10-Q 1 d63451d10q.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 July 3, 2015

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 July 29, 2015:

 

Title of Each Class

 

Number of Shares

Common Stock, par value $0.01 per share   412,865,328

 

 

 


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

Part I: Financial Information   

Item 1. Financial Statements (unaudited)

     4   

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

     45   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     63   

Item 4. Controls and Procedures

     64   
Part II: Other Information      65   

Item 1. Legal Proceedings

     65   

Item 1A. Risk Factors

     65   

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

     69   

Item 3. Defaults Upon Senior Securities

     69   

Item 4. Mine Safety Disclosures

     70   

Item 5. Other Information

     70   

Item 6. Exhibits

     71   

Signatures

     72   

Exhibit Index

     71   

(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
1.00% Notes    1.00% Convertible Senior Notes due 2020
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, as amended
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
CMOS    Complementary Metal Oxide Semiconductor
Commission    The Securities and Exchange Commission
DSP    Digital signal processing
ESPP    ON Semiconductor Corporation 2000 Employee Stock Purchase Plan
Exchange Act    Securities Exchange Act of 1934, as amended
FASB    Financial Accounting Standards Board
Freescale    Freescale Semiconductor, Inc.
IC    Integrated circuit
IoT    Internet-of-Things
IP    Intellectual property
IPRD    In-Process Research and Development
KSS    System Solutions Group back-end manufacturing facility in Hanyu, Japan
LED    Light-emitting diode
LSI    Large Scale Integration
Motorola    Motorola Inc.
PulseCore    PulseCore Holdings (Cayman) Inc.
SANYO Semiconductor    SANYO Semiconductor Co., Ltd.
SCI LLC    Semiconductor Components Industries, LLC
SDT    Sound Design Technologies Ltd.
SMBC    Sumitomo Mitsui Banking Corporation
TMOS    T Metal Oxide Semiconductor
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)

 

     July 3,
2015
    December 31,
2014
 

Assets

    

Cash and cash equivalents

   $ 576.6      $ 511.7   

Short-term investments

     1.3        6.1   

Receivables, net

     489.9        417.5   

Inventories

     743.0        729.9   

Other current assets

     121.3        140.6   
  

 

 

   

 

 

 

Total current assets

     1,932.1        1,805.8   

Property, plant and equipment, net

     1,225.5        1,203.9   

Goodwill

     263.8        263.8   

Intangible assets, net

     387.3        458.5   

Other assets

     106.7        91.0   
  

 

 

   

 

 

 

Total assets

   $ 3,915.4      $ 3,823.0   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Accounts payable

   $ 335.5      $ 378.2   

Accrued expenses

     273.8        287.9   

Deferred income on sales to distributors

     155.1        165.1   

Current portion of long-term debt (See Note 7)

     555.9        209.6   
  

 

 

   

 

 

 

Total current liabilities

     1,320.3        1,040.8   

Long-term debt (See Note 7)

     822.3        983.0   

Other long-term liabilities

     153.1        151.8   
  

 

 

   

 

 

 

Total liabilities

     2,295.7        2,175.6   
  

 

 

   

 

 

 

Commitments and contingencies (See Note 10)

    

ON Semiconductor Corporation stockholders’ equity:

    

Common stock ($0.01 par value, 750,000,000 shares authorized, 531,527,296 and 524,615,562 shares issued, 421,044,853 and 434,100,017 shares outstanding, respectively)

     5.3        5.2   

Additional paid-in capital

     3,387.8        3,281.2   

Accumulated other comprehensive loss

     (43.6     (41.5

Accumulated deficit

     (809.8     (915.6

Less: Treasury stock, at cost: 110,482,443 and 90,515,545 shares, respectively

     (942.3     (702.8
  

 

 

   

 

 

 

Total ON Semiconductor Corporation stockholders’ equity

     1,597.4        1,626.5   

Non-controlling interest in consolidated subsidiary

     22.3        20.9   
  

 

 

   

 

 

 

Total stockholders’ equity

     1,619.7        1,647.4   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 3,915.4      $ 3,823.0   
  

 

 

   

 

 

 

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     Six Months Ended  
     July 3,
2015
    June 27,
2014
    July 3,
2015
    June 27,
2014
 

Revenues

   $ 880.5      $ 757.6      $ 1,751.3      $ 1,464.1   

Cost of revenues (exclusive of amortization shown below)

     576.1        479.5        1,146.5        937.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     304.4        278.1        604.8        526.3   

Operating expenses:

        

Research and development

     100.4        84.2        200.8        162.3   

Selling and marketing

     50.4        47.9        103.7        92.3   

General and administrative

     45.0        44.7        91.7        85.7   

Amortization of acquisition-related intangible assets

     33.6        10.4        67.5        18.6   

Restructuring, asset impairments and other, net

     3.5        4.1        1.2        9.9   

Goodwill and intangible asset impairment

     3.7        —          3.7        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     236.6        191.3        468.6        368.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     67.8        86.8        136.2        157.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net:

        

Interest expense

     (10.7     (7.9     (19.9     (16.0

Interest income

     0.3        0.2        0.6        0.4   

Other

     2.1        (0.2     5.8        (0.9

Loss on debt extinguishment

     (0.4     —          (0.4     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net

     (8.7     (7.9     (13.9     (16.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     59.1        78.9        122.3        141.0   

Income tax (provision) benefit

     (7.7     16.2        (15.1     10.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     51.4        95.1        107.2        151.0   

Less: Net income attributable to non-controlling interest

     (0.7     (1.0     (1.4     (1.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ON Semiconductor Corporation

   $ 50.7      $ 94.1      $ 105.8      $ 149.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss), net of tax:

        

Net income

   $ 51.4      $ 95.1      $ 107.2      $ 151.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments

     —          (0.2     —          (0.6

Effects of cash flow hedges

     1.5        1.3        1.3        2.7   

Reclassification of unrealized gain or loss on available-for-sale securities

     0.7        —          (3.4     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax of $0.0 million

     2.2        1.1        (2.1     2.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     53.6        96.2        105.1        153.1   

Comprehensive income attributable to non-controlling interest

     (0.7     (1.0     (1.4     (1.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to ON Semiconductor Corporation

   $ 52.9      $ 95.2      $ 103.7      $ 151.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share attributable to ON Semiconductor Corporation:

        

Basic

   $ 0.12      $ 0.21      $ 0.25      $ 0.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.12      $ 0.21      $ 0.24      $ 0.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     426.9        441.1        429.2        440.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     436.3        444.5        438.2        444.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

5


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(unaudited)

 

     Six Months Ended  
     July 3,
2015
    June 27,
2014
 

Cash flows from operating activities:

    

Net income

   $ 107.2      $ 151.0   

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

    

Depreciation and amortization

     178.6        110.3   

Gain on sale or disposal of fixed assets

     (4.5     (0.3

Loss on debt extinguishment

     0.4        —     

Amortization of debt issuance costs

     0.9        0.7   

Write-down of excess inventories

     28.2        11.5   

Non-cash share-based compensation expense

     25.4        21.9   

Non-cash interest

     4.8        3.3   

Non-cash asset impairment charges

     0.2        1.8   

Non-cash goodwill and intangible asset impairment charges

     3.7        —     

Change in deferred taxes

     (0.4     (19.6

Other

     (5.1     (0.1

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

    

Receivables

     (73.1     (44.0

Inventories

     (41.3     (15.9

Other assets

     7.1        —     

Accounts payable

     (22.6     (0.2

Accrued expenses

     (14.1     4.1   

Deferred income on sales to distributors

     (10.0     22.1   

Other long-term liabilities

     (0.3     (20.1
  

 

 

   

 

 

 

Net cash provided by operating activities

     185.1        226.5   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (140.3     (96.5

Proceeds from sales of property, plant and equipment

     10.3        0.2   

Deposits utilized for purchases of property, plant and equipment

     —          1.3   

Purchase of businesses, net of cash acquired

     (2.9     (90.9

Proceeds from sale of available-for-sale securities

     4.9        —     

Proceeds from sale of held-to-maturity securities

     2.0        116.2   

Purchases of held-to-maturity securities

     (0.7     (2.3
  

 

 

   

 

 

 

Net cash used in investing activities

     (126.7     (72.0
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock under the employee stock purchase plan

     7.0        2.5   

Proceeds from exercise of stock options

     23.7        15.4   

Payments of tax withholding for restricted shares

     (11.4     (5.4

Repurchase of common stock

     (225.1     (30.8

Proceeds from debt issuance

     755.9        15.0   

Purchases of convertible note hedges

     (108.9     —     

Proceeds from issuance of warrants

     52.0        —     

Payments of debt issuance and other financing costs

     (19.5     —     

Repayment of long-term debt

     (453.1     (40.7

Payment of capital lease obligations

     (13.1     (21.0

Dividend to non-controlling shareholder of consolidated subsidiary

     —          (1.2
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     7.5        (66.2
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (1.0     1.1   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     64.9        89.4   

Cash and cash equivalents, beginning of period

     511.7        509.5   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 576.6      $ 598.9   
  

 

 

   

 

 

 

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 the first three fiscal quarters of each year, with the second quarter of 2015 ending on July 3, 2015, and each fiscal year ending on December 31. The three months ended July 3, 2015 and June 27, 2014 both contained 91 days. The six months ended July 3, 2015 and June 27, 2014 contained 184 and 178 days, respectively. As of July 3, 2015, the Company was organized into four operating segments, which also represent its four reporting segments: Application Products Group, Image Sensor Group, Standard Products Group, and System Solutions Group. Additional details on our reportable segments are included in Note 15: “Segment Information.”

