10-Q 1 d715527d10q.htm 10-Q 10-Q
Table of Contents

 

 

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 March 28, 2014

Or

 

¨ 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, zip code 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  ¨

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  ¨

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 the 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  ¨
Non-accelerated filer  ¨    (Do not check if a smaller reporting company)    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the issuer’s class of common stock as of the close of business on April 25, 2014:

 

Title of Each Class

  

Number of Shares

Common Stock, par value $0.01 per share    440,989,458

 

 

 


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

Part I: Financial Information

  4

Item 1. Financial Statements (unaudited)

  4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  33

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

43

Item 4. Controls and Procedures

  44

Part II: Other Information

  45

Item 1. Legal Proceedings

  45

Item 1A. Risk Factors

  45

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  46

Item 3. Defaults Upon Senior Securities

  46

Item 4. Mine Safety Disclosures

  46

Item 5. Other Information

  47

Item 6. Exhibits

  49

Signatures

 

50

Exhibit Index

 

(See the glossary of selected terms immediately following this table of contents for definitions of certain abbreviated terms)


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

FORM 10-Q

GLOSSARY OF SELECTED ABBREVIATED TERMS*

 

Abbreviated Term

  

Defined Term

2.625% Notes

   2.625% Convertible Senior Subordinated Notes due 2026

2.625% Notes, Series B

   2.625% Convertible Senior Subordinated Notes due 2026, Series B

Amended and Restated SIP

   ON Semiconductor Corporation Amended and Restated Stock Incentive Plan

AMIS

   AMIS Holdings, Inc.

ASU

   Accounting Standards Update

ASC

   Accounting Standards Codification

ASIC

   Application Specific Integrated Circuit

Catalyst

   Catalyst Semiconductor, Inc.

CMD

   California Micro Devices Corporation

DSP

   Digital signal processing

ESPP

   ON Semiconductor Corporation 2000 Employee Stock Purchase Plan

FASB

   Financial Accounting Standards Board

IP

   Intellectual property

KSS

   System Solutions Group back-end manufacturing facility in Hanyu, Japan

LSI

   Large Scale Integration

PulseCore

   PulseCore Holdings (Cayman) Inc.

SANYO Electric

   SANYO Electric Co., Ltd.

SANYO Semiconductor

   SANYO Semiconductor Co., Ltd.

SCI LLC

   Semiconductor Components Industries, LLC

SDT

   Sound Design Technologies Ltd.

SMBC

   Sumitomo Mitsui Banking Corporation

WSTS

   World Semiconductor Trade Statistics

 

* Terms used, but not defined, within the body of the Form 10-Q are defined in this Glossary.


Table of Contents

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)

 

     March 28,
2014
    December 31,
2013
 

Assets

    

Cash and cash equivalents

   $ 562.0      $ 509.5   

Short-term investments

     55.0        116.2   

Receivables, net

     417.1        383.4   

Inventories

     613.9        611.8   

Other current assets

     89.3        89.3   
  

 

 

   

 

 

 

Total current assets

     1,737.3        1,710.2   

Property, plant and equipment, net

     1,081.4        1,074.2   

Goodwill

     184.6        184.6   

Intangible assets, net

     215.3        223.4   

Other assets

     68.1        64.6   
  

 

 

   

 

 

 

Total assets

   $ 3,286.7      $ 3,257.0   
  

 

 

   

 

 

 

Liabilities, Non-Controlling Interest and Stockholders’ Equity

    

Accounts payable

   $ 276.7      $ 276.8   

Accrued expenses

     222.1        220.3   

Deferred income on sales to distributors

     151.7        140.5   

Current portion of long-term debt (see Note 6)

     173.7        181.6   
  

 

 

   

 

 

 

Total current liabilities

     824.2        819.2   

Long-term debt (see Note 6)

     746.5        760.6   

Other long-term liabilities

     176.1        190.4   
  

 

 

   

 

 

 

Total liabilities

     1,746.8        1,770.2   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 9)

    

ON Semiconductor Corporation stockholders’ equity:

    

Common stock ($0.01 par value, 750,000,000 shares authorized, 518,975,425 and 515,888,942 shares issued, 440,647,392 and 440,250,288 shares outstanding, respectively)

     5.2        5.2   

Additional paid-in capital

     3,228.9        3,210.8   

Accumulated other comprehensive loss

     (46.4     (47.4

Accumulated deficit

     (1,083.7     (1,142.1

Less: treasury stock, at cost; 78,328,033 and 75,638,654 shares, respectively

     (597.1     (572.5
  

 

 

   

 

 

 

Total ON Semiconductor Corporation stockholders’ equity

     1,506.9        1,454.0   

Non-controlling interest in consolidated subsidiary

     33.0        32.8   
  

 

 

   

 

 

 

Total stockholders’ equity

     1,539.9        1,486.8   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 3,286.7      $ 3,257.0   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

4


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in millions, except per share data)

(unaudited)

 

     Quarter Ended  
     March 28,
2014
    March 29,
2013
 

Revenues

   $ 706.5      $ 661.0   

Cost of revenues

     455.7        456.5   
  

 

 

   

 

 

 

Gross profit

     250.8        204.5   

Operating expenses:

    

Research and development

     78.1        88.4   

Selling and marketing

     44.4        39.8   

General and administrative

     41.0        36.2   

Amortization of acquisition-related intangible assets

     8.2        8.4   

Restructuring, asset impairments and other, net

     5.8        (6.0
  

 

 

   

 

 

 

Total operating expenses

     177.5        166.8   
  

 

 

   

 

 

 

Operating income

     73.3        37.7   
  

 

 

   

 

 

 

Other income (expense), net:

    

Interest expense

     (8.1     (10.1

Interest income

     0.2        0.3   

Other

     (0.6     0.9   

Loss on debt exchange

            (3.1
  

 

 

   

 

 

 

Other income (expense), net

     (8.5     (12.0
  

 

 

   

 

 

 

Income before income taxes

     64.8        25.7   

Income tax provision

     (6.2     (2.4
  

 

 

   

 

 

 

Net income

     58.6        23.3   

Less: Net income attributable to non-controlling interest

     (0.2     (0.7
  

 

 

   

 

 

 

Net income attributable to ON Semiconductor Corporation

   $ 58.4      $ 22.6   
  

 

 

   

 

 

 

Comprehensive income (loss), net of tax:

    

Net income

   $ 58.6      $ 23.3   
  

 

 

   

 

 

 

Foreign currency translation adjustments

     (0.4     (8.3

Effects of cash flow hedges

     1.4        (0.9

Unrealized loss on available-for-sale securities

            (0.1
  

 

 

   

 

 

 

Other comprehensive income (loss)

     1.0        (9.3
  

 

 

   

 

 

 

Comprehensive income

     59.6        14.0   

Comprehensive income attributable to non-controlling interest

     (0.2     (0.7
  

 

 

   

 

 

 

Comprehensive income attributable to ON Semiconductor Corporation

   $ 59.4      $ 13.3   
  

 

 

   

 

 

 

Net income per common share attributable to ON Semiconductor Corporation:

    

Basic

   $ 0.13      $ 0.05   
  

 

 

   

 

 

 

Diluted

   $ 0.13      $ 0.05   
  

 

 

   

 

 

 

Weighted average common shares outstanding:

    

Basic

     440.4        449.5   
  

 

 

   

 

 

 

Diluted

     444.5        452.5   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

5


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions) 

(unaudited)

 

     Three Months Ended  
     March 28,
2014
    March 29,
2013
 

Cash flows from operating activities:

    

Net income

   $ 58.6      $ 23.3   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     52.4        51.3   

Gain on sale or disposal of fixed assets

     (0.3     (7.4

Loss on debt exchange

     —          3.1   

Amortization of debt issuance costs

     0.3        0.3   

Provision for excess inventories

     6.8        15.9   

Non-cash share-based compensation expense

     8.5        5.8   

Non-cash interest

     1.6        3.1   

Non-cash foreign currency translation gain

     —          (21.0

Other

     1.8        0.7   

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

    

Receivables

     (33.0     (14.8

Inventories

     (8.8     (5.3

Other assets

     (5.2     37.3   

Accounts payable

     0.4        (9.0

Accrued expenses

     (6.1     1.9   

Deferred income on sales to distributors

     11.2        (0.7

Other long-term liabilities

     (13.3     0.7   
  

 

 

   

 

 

 

Net cash provided by operating activities

     74.9        85.2   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (47.7     (38.9

Proceeds from sales of property, plant and equipment

     0.2        8.0   

Deposits utilized for purchases of property, plant and equipment

     1.2        1.4   

Proceeds from held-to-maturity securities

     63.5        73.5   

Purchases of held-to-maturity securities

     (2.3     (6.0
  

 

 

   

 

 

 

Net cash provided by investing activities

     14.9        38.0   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of stock options

     9.6        3.8   

Payments of tax withholding for restricted shares

     (4.5     (2.2

Repurchase of common stock

     (19.4     —     

Proceeds from debt issuance

     —          26.2   

Payment of capital lease obligations

     (11.1     (11.5

Repayment of long-term debt

     (12.9     (81.5
  

 

 

   

 

 

 

Net cash used in financing activities

     (38.3     (65.2
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     1.0        (7.9
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     52.5        50.1   

Cash and cash equivalents, beginning of period

     509.5        486.9   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 562.0      $ 537.0   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

6


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1: Background and Basis of Presentation

ON Semiconductor Corporation, together with its wholly-owned and majority-owned subsidiaries (“ON Semiconductor” or the “Company”), uses a thirteen-week fiscal quarter accounting period for each quarter, with the first three quarters ending on the last Friday in March, June and September, and the fourth quarter ending on December 31. The three months ended March 28, 2014 and March 29, 2013 each contained 87 days and 88 days, respectively.

