor became a wholly-owned subsidiary of the Company. In the second quarter of 2011, the Company received $39.7 million in cash from SANYO Electric of which $19.0 million had been recognized as of April 1, 2011. These amounts represent adjustments for working capital and pension levels, as defined in the purchase agreement as well as certain adjustments to conform to the Company's accounting policies. As a result of these adjustments, the purchase price has been reduced to $479.9 million as of September 30, 2011. The purchase price may be subject to future adjustments, primarily related to pension and related benefit liabilities.
SANYO Semiconductor designs, manufactures and sells discrete components, hybrid integrated circuits, radio frequency and power related products as well as custom integrated circuits. Many of these devices fall into the Company’s existing product categories, however, SANYO Semiconductor expands the Company’s capacity in microcontrollers and custom application specific integrated circuits ("ASICs") for the consumer, automotive and industrial end-markets. SANYO Semiconductor also expands the Company’s presence in the Japan market.
The following table presents the initial allocation of the purchase price and subsequent adjustments applied on a retrospective basis based on the estimated fair values of the net assets acquired of SANYO Semiconductor (in millions):
 

5

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

 
 
Initial Estimate
 
Adjustments
 
Revised Estimate
Cash and cash equivalents
 
$
117.1

 
$

 
$
117.1

Receivables, net
 
242.1

 

 
242.1

Inventory
 
423.9

 
(5.0
)
 
418.9

Deferred income taxes current
 
0.5

 

 
0.5

Other current assets
 
119.2

 

 
119.2

Property, plant and equipment
 
148.0

 
(1.3
)
 
146.7

Deferred income taxes, non-current
 
60.5

 

 
60.5

Intangible assets
 
55.7

 

 
55.7

Other non-current assets
 
14.9

 

 
14.9

Total assets acquired
 
1,181.9

 
(6.3
)
 
1,175.6

Accounts payable
 
(300.0
)
 

 
(300.0
)
Deferred income taxes, current
 
(70.3
)
 
1.5

 
(68.8
)
Other current liabilities
 
(61.3
)
 
(20.2
)
 
(81.5
)
Deferred income taxes, non-current
 
(0.5
)
 

 
(0.5
)
Long-term accrued liabilities
 
(187.9
)
 
1.0

 
(186.9
)
Total liabilities assumed
 
(620.0
)
 
(17.7
)
 
(637.7
)
Net assets acquired
 
561.9

 
(24.0
)
 
537.9

Gain on acquisition
 
(61.3
)
 
3.3

 
(58.0
)
Purchase price
 
$
500.6

 
$
(20.7
)
 
$
479.9


The acquisition was accounted for as a business purchase pursuant to ASC Topic 805, Business Combinations. Under this ASC, acquisition and integration costs are not included as components of consideration transferred, but are accounted for as expenses in the period in which the costs are incurred.
Accounting standards require that when the fair value of the net assets acquired exceeds the purchase price, resulting in a bargain purchase gain, the acquirer must reassess the reasonableness of the values assigned to all of the net assets acquired, liabilities assumed and consideration transferred. The Company has performed such a reassessment and has concluded that the values assigned for the SANYO Semiconductor acquisition are reasonable. In the first quarter ended April 1, 2011, the Company originally reported a gain of $61.3 million which has been retrospectively adjusted to $58.0 million as reflected in the table above. The decrease in the gain is the result of the recognition of certain employee related benefit liabilities and certain adjustments to conform to the Company's accounting policies, partially offset by $20.7 million received from SANYO Electric in the second quarter of 2011. Consequently, the Company has recorded a $58.0 million bargain purchase gain on the SANYO Semiconductor acquisition. The Company believes the gain realized in purchase accounting was the result of a number of factors, including the following: SANYO Electric wanted to exit its semiconductor operations, historical losses recognized by SANYO Electric, SANYO Electric viewed this as the best outcome for SANYO Semiconductor and the fact that the Company will incur expenses associated with the transfer and consolidation of certain operations.
The purchase price allocation for the SANYO Semiconductor acquisition is preliminary and is subject to revision pending the receipt of additional information relating to the fair value of assets acquired and liabilities assumed. As of the end of the third quarter, management had not yet completed its evaluation of the fair value of certain assets and liabilities acquired, primarily (i) certain retirement plan liabilities assumed in connection with the SANYO Semiconductor business in Japan, (ii) the final valuation of certain asset retirement obligations identified as a result of the acquisition, and (iii) the final valuation of certain income tax accounts. Additional information related to the fair value of the assets acquired and liabilities assumed that is received during the measurement period may have a material impact on the allocation of the purchase price, including values assigned to assets, liabilities and the amount of the gain recognized in connection with the acquisition, which will be adjusted on a retrospective basis.
The $55.7 million of acquired intangible assets were assigned a weighted-average useful life of approximately 8.8 years. The intangible assets that make up that amount include: patents of $27.0 million (5.5-year weighted average useful life), $3.0