The accompanying unaudited financial statements as of and for the quarter and six months ended July 3, 2015 have been prepared in accordance with generally accepted accounting principles in the United States of America for unaudited interim financial information. Accordingly, the unaudited financial statements 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. The balance sheet as of December 31, 2014 was derived from the Company’s audited financial statements but 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, which consists 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, 2014 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (“2014 Form 10-K”). Financial results for interim periods are not necessarily indicative of the results of operations that may be expected for a full fiscal year. The Company expanded or condensed certain prior year amounts in our unaudited consolidated financial statements to conform to the current year presentation.

Use of Estimates

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 and allowances, warranties, and restructuring activities; (iii) assumptions surrounding future pension obligations; (iv) fair values of share-based compensation and of financial instruments (including derivative financial instruments); (v) evaluations of uncertain tax positions; (vi) estimates and assumptions used in connection with business combinations; and (vii) future cash flows used to assess and test for impairment of goodwill and long-lived assets, if applicable. Actual results could differ from these estimates.

Retrospective Measurement Period Adjustments for Business Combinations

During the quarter ended April 3, 2015, the Company finalized the purchase price allocation of Aptina, Inc. (“Aptina”) and, as a result, retrospectively adjusted its Consolidated Balance Sheet and related information as of December 31, 2014 for an immaterial amount as follows (in millions, see Note 3: “Acquisitions” for additional information):

 

     As of December 31, 2014  
     As Reported      Revision      As Revised  

Goodwill

   $ 264.7       $ (0.9    $ 263.8   

Intangible assets, net

   $ 457.6       $ 0.9       $ 458.5   

 

7


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Revision of Previously-Issued Financial Statements

As disclosed in the 2014 Form 10-K, the Company identified errors in its financial statements for the first three quarters of the fiscal year ended December 31, 2014, as included in the Company’s 2014 quarterly reports on Form 10-Q, and revised its previously issued financial statements to record a deferred tax asset in a foreign subsidiary during a prior period and to make adjustments in each successive period related to the foreign currency exchange rate changes associated with that item. The interim period ended June 27, 2014 also includes revised amounts from a change in the application of an accounting convention related to manufacturing variances.

The Company assessed the effect of the above errors in the aggregate on prior periods’ financial statements in accordance with the Commission’s Staff Accounting Bulletins No. 99 and 108 and, based on an analysis of quantitative and qualitative factors, determined that the errors were not material to any of the Company’s prior interim and annual financial statements. The financial statements for the quarter and six months ended June 27, 2014 included in this Form 10-Q are revised as described below for those adjustments and should be read in conjunction with Item 8, “Financial Statements and Supplementary Data” disclosed in the 2014 Form 10-K, filed with the Commission on February 27, 2015.

All financial information contained in the accompanying notes to these unaudited consolidated financial statements has been revised to reflect the correction of these errors.

The following tables present the effect of the aforementioned revisions on the Company’s consolidated statements of operations and comprehensive income for the quarter and six months ended June 27, 2014 (in millions, except per share data):

 

     Quarter Ended June 27, 2014  
     As Reported      Revision      As Revised  

Cost of revenues (exclusive of amortization shown below)

   $ 484.6       $ (5.1    $ 479.5   

Gross profit

     273.0         5.1         278.1   

Operating income

     81.7         5.1         86.8   

Other

     (1.2      1.0         (0.2

Other (expenses) income, net

     (8.9      1.0         (7.9

Income before income taxes

     72.8         6.1         78.9   

Net income

     89.0         6.1         95.1   

Net income attributable to ON Semiconductor Corporation

     88.0         6.1         94.1   

Comprehensive income

     90.1         6.1         96.2   

Comprehensive income attributable to ON Semiconductor Corporation

     89.1         6.1         95.2   

Basic net income per common share attributable to ON Semiconductor Corporation

   $ 0.20         0.01       $ 0.21   

Diluted net income per common share attributable to ON Semiconductor Corporation

   $ 0.20         0.01       $ 0.21   

 

8


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

     Six Months Ended June 27, 2014  
     As Reported      Revision      As Revised  

Cost of revenues (exclusive of amortization shown below)

   $ 940.3       $ (2.5    $ 937.8   

Gross profit

     523.8         2.5         526.3   

Operating income

     155.0         2.5         157.5   

Other

     (1.8      0.9         (0.9

Other (expenses) income, net

     (17.4      0.9         (16.5

Income before income taxes

     137.6         3.4         141.0   

Net income

     147.6         3.4         151.0   

Net income attributable to ON Semiconductor Corporation

     146.4         3.4         149.8   

Comprehensive income

     149.7         3.4         153.1   

Comprehensive income attributable to ON Semiconductor Corporation

     148.5         3.4         151.9   

Basic net income per common share attributable to ON Semiconductor Corporation

   $ 0.33         0.01       $ 0.34   

Diluted net income per common share attributable to ON Semiconductor Corporation

   $ 0.33         0.01       $ 0.34   

The following tables present the effect of the aforementioned revisions on the Company’s consolidated statement of cash flows for the six months ended June 27, 2014 (in millions). There was no impact to total cash flows from operating activities as a result of the errors or revisions:

 

     Six months ended June 27, 2014  
     As Reported      Revision      As Revised  

Cash flows from operating activities:

        

Net income

   $ 147.6       $ 3.4       $ 151.0   

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

        

Change in deferred taxes

     (18.7      (0.9      (19.6

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

        

Inventories

     (13.4      (2.5      (15.9

 

9


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Note 2: Recent Accounting Pronouncements

ASU No. 2015-11 - “Simplifying the Measurement of Inventory” (“ASU 2015-11”)

In July 2015, the FASB issued ASU 2015-11, which requires that entity should measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of ASU 2015-11 may have on its consolidated financial statements and has not elected early adoption of ASU 2015-11.

ASU No. 2015-03 - “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”)

In April 2015, the FASB issued ASU 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new standard is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company has not elected early adoption as of the period ended July 3, 2015 and does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.

ASU No. 2014-09 - “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”)

In May 2014, the FASB issued ASU 2014-09, which applies to any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards, superceding the revenue recognition requirements in Topic 605. Pursuant to ASU 2014-09, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange, as applied through a multi-step process to achieve that core principle. In July 2015, the FASB approved a deferral that permits public entities to apply the amendments in ASU 2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein, and that would also permit entities to elect to adopt the amendments as of the original effective date as applicable to reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact that the adoption of ASU 2014-09 may have on its consolidated financial statements.

 

Note 3: Acquisitions

Acquisition of Aptina

On August 15, 2014, the Company acquired 100% of Aptina for $405.4 million in cash, of which the $2.9 million that remained unpaid as of December 31, 2014 was subsequently paid during the six months ended July 3, 2015. As discussed below, $40.0 million of the total consideration was held in escrow as of July 3, 2015. The allocation of the purchase price of Aptina was finalized during the quarter ended April 3, 2015. Aptina is incorporated into the Company’s Image Sensor Group for reporting purposes.

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

The following table presents the initial allocation and subsequent adjustments applied on a retrospective basis to the purchase price of Aptina for the assets acquired and liabilities assumed on August 15, 2014 based on their fair values (in millions):

 

     Initial
Estimate
     Adjustments      Final
Allocation
 

Cash and cash equivalents

   $ 30.3       $ —         $ 30.3   

Receivables

     53.2         —           53.2   

Inventories

     85.3         (0.5      84.8   

Other current assets

     5.7         —           5.7   

Property, plant and equipment

     35.9         0.4         36.3   

Goodwill

     63.8         0.6         64.4   

Intangible assets

     183.1         24.7         207.8   

In-process research and development

     75.4         (24.1      51.3   

Other non-current assets

     2.3         —           2.3   
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     535.0         1.1         536.1   
  

 

 

    

 

 

    

 

 

 

Accounts payable

     66.8         (0.2      66.6   

Other current liabilities

     51.2         (1.5      49.7   

Other non-current liabilities

     14.5         (0.1      14.4   
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     132.5         (1.8      130.7   
  

 

 

    

 

 

    

 

 

 

Net assets acquired

   $ 402.5       $ 2.9       $ 405.4   
  

 

 

    

 

 

    

 

 

 

Acquired intangible assets include $51.3 million of IPRD assets, which are to be amortized over their respective useful lives upon successful completion of the related projects. The value assigned to IPRD was determined by considering the importance of products under development to the overall development plan, reviewing costs incurred for the projects, estimating costs to develop the purchased IPRD into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value.