The accompanying unaudited financial statements as of March 28, 2014 have been prepared in accordance with generally accepted accounting principles in the United States of America for unaudited interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America for audited financial statements. Additionally, the balance sheet as of December 31, 2013 was derived from audited financial statements, but also does not include all disclosures required by accounting principles generally accepted in the United States of America 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, 2013 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (“2013 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 Company condensed certain prior year amounts in our consolidated financial statements to conform to the current year presentation.

The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America 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 following: (i) measurement of valuation allowances relating to trade receivables, inventories and deferred tax assets; (ii) estimates of future payouts for customer incentives, warranties, and restructuring activities; (iii) assumptions surrounding future pension obligations; (iv) fair values of stock options and of financial instruments (including derivative financial instruments); (v) evaluations of uncertain tax positions; and (vi) future cash flows used to assess and test for impairment of long-lived assets and, if applicable, goodwill. Actual results could differ from these estimates.

Note 2: Recent Accounting Pronouncements

ASU No. 2013-11 - “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”)

In July 2013, the FASB issued ASU 2013-11, which applies to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Pursuant to ASU 2013-11, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. The amendments contained in ASU 2013-11 do not require new recurring disclosures. The related amendments are effective for reporting periods beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on the Company’s Consolidated Financial Statements.

 

7


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Note 3: Goodwill and Intangible Assets

Goodwill

The following table summarizes goodwill by relevant operating segment as of March 28, 2014 and December 31, 2013 (in millions):

 

     Balance as of March 28, 2014      Balance as of December 31, 2013  
     Goodwill      Accumulated
Impairment
Losses
    Carrying
Value
     Goodwill      Accumulated
Impairment
Losses
    Carrying
Value
 

Operating Segment:

               

Application Products Group

   $ 547.4       $ (410.2   $ 137.2       $ 547.4       $ (410.2   $ 137.2   

Standard Products Group

     76.0         (28.6     47.4         76.0         (28.6     47.4   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 623.4       $ (438.8   $ 184.6       $ 623.4       $ (438.8   $ 184.6   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Goodwill is tested for impairment annually on the first day of the fourth quarter unless a triggering event would require an interim 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. While management did not identify any triggering events through March 28, 2014 that would require an interim impairment analysis, the Company’s current projections include assumptions of current industry and market conditions, which could negatively change, and in turn, may adversely impact the fair value of the Company’s goodwill, intangible assets and other long-lived assets. As a result, the carrying value of the reporting units containing the Company’s goodwill may exceed their fair value in future impairment tests.

Intangible Assets

Intangible assets, net, were as follows as of March 28, 2014 and December 31, 2013 (in millions):

 

     March 28, 2014  
     Original
Cost
     Accumulated
Amortization
    Foreign Currency
Translation  Adjustment
    Accumulated
Impairment
    Carrying
Value
     Useful Life
(in Years)
 

Intellectual property

   $ 13.9       $ (9.5   $ —        $ (0.4   $ 4.0         5-12   

Customer relationships

     280.3         (109.0     (27.3     (23.0     121.0         5-18   

Patents

     43.7         (19.5     —          (13.7     10.5         12   

Developed technology

     146.2         (70.5     —          (2.4     73.3         5-12   

Trademarks

     14.0         (6.4     —          (1.1     6.5         15   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

Total intangibles

   $ 498.1       $ (214.9   $ (27.3   $ (40.6   $ 215.3      
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

     December 31, 2013  
     Original
Cost
     Accumulated
Amortization
    Foreign Currency
Translation  Adjustment
    Accumulated
Impairment
Losses
    Carrying
Value
     Useful Life
(in Years)
 

Intellectual property

   $ 13.9       $ (9.4   $ —        $ (0.4   $ 4.1         5-12   

Customer relationships

     280.3         (105.5     (27.4     (23.0     124.4         5-18   

Patents

     43.7         (19.0     —          (13.7     11.0         12   

Developed technology

     146.2         (66.7     —          (2.4     77.1         5-12   

Trademarks

     14.0         (6.1     —          (1.1     6.8         15   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

Total intangibles

   $ 498.1       $ (206.7   $ (27.4   $ (40.6   $ 223.4      
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

Amortization expense for acquisition-related intangible assets amounted to $8.2 million and $8.4 million for the quarters ended March 28, 2014 and March 29, 2013, respectively. Amortization expense for intangible assets is expected to be as follows over the next five years and thereafter (in millions):

 

8


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Period

   Estimated
Amortization
Expense
 

Remainder of 2014

   $ 24.4   

2015

     31.7   

2016

     30.6   

2017

     27.7   

2018

     24.4   

Thereafter

     76.5   
  

 

 

 

Total estimated amortization expense

   $ 215.3   
  

 

 

 

Note 4: Restructuring, Asset Impairments and Other, Net

A summary description of the activity included in the “Restructuring, Asset Impairments and Other, Net” caption on the Company’s Consolidated Statements of Operations and Comprehensive Income for the quarter ended March 28, 2014 is as follows (in millions):

 

      Restructuring      Other     Total  

Quarter ended March 28, 2014

       

System Solutions Group Voluntary Retirement Program

   $ 5.0       $ (2.8   $ 2.2   

KSS facility closure

     3.6         —          3.6   
  

 

 

    

 

 

   

 

 

 

Total

   $ 8.6       $ (2.8   $ 5.8   
  

 

 

    

 

 

   

 

 

 

The following is a rollforward of the accrued restructuring charges from December 31, 2013 to March 28, 2014 (in millions):

 

      Balance as of
December 31, 2013
     Charges      Usage     Balance as of
March 28, 2014
 

Estimated employee separation charges

   $ 25.2       $ 8.3       $ (13.8   $ 19.7   

Estimated costs to exit

     1.0         0.3         (0.5     0.8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 26.2       $ 8.6       $ (14.3   $ 20.5   
  

 

 

    

 

 

    

 

 

   

 

 

 

Activity related to the Company’s Restructuring, asset impairments and other, net for programs that had not been completed as of March 28, 2014, is as follows:

System Solutions Group Voluntary Retirement Program

During the fourth quarter of 2013, the Company initiated a voluntary retirement program for employees of certain of its System Solutions Group subsidiaries in Japan (the “Q4 2013 Voluntary Retirement Program”). Approximately 350 employees opted to retire under the Q4 2013 Voluntary Retirement Program of which 290 employees had retired by March 28, 2014. The remaining employees who accepted retirement packages are expected to retire by the end of 2014. For the quarter ended March 28, 2014, the Company recognized approximately $5.0 million of employee separation charges related to the Q4 2013 Voluntary Retirement Program. The company expects to incur an additional $1.6 million in employee separation charges related to this program through the end of 2014, offset by a pension curtailment benefit of approximately $1.7 million.

As part of these restructuring activities, approximately 70 contractor positions were also identified for elimination, of which approximately 15 remain to be terminated by the end of 2014.

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

As a result of the System Solutions Group headcount reductions, the Company recognized a $2.8 million pension curtailment benefit associated with the affected employees during the quarter ended March 28, 2014, which is recorded in Restructuring, asset impairments and other, net. See Note 5: “Balance Sheet Information” for additional information.

As of March 28, 2014, the accrued liability associated with employee separation charges was $8.8 million for the Q4 2013 Voluntary Retirement Program.

KSS Facility Closure

On October 6, 2013, the Company announced a plan to close KSS by the end of the second quarter of 2014 (the “KSS Plan”). Pursuant to the KSS Plan, a majority of the production from KSS will be transferred to other of the Company’s manufacturing facilities. The KSS Plan includes the elimination of approximately 170 full time and 40 contract employees. During the quarter ended March 28, 2014, the Company recorded approximately $3.3 million of employee separation charges and 0.3 million of exit costs related to the KSS Plan. The Company expects to record additional KSS Plan severance costs and related employee benefit plan expenses of approximately $5.1 million along with other exit costs of approximately $0.7 million to $1.7 million, offset by a pension curtailment gain of approximately $2.1 million through the end of 2014.

As of March 28, 2014, the accrued liability associated with employee separation charges was $10.4 million for the KSS Plan.

 

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Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Note 5: Balance Sheet Information

Certain significant amounts included in the Company’s balance sheet as of March 28, 2014 and December 31, 2013 consist of the following (dollars in millions):

 

     March 28,
2014
    December 31,
2013
 

Receivables, net:

    

Accounts receivable

   $ 418.2      $ 384.4   

Less: Allowance for doubtful accounts

     (1.1     (1.0
  

 

 

   

 

 

 
   $ 417.1      $ 383.4   
  

 

 

   

 

 

 

Inventories:

    

Raw materials

   $ 95.9      $ 89.2   

Work in process

     326.4        319.6   

Finished goods

     191.6        203.0   
  

 

 

   

 

 

 
   $ 613.9      $ 611.8   
  

 

 

   

 

 

 

Other current assets:

    

Prepaid expenses

   $ 28.0      $ 24.8   

Value added and other income tax receivables

     30.8        31.7   

Other

     30.5        32.8   
  

 

 

   

 

 

 
   $ 89.3      $ 89.3   
  

 

 

   

 

 

 

Property, plant and equipment, net (1):

    

Land

   $ 52.7      $ 52.3   

Buildings

     476.5        467.7   

Machinery and equipment

     1,954.9        1,918.4   
  

 

 

   

 

 

 

Total property, plant and equipment

     2,484.1        2,438.4   

Less: Accumulated depreciation

     (1,402.7     (1,364.2
  

 

 

   

 

 

 
   $ 1,081.4      $ 1,074.2   
  

 

 

   

 

 

 

Accrued expenses:

    

Accrued payroll

   $ 89.9      $ 91.3   

Sales related reserves

     54.9        54.2   

Restructuring reserves

     20.5        26.2   

Accrued pension liability

     10.4        10.4   

Accrued interest

     5.2        1.9   

Other

     41.2        36.3   
  

 

 

   

 

 

 
   $ 222.1      $ 220.3   
  

 

 

   

 

 

 

 

(1) Included in property, plant, and equipment are approximately $9.1 million of fixed assets which are held-for-sale as of March 28, 2014.