6

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

million of trademarks (3.0-year weighted average useful life) and customer relationships of $25.7 million (13-year weighted average useful life). Other current assets acquired includes $80.0 million representing the estimated fair value of a favorable supply arrangement provided by SANYO Electric to the Company in the form of operational cost reduction to the acquired business during the period of time it is effectively required to utilize certain SANYO Electric seconded employees and manufacturing facilities in Japan. This asset has been charged to cost of goods sold over the period of benefit, which was estimated to be 5 months. The amortization totaled $80.4 million as a result of foreign currency exchange rate changes over the recognition period.
The estimated allocation of the purchase price is based on management estimates and assumptions, and other information compiled by management, which utilized established valuation techniques appropriate for the high-technology industry. These techniques were the income approach, cost approach or market approach, depending upon which was the most appropriate based on the nature and reliability of the data available. The income approach is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life. The cost approach takes into account the cost to replace (or reproduce) the asset and the effects on the asset's value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is a technique used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date.
Included in the initial estimate of net assets acquired are long-term liabilities assumed representing approximately $46.9 million of underfunded pension obligations relating to existing defined benefit pension plans as well as $136.4 million representing estimated liabilities associated with the Company’s estimated portion of underfunded pension obligations relating to certain employees participating in the SANYO Electric or affiliate multiemployer defined benefit pension plan from which the Company intends to withdraw. The Company is in the process of establishing defined benefit pension plans which are intended to provide similar retirement benefits as the SANYO Electric sponsored multiemployer plans and expects to withdraw from the SANYO Electric sponsored multiemployer plans by December 31, 2012.
The following unaudited pro forma consolidated results of operations for the quarter and nine months ended October 1, 2010 has been prepared as if the acquisition of SANYO Semiconductor had occurred on January 1, 2010 and includes adjustments for depreciation expense, amortization of intangibles and the tax effect of such items (in millions, except per share data):

 
 
For Quarter Ended
For Nine Months Ended
 
October 1, 2010
October 1, 2010
Net Revenues
$
921.0

$
2,663.4

Net Income
$
66.9

$
213.0

Net income per common share—Basic
$
0.16

$
0.50

Net income per common share—Diluted
$
0.15

$
0.48


Acquisition of the CMOS Image Sensor Business Unit from Cypress Semiconductor

On February 27, 2011, the Company completed the purchase of the ISBU from Cypress Semiconductor, which was accounted for as an acquisition of a business. The Company paid approximately $34.1 million in cash. The ISBU purchased from Cypress Semiconductor includes a broad portfolio of high-performance custom and standard image sensors used in multi-megapixel machine vision, linear and two dimensional (2D) bar code imaging, medical x-ray imaging, biometrics, digital photography and cinematography, and aerospace applications. The acquired products include the VITA, LUPA, STAR and IBIS families, which are all well known throughout the industry.
The following table presents the initial allocation of the purchase price of the ISBU to the assets acquired on February 27, 2011 based on their estimated fair values (in millions):
 

7

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

Cash and cash equivalents
$
1.5

Receivables, net
2.6

Inventory
9.2

Other current assets
0.4

Property, plant and equipment
1.2

Goodwill
8.0

Intangible assets
11.2

In-process research and development
11.2

Total assets acquired
45.3

Accounts payable
(5.6
)
Other current liabilities
(4.2
)
Other non-current liabilities
(1.4
)
Total liabilities assumed
(11.2
)
Net assets acquired
$
34.1


Of the $22.4 million of acquired intangible assets, $11.2 million was assigned to in-process research and development (“IPRD”) assets that will be amortized over the useful life upon successful completion of the projects or expensed if impaired. The value assigned to IPRD was determined by considering the importance of products under development to the overall development plan, estimating costs to develop the purchased IPRD into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The fair value of IPRD was determined using the income approach. The income approach recognizes that the current value of an asset or liability is premised on the expected receipt or payment of future economic benefits generated over its remaining life. A discount rate of 17.5% was used in the present value calculations, and was derived from a weighted-average cost of capital analysis, adjusted to reflect the risks inherent in the acquired research and development operations.
The remaining $11.2 million of acquired intangible assets have a weighted-average useful life of approximately 6.1 years. The intangible assets that make up the amount include: customer relationships of $4.2 million (6.0-year weighted average useful life), developed technology of $6.2 million (7.0-year weighted average useful life) and backlog of $0.8 million (0.3-year weighted average useful life).
Of the total purchase price of approximately $34.1 million, approximately $8.0 million has been allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets were the potential synergies expected to be derived from combining the ISBU business with the Company’s existing sensor business. The Company expects these relationships to provide the capability of selling advanced technology of next generation products to the market place. Goodwill will not be amortized but instead tested for impairment at least annually (more frequently if certain indicators are present). The $8.0 million of goodwill as of September 30, 2011 was assigned to the digital and mixed signal product group, none of which is expected to be deductible for tax purposes.
The allocation of purchase price is based on management estimates and assumptions, and other information compiled by management, which utilized established valuation techniques appropriate for the high-technology industry. These valuation techniques were the income approach, cost approach or market approach, depending upon which was the most appropriate based on the nature and reliability of the data available. The income approach is predicated upon the value of future cash flows that an asset is expected to generate over its economic life. The cost approach takes into account the cost to replace (or reproduce) the asset and the effects on the asset’s value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is a technique used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date.
The Company has determined that pro forma results of operations for the ISBU are not significant for inclusion.

8

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

Note 3:
Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the Company’s recent and historical acquisitions.
Goodwill is evaluated for potential impairment on an annual basis or whenever events or circumstances indicate that impairment may have occurred. See Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates – Goodwill” of this Form 10-Q for information concerning this process. The Company will perform its annual impairment analysis as of the first day of the fiscal fourth quarter of each year unless a triggering event would require an expedited analysis. Adverse changes in operating results and/or unfavorable changes in economic factors used to estimate fair values could result in a non-cash impairment charge in the future. As of September 30, 2011, there were no triggering events which would require the Company to perform an impairment analysis.
The Company has determined that its product families, which are components of its operating segments, constitute reporting units for purposes of allocating and testing goodwill. Because the product families are one level below the operating segments, they constitute individual businesses and the Company’s segment management regularly reviews the operating results of each product family. As of each acquisition date, all goodwill was assigned to the product families that were expected to benefit from the synergies of the respective acquisition. The amount of goodwill assigned to each reporting unit was the difference between the fair value of the reporting unit and the fair value of identifiable assets and liabilities allocated to the reporting unit as of the acquisition date. The Company determined the fair value of a reporting unit using the income approach, which is based on the present value of estimated future cash flows using management’s assumptions and forecasts as of the acquisition date.