Other acquired intangible assets of $207.8 million include: customer relationships of $126.5 million (two to six year useful life); developed technology of $79.0 million (six year useful life); and trademarks of $2.3 million (6 month useful life).

Goodwill of $64.4 million was assigned to the Image Sensor Group. Among the factors that contributed to goodwill arising from the acquisition were the potential synergies that are expected to be derived from combining Aptina with the Company’s existing image sensor business. Goodwill is not deductible for tax purposes.

Pursuant to the agreement and plan of merger between the Company and the sellers of Aptina (the “Merger Agreement”), $40.0 million of the total consideration was withheld by the Company and is placed into an escrow account through November 2015 to secure against certain indemnifiable events described in the Merger Agreement. The $40.0 million consideration held in escrow has been accounted for as restricted cash as of July 3, 2015 and is included in other current assets and accrued expenses on the Company’s Consolidated Balance Sheet as of July 3, 2015.

Acquisition of Truesense Imaging, Inc. (“Truesense”)

On April 30, 2014, the Company acquired 100% of Truesense for $95.7 million in cash. Truesense is incorporated into the Company’s Image Sensor Group and the allocation of the purchase price was finalized during the year ended December 31, 2015.

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

The following unaudited pro-forma consolidated results of operations for the quarter and six months ended June 27, 2014 has been prepared as if the acquisition of Truesense had occurred on January 1, 2013 and includes adjustments for depreciation expense, amortization of intangibles, and the effect of purchase accounting adjustments including the step-up of inventory (in millions, except per share data):

 

     Quarter
Ended
     Six Months
Ended
 
     June 27, 2014      June 27, 2014  

Revenues

   $ 765.3       $ 1,490.4   

Gross profit

     282.6         537.9   

Net income attributable to ON Semiconductor Corporation

   $ 95.3       $ 153.2   

Net income per common share attributable to ON Semiconductor Corporation:

     

Basic

   $ 0.22       $ 0.35   

Diluted

   $ 0.21       $ 0.34   

 

Note 4: Goodwill and Intangible Assets

Goodwill

The following table summarizes goodwill by relevant reportable segment as of July 3, 2015 and December 31, 2014 (in millions):

 

     Balance as of July 3, 2015      Balance as of December 31, 2014  
     Goodwill      Accumulated
Impairment
Losses
    Carrying
Value
     Goodwill      Accumulated
Impairment
Losses
    Carrying
Value
 

Reportable Segment:

               

Application Products Group

   $ 539.9       $ (418.9   $ 121.0       $ 539.9       $ (418.9   $ 121.0   

Image Sensor Group

     95.4         —          95.4         95.4         —          95.4   

Standard Products Group

     76.0         (28.6     47.4         76.0         (28.6     47.4   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 711.3       $ (447.5   $ 263.8       $ 711.3       $ (447.5   $ 263.8   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

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 may result in future non-cash impairment charges. While management did not identify any triggering events through July 3, 2015 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.

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Intangible Assets

Intangible assets, net, were as follows as of July 3, 2015 and December 31, 2014 (in millions):

 

     July 3, 2015  
     Original
Cost
     Accumulated
Amortization
    Foreign Currency
Translation Adjustment
    Accumulated
Impairment
Losses
    Carrying
Value
 

Intellectual property

   $ 13.9       $ (10.2   $ —        $ (0.4   $ 3.3   

Customer relationships

     425.6         (180.1     (27.8     (23.7     194.0   

Patents

     43.7         (22.5     —          (13.7     7.5   

Developed technology

     244.3         (120.2     —          (2.6     121.5   

Trademarks

     16.3         (9.6     —          (1.1     5.6   

IPRD

     59.1         —          —          (3.7     55.4   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total intangibles

   $ 802.9       $ (342.6   $ (27.8   $ (45.2   $ 387.3   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2014  
     Original
Cost
     Accumulated
Amortization
    Foreign Currency
Translation Adjustment
    Accumulated
Impairment
Losses
    Carrying
Value
 

Intellectual property

   $ 13.9       $ (10.0   $ —        $ (0.4   $ 3.5   

Customer relationships

     425.6         (146.2     (27.8     (23.7     227.9   

Patents

     43.7         (21.3     —          (13.7     8.7   

Developed technology

     241.9         (88.9     —          (2.6     150.4   

Trademarks

     16.3         (8.7     —          (1.1     6.5   

IPRD

     61.5         —          —          —          61.5   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total intangibles

   $ 802.9       $ (275.1   $ (27.8   $ (41.5   $ 458.5   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

During the quarter and six months ended July 3, 2015, the Company canceled certain of its previously capitalized IPRD projects and recorded an impairment loss of $3.7 million included in the “Goodwill and intangible asset impairment” caption on the Company’s Consolidated Statements of Operations and Comprehensive Income. Additionally, during the six months ended July 3, 2015, the Company completed certain of its IPRD projects and reclassified $2.4 million to developed technology.

Amortization expense for acquisition-related intangible assets amounted to $33.6 million and $67.5 million for the quarter and six months ended July 3, 2015, respectively, and $10.4 million and $18.6 million for the quarter and six months ended June 27, 2014, respectively. Amortization expense for intangible assets, with the exception of the $55.4 million of IPRD assets that will be amortized once the corresponding projects have been completed, is expected to be as follows for each of the next five years and thereafter (in millions):

 

Period

   Estimated
Amortization
Expense
 

Remainder of 2015

   $ 67.0   

2016

     88.7   

2017

     56.6   

2018

     34.9   

2019

     29.6   

Thereafter

     55.1   
  

 

 

 

Total estimated amortization expense

   $ 331.9   
  

 

 

 

 

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Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Note 5: Restructuring, Asset Impairments and Other, Net

Summarized 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 and six months ended July 3, 2015 is as follows (in millions):

 

     Restructuring      Impairment      Other      Total  

Quarter ended July 3, 2015

           

Business combination severance

   $ 0.3       $ —         $ —         $ 0.3   

European marketing organization relocation

     2.7         —           —           2.7   

Other (1)

     0.2         0.2         0.1         0.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3.2       $ 0.2       $ 0.1       $ 3.5   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Restructuring      Impairment      Other      Total  

Six months ended July 3, 2015

           

KSS facility closure

   $ 0.3       $ —         $ (3.4    $ (3.1

Business combination severance

     0.7         —           —           0.7   

European marketing organization relocation

     3.5         —           —           3.5   

Other (1)

     0.2         0.2         (0.3      0.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4.7       $ 0.2       $ (3.7    $ 1.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes amounts related to certain reductions in workforce, other facility closures, asset disposal activity and certain other activity which is not considered to be significant.

Changes in accrued restructuring charges from December 31, 2014 to July 3, 2015 are summarized as follows (in millions):

 

     Balance as of
December 31, 2014
     Charges      Usage      Balance as of
July 3, 2015
 

Estimated employee separation charges

   $ 2.3       $ 4.7       $ (2.7    $ 4.3   

Estimated costs to exit

     1.1         —           (0.4      0.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3.4       $ 4.7       $ (3.1    $ 5.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Activity related to the Company’s restructuring programs that were either initiated during 2015 or had not been completed as of July 3, 2015, is as follows:

KSS Facility Closure

On October 6, 2013, the Company announced a plan to close KSS (the “KSS Plan”). Pursuant to the KSS Plan, a majority of the production from KSS was transferred to other Company manufacturing facilities. The KSS Plan includes the elimination of 170 full time and 40 contract employees. There were no charges incurred during the quarter ended July 3, 2015. For the six months ended July 3, 2015, the Company recorded $0.3 million of employee related separation charges, offset by $3.4 million of gains related to the sale of assets. All of the employees have exited under this program and there was no remaining accrual for future payments as of July 3, 2015.

Business Combination Severance

Certain positions were eliminated following the acquisition of Aptina on August 15, 2014. During the first quarter of 2015, 44 positions were identified for elimination. The Company recorded $0.3 million and $0.7 million of related employee separation charges during the quarter and six months ended 2015, respectively. The total plan is estimated to cost $1.2 million. All impacted employees are expected to exit during the second half of 2015.

As of July 3, 2015, there was a $0.3 million accrued liability associated with employee separation charges.

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

European Marketing Organization Relocation

In January 2015, the Company announced that it would relocate its European customer marketing organization from France to Slovakia and Germany. As a result, six positions are expected to be eliminated. The Company recorded $2.7 million and $3.5 million of related employee separation charges during the quarter and six months ended July 3, 2015, respectively. The total plan is estimated to incur $3.5 million of expenses. The impacted employees are expected to exit during the second half of 2016.

As of July 3, 2015, there was $3.5 million accrued liability associated with employee separation charges for the European customer marketing organization move.