Warranty Reserves

The activity related to the Company’s warranty reserves for the three months ended March 28, 2014 and March 29, 2013, respectively, is as follows (in millions):

 

     Three Months Ended  
     March 28,
2014
    March 29,
2013
 

Beginning Balance

   $ 6.0      $ 10.2   

Provision

     0.4        1.2   

Usage

     (0.2     (3.8
  

 

 

   

 

 

 

Ending Balance

   $ 6.2      $ 7.6   
  

 

 

   

 

 

 

 

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Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Defined Benefit Plans

The Company maintains defined benefit plans for certain of its foreign subsidiaries. The Company recognizes the aggregate amount of all overfunded plans as assets and the aggregate amount of all underfunded plans as liabilities in its financial statements. As of March 28, 2014, the total accrued pension liability for underfunded plans was $117.4 million, of which the current portion of $10.4 million was classified as accrued expenses. As of December 31, 2013, the total accrued pension liability for underfunded plans was $128.9 million, of which the current portion of $10.4 million was classified as accrued expenses. As of March 28, 2014 and December 31, 2013, the total pension asset for overfunded plans was $0.6 million and $0.6 million, respectively.

The Company recorded a pension curtailment gain of $2.8 million included in Restructuring, asset impairments and other, net for the quarter ended March 28, 2014 related to the Q4 2013 Voluntary Retirement Program. See Note 4: “Restructuring, Asset Impairments and Other, Net” for additional information.

The components of the Company’s net periodic pension expense for the quarters ended March 28, 2014 and March 29, 2013 are as follows (in millions):

 

     Quarter Ended  
     March 28,
2014
    March 29,
2013
 

Service cost

   $ 2.5      $ 3.7   

Interest cost

     1.5        2.0   

Expected return on plan assets

     (0.9     (1.1

Curtailment gain

     (2.8     (9.0

Actuarial loss

     —          13.6   
  

 

 

   

 

 

 

Total net periodic pension cost

   $ 0.3      $ 9.2   
  

 

 

   

 

 

 

 

12


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Note 6: Long-Term Debt

The Company’s long-term debt consists of the following (dollars in millions):

 

     March 28,
2014
    December 31,
2013
 

Senior Revolving Credit Facility due 2018, interest payable quarterly at 1.75% and 2.00% respectively

   $ 120.0      $ 120.0   

Loan with Japanese bank due 2014 through 2018, interest payable quarterly at 1.98% and 2.00%, respectively (1)

     264.3        273.7   

2.625% Notes, Series B (net of discount of $20.1 million and $21.7 million, respectively) (2)

     336.8        335.2   

Loan with Hong Kong bank, interest payable weekly at 1.90% and 1.91%, respectively

     40.0        40.0   

Loans with Philippine bank due 2014 through 2015, interest payable monthly and quarterly at an average rate of 2.16% and 2.16%, respectively

     37.9        39.2   

Loan with Chinese bank due 2014, interest payable quarterly at 3.34% and 3.34%, respectively

     7.0        7.0   

Loan with Singapore bank, interest payable weekly at 1.92% and 1.94%, respectively

     15.0        15.0   

Loan with British finance company, interest payable monthly at 1.55% and 1.57%, respectively

     —          0.2   

U.S. real estate mortgages payable monthly through 2016 at an average rate of 4.86%

     27.7        28.1   

U.S. equipment financing payable monthly through 2016 at 2.94%

     8.3        9.5   

Canada equipment financing payable monthly through 2017 at 3.81%

     5.5        5.9   

Canada revolving line of credit, interest payable quarterly at 1.84% and 1.84%, respectively

     15.0        15.0   

Capital lease obligations

     42.7        53.4   
  

 

 

   

 

 

 

Long-term debt, including current maturities

     920.2        942.2   

Less: Current maturities

     (173.7     (181.6
  

 

 

   

 

 

 

Long-term debt

   $ 746.5      $ 760.6   
  

 

 

   

 

 

 

 

(1) This loan represents SCI LLC’s unsecured loan with SMBC, which is guaranteed by the Company.
(2) Interest is payable on June 15 and December 15 of each year at 2.625% annually. The 2.625% Notes, Series B may be put back to the Company at the option of the holders of the notes on December 15 of 2016 and 2021 or called at the option of the Company on or after December 20, 2016.

Expected maturities relating to the Company’s long-term debt as of March 28, 2014 are as follows (in millions):

 

Period

        Expected
Maturities
 

Remainder of 2014

     $ 157.7   

2015

       74.1   

2016

       425.0   

2017

       39.1   

2018

       243.5   

Thereafter

       0.9   
    

 

 

 

Total

     $ 940.3   
    

 

 

 

For purposes of the table above, the convertible debt is assumed to mature at the earliest put date.

For additional information with respect to the Company’s long-term debt, see Note 8: “Long-Term Debt” of the notes to the Company’s audited Consolidated Financial Statements included in Part IV, Item 15 of the 2013 Form 10-K.

Debt Guarantees

ON Semiconductor was the sole issuer of the 2.625% Notes, Series B. See Note 15: “Guarantor and Non-Guarantor Statements” for the condensed consolidated financial information for the issuers of the 2.625% Notes, Series B, the guarantor subsidiaries and the non-guarantor subsidiaries.

 

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Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Note 7: Earnings Per Share and Equity

Earnings Per Share

Calculations of net income per common share attributable to ON Semiconductor are as follows (in millions, except per share data):

 

      Quarter Ended  
     March 28,
2014
     March 29,
2013
 

Net income attributable to ON Semiconductor Corporation

   $ 58.4       $ 22.6   
  

 

 

    

 

 

 

Basic weighted average common shares outstanding

     440.4         449.5   

Add: Incremental shares for:

     

Dilutive effect of share-based awards

     4.1         3.0   

Dilutive effect of Convertible Notes

     —           —     
  

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     444.5         452.5   
  

 

 

    

 

 

 

Net income per common share attributable to ON Semiconductor Corporation:

     

Basic

   $ 0.13       $ 0.05   
  

 

 

    

 

 

 

Diluted

   $ 0.13       $ 0.05   
  

 

 

    

 

 

 

Basic net income per common share is computed by dividing net income attributable to ON Semiconductor Corporation by the weighted average number of common shares outstanding during the period.

The number of incremental shares from the assumed exercise of stock options and assumed issuance of shares relating to restricted stock units is calculated by applying the treasury stock method. Share-based awards whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income per share calculation. The excluded number of anti-dilutive share-based awards was approximately 7.7 million and 12.5 million for the quarters ended March 28, 2014 and March 29, 2013, respectively.

The dilutive impact related to the Company’s convertible notes is determined in accordance with the net share settlement requirements prescribed by ASC Topic 260, Earnings Per Share. Under the net share settlement calculation, the Company’s convertible notes are assumed to be convertible into cash up to the par value, with the excess of par value being convertible into common stock. A dilutive effect occurs when the stock price exceeds the conversion price for each of the convertible notes. In periods when the share price is lower than the conversion price, the impact is anti-dilutive and therefore has no impact on the Company’s earnings per share calculations.

 

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Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Equity

Share Repurchase Program

Information relating to the Company’s share repurchase program is as follows (in millions, except per share data):

 

     Quarter Ended  
     March 28, 2014  

Number of repurchased shares (1)

     2.2   

Beginning accrued share repurchases (2)

   $ 0.6   

Aggregate purchase price

     20.1   

Fees, commissions and other expenses

     —     

Less: ending accrued share repurchases (3)

     (1.3
  

 

 

 

Total cash used for share repurchases

   $ 19.4   
  

 

 

 

Weighted-average purchase price per share

   $ 9.12   

Available for future purchases at period end

   $ 123.3   

 

(1) None of these shares had been reissued or retired as of March 28, 2014, but may be reissued or retired by the Company at a later date.
(2) Represents unpaid amounts recorded in accrued expenses on the Company’s Consolidated Balance Sheet as of December 31, 2013.
(3) Represents unpaid amounts recorded in accrued expenses on the Company’s Consolidated Balance Sheet as of March 28, 2014.

Shares for Restricted Stock Units Tax Withholding

Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the accompanying consolidated financial statements. Shares, with a fair market value equal to the applicable statutory minimum amount of the employee withholding taxes due, are withheld by the Company upon the vesting of restricted stock units to pay the applicable statutory minimum amount of employee withholding taxes and are considered common stock repurchases. The Company then pays the applicable statutory minimum amount of withholding taxes in cash. The amount remitted for the quarter ended March 28, 2014 was $4.5 million, for which the Company withheld approximately 0.5 million shares of common stock that were underlying the restricted stock units that vested. None of these shares had been reissued or retired as of March 28, 2014; however, these shares may be reissued or retired by the Company at a later date.

Non-Controlling Interest

The Company’s entity which operates assembly and test operations in Leshan, China is owned by a joint venture company, Leshan-Phoenix Semiconductor Company Limited (“Leshan”). The Company owns a majority of the outstanding equity interests in Leshan and its investment in Leshan has been consolidated in the Company’s financial statements.

At December 31, 2013, the non-controlling interest balance was $32.8 million. This balance was increased to $33.0 million at March 28, 2014 due to the non-controlling interest’s $0.2 million share of the earnings for the quarter ended March 28, 2014.