A reconciliation of the original goodwill from each of the Company's acquisitions to the carrying value as of September 30, 2011 and December 31, 2010 for each reporting unit that contains goodwill, is as follows (in millions):






















 

9

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

 
 
 
 
 
Balance as of December 31, 2010
 
For the Nine Months Ended September 30, 2011
 
Balance as of September 30, 2011
Acquisition
Operating
Segment
 
Reporting Unit
 
Goodwill
 
Accumulated
Amortization
 
Accumulated
Impairment
Losses
 
Carrying
Value
 
Goodwill
Acquired
 
Purchase
Price
Adjustments
 
Impairment
Losses
 
Goodwill
 
Accumulated
Amortization
 
Accumulated
Impairment
Losses
 
Carrying
Value
Cherry acquisition:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Automotive & Power Group:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Analog Automotive
 
$
21.8

 
$
(4.2
)
 
$

 
$
17.6

 
$

 
$

 
$

 
$
21.8

 
$
(4.2
)
 
$

 
$
17.6

 
Computing & Consumer Products:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Signal & Interface
 
29.1

 
(5.6
)
 

 
23.5

 

 

 

 
29.1

 
(5.6
)
 

 
23.5

Leshan additional interest:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Standard Products:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Small Signal
 
3.8

 

 

 
3.8

 

 

 

 
3.8

 

 

 
3.8

AMIS acquisition:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Digital & Mixed-Signal Product Group:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrial
 
238.7

 

 
(214.7
)
 
24.0

 

 

 

 
238.7

 

 
(214.7
)
 
24.0

 
 
 
Foundry
 
146.2

 

 
(131.4
)
 
14.8

 

 

 

 
146.2

 

 
(131.4
)
 
14.8

 
 
 
Medical
 
79.7

 

 
(59.9
)
 
19.8

 

 

 

 
79.7

 

 
(59.9
)
 
19.8

 
 
 
Military/Aerospace
 
44.8

 

 

 
44.8

 

 

 

 
44.8

 

 

 
44.8

Catalyst acquisition:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Standard Products:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Memory Products
 
14.1

 

 

 
14.1

 

 

 

 
14.1

 

 

 
14.1

PulseCore acquisition:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Digital & Mixed-Signal Product Group:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Protection Products
 
8.9

 

 
(8.9
)
 

 

 

 

 
8.9

 

 
(8.9
)
 

CMD acquisition:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Standard Products:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Filter Products
 
20.1

 

 

 
20.1

 

 

 

 
20.1

 

 

 
20.1

SDT acquisition:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Digital & Mixed-Signal Product Group:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Medical Products
 
8.7

 

 

 
8.7

 

 

 

 
8.7

 

 

 
8.7

ISBU acquisition:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Digital & Mixed-Signal Product Group:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sensor Products
 

 

 

 

 
8.0

 

 

 
8.0

 

 

 
8.0

 
 
 
 
 
$
615.9

 
$
(9.8
)
 
$
(414.9
)
 
$
191.2

 
$
8.0

 
$

 
$

 
$
623.9

 
$
(9.8
)
 
$
(414.9
)
 
$
199.2


10

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)


Intangible Assets
The Company’s acquisitions resulted in intangible assets consisting of values assigned to intellectual property, assembled workforce, customer relationships, non-compete agreements, patents, developed technology, trademarks, acquired software and IPRD. These are stated at cost less accumulated amortization, are amortized over their economic useful lives ranging from less than 1 year to 18 years using the straight-line method and are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable.
Intangible assets, net were as follows as of September 30, 2011 and December 31, 2010 (in millions):
 
 
September 30, 2011
 
Original
Cost
 
Accumulated
Amortization
 
Foreign Currency
Translation Adjustment
 
Impairment
 
Carrying
Value
 
Useful Life
(in Years)
Intellectual property
$
13.9

 
$
(7.9
)
 
$

 
$

 
$
6.0

 
5-12

Assembled workforce
6.7

 
(6.7
)
 

 

 

 
5

Customer relationships
280.3

 
(66.3
)
 
(26.6
)
 
(3.2
)
 
184.2

 
5-18

Non-compete agreements
0.5

 
(0.5
)
 

 

 

 
1-3

Patents
43.7

 
(8.9
)
 

 

 
34.8

 
12

Developed technology
136.2

 
(31.9
)
 

 
(2.0
)
 
102.3

 
5-12

Trademarks
14.0

 
(3.0
)
 

 


 
11.0

 
15

In-process research and development
12.5

 

 

 
(2.5
)
 
10.0

 
8

Acquired software
1.0

 
(1.0
)
 

 

 

 
2

Backlog
0.8

 
(0.8
)
 

 

 

 
0.3

Total intangibles
$
509.6

 
$
(127.0
)
 
$
(26.6
)
 
$
(7.7
)
 
$
348.3

 
 


11

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

 
December 31, 2010
 
Original
Cost
 
Accumulated
Amortization
 
Foreign Currency
Translation Adjustment
 
Impairment
 
Carrying
Value
 
Useful Life
(in Years)
Intellectual property
$
13.9

 
$
(7.0
)
 