 

Note 6: Balance Sheet Information

Certain amounts included in the Company’s balance sheet as of July 3, 2015 and December 31, 2014 consist of the following (dollars in millions):

 

     July 3, 2015      December 31, 2014  

Receivables, net:

     

Accounts receivable

   $ 492.0       $ 419.1   

Less: Allowance for doubtful accounts

     (2.1      (1.6
  

 

 

    

 

 

 
   $ 489.9       $ 417.5   
  

 

 

    

 

 

 

Inventories:

     

Raw materials

   $ 95.8       $ 119.7   

Work in process

     443.5         365.5   

Finished goods

     203.7         244.7   
  

 

 

    

 

 

 
   $ 743.0       $ 729.9   
  

 

 

    

 

 

 

Other current assets (1):

     

Prepaid expenses

   $ 25.6       $ 28.7   

Value added and other income tax receivables

     35.8         40.4   

Acquisition consideration held in escrow (see Note 3)

     40.0         40.0   

Other

     19.9         31.5   
  

 

 

    

 

 

 
   $ 121.3       $ 140.6   
  

 

 

    

 

 

 

Property, plant and equipment, net:

     

Land

   $ 45.9       $ 46.1   

Buildings

     499.8         484.3   

Machinery and equipment

     2,245.1         2,165.0   
  

 

 

    

 

 

 

Total property, plant and equipment

     2,790.8         2,695.4   

Less: Accumulated depreciation

     (1,565.3      (1,491.5
  

 

 

    

 

 

 
   $ 1,225.5       $ 1,203.9   
  

 

 

    

 

 

 

Accrued expenses:

     

Accrued payroll

   $ 97.0       $ 117.0   

Sales related reserves

     72.2         65.8   

Acquisition consideration payable to seller (see Note 3)

     40.0         40.0   

Other

     64.6         65.1   
  

 

 

    

 

 

 
   $ 273.8       $ 287.9   
  

 

 

    

 

 

 

 

(1) Included in other current assets are $0.8 million of property, plant and equipment which are held-for-sale as of July 3, 2015.

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Warranty Reserves

Activity related to the Company’s warranty reserves for the six months ended July 3, 2015 and June 27, 2014 is as follows (in millions):

 

     Six Months Ended  
     July 3, 2015      June 27, 2014  

Beginning Balance

   $ 5.5       $ 6.0   

Provision

     0.3         1.1   

Usage

     (0.6      (1.3
  

 

 

    

 

 

 

Ending Balance

   $ 5.2       $ 5.8   
  

 

 

    

 

 

 

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 July 3, 2015, the total accrued pension liability for underfunded plans was $92.8 million, of which the current portion of $0.1 million was classified as accrued expenses. As of December 31, 2014, the total accrued pension liability for underfunded plans was $96.1 million, of which the current portion of $0.2 million was classified as accrued expenses.

The components of the Company’s net periodic pension expense for the quarters and six months ended July 3, 2015 and June 27, 2014 are as follows (in millions):

 

     Quarter Ended      Six Months Ended  
     July 3, 2015      June 27, 2014      July 3, 2015      June 27, 2014  

Service cost

   $ 2.2       $ 2.4       $ 4.4       $ 4.9   

Interest cost

     1.0         1.5         2.0         3.0   

Expected return on plan assets

     (0.9      (0.9      (1.8      (1.8

Curtailment gain

     —           (3.1      —           (5.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net periodic pension cost

   $ 2.3       $ (0.1    $ 4.6       $ 0.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Note 7: Long-Term Debt

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

 

     July 3, 2015      December 31, 2014  

Senior Revolving Credit Facility due 2020, interest payable monthly at 1.69% as of December 31, 2014

   $ —         $ 350.0   

1.00% Notes (net of discount of $109.1 million) (1)

     580.9         —     

2.625% Notes, Series B (net of discount of $11.0 million and $14.7 million, respectively) (2)

     345.9         342.2   

Loan with Japanese bank due 2015 through 2018, interest payable quarterly at 2.03% and 2.01%, respectively (3)

     207.5         235.9   

U.S. real estate mortgages payable monthly through 2019 at an average rate of 3.35% (4)

     52.4         54.8   

Loans with Philippine bank due 2015 through 2019, interest payable monthly and quarterly at an average rate of 2.41% and 2.37%, respectively (5)

     36.6         54.2   

Loan with Hong Kong bank, interest payable weekly at 1.44% and 1.92%, respectively (6)

     25.0         35.0   

Malaysia revolving line of credit, interest payable quarterly at 1.73% and 1.71%, respectively (7)

     25.0         25.0   

Loan with Singapore bank, interest payable weekly at 1.44% and 1.42%, respectively (6)

     30.0         20.0   

Vietnam revolving line of credit, interest payable quarterly and annually at an average rate of 1.81% and 1.87%, respectively (7)

     25.0         10.7   

Canada revolving lines of credit, interest payable quarterly at 1.88% and 1.84%, respectively (7)

     15.0         15.0   

Loans with Philippine bank due 2020 (8)

     —           —     

Canada equipment financing payable monthly through 2017 at 3.81% (9)

     3.3         4.2   

U.S. equipment financing payable monthly through 2016 at 2.94% (9)

     2.4         4.8   

Capital lease obligations

     29.2         40.8   
  

 

 

    

 

 

 

Long-term debt, including current maturities

     1,378.2         1,192.6   

Less: Current maturities

     (555.9      (209.6
  

 

 

    

 

 

 

Long-term debt

   $ 822.3       $ 983.0   
  

 

 

    

 

 

 

 

(1) Interest is payable on June 1 and December 1 of each year at 1.00% annually. See below under the heading “1.00% Notes” for additional information.
(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. The notes can be convertible at any time on or after June 15, 2016.
(3) This loan represents SCI LLC’s non-collateralized loan with SMBC, which is guaranteed by the Company.
(4) Debt arrangement collateralized by real estate, including certain of our facilities in California, Oregon and Idaho.
(5) $36.6 million collateralized by equipment as of July 3, 2015 with $15.0 million non-collateralized and $39.2 million collateralized by equipment as of December 31, 2014.
(6) Debt arrangement collateralized by accounts receivable.
(7) Non-collateralized debt arrangement.
(8) See below under the heading “Philippine Term Loans” for additional information.
(9) Debt arrangement collateralized by equipment.

 

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Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Expected maturities relating to the Company’s long-term debt as of July 3, 2015 are as follows (in millions):

 

Period

   Expected
Maturities
 

Remainder of 2015

   $ 160.1   

2016

     426.9   

2017

     53.7   

2018

     132.8   

2019

     34.8   

Thereafter

     690.0   
  

 

 

 

Total

   $ 1,498.3   
  

 

 

 

For purposes of the table above, the 2.625% Notes, Series B are assumed to mature at the earliest conversion 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 2014 Form 10-K.

Debt Guarantees

ON Semiconductor was the sole issuer in the private unregistered offering of the 1.00% Notes. Additionally, ON Semiconductor was the sole issuer of the publicly issued 2.625% Notes, Series B. See Note 16: “Guarantor and Non-Guarantor Statements” for the condensed consolidated financial information for the issuer of the 2.625% Notes, Series B, the guarantor subsidiaries and the non-guarantor subsidiaries.

Amended Senior Revolving Credit Facility

On May 1, 2015, the Company and its wholly-owned subsidiary, SCI LLC, entered into an amendment to the $800.0 million, five-year senior revolving credit facility (the “Facility”) Amended and Restated Credit Agreement dated as of October 10, 2013 (“Credit Agreement”) among the Company and a group of lenders. The amendment expands the borrowing capacity of the Facility to $1.0 billion and resets the five-year maturity date. The Facility may be used for general corporate purposes including working capital, stock repurchase, and/or acquisitions. The Company recorded $2.1 million of new debt issuance costs and wrote-off $0.4 million of existing debt issuance costs associated with the Facility resulting in a loss on debt extinguishment during the quarter and six months ended July 3, 2015.

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

On June 1, 2015, the Company and its wholly-owned subsidiary, SCI LLC, entered into a second amendment of the Facility that provides for, among other things, modifications to the Credit Agreement to allow for the issuance by the Company of its convertible senior notes, subject to the satisfaction of certain conditions, and to permit the Company to enter into certain hedging transactions relating to such notes or otherwise. In addition, the second amendment provides for the release of the pledged stock of certain of the Company’s subsidiaries upon the issuance of the convertible senior notes.

The obligations under the Facility are guaranteed by certain of the domestic subsidiaries of the Company and SCI LLC.

1.00% Notes

On June 8, 2015, the Company completed a private placement of $690.0 million of its 1.00% Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Company incurred issuance costs of $18.3 million in connection with the issuance of the notes, of which $15.4 million were capitalized as debt issuance costs and are being amortized using the effective interest method and $2.9 million were allocated to the conversion option (as further described below) and were recorded to equity. The 1.00% Notes are governed by an indenture between the Company, as the issuer, and Wells Fargo Bank, National Association, as trustee.