At December 31, 2012, the non-controlling interest balance was $29.6 million. This balance increased to $30.3 million at March 29, 2013 due to the non-controlling interest’s $0.7 million share of the earnings for the quarter ended March 29, 2013.

 

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Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Note 8: Share-Based Compensation

Total share-based compensation expense related to the Company’s employee stock options, restricted stock units and ESPP for the quarters ended March 28, 2014 and March 29, 2013 was comprised as follows (in millions):

 

      Quarter Ended  
     March 28,
2014
     March 29,
2013
 

Cost of revenues

   $ 1.4       $ 1.1   

Research and development

     1.8         1.4   

Selling and marketing

     1.5         1.1   

General and administrative

     3.8         2.2   
  

 

 

    

 

 

 

Share-based compensation expense before income taxes

   $ 8.5       $ 5.8   
  

 

 

    

 

 

 

Related income tax benefits (1)

     —           —     
  

 

 

    

 

 

 

Share-based compensation expense, net of taxes

   $ 8.5       $ 5.8   
  

 

 

    

 

 

 

 

(1) 

A majority of the Company’s share-based compensation relates to its domestic subsidiaries; therefore, no related deferred income tax benefits are recorded due to historical net operating losses at those subsidiaries.

At March 28, 2014, total estimated unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested stock options granted prior to that date was $4.8 million. At March 28, 2014, total estimated unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested restricted stock units with time-based service conditions and performance-based vesting criteria granted prior to that date was $65.8 million. The total intrinsic value of stock options exercised during the quarter ended March 28, 2014 was $3.3 million. The Company recorded cash received from the exercise of stock options of $9.6 million during the quarter ended March 28, 2014. The Company recorded no related income tax benefits during the quarter ended March 28, 2014.

Share-Based Compensation Information

Share-based compensation expense recognized in the Consolidated Statement of Operations and Comprehensive Income is based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures for stock options were estimated to be approximately 11.0% and 11.0% in the quarters ended March 28, 2014 and March 29, 2013, respectively. Pre-vesting forfeitures for restricted stock units were estimated to be approximately 5.0% and 4.0% in the quarters ended March 28, 2014 and March 29, 2013, respectively.

Shares Available

As of December 31, 2013, there was an aggregate of 37.4 million shares of common stock available for grant under the Company’s Amended and Restated SIP and 4.3 million shares available for issuance under the ESPP. As of March 28, 2014, there was an aggregate of 37.1 million shares of common stock available for grant under the Amended and Restated SIP and 4.3 million shares available for issuance under the ESPP.

 

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Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Stock Options

A summary of stock option transactions follows (in millions except per share and term data):

 

     Quarter Ended March 28, 2014  
     Number of
Shares
    Weighted Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Term (in years)
     Aggregate
Intrinsic  Value
(In-The-
Money)
 

Outstanding at December 31, 2013

     14.0      $ 7.89         

Granted

     —          —           

Exercised

     (1.4     6.66         

Canceled

     (0.2     9.14         
  

 

 

         

Outstanding at March 28, 2014

     12.4      $ 8.01         3.38       $ 19.3   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at March 28, 2014

     10.1      $ 8.16         3.03       $ 15.0   
  

 

 

   

 

 

    

 

 

    

 

 

 

Additional information about stock options outstanding at March 28, 2014 with exercise prices less than or above $9.19 per share, the effective closing price of the Company’s common stock at March 28, 2014, follows (number of shares in millions):

 

     Exercisable      Unexercisable      Total  

Exercise Prices

   Number of
Shares
     Weighted
Average
Exercise Price
     Number of
Shares
     Weighted
Average
Exercise Price
     Number of
Shares
     Weighted
Average
Exercise Price
 

Less than $9.19

     6.2       $ 6.75         2.2       $ 7.25         8.4       $ 6.88   

Above $9.19

     3.9       $ 10.37         0.1       $ 10.64         4.0       $ 10.37   
  

 

 

       

 

 

       

 

 

    

Total outstanding

     10.1       $ 8.16         2.3       $ 7.40         12.4       $ 8.01   
  

 

 

       

 

 

       

 

 

    

Restricted Stock Units

Restricted stock units vest over one to three years with service-based requirements or performance-based requirements and are payable in shares of the Company’s common stock upon vesting. The following table presents a summary of the status of the Company’s restricted stock units granted to certain officers and employees of the Company as of March 28, 2014, and changes during the quarter ended March 28, 2014 (number of shares in millions):

 

     Quarter Ended March 28, 2014  
     Number of Shares     Weighted Average
Grant Date Fair
Value
 

Non-vested shares underlying restricted stock units at December 31, 2013

     10.8      $ 8.52   

Granted

     3.4        9.33   

Released

     (1.7     8.34   

Forfeited

     (3.1     10.17   
  

 

 

   

 

 

 

Non-vested shares underlying restricted stock units at March 28, 2014

     9.4      $ 8.31   
  

 

 

   

 

 

 

 

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Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Note 9: Commitments and Contingencies

Leases

The following is a schedule by year of future minimum lease obligations under non-cancelable operating leases as of March 28, 2014 (in millions):

 

Remainder of 2014

   $ 14.4   

2015

     14.7   

2016

     11.4   

2017

     9.0   

2018

     7.0   

Thereafter

     32.7   
  

 

 

 

Total

   $ 89.2   
  

 

 

 

Environmental Contingencies

The Company’s headquarters in Phoenix, Arizona is located on property that is a “Superfund” site, which is a property listed on the National Priorities List and subject to clean-up activities under the Comprehensive Environmental Response, Compensation, and Liability Act. Motorola and Freescale have been involved in the clean-up of on-site solvent contaminated soil and groundwater and off-site contaminated groundwater pursuant to consent decrees with the State of Arizona. As part of the Company’s August 4, 1999 recapitalization (the “Recapitalization”), Motorola retained responsibility for this contamination, and Motorola and Freescale have agreed to indemnify the Company with respect to remediation costs and other costs or liabilities related to this matter.

As part of the Recapitalization, the Company was granted various manufacturing facilities, one of which was located in the Czech Republic. In regards to this site, the Company has ongoing remediation projects to respond to releases of hazardous substances that occurred prior to the Recapitalization during the years that this facility was operated by government-owned entities. In each case, the remediation project consists primarily of monitoring groundwater wells located on-site and off-site with additional action plans developed to respond in the event activity levels are exceeded at each of the respective locations. The government of the Czech Republic has agreed to indemnify the Company and the respective subsidiaries, subject to specified limitations, for remediation costs associated with this historical contamination. Based upon the information available, total future remediation costs to the Company are not expected to be material.

The Company’s design center in East Greenwich, Rhode Island is located on property that has localized soil contamination. In connection with the purchase of the facility, the Company entered into a settlement agreement and covenant not to sue with the State of Rhode Island. This agreement requires that remedial actions be undertaken and a quarterly groundwater monitoring program be initiated by the former owners of the property. Based on the information available, any costs to the Company in connection with this matter have not been, and are not expected to be, material.

As a result of its acquisition of AMIS, the Company is a “primary responsible party” to an environmental remediation and clean-up at AMIS’s former corporate headquarters in Santa Clara, California. Costs incurred by AMIS have included implementation of the clean-up plan, operations and maintenance of remediation systems, and other project management costs. However, AMIS’s former parent company, a subsidiary of Nippon Mining, contractually agreed to indemnify AMIS and the Company for any obligations relating to environmental remediation and clean-up at this location. Based on the information available, any costs to the Company in connection with this matter have not been, and are not expected to be, material.

The Company’s former manufacturing location in Aizu, Japan is located on property where soil and ground water contamination has been detected. The Company believes that the contamination originally occurred during a time when the facility was operated by a prior owner. The Company has worked with local authorities to implement a remediation plan and expects remaining remediation costs to be covered by insurance. Based on information available, any costs to the Company in connection with this matter have not been, and are not expected to be, material.

Financing Contingencies

In the normal course of business, the Company provides standby letters of credit or other guarantee instruments to certain parties initiated by either the Company or its subsidiaries, as required for transactions such as, but not limited to, purchase commitments, agreements to mitigate collection risk, leases, utilities or customs guarantees. The Company’s senior revolving

 

18


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

credit facility includes $40.0 million of availability for the issuance of letters of credit. A $0.2 million letter of credit was outstanding under the senior revolving credit facility as of March 28, 2014. The Company also had outstanding guarantees and letters of credit outside of its senior revolving credit facility totaling $6.2 million as of March 28, 2014.

As part of securing financing in the normal course of business, the Company issued guarantees related to its receivables financing, certain capital lease obligations, equipment financing, lines of credit and real estate mortgages, which totaled approximately $69.7 million as of March 28, 2014. The Company is also a guarantor of SCI LLC’s unsecured loan with SMBC, which had a balance of $264.3 million as of March 28, 2014. See Note 6: “Long-Term Debt” for further information on this loan.

Based on historical experience and information currently available, the Company believes that in the foreseeable future it will not be required to make payments under the standby letters of credit or guarantee arrangements.

Indemnification Contingencies

The Company is a party to a variety of agreements entered into in the ordinary course of business pursuant to which it may be obligated to indemnify the other parties for certain liabilities that arise out of or relate to the subject matter of the agreements. Some of the agreements entered into by the Company require it to indemnify the other party against losses due to IP infringement, property damage including environmental contamination, personal injury, failure to comply with applicable laws, the Company’s negligence or willful misconduct, or breach of representations and warranties and covenants related to such matters as title to sold assets.

The Company faces risk of exposure to warranty and product liability claims in the event that its products fail to perform as expected or such failure of its products results, or is alleged to result, in economic damage, bodily injury or property damage. In addition, if any of the Company’s designed products are alleged to be defective, the Company may be required to participate in their recall. Depending on the significance of any particular customer and other relevant factors, the Company may agree to provide more favorable rights to such customer for valid defective product claims.