$

 
$

 
$
6.9

 
5-12

Assembled workforce
6.7

 
(6.1
)
 

 

 
0.6

 
5

Customer relationships
250.5

 
(51.2
)
 
(27.2
)
 
(3.2
)
 
168.9

 
5-18

Non-compete agreements
0.5

 
(0.5
)
 

 

 

 
1-3

Patents
16.7

 
(4.2
)
 

 

 
12.5

 
12

Developed technology
113.0

 
(22.5
)
 

 
(2.0
)
 
88.5

 
5-12

Trademarks
11.0

 
(1.7
)
 

 

 
9.3

 
15

In-process research and development
18.3

 

 

 
(2.0
)
 
16.3

 
8

Acquired software
1.0

 
(1.0
)
 

 

 

 
2

Total intangibles
$
431.6

 
$
(94.2
)
 
$
(27.2
)
 
$
(7.2
)
 
$
303.0

 
 

Amortization expense for intangible assets amounted to $10.6 million and $32.8 million for the quarter and nine months ended September 30, 2011, of which zero and $1.1 million was included in cost of revenues; and $8.5 million and $25.6 million for the quarter and nine months ended October 1, 2010, of which $0.6 million and $1.8 million was included in cost of revenues. The Company is currently amortizing ten projects totaling $22.2 million through developed technology relating to projects that were originally classified as IPRD at the time of acquisition, but which are now completed, over a weighted average useful life of 10.3 years. Amortization expense for intangible assets, with the exception of the remaining $10.0 million of in-process research and development assets that will be amortized once the corresponding projects have been completed, is expected to be as follows over the next five years, and thereafter (in millions):
 
 
Total
Remainder of 2011
$
24.2

2012
40.6

2013
35.9

2014
35.7

2015
34.6

Thereafter
167.3

Total estimated amortization expense
$
338.3



12

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

Note 4:
New Accounting Pronouncements
Accounting Standards Update (ASU) No. 2011-08 - Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU 2011-08)
In September 2011, the Financial Accounting Standards Board ("FASB") issued ASU 2011-08, which is intended to reduce the complexity and cost of performing an evaluation of impairment of goodwill.  Under the new guidance,  an entity will have the option of first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount.  If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary.  The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, although early adoption is permitted. The adoption of this pronouncement is not expected to have a material impact on the Company's consolidated financial statements.
Accounting Standards Update No. 2011-09 - Compensation - Retirement Benefits - Multiemployer Plans (Subtopic 715-80) (ASU 2011-09)
In September 2011, the FASB issued ASU 2011-09, which requires that employers provide additional separate disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans. The additional quantitative and qualitative disclosures will provide users with more detailed information about an employer's involvement in multiemployer pension plans. The amendments will be effective for annual disclosures for multiemployer pension plans and multiemployer other postretirement benefit plans for fiscal years ending after December 15, 2011. The Company anticipates that the adoption of this standard will expand its consolidated financial statement footnote disclosures, but otherwise is not expected to have a material impact on our financial statements.
Accounting Standards Update No. 2011-04 - “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. Generally Accepted Accounting Principles and IFRSs” (“ASU 2011-04”)
ASU 2011-04 generally provides a uniform framework for fair value measurements and related disclosures between generally accepted accounting principles and international financial reporting standards (“IFRS”). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about the unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity's use of a nonfinancial asset that is different from the asset's highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will be effective for interim and annual periods beginning on or after December 15, 2011, which for the Company will be its first quarter of 2012. The Company is currently evaluating the impact that ASU 2011-04 will have on its financial statements.
Accounting Standards Update No. 2011-05 - “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”)
ASU 2011-05 amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement and statement of comprehensive income; or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. The FASB has decided to defer the specific requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income. ASU 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 (for the Company this will be its first quarter 2012), with early adoption permitted. The Company believes the adoption of this update will change the order in which certain financial statements are presented and provide additional detail on those financial statements when applicable, but will not have any other impact on its financial statements.
Adoption of Accounting Standards Update No. 2010-17, “Revenue Recognition—Milestone Method” (“ASU 2010-17”)
In April 2010, the FASB issued ASU 2010-17, which is included in ASC 605—Milestone Method of Revenue Recognition. This ASU codifies the consensus reached in Emerging Issues Task Force 08-09, “Milestone Method of Revenue Recognition,” and addresses the accounting when entities enter into revenue arrangements with multiple payment streams for a single deliverable or a single unit of accounting. The pronouncement shall be applied prospectively to milestones achieved in

13

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

fiscal years, and interim periods within those years, beginning after June 15, 2010, with earlier application and retrospective application permitted. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.
Adoption of ASU No. 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations” (“ASU 2010-29”)
In December 2010, the FASB issued ASU 2010-29.  The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this pronouncement affected the Company's disclosure related to its acquisitions.