The Company’s use of the net proceeds from the offering included the following: (i) the funding of the cost of the convertible note hedge transactions described below (the cost of which was partially offset by the proceeds that the Company received from entering into the warrant transactions described below); (ii) funding the repurchase of $70.0 million of the Company’s common stock which was acquired from purchasers of the 1.00% Notes in privately negotiated transactions effected through one or more of the initial purchasers or their affiliates conducted concurrently with the issuance of the 1.00% Notes; and (iii) repayment of $350.0 million of borrowings outstanding under its revolving credit facility. The remainder of the proceeds is intended for general corporate purposes, including additional share repurchases and potential acquisitions.

The notes bear interest at the rate of 1.00% per year from the date of issuance, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2015. The notes are fully and unconditionally guaranteed on a senior unsecured obligation basis by certain existing domestic subsidiaries of the Company.

The notes are convertible by holders into cash and shares of the Company’s common stock at a conversion rate of 54.0643 shares of common stock per $1,000 principal amount of notes (subject to adjustment in certain events), which is equivalent to an initial conversion price of $18.50 per share of common stock. The Company will settle conversion of all notes validly tendered for conversion in cash and shares of the Company’s common stock, if applicable, subject to the Company’s right to pay the share amount in additional cash. Holders may convert their notes only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2015, if the last reported sale price of common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business-day period immediately following any five consecutive trading-day period in which the trading price per $1,000 principal amount of notes for each day of such period was less than 98% of the product of the closing sale price of the Company’s common stock and the conversion rate; (iii) upon occurrence of the specified transactions described in the indenture relating to the notes; or (iv) on and after September 1, 2020. Upon conversion of the notes, the Company will deliver cash, shares of our common stock or a combination of cash and shares of our common stock, at the Company’s election. For a discussion of the dilutive effects for earnings per share calculations, see Note 8: “Earnings Per Share and Equity.”

The notes will mature on December 1, 2020. If a holder elects to convert its notes in connection with the occurrence of specified fundamental changes that occur prior to September 1, 2020, the holder will be entitled to receive, in addition to cash and shares of common stock equal to the conversion rate, an additional number of shares of common stock, in each case as described in the indenture. Notwithstanding these conversion rate adjustments, these notes contain an explicit limit on the number of shares issuable upon conversion.

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

In connection with the occurrence of specified fundamental changes, holders may require the Company to repurchase for cash all or part of their notes at a purchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but not including, the fundamental change repurchase date.

The notes, which are the Company’s unsecured obligations, will rank equally in right of payment to all of the Company’s existing and future unsubordinated indebtedness and will be senior in right of payment to all of the Company’s existing and future subordinated obligations. The notes will also be effectively subordinated to any of the Company’s or its subsidiaries’ secured indebtedness to the extent of the value of the assets securing such indebtedness.

In accordance with accounting guidance on embedded conversion features, the Company valued and bifurcated the conversion option associated with the 1.00% Notes from the respective host debt instrument, which is referred to as the debt discount, and initially recorded the conversion option of $110.4 million in stockholders’ equity. The resulting debt discount is being amortized to interest expense at an effective interest rate of 4.29% over the contractual terms of the notes.

Included in other assets as of July 3, 2015, were $15.2 million of debt issuance costs associated with the 1.00% Notes, which are being amortized using the effective interest method. Included in long-term debt as of July 3, 2015 was $109.1 million of unamortized debt discount associated with the 1.00% Notes, which will be amortized using the effective interest method.

The Company used $56.9 million of the net proceeds from the offering of its 1.00% Notes to concurrently enter into convertible note hedge and warrant transactions with certain of the initial purchasers of the 1.00% Notes. Pursuant to these transactions, the Company has the option to purchase initially (subject to adjustment for certain specified transactions) a total of 37.3 million shares of its common stock at a price of $18.50 per share. The total cost of the convertible note hedge transactions was $108.9 million. In addition, the Company sold warrants to certain bank counterparties whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) a total of 37.3 million shares of the Company’s common stock at a price of $25.96 per share. The Company received $52.0 million in cash proceeds from the sale of these warrants.

In aggregate, the purchase of the convertible note hedges and the sale of the warrants are intended to offset potential dilution from the conversion of these notes. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions was recorded as a reduction to additional paid in capital in the consolidated balance sheet. A portion of the shares subject to the conversion of the 1.00% Notes and hedging transactions were reserved in the form of the Company’s treasury stock.

Philippine Term Loans

During the second quarter of 2015, the Company’s wholly-owned Philippine subsidiaries and ON Semiconductor, as guarantor, entered into two non-collateralized term loans with an aggregate borrowing capacity of $50.0 million, the terms of which were set forth in agreements by and between the Company’s Philippine subsidiaries and a Philippine bank. There were no amounts outstanding under the term loans at July 3, 2015. Subsequent to July 3, 2015, the Company borrowed the full $50.0 million available under the term loans. Borrowings under the loans bear interest based on 3-month LIBOR plus 2.0% per annum, with interest payable quarterly in arrears. The total borrowed amount must be repaid within five years over 17 equal quarterly principal installments starting at the end of the fourth quarter from the initial drawdown date, with the balance to be repaid on the maturity date of the loan.

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Note 8: 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      Six Months Ended  
     July 3, 2015      June 27, 2014      July 3, 2015      June 27, 2014  

Net income attributable to ON Semiconductor Corporation

   $ 50.7       $ 94.1       $ 105.8       $ 149.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic weighted average common shares outstanding

     426.9         441.1         429.2         440.7   

Dilutive effect of share-based awards

     4.5         3.4         5.1         3.8   

Dilutive effect of Convertible Notes

     4.9         —           3.9         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     436.3         444.5         438.2         444.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share attributable to ON Semiconductor Corporation:

           

Basic

   $ 0.12       $ 0.21       $ 0.25       $ 0.34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.12       $ 0.21       $ 0.24       $ 0.34   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 1.2 million and 7.1 million for the quarters ended July 3, 2015 and June 27, 2014, respectively, and 1.1 million and 7.4 million for the six months ended July 3, 2015 and June 27, 2014, respectively.

The dilutive impact related to the Company’s 1.00% Notes and 2.625% Notes, Series B 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. Additionally, if the average price of our common stock exceeds $25.96 per share for a reporting period, the Company will also include the effect of the additional potential shares using the treasury stock method, that may be issued related to the warrants that were issued concurrently with the issuance of the 1.00% Notes. Prior to conversion, the convertible note hedges are not considered for purposes of the earnings per share calculations, as their effect would be anti-dilutive. Upon conversion, the convertible note hedges are expected to offset the dilutive effect of the 1.00% Notes when the stock price is above $18.50 per share. 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 2014 Form 10-K for a discussion of the conversion prices and other features of the 2.625% Notes, Series B and see Note 7: “Long-Term Debt” for a discussion of the conversion prices and other features of the 1.00% Notes.

 

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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      Six Months Ended  
     July 3, 2015      June 27, 2014      July 3, 2015      June 27, 2014  

Number of repurchased shares (1)(5)

     10.4         1.1         19.0         3.3   

Beginning accrued share repurchases (2)

   $ 2.0       $ 1.3       $ —         $ 0.6   

Aggregate purchase price

     131.1         10.1         228.1         30.2   

Less: ending accrued share repurchases (3)

     (3.0      —           (3.0      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash used for share repurchases

   $ 130.1       $ 11.4       $ 225.1       $ 30.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average purchase price per share (4)

   $ 12.59       $ 9.57       $ 11.96       $ 9.27   

Available for future purchases at period end

   $ 748.2       $ 113.2       $ 748.2       $ 113.2   

 

(1) None of these shares had been reissued or retired as of July 3, 2015, 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 the beginning of the period.
(3) Represents unpaid amounts recorded in accrued expenses on the Company’s Consolidated Balance Sheet as of the end of the period.
(4) Exclusive of fees, commissions and other expenses.
(5) Includes 5.4 million shares, totaling $70.0 million, repurchased concurrently with the issuance of the 1.00% Notes. See Note 7: “Long-Term Debt” for information with respect to our long-term debt.

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 unaudited 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 and six months ended July 3, 2015 was $0.2 million and $11.4 million, respectively, for which the Company withheld less than 0.1 million and 0.9 million shares of common stock, respectively, that were underlying the restricted stock units that vested. None of these shares had been reissued or retired as of July 3, 2015, 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.

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

At December 31, 2014, the non-controlling interest balance was $20.9 million. This balance increased to $22.3 million as of July 3, 2015, resulting from the non-controlling interest’s $1.4 million share of the earnings for the six months ended July 3, 2015.

At December 31, 2013, the non-controlling interest balance was $32.8 million. This balance was unchanged at $32.8 million as of June 27, 2014 due to the non-controlling interest’s $1.2 million share of the earnings for the six months ended June 27, 2014, offset by a $1.2 million dividend paid to the non-controlling shareholder.