The Company and its subsidiaries provide for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, by-laws, articles of association or similar organizational documents, as the case may be. The Company maintains directors’ and officers’ insurance, which should enable it to recover a portion of any future amounts paid.

While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under any of these indemnities have not had a material effect on the Company’s business, financial condition, results of operations or cash flows. Additionally, the Company does not believe that any amounts that it may be required to pay under these indemnities in the future will be material to the Company’s business, financial position, results of operations or cash flows.

Legal Matters

The Company is currently involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters, including the matters described or referred to in the previous paragraphs, will have a material effect on the Company’s financial condition, results of operations or cash flows. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company’s business, consolidated financial position, results of operations or cash flows could be materially and adversely affected.

 

19


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Note 10: Fair Value Measurements

Fair Value of Financial Instruments

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 28, 2014 and December 31, 2013 (in millions):

 

     Balance as of
March  28, 2014
     Quoted Prices in
Active  Markets (Level 1)
     Balance as of
December 31, 2013
     Quoted Prices in
Active  Markets (Level 1)
 

Description

           

Assets:

           

Cash and cash equivalents:

           

Demand and time deposits

   $ 438.9       $ 438.9       $ 447.5       $ 447.5   

Money market funds

     123.1         123.1         62.0         62.0   

Other Current Assets:

           

Foreign currency exchange contracts

   $ 0.1       $ 0.1       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign currency exchange contracts

   $ —         $ —         $ 0.1       $ 0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments have an original maturity to the Company between three months and one year, are classified as held-to-maturity and are carried at amortized cost as the Company has the intent and the ability to hold these securities until maturity. Short-term investments classified as held-to-maturity as of March 28, 2014 and December 31, 2013 were as follows (in millions):

 

      Balance at March 28, 2014      Balance at December 31, 2013  
      Carried at
Amortized Cost
     Fair Value      Carried at
Amortized Cost
     Fair Value  

Short-term investments held-to-maturity

           

Commercial paper

   $ 11.5       $ 11.5       $ 15.5       $ 15.5   

Corporate bonds

     43.5         43.5         93.7         93.7   

Government agencies

     —           —           7.0         7.0   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 55.0       $ 55.0       $ 116.2       $ 116.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s financial assets are valued using market prices on active markets (Level 1). The Company’s short-term investments balance of $55.0 million as of March 28, 2014 is classified as held-to-maturity and is carried at amortized cost. There was no unrealized gain or loss on these short-term investments as of March 28, 2014.

The carrying amounts of other current assets and liabilities, such as accounts receivable and accounts payable, approximate fair value based on the short-term nature of these instruments.

Fair Value of Long-Term Debt, Including Current Portion

The carrying amounts and fair values of the Company’s long-term borrowings (excluding capital lease obligations, real estate mortgages and equipment financing) as of March 28, 2014 and December 31, 2013 are as follows (in millions):

 

      March 28, 2014      December 31, 2013  
      Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Long-term debt, including current portion

           

Convertible Notes

   $ 336.8       $ 431.9       $ 335.2       $ 392.6   

Long-term debt

   $ 499.2       $ 500.1       $ 510.2       $ 511.4   

The fair value of the Company’s Convertible Notes was estimated based on market prices in active markets (Level 1). The fair value of other long-term debt was estimated based on discounting the remaining principal and interest payments using current market rates for similar debt (Level 2) as of March 28, 2014 and December 31, 2013.

 

20


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Note 11: Financial Instruments

Foreign Currencies

As a multinational business, the Company’s transactions are denominated in a variety of currencies. When appropriate, the Company uses forward foreign currency contracts to reduce its overall exposure to the effects of currency fluctuations on its results of operations and cash flows. The Company’s policy prohibits trading in currencies for which there are no underlying exposures, or entering into trades for any currency to intentionally increase the underlying exposure.

The Company primarily hedges existing assets and liabilities associated with transactions currently on its balance sheet.

As of March 28, 2014 and December 31, 2013, the Company had outstanding foreign exchange contracts with notional amounts of $116.6 million and $101.7 million, respectively. Such contracts were obtained through financial institutions and were scheduled to mature within one to three months. Management believes that these financial instruments should not subject the Company to increased risks from foreign exchange movements because gains and losses on these contracts should offset losses and gains on the underlying assets, liabilities and transactions to which they are related. The following schedule shows the Company’s net foreign exchange positions in U.S. dollars as of March 28, 2014 and December 31, 2013 (in millions):

 

     March 28, 2014      December 31, 2013  
     Buy (Sell)     Notional Amount      Buy (Sell)     Notional Amount  

Euro

   $ (36.3   $ 36.3       $ (30.5   $ 30.5   

Japanese Yen

     (9.2     9.2         (6.7     6.7   

Malaysian Ringgit

     37.8        37.8         35.8        35.8   

Philippine Peso

     15.6        15.6         11.7        11.7   

Other Currencies

     11.6        17.7         10.6        17.0   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 19.5      $ 116.6       $ 20.9      $ 101.7   
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company is exposed to credit-related losses if counterparties to its foreign exchange contracts fail to perform their obligations. As of March 28, 2014, the counterparties to the Company’s foreign exchange contracts are highly rated financial institutions and no credit-related losses are anticipated. Amounts payable or receivable under the contracts are included in other current assets or accrued expenses in the accompanying Consolidated Balance Sheet. For the quarter ended March 28, 2014, the realized and unrealized foreign currency transaction loss was $0.7 million. For the quarter ended March 29, 2013, the realized and unrealized foreign currency transaction gain was $0.7 million.

Cash Flow Hedges

The Company is exposed to global market risks associated with fluctuations in interest rates and foreign currency exchange rates. The Company addresses these risks through controlled management that includes the use of derivative financial instruments to economically hedge or reduce these exposures. The Company does not enter into derivative financial instruments for trading or speculative purposes.

The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies will be adversely affected by changes in exchange rates. The Company enters into forward contracts that are designated as foreign-currency cash flow hedges of selected forecasted payments denominated in currencies other than U.S. dollars. All the contracts mature within 12 months and upon maturity, the amount recorded in accumulated other comprehensive income is reclassified into earnings. The Company documents all relationships between designated hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions.

All derivatives are recognized on the balance sheet at their fair value and classified based on the instrument’s maturity date. The total notional amount of outstanding derivatives designated as cash flow hedges as of March 28, 2014 was approximately $47.8 million, which is primarily comprised of cash flow hedges for Malaysian Ringgit/U.S. dollar and Philippine Peso/U.S. dollar currency pairs.

 

21


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

For the quarter ended March 28, 2014, the Company recorded a net loss of $1.3 million associated with cash flow hedges recognized as a component of cost of revenues. As of March 28, 2014, the Company had a $0.4 million liability balance for contracts designated as cash flow hedging instruments that were classified as other liabilities. As of December 31, 2013, the Company had a $1.8 million liability balance for contracts designated as cash flow hedging instruments which were classified as other liabilities.

Note 12: Changes in Accumulated Other Comprehensive Loss

Amounts comprising the Company’s accumulated other comprehensive loss and reclassifications for the quarter ended March 28, 2014 are as follows (net of tax of $0, in millions):

 

     Foreign Currency
Translation
Adjustments
    Effects of Cash
Flow Hedges
    Unrealized Gains
and Losses on
Available-for-Sale
Securities
     Total  

Balance as of December 31, 2013

   $ (46.0   $ (1.8   $ 0.4       $ (47.4
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss) prior to reclassifications

     (0.4     2.7        —           2.3   

Amounts reclassified from accumulated other comprehensive loss

     —          (1.3     —           (1.3
  

 

 

   

 

 

   

 

 

    

 

 

 

Net current period other comprehensive gain

     (0.4     1.4        —           1.0   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance as of March 28, 2014

   $ (46.4   $ (0.4   $ 0.4       $ (46.4
  

 

 

   

 

 

   

 

 

    

 

 

 

Amounts which were reclassified from accumulated other comprehensive loss to the Company’s Consolidated Statements of Operations and Comprehensive Income during the quarter ended March 28, 2014 were as follows (net of tax of $0, in millions):

 

     Amounts Reclassified from
Accumulated Other
Comprehensive Loss
   

Affected Line Item Where Net Income is

Presented

Effects of cash flow hedges

   $ (1.3   Cost of revenues

 

22


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Note 13: Supplemental Disclosures

Supplemental Disclosure of Cash Flow Information

The Company’s non-cash financing activities and cash payments for interest and income taxes are as follows (in millions):

 

     For the Quarter Ended  
     March 28,
2014
    March 29,
2013
 

Non-cash financing activities:

    

Capital expenditures in accounts payable

   $ 54.8      $ 53.2   

Equipment acquired or refinanced through capital leases

   $ 0.4      $ 0.4   

Cash (received) paid for:

    

Interest income

   $ (0.2   $ (0.3

Interest expense

   $ 2.8      $ 2.0   

Income taxes

   $ 5.3      $ 2.5   

Note 14: Segment Information

As of March 28, 2014, the Company was organized into three operating segments, which also represented its three reporting segments: Application Products Group, Standard Products Group and System Solutions Group. Each of the Company’s major product lines has been examined and each product line has been assigned to a segment based on the Company’s operating strategy. Because many products are sold into different end-markets, the total revenue reported for a segment is not indicative of actual sales in the end-market associated with that segment, but rather is the sum of the revenue from the product lines assigned to that segment. These segments represent the Company’s view of the business and as such are used to evaluate progress of major initiatives and allocation of resources.