Note 5:
Restructuring, Asset Impairments and Other, Net
The activity related to the Company’s restructuring, asset impairments and other, net for programs that were either initiated in 2011 or had not been completed as of December 31, 2010, are as follows:

Other
During the quarter and nine months ended September 30, 2011, the Company recorded $61.2 million of asset impairment charges associated with the October 2011 announced shutdown of the Company's Aizu, Japan wafer manufacturing facility by June 2012. The determination to shutdown this facility triggered an impairment analysis of the carrying value of the related long-lived assets. The Company's asset group used for the impairment test was the wafer manufacturing plant. The Company estimated future undiscounted cash flows for the period of continued manufacturing activities and the eventual disposition of the assets using price, volume, cost and salvage value assumptions that management considered reasonable in the circumstances. Based on those undiscounted cash flows for the wafer manufacturing plant, an impairment of the plant and associated long-lived assets was indicated. The impairment charge was recorded as the amount by which the carrying values of the respective assets exceeded their estimated fair values as of September 30, 2011. The fair values were estimated by obtaining third party valuation estimates, which are unobservable inputs. The Aizu, Japan wafer manufacturing facility mainly supports the Automotive and Power Products Group and the Computing and Consumer Products Group. (See Note 13: "Subsequent Events" for further discussion of the Company's October 2011 announced shutdown of the Aizu, Japan wafer manufacturing facility and related charges.)
During the quarter and nine months ended September 30, 2011, the Company recorded zero and $4.8 million, respectively, of other costs associated with damaged inventory and other assets due to the Japanese earthquake and tsunami.
Additionally, in the third quarter of 2011, the Company recorded $0.5 million of other costs associated with the impairment of one project associated with our SDT acquisition, which was determined to be no longer viable.
Restructuring Activities Related to the 2011 Global Workforce Reduction
In the third quarter of 2011, the Company announced plans to reduce worldwide personnel for cost savings purposes. During the third quarter of 2011, a total of 38 employees were notified that their employment with the Company would be terminated due to their positions being eliminated or consolidated in connection with this restructuring. As of the end of the third quarter, 10 of these employees still remained employed by the Company. The Company recorded employee separation charges of approximately $2.3 million related to these terminations. These charges have been included in restructuring, asset impairment and other, net on the consolidated statement of operations for the quarter and nine months ended September 30, 2011. We expect that all of these notified individuals will be officially separated and exited from the Company during the fourth quarter of 2012, with all related benefit payments being made in the same period.
 
Balance at Beginning of Period
 
Charges
 
Usage
 
Adjustments
 
Balance at End of Period
Estimated employee separation costs (in millions):
 
 
 
 
 
 
 
 
 
December 31, 2010 through September 30, 2011
$

 
$
2.3

 
$
(0.5
)
 
$

 
$
1.8

Restructuring Activities Related to the 2011 Closure of the Phoenix, Arizona Wafer Manufacturing Facility
In the second quarter of 2011, the Company proceeded with its previously announced plans to close the Phoenix, Arizona

14

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

wafer manufacturing facility for cost saving purposes. During the nine months ended September 30, 2011, a total of 166 employees were notified that their employment with the Company would be terminated due to their positions being eliminated or consolidated in connection with this restructuring. As of the end of the third quarter, 127 employees had been exited. The remaining 39 employees are expected to be exited in the fourth quarter of 2011.
The Company recorded employee separation charges of approximately $2.5 million related to these terminations. These charges have been included in restructuring, asset impairment and other, net on the consolidated statement of operations for the nine months ended September 30, 2011. We expect that all of these notified individuals will have been officially separated and exited from the Company by the end of the fourth quarter of 2011, with all related benefit payments being made during the third and fourth quarter of 2011.
Additionally, during the nine months ended September 30, 2011, the Company recorded exit costs of approximately $1.6 million, related to the decommissioning of the Phoenix, Arizona wafer manufacturing facility.
 
Balance at Beginning of Period
 
Charges
 
Usage
 
Adjustments
 
Balance at End of Period
Estimated employee separation costs (in millions):
 
 
 
 
 
 
 
 
 
December 31, 2010 through September 30, 2011
$

 
$
2.5

 
$
(1.7
)
 
$

 
$
0.8

Estimated costs to exit (in millions):
 
 
 
 
 
 
 
 
 
December 31, 2010 through September 30, 2011
$

 
$
1.6

 
$
(1.1
)
 
$

 
$
0.5

Restructuring Activities Related to the 2011 Acquisition of SANYO Semiconductor
Cumulative charges of $10.0 million, net of adjustments, have been recognized through September 30, 2011, related to the 2011 announced plans to integrate and restructure the overlapping operations of SANYO Semiconductor and the Company, in part, for cost savings purposes (See Note 2: “Acquisitions” for further discussion regarding the Company's acquisition of SANYO Semiconductor). As part of these plans, one assembly and test facility is being consolidated into other existing factories. During the first nine months of 2011, a total of 289 employees were terminated and the Company recorded employee separation charges of approximately $8.5 million related to these terminations. These charges have been included in restructuring, asset impairment and other, net on the consolidated statement of operations for the nine months ended September 30, 2011.
During the nine months ended September 30, 2011, the Company recorded exit costs of approximately $1.5 million related to termination of certain leases, purchase agreements, and items relating to the consolidation of factories.
While the Company has the intention of consolidating the front end manufacturing processes of SANYO Semiconductor with those of the Company over the next 12 to 18 months, the anticipated consolidation and associated costs are still being evaluated. If the Company does proceed with the consolidation, it is likely the Company will incur significant expenses to complete these activities.
 