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Note 9: Share-Based Compensation

Total share-based compensation expense related to the Company’s employee stock options, restricted stock units, stock grant awards and ESPP for the quarters and six months ended July 3, 2015 and June 27, 2014 was comprised as follows (in millions):

 

     Quarter Ended      Six Months Ended  
     July 3,
2015
     June 27,
2014
     July 3,
2015
     June 27,
2014
 

Cost of revenues

   $ 1.9       $ 1.7       $ 3.8       $ 3.1   

Research and development

     2.5         2.2         4.8         4.0   

Selling and marketing

     2.3         2.2         4.5         3.7   

General and administrative

     7.4         7.3         12.3         11.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share-based compensation expense before income taxes

   $ 14.1       $ 13.4       $ 25.4       $ 21.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Related income tax benefits (1)

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Share-based compensation expense, net of taxes

   $ 14.1       $ 13.4       $ 25.4       $ 21.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

As of July 3, 2015, total estimated unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested stock options granted prior to that date was $1.7 million, which is expected to be recognized over a weighted-average period of 1.0 years. As of July 3, 2015, 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 $66.2 million, which is expected to be recognized over a weighted-average period of 1.8 years. The total intrinsic value of stock options exercised during the quarter and six months ended July 3, 2015 was $1.5 million and $11.7 million, respectively. The Company recorded cash received from the exercise of stock options of $2.3 million and $23.7 million, respectively, during the quarter and six months ended July 3, 2015. The Company recorded no related income tax benefits during the quarter and six months ended July 3, 2015.

Share-Based Compensation Information

Share-based compensation expense recognized in the Consolidated Statements of Operations and Comprehensive Income is based on awards that are 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. The annualized pre-vesting forfeiture rate for stock options was estimated to be 11% and 11% during the quarters and six months ended July 3, 2015 and June 27, 2014, respectively. The annualized pre-vesting forfeiture rate for restricted stock units was estimated to be 5% and 5% during the quarters and six months ended July 3, 2015 and June 27, 2014, respectively.

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Shares Available

As of December 31, 2014, there was an aggregate of 35.2 million shares of common stock available for grant under the Company’s Amended and Restated SIP and 3.0 million shares available for issuance under the ESPP. On May 20, 2015, shareholders approved an amendment to the Company’s ESPP which increased the number of shares reserved and available to be issued pursuant to the ESPP by 5.5 million. As of July 3, 2015, there was an aggregate of 29.8 million shares of common stock available for grant under the Amended and Restated SIP and 7.6 million shares available for issuance under the ESPP.

Stock Options

Summarized stock option information for the six months ended July 3, 2015 is as follows (in millions except per share and term data):

 

     Six Months Ended July 3, 2015  
     Number of
Shares
     Weighted-Average
Exercise Price
     Weighted-
Average
Remaining
Contractual
Term (in years)
     Aggregate
Intrinsic Value
(In-The-Money)
 

Outstanding at December 31, 2014

     8.8       $ 7.81         

Granted

                     

Exercised

     (3.0      7.88         

Canceled

     (0.1      6.78         
  

 

 

          

Outstanding at July 3, 2015

     5.7       $ 7.79         2.80       $ 21.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at July 3, 2015

     4.7       $ 7.95         2.55       $ 16.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Additional information with respect to stock options outstanding as of July 3, 2015, with exercise prices less than or above $11.46 per share, the effective closing price of the Company’s common stock at July 3, 2015, is as 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 $11.46

     4.6       $ 7.89         1.0       $ 7.01         5.6       $ 7.74   

Above $11.46

     0.1       $ 11.66               $         0.1       $ 11.66   
  

 

 

       

 

 

       

 

 

    

Total outstanding

     4.7       $ 7.95         1.0       $ 7.01         5.7       $ 7.79   
  

 

 

       

 

 

       

 

 

    

Restricted Stock Units

Restricted stock units generally vest over three years with service-based requirements or performance-based requirements or a combination of service-based and performance-based requirements and are payable in shares of the Company’s common stock upon vesting. The following table presents summarized information with respect to the Company’s restricted stock units as of July 3, 2015 and changes during the six months ended July 3, 2015 (number of shares in millions):

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

     Number of
Shares
     Weighted-
Average Grant
Date Fair Value
 

Non-vested shares underlying restricted stock units at December 31, 2014

     8.7       $ 8.66   

Granted

     2.9         13.03   

Achieved

     0.7         9.35   

Released

     (2.9      8.76   

Forfeited

     (0.3      8.85   
  

 

 

    

 

 

 

Non-vested shares underlying restricted stock units at July 3, 2015

     9.1       $ 10.08   
  

 

 

    

 

 

 

Stock Grant Awards

During the quarter and six months ended July 3, 2015, the Company granted 0.1 million shares of stock under stock grant awards to certain directors of the Company with immediate vesting at a weighted-average grant date fair value of $13.09 per share.

 

Note 10: Commitments and Contingencies

Leases

The following represents future minimum lease obligations under non-cancelable operating leases as of July 3, 2015 (in millions):

 

Remainder of 2015

   $ 19.5   

2016

     25.4   

2017

     17.0   

2018

     11.2   

2019

     8.8   

Thereafter

     35.7   
  

 

 

 

Total

   $ 117.6   
  

 

 

 

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 received various manufacturing facilities, one of which is 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.

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

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.

The Company was notified by the Environmental Protection Agency (“EPA”) that it has been identified as a “potentially responsible party” (“PRP”) in the Chemetco Superfund matter. Chemetco is a defunct reclamation services supplier who operated in Illinois at what is now a Superfund site. The Company used Chemetco for reclamation services. The EPA is pursuing Chemetco customers for contribution to the site cleanup activities. The Company has joined a PRP group which is cooperating with the EPA in the evaluation and funding of the cleanup. 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.

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. As of July 3, 2015, the Company’s senior revolving credit facility included $15.0 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 July 3, 2015. The Company also had outstanding guarantees and letters of credit outside of its senior revolving credit facility totaling $5.6 million as of July 3, 2015.

As part of obtaining financing in the normal course of business, the Company issued guarantees related to certain of its capital lease obligations, equipment financing, lines of credit and real estate mortgages, which totaled $123.7 million as of July 3, 2015. The Company is also a guarantor of SCI LLC’s non-collateralized loan with SMBC, which had a balance of $207.5 million as of July 3, 2015. See Note 7: “Long-Term Debt” for additional information.

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

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.

 

26


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

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 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, the Company cannot guarantee the outcome of these actions.

On August 22, 2014, Collabo Innovations, Inc. filed a lawsuit in the U.S. District Court for the District of Delaware against the Company and three of its subsidiaries, all of which were acquired in the acquisition of Aptina. The complaint alleges infringement of U.S. Patent Nos. 6,166,405, 7,696,543, 5,976,907, 7,135,725 and 7,023,034 (the “Collabo Patents”) and seeks unspecified damages for past infringement. The Collabo Patents relate to CMOS image sensor products. Collabo served the complaint in December 2014, and the Company answered in April 2015. Collabo dismissed U.S. Patent No. 7,153,725 from the lawsuit in June of 2015. The Company disputes the claims and will defend the litigation vigorously. Based on the limited information currently available, the Company is not able to estimate what the possible loss or range of loss might be, if any. The Company will pursue its rights under the Aptina acquisition agreements to indemnification for losses that may arise out of or result from this matter.

Intellectual Property Matters

We face risk to exposure from claims of infringement of the IP rights of others. In the ordinary course of business, we receive letters asserting that our products or components breach another party’s rights, including the Collabo Patents above. These threats may seek that we make royalty payments, that we stop use of such rights, or other remedies.

 

27


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Note 11: Fair Value Measurements

Fair Value of Financial Instruments

Summarized information with respect to the Company’s financial assets and liabilities measured at fair value on a recurring basis as of July 3, 2015 and December 31, 2014 is as follows (in millions):

 

Description

   Balance at
July 3, 2015
     Quoted Prices in
Active Markets
     Balance at
December 31, 2014
     Quoted Prices in
Active Markets
 

Cash equivalents (Level 1):

           

Demand and time deposits

   $ —         $ —         $ 20.3       $ 20.3   

Money market funds

     167.5         167.5         46.3         46.3   

Other Current Assets (Level 2):

           

Foreign currency exchange contracts

   $ 0.1       $ 0.1       $ 0.1       $ 0.1   

Liabilities (Level 2):

           

Designated cash flow hedges

   $ 2.2       $ 2.2       $ 3.5       $ 3.5   

Short-Term Investments

The Company’s short-term investments are valued using market prices on active markets (Level 1). Short-term investments with an original maturity 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 ability to hold these securities until maturity. Investments that are designated as available-for-sale are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive loss.

Short-term investments classified as held-to-maturity as of July 3, 2015 and December 31, 2014 were as follows (in millions):

 

     Balance at July 3, 2015      Balance at December 31, 2014  
     Carried at
Amortized Cost
     Fair Value      Carried at
Amortized Cost
     Fair Value  

Short-term investments held-to-maturity

           

Corporate bonds

   $ 0.7       $ 0.7       $ 2.0       $ 2.0   

There were no unrealized gains or losses on held-to-maturity short-term investments as of July 3, 2015.