Revenues, gross profit and operating income for the Company’s reportable segments for the quarters ended March 28, 2014 and March 29, 2013 are as follows (in millions):

 

     Application
Products Group
     Standard
Products
Group
     System Solutions
Group
    Total  

For the quarter ended March 28, 2014:

          

Revenues from external customers

   $ 279.5       $ 292.9       $ 134.1      $    706.5   

Segment gross profit

   $ 126.1       $ 106.2       $ 25.0      $ 257.3   

Segment operating income (loss)

   $ 37.8       $ 60.2       $ (8.7   $ 89.3   

For the quarter ended March 29, 2013:

          

Revenues from external customers

   $ 245.0       $ 265.2       $ 150.8      $ 661.0   

Segment gross profit

   $ 106.9       $ 94.5       $ 8.6      $ 210.0   

Segment operating income (loss)

   $ 27.5       $ 57.6       $ (45.7   $ 39.4   

 

23


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Depreciation and amortization expense is included in segment operating income. Reconciliations of segment gross profit and segment operating income to the financial statements are as follows (in millions):

 

     Quarter Ended  
     March 28, 2014     March 29, 2013  

Gross profit for reportable segments

   $ 257.3      $ 210.0   

Unallocated amounts:

    

Other unallocated manufacturing costs

     (6.5     (5.5
  

 

 

   

 

 

 

Gross profit

   $ 250.8      $ 204.5   
  

 

 

   

 

 

 

Operating income for reportable segments

   $ 89.3        39.4   

Unallocated amounts:

    

Restructuring and other charges

     (5.8     6.0   

Other unallocated manufacturing costs

     (6.5     (5.5

Other unallocated operating expenses

     (3.7     (2.2
  

 

 

   

 

 

 

Operating income

   $ 73.3      $ 37.7   
  

 

 

   

 

 

 

The Company’s consolidated assets are not specifically assigned to its individual reporting segments. Rather, assets used in operations are generally shared across the Company’s reporting segments. See Note 5: “Balance Sheet Information” for additional information.

The Company operates in various geographic locations. Sales to unaffiliated customers have little correlation with the location of manufacturers. It is, therefore, not meaningful to present operating profit by geographical location.

Revenues by geographic location, including local sales made by operations within each area, based on sales billed from the respective country are summarized as follows (in millions):

 

     Quarter Ended  
     March 28, 2014      March 29, 2013  

United States

   $ 112.0       $ 98.9   

Japan

     65.3         71.7   

China

     202.7         199.4   

Singapore

     180.4         166.4   

United Kingdom

     117.2         97.7   

Other

     28.9         26.9   
  

 

 

    

 

 

 
   $    706.5       $    661.0   
  

 

 

    

 

 

 

For the quarters ended March 28, 2014 and March 29, 2013, there were no individual customers which accounted for more than 10% of the Company’s total revenues.

Property, plant and equipment, net by geographic location, is summarized as follows (in millions):

 

     March 28,
2014
     December 31,
2013
 

United States

   $ 254.3       $ 255.3   

Czech Republic

     111.3         111.1   

Malaysia

     218.9         213.9   

Philippines

     173.2         173.8   

Other

     323.7         320.1   
  

 

 

    

 

 

 
   $ 1,081.4       $ 1,074.2   
  

 

 

    

 

 

 

 

24


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Note 15: Guarantor and Non-Guarantor Statements

ON Semiconductor is the sole issuer of the 2.625% Notes, Series B. ON Semiconductor’s 100% owned domestic subsidiaries, except those domestic subsidiaries acquired through the acquisitions of AMIS, Catalyst, PulseCore, CMD, SDT, and SANYO Semiconductor (collectively, the “Guarantor Subsidiaries”), fully and unconditionally guarantee, subject to customary releases, on a joint and several basis ON Semiconductor’s obligations under the 2.625% Notes, Series B. 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 2.625% Notes, Series B. The repayment of the unsecured 2.625% Notes, Series B is subordinated to the senior indebtedness of ON Semiconductor and the Guarantor Subsidiaries on the terms described in the indenture for the 2.625% Notes, Series B.

Condensed consolidating financial information for the issuer of the 2.625% Notes, Series B, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries is as follows (in millions):

 

25


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF MARCH 28, 2014

(in millions)

 

     Issuer     Guarantor                    
     ON  Semiconductor
Corporation
    SCI LLC     Other
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Total  

Cash and cash equivalents

   $ —        $ 314.1      $ —        $ 247.9      $ —        $ 562.0   

Short-term investments

     —          55.0        —          —          —          55.0   

Receivables, net

     —          58.8        —          358.3        —          417.1   

Inventories

     —          46.4        —          565.4        2.1        613.9   

Short-term intercompany receivables

     —          —          4.1        46.5        (50.6     —     

Other current assets

     —          19.9        —          69.4        —          89.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     —          494.2        4.1        1,287.5        (48.5     1,737.3   

Property, plant and equipment, net

     —          251.2        3.1        828.8        (1.7     1,081.4   

Goodwill

     —          111.6        37.3        35.7        —          184.6   

Intangible assets, net

     —          109.3        —          126.8        (20.8     215.3   

Long-term intercompany receivables

     —          —          —          1.5        (1.5     —     

Other assets

     1,847.8        1,756.5        136.7        841.3        (4,514.2     68.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,847.8      $ 2,722.8      $ 181.2      $ 3,121.6      $ (4,586.7   $ 3,286.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accounts payable

   $ —        $ 35.9      $ 0.2      $ 240.6      $ —        $ 276.7   

Accrued expenses

     4.0        46.0        0.3        171.8        —          222.1   

Deferred income on sales to distributors

     —          36.6        —          115.1        —          151.7   

Current portion of long-term debt

     —          71.8        —          101.9        —          173.7   

Short-term intercompany payables

     —          50.6        —          —          (50.6     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     4.0        240.9        0.5        629.4        (50.6     824.2   

Long-term debt

     336.9        382.7        —          26.9        —          746.5   

Other long-term liabilities

     —          38.4        0.1        137.6        —          176.1   

Long-term intercompany payables

     —          1.5        —          —          (1.5     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     340.9        663.5        0.6        793.9        (52.1     1,746.8   

Common stock

     5.2        24.6        50.9        173.9        (249.4     5.2   

Additional paid-in capital

     3,228.9        2,365.8        259.8        1,402.6        (4,028.2     3,228.9   

Accumulated other comprehensive loss

     (46.4     (48.0     —          (39.1     87.1        (46.4

Accumulated deficit

     (1,083.7     (283.1     (130.1     790.3        (377.1     (1,083.7

Less: treasury stock, at cost

     (597.1     —          —          —          —          (597.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ON Semiconductor Corporation stockholders’ equity

     1,506.9        2,059.3        180.6        2,327.7        (4,567.6     1,506.9   

Non-controlling interest in consolidated subsidiary

     —          —          —          —          33.0        33.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     1,506.9        2,059.3        180.6        2,327.7        (4,534.6     1,539.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 1,847.8      $ 2,722.8      $ 181.2      $ 3,121.6      $ (4,586.7   $ 3,286.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2013

(in millions)

 

     Issuer     Guarantor                    
     ON  Semiconductor
Corporation
    SCI LLC     Other
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Total  

Cash and cash equivalents

   $ —        $ 267.9      $ —        $ 241.6      $ —        $ 509.5   

Short-term investments

     —          116.2        —          —          —          116.2   

Receivables, net

     —          49.8        —          333.6        —          383.4   

Inventories

     —          46.7        —          562.1        3.0        611.8   

Short-term intercompany receivables

     —          —          4.1        7.6        (11.7     —     

Other current assets

     —          17.8        —          71.5        —          89.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     —          498.4        4.1        1,216.4        (8.7     1,710.2   

Property, plant and equipment, net

     —          252.3        3.1        820.6        (1.8     1,074.2   

Goodwill

     —          111.5        37.3        35.8        —          184.6   

Intangible assets, net

     —          113.0        —          132.2        (21.8     223.4   

Long-term intercompany receivables

     —          —          —          3.3        (3.3     —     

Other assets

     1,790.2        1,600.6        136.1        837.3        (4,299.6     64.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,790.2      $ 2,575.8      $ 180.6      $ 3,045.6      $ (4,335.2   $ 3,257.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accounts payable

   $ —        $ 39.1        0.5        237.2        —        $ 276.8   

Accrued expenses

     1.0        50.8        0.2        168.3        —          220.3   

Deferred income on sales to distributors

     —          32.3        —          108.2        —          140.5   

Current portion of long-term debt

     —          79.3        —          102.3        —          181.6   

Short-term intercompany payables

     —          11.7        —          —          (11.7     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     1.0        213.2        0.7        616.0        (11.7     819.2   

Long-term debt

     335.2        396.1        —          29.3        —          760.6   

Other long-term liabilities

     —          42.2        0.1        148.1        —          190.4   

Long-term intercompany payables

     —          3.3        —          —          (3.3     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     336.2        654.8        0.8        793.4        (15.0     1,770.2   

Common stock

     5.2        0.3        50.9        201.6        (252.8     5.2   

Additional paid-in capital

     3,210.8        2,335.1        259.8        1,402.6        (3,997.5     3,210.8   

Accumulated other comprehensive loss

     (47.4     (49.2     —          (38.6     87.8        (47.4

Accumulated deficit

     (1,142.1     (365.2     (130.9     686.6        (190.5     (1,142.1

Less: treasury stock, at cost

     (572.5     —          —          —          —          (572.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ON Semiconductor Corporation stockholders’ equity

     1,454.0        1,921.0        179.8        2,252.2        (4,353.0     1,454.0   

Non-controlling interest in consolidated subsidiary

     —          —          —          —          32.8        32.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     1,454.0        1,921.0        179.8        2,252.2        (4,320.2     1,486.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 1,790.2      $ 2,575.8      $ 180.6      $ 3,045.6      $ (4,335.2   $ 3,257.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE QUARTER ENDED MARCH 28, 2014