 
Balance at Beginning of Period
 
Charges
 
Usage
 
Adjustments
 
Balance at End of Period
Estimated employee separation costs (in millions):
 
 
 
 
 
 
 
 
 
December 31, 2010 through September 30, 2011
$

 
$
8.5

 
$
(8.5
)
 
$

 
$

Estimated costs to exit (in millions):
 
 
 
 
 
 
 
 
 
December 31, 2010 through September 30, 2011
$

 
$
1.5

 
$
(1.5
)
 
$

 
$


Restructuring Activities Related to the 2010 Acquisition of California Micro Devices Corporation (“CMD”)
Cumulative charges of $3.6 million, net of adjustments, have been recognized through September 30, 2011, related to the January 2010 announced plans to integrate and restructure the overlapping operations of the CMD business and the Company, in part for cost savings purposes.
Cumulative employee separation charges of $3.5 million, net of adjustments, have been recognized through

15

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

September 30, 2011. A total of 27 employees, including five former executive officers of CMD, were notified during 2010 that their positions were being eliminated or consolidated. As of September 30, 2011, all terminations and related termination benefit payments associated with these plans were completed.
Cumulative exit costs of $0.1 million have been recognized from the inception of this restructuring activity through September 30, 2011, related to charges incurred to terminate certain lease agreements. All payments related to these exit activities are expected to be completed by the end of the fourth quarter of fiscal 2011.
 
 
Balance at
Beginning
of Period
 
Charges
 
Usage
 
Adjustments
 
Balance at
End of
Period
Estimated employee separation charges (in millions):
 
 
 
 
 
 
 
 
 
December 31, 2010 through September 30, 2011
$
1.0

 
$

 
$
(1.0
)
 
$

 
$

Estimated costs to exit (in millions):
 
 
 
 
 
 
 
 
 
December 31, 2010 through September 30, 2011
$
0.1

 
$

 
$
(0.1
)
 
$

 
$


Restructuring Activities Related to the 2009 Global Workforce Reduction
Cumulative employee separation charges of $13.0 million, net of adjustments, have been recognized through September 30, 2011, related to the first quarter of 2009 announced plans to reduce worldwide personnel for cost savings purposes. A total of 570 employees were notified during 2009 that their positions were being eliminated or consolidated, all of which were terminated as of December 31, 2010. All terminations associated with this plan were completed by the end of the fourth quarter of 2010, and all related termination benefits were paid out by the end of the first quarter of 2011.
 
 
Balance at
Beginning
of Period
 
Charges
 
Usage
 
Adjustments
 
Balance at
End of
Period
Estimated employee separation charges (in millions):
 
 
 
 
 
 
 
 
 
December 31, 2010 through September 30, 2011
$
0.2

 
$

 
$
(0.2
)
 
$

 
$


Acquisition of AMIS Holdings, Inc. (“AMIS”)
On March 17, 2008, the Company completed the purchase of AMIS, whereby AMIS became a wholly-owned subsidiary of the Company.
The Company had $10.0 million of accrued liabilities for estimated costs to exit certain activities of AMIS, of which $0.2 million were for employee separation costs and $9.8 million were for exit costs outstanding as of December 31, 2010. During the nine months ended September 30, 2011, the Company paid exit costs associated with the decommissioning costs resulting from the shutdown of a fabrication facility of $0.3 million. All payments related to these activities are expected to be completed by the end of the first quarter of fiscal 2012.
 
Balance at Beginning of Period
 
Usage
 
Adjustments
 
Balance at End of Period
Estimated employee separation costs (in millions):
 
 
 
 
 
 
 
December 31, 2010 through September 30, 2011
0.2

 
$

 
$

 
$
0.2

Estimated costs to exit (in millions):
 
 
 
 
 
 
 
December 31, 2010 through September 30, 2011
$
9.8

 
$
(0.3
)
 
$

 
$
9.5

A reconciliation of the activity in the tables above to the “Restructuring, asset impairments and other, net” caption on the consolidated statement of operations for the quarter and nine months ended September 30, 2011, is as follows (in millions):
 

16

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

 
Quarter Ended
Nine Months Ended
 
September 30, 2011
September 30, 2011
Restructuring
 
 
2011 Charges:
 
 
Estimated employee separation charges
$
2.4

$
13.3

Exit costs
1.3

3.1

Asset Impairment
 
 
Aizu Japan wafer manufacturing facility
61.2

61.2

Other
 
 
Assets damaged related to Japanese earthquake

4.8

Impairment of IPRD
0.5

0.5

 
$
65.4

$
82.9


17

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)



Note 6:
Balance Sheet Information

 
September 30, 2011
 
December 31, 2010
Receivables, net:
 
 
 
Accounts receivable
$
546.5

 
$
301.9

Less: Allowance for doubtful accounts
(7.5
)
 
(7.3
)
 
$
539.0

 
$
294.6

Inventories:
 
 
 
Raw materials
$
58.6

 
$
49.0

Work in process
447.9

 
210.9

Finished goods
200.1

 
100.9

 
$
706.6

 
$
360.8

Other Current Assets:
 
 
 
Deposits
$
2.9

 
$
1.9

Prepaid Expenses
31.1

 
22.2

Tax Receivables
32.9

 
14.9

Other
23.4

 
24.6

 
$
90.3

 
$
63.6

Property, plant and equipment, net:
 
 
 
Land
$
78.0

 
$
48.3

Buildings
532.5

 
484.4

Machinery and equipment
1,940.4

 
1,631.1

Total property, plant and equipment
2,550.9

 
2,163.8

Less: Accumulated depreciation
(1,420.1
)
 
(1,299.5
)
 
$
1,130.8

 
$
864.3

Accrued expenses:
 
 
 
Accrued payroll
$
116.0

 
$
73.1

Sales related reserves
44.5

 
36.5

Restructuring reserves
12.8

 
11.3

Accrued pension liability
0.4

 
0.3

Other
44.9

 
41.4

 
$
218.6

 
$
162.6

Accumulated other comprehensive loss:
 
 
 
Foreign currency translation adjustments
$
(48.3
)
 