As of July 3, 2015 and December 31, 2014, the Company held short-term investments classified as available-for-sale, measured at Level 1, with a fair value equal to its carrying value of $0.6 million and $4.1 million, respectively. See Note 13: “Changes in Accumulated Other Comprehensive Loss” for additional information on unrealized gains and losses on available-for-sale short-term investments.

Other

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 July 3, 2015 and December 31, 2014 are as follows (in millions):

 

     July 3, 2015      December 31, 2014  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Long-term debt, including current portion

           

Convertible notes

   $ 926.8       $ 1,106.4       $ 342.2       $ 424.8   

Long-term debt

   $ 364.2       $ 363.7       $ 745.8       $ 744.8   

 

28


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

The fair value of the Company’s 2.625% Notes, Series B was estimated based on market prices in active markets (Level 1). The fair value of other long-term debt, including the recently issued 1.00% Notes, was estimated based on discounting the remaining principal and interest payments using current market rates for similar debt (Level 2) as of July 3, 2015 and December 31, 2014.

Cost Method Investments

Investments in equity securities that do not qualify for fair value accounting are accounted for under the cost method. Accordingly, the Company accounts for investments in companies that it does not control, or have significant influence over, under the cost method, as applicable. If a decline in the fair value of a cost method investment is determined to be other than temporary, an impairment charge is recorded, and the fair value becomes the new cost basis of the investment. The Company evaluates all of its cost method investments for impairment; however, it is not required to determine the fair value of its investment unless impairment indicators are present.

As of July 3, 2015 and December 31, 2014, the Company’s cost method investments had a carrying value of $12.1 million and $12.2 million, respectively.

 

29


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Note 12: 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, which are undesignated hedges for accounting purposes.

As of July 3, 2015 and December 31, 2014, the Company had net outstanding foreign exchange contracts with notional amounts of $90.9 million and $145.7 million, respectively. Such contracts were obtained through financial institutions and were scheduled to mature within one to three months from the time of purchase. 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 summarizes the Company’s net foreign exchange positions in U.S. dollars as of July 3, 2015 and December 31, 2014 (in millions):

 

     July 3, 2015      December 31, 2014  
     Buy (Sell)      Notional Amount      Buy (Sell)      Notional Amount  

Euro

   $ (19.4    $ 19.4       $ (31.2    $ 31.2   

Japanese Yen

     (29.5      29.5         (42.1      42.1   

Malaysian Ringgit

     —           —           39.2         39.2   

Philippine Peso

     19.3         19.3         16.7         16.7   

Other Currencies

     17.2         22.7         11.1         16.5   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ (12.4    $ 90.9       $ (6.3    $ 145.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company is exposed to credit-related losses if counterparties to its foreign exchange contracts fail to perform their obligations. As of July 3, 2015, the counterparties to the Company’s foreign currency hedge contracts as well as the cash flow hedges described below are held at financial institutions which the Company believes to be highly rated, and no credit-related losses are anticipated. Amounts receivable or payable under the contracts are included in other current assets or accrued expenses in the accompanying Consolidated Balance Sheet. For the quarters ended July 3, 2015 and June 27, 2014, realized and unrealized foreign currency transactions totaled a $0.1 million loss and a $0.1 million loss, respectively. For the six months ended July 3, 2015, there was no gain or loss recognized from realized and unrealized foreign currency transactions. For the six months ended June 27, 2014, realized and unrealized foreign currency transactions totaled a loss of $1.0 million. The realized and unrealized foreign currency transactions are included in other income and expenses in the Company’s Consolidated Statements of Operations and Comprehensive Income.

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.

 

30


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

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 July 3, 2015 was $33.9 million, which is primarily composed of cash flow hedges for Malaysian Ringgit/U.S. dollar and Philippine Peso/U.S. dollar currency pairs.

For the quarter and six months ended July 3, 2015, the Company recorded a net loss of $1.6 million and $3.4 million, respectively, associated with cash flow hedges recognized as a component of cost of revenues. As of July 3, 2015, the Company had a $2.2 million liability balance for contracts designated as cash flow hedging instruments. As of December 31, 2014, the Company had a $3.5 million liability balance for contracts designated as cash flow hedging instruments that were classified as other liabilities.

 

31


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Note 13: Changes in Accumulated Other Comprehensive Loss

Amounts comprising the Company’s accumulated other comprehensive loss and reclassifications for the six months ended July 3, 2015 are as follows (net of tax of $0, in millions):

 

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

Balance as of December 31, 2014

   $ (42.5    $ (3.5    $ 4.5       $ (41.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss) prior to reclassifications

     —           4.7         —           4.7   

Amounts reclassified from accumulated other comprehensive loss

     —           (3.4      (3.4      (6.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current period other comprehensive income

     —           1.3         (3.4      (2.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of July 3, 2015

   $ (42.5    $ (2.2    $ 1.1       $ (43.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts which were reclassified from accumulated other comprehensive loss to the Company’s Consolidated Statements of Operations and Comprehensive Income during the quarter and six months ended July 3, 2015, respectively, were as follows (net of tax of $0, in millions):

 

     Amounts Reclassified from Accumulated Other Comprehensive Loss
     Quarter Ended     Six Months Ended      
     July 3, 2015     June 27, 2014     July 3, 2015     June 27, 2014     Affected Line Item Where Net
Income is Presented

Effects of cash flow hedges

   $ (1.6   $ (0.1   $ (3.4   $ (1.4   Cost of revenues

Gains and Losses on Available-for-Sale Securities

     —          —          (3.4     —        Other income and expense
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications

   $ (1.6   $ (0.1   $ (6.8   $ (1.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

Included in accumulated other comprehensive loss as of July 3, 2015 is $14.0 million of foreign currency translation losses related to the Company’s subsidiary that owns the KSS facility, which utilizes the Japanese Yen as its functional currency. In connection with the previously announced restructuring plan, the Company intends to liquidate the legal entity. Upon the substantial liquidation of the KSS entity, the Company will evaluate the need to release any amount remaining in accumulated other comprehensive income to its results of operations, as required by the appropriate accounting standards.

 

32


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Note 14: Supplemental Disclosures

Supplemental Disclosure of Cash Flow Information

Certain of the Company’s non-cash activities along with cash payments for interest and income taxes are as follows (in millions):

 

     Six Months Ended  
     July 3, 2015      June 27, 2014  

Non-cash activities:

     

Capital expenditures in accounts payable and other liabilities

   $ 91.1       $ 80.1   

Equipment acquired or refinanced through capital leases

   $ 1.5       $ 6.1   

Cash (received) paid for:

     

Interest income

   $ (0.6    $ (0.4

Interest expense

   $ 14.4       $ 11.2   

Income taxes

   $ 11.3       $ 8.6   

 

33


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Note 15: Segment Information

As of July 3, 2015, the Company was organized into four reportable segments, consisting of the Application Products Group, Standard Products Group, System Solutions Group and Image Sensor Group. The Company’s Image Sensor Group was established during the third quarter of 2014 following the Company’s acquisitions of Truesense and Aptina. Previously reported information has been recast to reflect the current reportable segments.

Each of the Company’s major product lines has been examined and each product line has been assigned to a reportable 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 and gross profit for the Company’s reportable segments for the quarters and six months ended July 3, 2015 and June 27, 2014 are as follows (in millions):

 

     Application
Products
Group
     Image Sensor
Group
     Standard
Products
Group
     System
Solutions
Group
     Total  

For the quarter ended July 3, 2015:

              

Revenues from external customers

   $ 263.5       $ 173.2       $ 307.8       $ 136.0       $ 880.5   

Segment gross profit

   $ 117.2       $ 51.7       $ 104.3       $ 26.2       $ 299.4   

For the quarter ended June 27, 2014:

              

Revenues from external customers

   $ 276.9       $ 24.3       $ 303.7       $ 152.7       $ 757.6   

Segment gross profit

   $ 125.2       $ 11.7       $ 110.2       $ 31.0       $ 278.1   

For the six months ended July 3, 2015:

              

Revenues from external customers

   $ 527.8       $ 343.7       $ 611.0       $ 268.8       $ 1,751.3   

Segment gross profit

   $ 236.0       $ 101.8       $ 217.9       $ 52.7       $ 608.4   

For the six months ended June 27, 2014:

              

Revenues from external customers

   $ 544.5       $ 36.2       $ 596.6       $ 286.8       $ 1,464.1   

Segment gross profit

   $ 243.0       $ 20.0       $ 216.4       $ 56.0       $ 535.4   

Gross profit shown above and below is exclusive of the amortization of acquisition-related intangible assets. Depreciation expense is included in segment gross profit. Reconciliations of segment gross profit to consolidated gross profit are as follows (in millions):

 

     Quarter Ended      Six Months Ended  
     July 3, 2015      June 27, 2014      July 3, 2015      June 27, 2014  

Gross profit for reportable segments

   $ 299.4       $ 278.1       $ 608.4       $ 535.4   

Less: unallocated manufacturing benefit (costs)

     5.0         —           (3.6      (9.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated Gross profit

   $ 304.4       $ 278.1       $ 604.8       $ 526.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s consolidated assets are not specifically ascribed to its individual reporting segments. Rather, assets used in operations are generally shared across the Company’s reporting segments.