(in millions)

 

     Issuer     Guarantor
Subsidiaries
                    
     ON  Semiconductor
Corporation
    SCI LLC     Other
Subsidiaries
     Non-
Guarantor
Subsidiaries
    Eliminations     Total  

Revenues

   $ —        $ 170.0      $ 3.9       $ 974.1      $ (441.5   $ 706.5   

Cost of revenues

     —          139.4        0.2         756.7        (440.6     455.7   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —          30.6        3.7         217.4        (0.9     250.8   

Operating expenses:

             

Research and development

     —          12.2        3.0         62.9        —          78.1   

Selling and marketing

     —          19.3        0.2         24.9        —          44.4   

General and administrative

     —          13.2        0.3         27.5        —          41.0   

Amortization of acquisition related intangible assets

     —          3.7        —           5.5        (1.0     8.2   

Restructuring, asset impairments and other, net

     —          0.4        —           5.4        —          5.8   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          48.8        3.5         126.2        (1.0     177.5   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     —          (18.2     0.2         91.2        0.1        73.3   

Other income (expense), net:

             

Interest expense

     (4.0     (3.5     —           (0.6     —          (8.1

Interest income

     —          0.1        —           0.1        —          0.2   

Other

     —          (0.6     —           —          —          (0.6

Equity in earnings

     62.4        98.6        0.6         —          (161.6     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other income (expense), net

     58.4        94.6        0.6         (0.5     (161.6     (8.5

Income before income taxes

     58.4        76.4        0.8         90.7        (161.5     64.8   

Income tax provision

     —          5.7        —           (11.9     —          (6.2
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     58.4        82.1        0.8         78.8        (161.5     58.6   

Net income attributable to non-controlling interest

     —          —          —           —          (0.2     (0.2
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to ON Semiconductor Corporation

   $ 58.4      $ 82.1      $ 0.8       $ 78.8      $ (161.7   $ 58.4   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to ON Semiconductor Corporation

   $ 59.4      $ 83.3      $ 0.8       $ 78.4      $ (162.5   $ 59.4   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE QUARTER ENDED MARCH 29, 2013

(in millions)

 

     Issuer     Guarantor
Subsidiaries
                    
     ON  Semiconductor
Corporation
    SCI LLC     Other
Subsidiaries
     Non-
Guarantor
Subsidiaries
    Eliminations     Total  

Revenues

   $ —        $ 178.1      $ 3.2       $ 947.8      $ (468.1   $ 661.0   

Cost of revenues

     —          112.3        0.2         819.2        (475.2     456.5   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     —          65.8        3.0         128.6        7.1        204.5   

Operating expenses:

             

Research and development

     —          41.6        2.5         44.3        —          88.4   

Selling and marketing

     —          16.7        0.1         23.0        —          39.8   

General and administrative

     —          5.1        0.2         30.9        —          36.2   

Amortization of acquisition related intangible assets

     —          3.8        —           5.6        (1.0     8.4   

Restructuring, asset impairments and other, net

     —          1.0        —           (7.0     —          (6.0
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          68.2        2.8         96.8        (1.0     166.8   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     —          (2.4     0.2         31.8        8.1        37.7   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other income (expense), net:

             

Interest expense

     (6.1     (2.4     —           (1.6     —          (10.1

Interest income

     —          0.2        —           0.1        —          0.3   

Other

     —          7.8        —           (6.9     —          0.9   

Loss on debt exchange

     (3.1     —          —           —          —          (3.1

Equity in earnings

     31.8        24.9        1.6         (0.1     (58.2     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other income (expense), net

     22.6        30.5        1.6         (8.5     (58.2     (12.0
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     22.6        28.1        1.8         23.3        (50.1     25.7   

Income tax provision

     —          2.2        —           (4.6     —          (2.4
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     22.6        30.3        1.8         18.7        (50.1     23.3   

Net income attributable to non-controlling interest

     —          —          —           —          (0.7     (0.7
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to ON Semiconductor Corporation

   $ 22.6      $ 30.3      $ 1.8       $ 18.7      $ (50.8   $ 22.6   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to ON Semiconductor Corporation

   $ 13.3      $ 19.8      $ 1.8       $ 10.1      $ (31.7   $ 13.3   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE QUARTER ENDED MARCH 28, 2014

(in millions)

 

     Issuer     Guarantor
Subsidiaries
                   
     ON  Semiconductor
Corporation
    SCI LLC     Other
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Total  

Net cash provided by operating activities

   $ —        $ 27.3      $ 0.5      $ 47.1      $ —        $ 74.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

            

Purchases of property, plant and equipment

     —          (14.9     (0.5     (32.3     —          (47.7

Proceeds from sales of property, plant and equipment

     —          0.6        —          (0.4     —          0.2   

Deposits utilized for purchases of property, plant and equipment

     —          —          —          1.2        —          1.2   

Proceeds from held-to maturity securities

     —          63.5        —          —          —          63.5   

Purchases of held-to-maturity securities

     —          (2.3     —          —          —          (2.3

Contribution from subsidiaries

     14.3        —          —          —          (14.3     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     14.3        46.9        (0.5     (31.5     (14.3     14.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

            

Intercompany loans

     —          (147.9     —          147.9        —          —     

Intercompany loan repayments to guarantor

     —          146.1        —          (146.1     —          —     

Payments to parent

     —          (14.3     —          —          14.3        —     

Proceeds from exercise of stock options

     9.6        —          —          —          —          9.6   

Payments of tax withholding for restricted shares

     (4.5     —          —          —          —          (4.5

Repurchase of common stock

     (19.4     —          —          —          —          (19.4

Payment of capital leases obligations

     —          (10.3     —          (0.8     —          (11.1

Repayment of long-term debt

     —          (1.6     —          (11.3     —          (12.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (14.3     (28.0     —          (10.3     14.3        (38.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          —          1.0        —          1.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     —          46.2        —          6.3        —          52.5   

Cash and cash equivalents, beginning of period

     —          267.9        —          241.6        —          509.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ —        $ 314.1      $ —        $ 247.9      $ —        $ 562.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE QUARTER ENDED MARCH 29, 2013

(in millions)

 

     Issuers     Guarantor
Subsidiaries
                    
     ON  Semiconductor
Corporation
    SCI LLC     Other
Subsidiaries
     Non-
Guarantor
Subsidiaries
    Eliminations     Total  

Net cash provided by operating activities

   $ —        $ (10.0   $ —         $ 95.2      $ —        $ 85.2   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

             

Purchases of property, plant and equipment

     —          (3.9     —           (35.0     —          (38.9

Proceeds from sales of property, plant and equipment

     —          0.1        —           7.9        —          8.0   

Deposits utilized for purchases of property, plant and equipment

     —          —          —           1.4        —          1.4   

Proceeds from held-to maturity securities

     —          73.5        —           —          —          73.5   

Purchase of held-to-maturity securities

     —          (6.0     —           —          —          (6.0

Contribution from subsidiaries

     75.9        —          —           —          (75.9     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     75.9        63.7        —           (25.7     (75.9     38.0   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

             

Intercompany loans

     —          (213.3     —           213.3        —          —     

Intercompany loan repayments to guarantor

     —          378.4        —           (378.4     —          —     

Payments to parent

     —          (75.9     —           —          75.9        —     

Proceeds from exercise of stock options

     3.8        —          —           —          —          3.8   

Payments of tax withholding for restricted shares

     (2.2     —          —           —          —          (2.2

Proceeds from debt issuance

     —          —          —           26.2        —          26.2   

Payment of capital leases obligations

     —          (10.3     —           (1.2     —          (11.5

Repayment of long-term debt

     (77.5     (1.4     —           (2.6     —          (81.5
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (75.9     77.5        —           (142.7     75.9        (65.2
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          —           (7.9     —          (7.9
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     —          131.2        —           (81.1     —          50.1   

Cash and cash equivalents, beginning of period

     —          212.1        —           274.8        —          486.9   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ —        $ 343.3      $ —         $ 193.7      $ —        $ 537.0   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See also Note 9: “Commitments and Contingencies—Financing Contingencies” for further discussion of the Company’s guarantees.

 

31


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(unaudited)

 

Note 16: Subsequent Events

Acquisition of Truesense Imaging, Inc.

On April 2, 2014, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Sensor Holding Corporation (“Sensor”), the stockholders of Sensor, Sensor Intermediate Holding Corporation (“Sensor Intermediate”), and the subsidiaries of Sensor Intermediate, including Truesense Imaging, Inc. (“Truesense”), pursuant to which, upon the satisfaction of certain conditions, the Company would acquire all of the shares of Sensor for an estimated purchase price of approximately $92.0 million, subject to customary closing adjustments. The acquisition closed on April 30, 2014, for a total purchase price of approximately $95.0 million, after closing adjustments for cash and working capital amounts. Truesense is a leading provider of high-performance image sensor devices addressing a wide range of industrial end-markets, including machine vision, surveillance, traffic monitoring, medical and scientific imaging and photography.

 

32


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (“2013 Form 10-K”), filed with the Securities and Exchange Commission (the “Commission”) on February 21, 2014, and our unaudited consolidated financial statements for the fiscal quarter ended March 28, 2014, included elsewhere in this Form 10-Q. Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties, and other factors. Actual results could differ materially because of the factors discussed below or elsewhere in this Form 10-Q. See Part II, Item 1A. “Risk Factors” of this Form 10-Q and Part I, Item 1A. “Risk Factors” of our 2013 Form 10-K.