$
(58.8
)
Unrecognized prior service cost of defined benefit pension plan
(0.2
)
 
(0.1
)
Prior service cost from pension legal plan amendment

 
(0.2
)
 
$
(48.5
)
 
$
(59.1
)

The activity related to the Company’s warranty reserves for the nine months ended September 30, 2011 and October 1, 2010, respectively is as follows (in millions):
 

18

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

 
Nine Months Ended
 
September 30, 2011
 
October 1, 2010

Beginning Balance
3.3

 
3.2

Provision
2.4

 
0.7

Usage
(0.7
)
 
(0.2
)
Ending Balance
5.0

 
3.7



The Company maintains defined benefits plans for some of its foreign subsidiaries. The Company recognizes the aggregate amount of all overfunded plans as an asset and the aggregate amount of all underfunded plans as a liability in its financial statements. Included in other long-term liabilities as of September 30, 2011 is total accrued pension liability for underfunded plans of $80.4 million. Included in this amount is $54.1 million for the SANYO Semiconductor portion of the underfunded pension liability assumed by the Company.  As of December 31, 2010, the total accrued pension liability for underfunded plans was $22.7 million. As of September 30, 2011 and December 31, 2010, the total pension asset for overfunded plans was $12.1 million and $13.4 million, respectively. The components of the Company’s net periodic pension expense for the quarter and nine months ended September 30, 2011 and October 1, 2010 are as follows (in millions):
 
 
Quarter Ended
 
Nine Months Ended
 
September 30, 2011
 
October 1, 2010
 
September 30, 2011
 
October 1, 2010
Service cost
2.1

 
1.0

 
6.5

 
3.0

Interest cost
1.3

 
0.8

 
3.9

 
2.4

Expected return on plan assets
(1.0
)
 
(0.8
)
 
(3.0
)
 
(2.4
)
Amortization of prior service cost
0.1

 
0.1

 
0.3

 
0.3

Total net periodic pension cost
2.5

 
1.1

 
7.7

 
3.3


Included in other long-term liabilities as of September 30, 2011, are the estimated liabilities of $148.3 million, which represents the Company’s estimated portion of underfunded pension obligations relating to certain employees participating in certain SANYO Electric multiemployer defined benefit pension plans from which the Company intends to withdraw. During the quarter and nine months ended September 30, 2011, the Company recorded $8.8 million and $14.6 million, respectively, of expense associated with the Company’s participation in the SANYO Electric multiemployer pension plans. Due to the performance of the underlying SANYO Electric pension plan assets, during the quarter ended September 30, 2011, the Company increased its estimate of its withdrawal liability by approximately $5.7 million.

19

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)


Note 7:
Long-Term Debt
Long-term debt consists of the following (in millions):
 
 
September 30, 2011
 
December 31, 2010
U.S. real estate mortgages payable monthly through 2016 at an average rate of 4.857%
$
32.0

 
$
33.0

U.S. equipment financing payable monthly through 2015 at an average rate of 3.23%
11.5

 

Loan with a Japanese company due 2011 through 2017, interest payable quarterly at 1.99575%
349.2

 

Zero Coupon Convertible Senior Subordinated Notes due 2024 (1)
92.4

 
87.5

1.875% Convertible Senior Subordinated Notes due 2025 (2)
86.8

 
82.2

2.625% Convertible Senior Subordinated Notes due 2026 (3)
380.2

 
410.1

Loan with British finance company, interest payable monthly at 2.5643% and 2.18%, respectively
16.8

 
13.8

Loan with Hong Kong bank, interest payable weekly at 1.9874% and 2.0325%, respectively
35.0

 
40.0

Loan with Singapore bank, interest payable weekly at 1.96%
25.0

 

Loans with Philippine banks due 2011 through 2015, interest payable monthly and quarterly at an average rate of 1.84005% and 1.80446%, respectively
70.9

 
68.8

Loans with Chinese banks due 2011 through 2013, interest payable quarterly at an average rate of 4.16346% and 4.23375%, respectively
20.0

 
34.0

Loans with Japanese banks due 2011 through 2013, interest payable monthly & semi-annually at an average rate of 1.46906% and 1.44545%, respectively
6.3

 
3.9

Capital lease obligations
110.9

 
115.5


1,237.0

 
888.8

Less: Current maturities
(288.2
)
 
(136.0
)
 
$
948.8

 
$
752.8

_______________________

(1)
The Zero Coupon Convertible Senior Subordinated Notes due 2024 may be put back to the Company at the option of the holders of the notes on April 15 of 2012, 2014 and 2019 or called at the option of the Company on or after April 15, 2012.
(2)
The 1.875% Convertible Senior Subordinated Notes due 2025 may be put back to the Company at the option of the holders of the notes on December 15 of 2012, 2015 and 2020 or called at the option of the Company on or after December 20, 2012.
(3)
The 2.625% Convertible Senior Subordinated Notes due 2026 may be put back to the Company at the option of the holders of the notes on December 15 of 2013, 2016 and 2021 or called at the option of the Company on or after December 20, 2013.

Annual maturities relating to the Company’s long-term debt as of September 30, 2011 are as follows (in millions):
 
 
 
Actual
Maturities
Remainder 2011
 
49.3

2012
 
356.7

2013
 
476.6

2014
 
74.7

2015
 
62.8

Thereafter
 
216.9

Total
 
$
1,237.0


20

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)


July 2011 U.S. Loan
In July 2011, one of the Company's U.S. subsidiaries entered into a $12.0 million loan with a U.S. bank, which was secured by equipment. The loan, which had a balance of $11.5 million as of September 30, 2011, amortizes monthly over four years along with interest at a fixed rate of 3.23% per annum.
June 2011 Philippine Loan
In June 2011, one of the Company's Philippine subsidiaries entered into a $10.0 million short-term loan agreement with a Philippine bank with proceeds to be used for working capital requirements. The loan, which had a balance of $10.0 million as of September 30, 2011, bears interest payable monthly based on 1-month London Interbank Offered Rate ("LIBOR") plus 1.625% per annum. The balance is due in December 2011 unless the loan is renewed.

May 2011 Singapore Loan
In May 2011, one of the Company's Asian subsidiaries entered into a $35.0 million loan agreement with a Singapore bank pursuant to which the bank purchased accounts receivables, with recourse. In accordance with generally accepted accounting principles in the United States, the purchased assets remained on our balance sheet as of September 30, 2011. The loan, which had a balance of $25.0 million as of September 30, 2011, bears interest payable weekly at 1-month Singapore Interbank Offered Rate plus 1.75% per annum. The loan amount is subject to an eligible borrowing calculation as defined in the loan agreement. The loan will expire in May of 2012, unless renewed.
March 2011 Chinese Loan
In March 2011, one of the Company’s Chinese subsidiaries entered into a $7.0 million two-year loan agreement with a Chinese bank to finance the purchase of raw materials. The loan which had a balance of $7.0 million as of September 30, 2011, bears interest payable quarterly in arrears based on 3-month LIBOR plus 3.80% per annum.

Acquisition Note Payable to SANYO Electric
In January 2011, SCI LLC, as borrower, and the Company, as guarantor, entered into a seven-year, unsecured loan agreement with SANYO Electric to finance a portion of the purchase price of the SANYO Semiconductor acquisition. The loan had an original principal amount of approximately $377.5 million and had a principal balance of $349.2 million as of September 30, 2011. The loan bears interest at a rate of 3-month LIBOR plus 1.75% per annum, and provides for quarterly interest and $9.4 million in principal payments, with the unpaid balance of $122.7 million due in January 2018.
January 2011 Japanese Loan
As part of the acquisition of SANYO Semiconductor, one of the Company’s newly acquired Japanese subsidiaries has continued its existing five-year loan agreement with a Japanese bank for up to 450 million JPY principal to finance capital equipment purchases. The loan, which had a balance of $2.4 million at September 30, 2011 (180.0 million JPY principal), bears interest at an annual rate of 1-month Tokyo Interbank Offered Rate plus 1.4% per annum and requires monthly principal payments through September 2013 of approximately $0.1 million (7.5 million JPY principal) along with accrued interest.

Loss on Debt Repurchase

During the quarter ended September 30, 2011, the Company repurchased $53.0 million in par value ($46.6 million of net carrying value) of its 2.625% Convertible Senior Subordinated Notes due 2026 for $56.2 million in cash. The cash payment was allocated between the fair value of the liability component and the equity component of the convertible security.

The amount allocated to the extinguishment of the liability component was based on the discounted cash flows using a rate of return an investor would have required on non-convertible debt with other terms substantially similar to the 2.625% Convertible Senior Subordinated Notes due 2026. The remaining consideration was recognized as a reacquisition of the equity component.


21

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

The difference between the consideration allocated to the liability component and the net carrying amount of the liability and unamortized debt issuance costs was recorded as a loss on debt repurchase of $5.3 million which included the write-off of $0.5 million in unamortized debt issuance costs. We also recorded an adjustment to additional paid-in capital in the amount of $4.8 million for the reacquisition of equity component.


Debt Guarantees
ON Semiconductor is the sole issuer of the Zero Coupon Convertible Senior Subordinated Notes due 2024, the 1.875% Convertible Senior Subordinated Notes due 2025 and the 2.625% Convertible Senior Subordinated Notes due 2026 (collectively, the “Convertible Notes”). ON Semiconductor’s domestic subsidiaries, except those domestic subsidiaries acquired through the acquisitions of AMIS, Catalyst Semiconductor, Inc. (“Catalyst”), PulseCore Holdings (Cayman) Inc. (“PulseCore”), CMD, Sound Design Technologies Ltd. (“SDT”), and SANYO Semiconductor (collectively, the “Guarantor Subsidiaries”), fully and unconditionally guarantee on a joint and several basis ON Semiconductor’s obligations under the Convertible Notes. The Guarantor Subsidiaries include SCI LLC, Semiconductor Components Industries of Rhode Island, Inc., as well as other holding companies whose net assets consist primarily of investments in the joint venture in Leshan, China and equity interests in the Company’s other foreign subsidiaries. ON Semiconductor’s other remaining subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) are not guarantors of the Convertible Notes. The repayment of the unsecured Convertible Notes is subordinated to the senior indebtedness of ON Semiconductor and the Guarantor Subsidiaries on the terms described in the indentures for such Convertible Notes. Condensed consolidated financial information for the issuer of the Convertible Notes, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries is as follows (in millions):
 

22

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(unaudited)

 
Issuer
 
Guarantor
 
 
 
 
 
 
 
ON Semiconductor
Corporation (1)
 
SCI LLC
 
Other
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
As of September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
407.1

 

 
$
252.2

 

 
$
659.3

Short-term investments

 
178.4

 

 

 

 
178.4

Receivables, net

 
57.3

 

 
481.7

 

 
539.0

Inventories,

 
44.8

 

 
656.6

 
5.2

 
706.6

Other current assets

 
8.7
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