Company Highlights for the Quarter Ended March 28, 2014

 

   

Total revenues of approximately $706.5 million

 

   

Gross margin of approximately 35.5%

 

   

Net income of $0.13 per diluted share

 

   

Cash, cash equivalents and short-term investments of approximately $617.0 million

 

   

Completed the repurchase of approximately 2.2 million shares of common stock pursuant to our previously announced share repurchase program

Executive Overview

This Executive Overview presents summary information regarding our industry, markets, business and operating trends only. For further information regarding the events summarized herein, see Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in its entirety.

Industry Overview

We participate in unit and revenue surveys and use data summarized by the WSTS group to evaluate overall semiconductor market trends and to track our progress against the market in the areas we provide semiconductor components. The most recently published estimates from WSTS project a compound annual growth rate in our serviceable addressable market of approximately 4% during 2014 through 2016. These are not our projections and may not be indicative of actual results. We, like many of our competitors, view this information as helpful third party projections and estimates.

Business Overview

ON Semiconductor Corporation and its subsidiaries (“we,” “us,” “our,” “ON Semiconductor,” or the “Company”) is driving innovation in energy efficient electronics. Our extensive portfolio of power and signal management, logic, discrete and custom devices helps customers efficiently solve their design challenges in advanced electronic systems and products. Our power management and motor driver semiconductor components control, convert, protect and monitor the supply of power to the different elements within a wide variety of electronic devices. Our custom ASICs use analog, DSP, mixed-signal and advanced logic capabilities to act as the brain behind many of our automotive, medical, military/aerospace, consumer and industrial customers’ products. Our data management semiconductor components provide high-performance clock management and data flow management for precision computing, communications and industrial systems. Our image sensors, optical image stabilization and auto focus devices provide advanced imaging solutions for optical systems. Our standard semiconductor components serve as “building blocks” within virtually all types of electronic devices. These various products fall into the logic, analog, discrete, image sensors and memory categories used by the WSTS group.

Subsequent to March 28, 2014, we completed the purchase of Truesense Imaging, Inc. (“Truesense”), whereby Truesense became our wholly-owned subsidiary. The aggregate purchase price of this transaction was approximately $95.0 million after closing adjustments for cash and working capital amounts. See Note 16: “Subsequent Events” of the notes to our unaudited consolidated financial statement located elsewhere in this Form 10-Q for additional information.

We serve a broad base of end-user markets, including automotive, communications, computing, consumer electronics, medical, industrial, smart grid and military/aerospace. Our devices are found in a wide variety of end-products including automotive electronics, smartphones, media tablets, wearable electronics, computers, servers, industrial building and home automation systems, consumer white goods, LED lighting, power supplies, networking and telecom equipment, medical diagnostics, imaging and hearing health, and sensor networks.

 

33


Table of Contents

Our portfolio of devices enables us to offer advanced ICs and the “building block” components that deliver system level functionality and design solutions. Our extensive product portfolio consisted of approximately 46,000 products as of March 28, 2014 and we shipped approximately 10.9 billion units in the first three months of 2014, as compared to 9.9 billion units in the first three months of 2013. We offer micro packages, which provide increased performance characteristics while reducing the critical board space inside today’s ever shrinking electronic devices and power modules, delivering improved energy efficiency and reliability for a wide variety of high power applications. We believe that our ability to offer a broad range of products, combined with our global manufacturing and logistics network, provides our customers with single source purchasing on a cost-effective and timely basis.

Segments

As of March 28, 2014, we were organized into three operating segments, which also represented our three reporting segments: Application Products Group, Standard Products Group, and System Solutions Group. Each of our major product lines has been assigned to a segment based on our operating strategy. Because many products are sold into different end-markets, the total revenue reported for a segment is not indicative of actual sales in the end-market associated with that segment, but rather is the sum of the revenues from the product lines assigned to that segment. From time to time we reassess the alignment of our product families and devices associated with our operating segments, and may move product families or individual devices from one operating segment to another.

Business and Macroeconomic Environment

We have recognized efficiencies from implemented restructuring activities and programs and continue to implement profitability enhancement programs to improve our cost structure. However, the semiconductor industry has traditionally been highly cyclical and has often experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions. While there have been recent indications of improving conditions, our business environment continues to experience significant uncertainty and volatility. We have historically reviewed, and will continue to review, our cost structure, capital investments and other expenditures to align our spending and capacity with our current sales and manufacturing projections.

Outlook

ON Semiconductor Second Quarter 2014 Outlook

Based upon product booking trends, backlog levels, and estimated turns levels, we estimate that our revenues will be approximately $738 million to $768 million in the second quarter of 2014. Backlog levels for the second quarter of 2014 represent approximately 80% to 85% of our anticipated second quarter 2014 revenues. We estimate average selling prices for the second quarter of 2014 will be down approximately 1% when compared to the first quarter of 2014. For the second quarter of 2014, we estimate that gross margin as a percentage of revenues will be approximately 34.7% to 36.6%. Our guidance for the second quarter of 2014 includes the contribution from our acquisition of Truesense, which closed on April 30, 2014. See Note 16: “Subsequent Events” of the notes to our unaudited consolidated financial statements located elsewhere in this Form 10-Q for additional information.

 

34


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Results of Operations

Quarter Ended March 28, 2014 Compared to the Quarter Ended March 29, 2013

The following table summarizes certain information relating to our operating results that has been derived from our unaudited consolidated financial statements for the quarters ended March 28, 2014 and March 29, 2013 (in millions):

 

     Quarter Ended        
     March 28, 2014     March 29, 2013     Dollar Change  

Revenues

   $ 706.5      $ 661.0      $ 45.5   

Cost of revenues

     455.7        456.5        (0.8
  

 

 

   

 

 

   

 

 

 

Gross profit

     250.8        204.5        46.3   

Operating expenses:

      

Research and development

     78.1        88.4        (10.3

Selling and marketing

     44.4        39.8        4.6   

General and administrative

     41.0        36.2        4.8   

Amortization of acquisition-related intangible assets

     8.2        8.4        (0.2

Restructuring, asset impairments and other, net

     5.8        (6.0     11.8   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     177.5        166.8        10.7   
  

 

 

   

 

 

   

 

 

 

Operating income

     73.3        37.7        35.6   
  

 

 

   

 

 

   

 

 

 

Other income (expense), net:

      

Interest expense

     (8.1     (10.1     2.0   

Interest income

     0.2        0.3        (0.1

Other

     (0.6     0.9        (1.5

Loss on debt exchange

     —          (3.1     3.1   
  

 

 

   

 

 

   

 

 

 

Other income (expense), net

     (8.5     (12.0     3.5   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     64.8        25.7        39.1   

Income tax provision

     (6.2     (2.4     (3.8
  

 

 

   

 

 

   

 

 

 

Net income

     58.6        23.3        35.3   

Less: Net income attributable to non-controlling interest

     (0.2     (0.7     0.5   
  

 

 

   

 

 

   

 

 

 

Net income attributable to ON Semiconductor Corporation

   $ 58.4      $ 22.6      $ 35.8   
  

 

 

   

 

 

   

 

 

 

Revenues

Revenues were $706.5 million and $661.0 million for the quarters ended March 28, 2014 and March 29, 2013, respectively. The increase in revenues for the quarter ended March 28, 2014 compared to the quarter ended March 29, 2013 was attributed to our Application Products Group and Standard Products Group, both of which experienced increases in revenue as a result of an improved demand environment, partially offset by decreased revenue from our System Solutions Group due to a weakened Yen and the continued impact of a softening of the consumer end-markets.

As compared to the quarter ended March 29, 2013, we experienced a decline in average selling prices of approximately 5%, offset by favorable changes in volume and mix, which resulted in a net increase in revenue of approximately 7% for the quarter ended March 28, 2014.

Our revenues by reportable segment for the quarters ended March 28, 2014 and March 29, 2013 were as follows (dollars in millions):

 

     Quarter Ended
March 28, 2014
     As a % of
Total  Revenue (1)
    Quarter Ended
March 29, 2013
     As a % of
Total  Revenue (1)
 

Application Products Group

   $ 279.5         39.6   $ 245.0         37.1

Standard Products Group

     292.9         41.5     265.2         40.1

System Solutions Group

     134.1         19.0     150.8         22.8
  

 

 

      

 

 

    

Total revenues

   $ 706.5         $ 661.0      
  

 

 

      

 

 

    

 

(1)

Certain amounts may not total due to rounding of individual amounts.

 

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Revenues from the Application Products Group increased by $34.5 million, or approximately 14%, from the first quarter of 2013 to the first quarter of 2014. This increase is primarily attributable to a $18.0 million, or approximately 14%, increase in revenues from our ASIC products, combined with an increase in revenues from our analog products of $13.2 million, or approximately 15%, as a result of an improved demand environment.

Revenues from the Standard Products Group increased by $27.7 million, or approximately 10%, from the first quarter of 2013 to the first quarter of 2014. This increase is primarily attributable to a $18.9 million, or approximately 18%, increase in revenue from our discrete products, combined with an increase in revenues from our analog products of $4.5 million, or approximately 6%, as a result of an improved demand environment.

Revenues from the System Solutions Group decreased by $16.7 million, or approximately 11%, from the first quarter of 2013 to the first quarter of 2014. This decrease is primarily attributable to a $15.7 million, or approximately 15% decrease in revenue from our LSI products along with decreases from a softening of the consumer end-markets and the impact of a weakening Yen.

Revenues by geographic location for the quarters ended March 28, 2014 and March 29, 2013 were as follows (dollars in millions):

 

     Quarter Ended
March 28, 2014
     As a %  of
Total Revenue (1)
    Quarter Ended
March 29, 2013
     As a %  of
Total Revenue (1)
 

United States

   $ 112.0