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 gross profit by geographical location.

 

34


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

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      Six Months Ended  
     July 3, 2015      June 27, 2014      July 3, 2015      June 27, 2014  

United States

   $ 140.8       $ 126.1       $ 272.6       $ 238.1   

Japan

     64.8         66.8         127.4         132.1   

Hong Kong

     224.0         220.9         415.2         423.6   

Singapore

     294.6         189.7         610.9         370.1   

United Kingdom

     119.2         118.3         248.9         235.5   

Other

     37.1         35.8         76.3         64.7   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 880.5       $ 757.6       $ 1,751.3       $ 1,464.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     July 3,
2015
     December 31,
2014
 

United States

   $ 318.9       $ 308.1   

Czech Republic

     108.3         113.8   

Malaysia

     228.0         232.2   

Philippines

     230.2         197.4   

China

     115.7         122.2   

Other

     224.4         230.2   
  

 

 

    

 

 

 
   $ 1,225.5       $ 1,203.9   
  

 

 

    

 

 

 

For the quarters and six months ended July 3, 2015 and June 27, 2014, there were no individual customers, including distributors, which accounted for more than 10% of the Company’s total consolidated revenues.

 

Note 16: 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, SANYO Semiconductor, Truesense and Aptina (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 non-collateralized 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.

The condensed consolidating financial statements included in this footnote have been corrected consistent with the revisions described in Note 1: “Background and Basis of Presentation.”

 

35


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

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):

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JULY 3, 2015

(in millions)

 

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

Cash and cash equivalents

   $ —         $ 306.7       $ —         $ 269.9       $ —        $ 576.6   

Short-term investments

     —           0.7         —           0.6         —          1.3   

Receivables, net

     —           66.9         —           423.0         —          489.9   

Inventories

     —           90.0         —           654.2         (1.2     743.0   

Short-term intercompany receivables

     —           85.5         1.4         —           (86.9     —     

Other current assets

     0.7         18.9         —           100.4         1.3        121.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     0.7         568.7         1.4         1,448.1         (86.8     1,932.1   

Property, plant and equipment, net

     —           291.3         2.8         932.5         (1.1     1,225.5   

Goodwill

     —           111.6         37.3         114.9         —          263.8   

Intangible assets, net

     —           113.9         —           289.0         (15.6     387.3   

Long-term intercompany receivables

     —           11.2         —           —           (11.2     —     

Other assets

     2,527.4         2,103.2         149.2         862.3         (5,535.4     106.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,528.1       $ 3,199.9       $ 190.7       $ 3,646.8       $ (5,650.1   $ 3,915.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Accounts payable

   $ —         $ 50.2       $ 0.1       $ 285.2       $ —        $ 335.5   

Accrued expenses

     3.9         73.9         0.4         195.6         —          273.8   

Deferred income on sales to distributors

     —           34.4         —           120.7         —          155.1   

Current portion of long-term debt

     345.9         66.5         —           143.5         —          555.9   

Short-term intercompany payables

     —           —           —           86.9         (86.9     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     349.8         225.0         0.5         831.9         (86.9     1,320.3   

Long-term debt

     580.9         221.1         —           20.3         —          822.3   

Other long-term liabilities

     —           33.5         0.1         119.5         —          153.1   

Long-term intercompany payables

     —           —           —           11.2         (11.2     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     930.7         479.6         0.6         982.9         (98.1     2,295.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Stockholders’ equity

     1,597.4         2,720.3         190.1         2,663.9         (5,574.3     1,597.4   

Non-controlling interest in consolidated subsidiary

     —           —           —           —           22.3        22.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     1,597.4         2,720.3         190.1         2,663.9         (5,552.0     1,619.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 2,528.1       $ 3,199.9       $ 190.7       $ 3,646.8       $ (5,650.1   $ 3,915.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

36


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2014

(in millions)

 

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

Cash and cash equivalents

   $ —         $ 199.9       $ —         $ 311.8       $ —        $ 511.7   

Short-term investments

     —           2.0         —           4.1         —          6.1   

Receivables, net

     —           56.6         —           360.9         —          417.5   

Inventories

     —           60.5         —           652.9         16.5        729.9   

Short-term intercompany receivables

     —           —           4.9         —           (4.9     —     

Other current assets

     —           14.0         —           126.6         —          140.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —           333.0         4.9         1,456.3         11.6        1,805.8   

Property, plant and equipment, net

     —           262.1         3.1         940.1         (1.4     1,203.9   

Goodwill

     —           111.6         37.3         114.9         —          263.8   

Intangible assets, net

     —           98.2         —           377.9         (17.6     458.5   

Long-term intercompany receivables

     —           204.2         —           —           (204.2     —     

Other assets

     1,969.1         2,002.3         143.5         858.2         (4,882.1     91.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,969.1       $ 3,011.4       $ 188.8       $ 3,747.4       $ (5,093.7   $ 3,823.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Accounts payable

   $ —         $ 37.8         0.1         340.3         —        $ 378.2   

Accrued expenses

     0.4         71.6         0.5         215.4         —          287.9   

Deferred income on sales to distributors

     —           36.4         —           128.7         —          165.1   

Current portion of long-term debt

     —           57.6         —           152.0         —          209.6   

Short-term intercompany payables

     —           2.3         —           2.6         (4.9     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     0.4         205.7         0.6         839.0         (4.9     1,040.8   

Long-term debt

     342.2         609.5         —           31.3         —          983.0   

Other long-term liabilities

     —           21.1         —           130.7         —          151.8   

Long-term intercompany payables

     —           —           —           204.2         (204.2     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     342.6         836.3         0.6         1,205.2         (209.1     2,175.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Stockholders’ equity

     1,626.5         2,175.1         188.2         2,542.2         (4,905.5     1,626.5   

Non-controlling interest in consolidated subsidiary

     —           —           —           —           20.9        20.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     1,626.5         2,175.1         188.2         2,542.2         (4,884.6     1,647.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 1,969.1       $ 3,011.4       $ 188.8       $ 3,747.4       $ (5,093.7   $ 3,823.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

37


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 JULY 3, 2015

(in millions)

 

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

Revenues

   $ —        $ 286.6      $ —        $ 1,110.1      $ (516.2   $ 880.5   

Cost of revenues (exclusive of amortization shown below)

     —          175.5        0.2        899.9        (499.5     576.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          111.1        (0.2     210.2        (16.7     304.4   

Operating expenses:

            

Research and development

     —          31.8        3.3        65.3        —          100.4   

Selling and marketing

     —          23.4        0.2        26.8        —          50.4   

General and administrative

     —          7.2        0.3        37.5        —          45.0   

Amortization of acquisition related intangible assets

     —          3.5        —          31.1        (1.0     33.6   

Restructuring, asset impairments and other, net

     —          0.1        —          3.4        —          3.5   

Goodwill and intangible asset impairment

     —          —          —          3.7        —          3.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          66.0        3.8        167.8        (1.0     236.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     —          45.1        (4.0     42.4        (15.7     67.8   

Other income (expense), net:

            

Interest expense

     (6.1     (2.8     —          (1.8     —          (10.7

Interest income

     —          0.2        —          0.1        —          0.3   

Other

     —          1.7        —          0.4        —          2.1   

Loss on debt extinguishment

     —          (0.4     —          —          —          (0.4

Equity in earnings

     56.8        13.6        3.0        —          (73.4     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     50.7        12.3        3.0        (1.3     (73.4     (8.7

Income before income taxes

     50.7        57.4        (1.0     41.1        (89.1     59.1   

Income tax provision

     —          (1.6     —          (6.1     —          (7.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     50.7        55.8        (1.0     35.0        (89.1     51.4   

Net income attributable to non-controlling interest

     —          —          —          —          (0.7     (0.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ON Semiconductor Corporation

   $ 50.7      $ 55.8      $ (1.0   $ 35.0      $ (89.8   $ 50.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to ON Semiconductor Corporation

   $ 52.9      $ 58.0      $ (1.0   $ 35.7      $ (92.7   $ 52.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


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 JUNE 27, 2014

(in millions)

 

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

Revenues

   $ —        $ 177.2      $ 4.0      $ 1,050.1      $ (473.7   $ 757.6   

Cost of revenues (exclusive of amortization shown below)

     —          142.9        0.3        811.2        (474.9     479.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          34.3        3.7        238.9        1.2        278.1   

Operating expenses:

            

Research and development

     —          13.2        2.9        68.1        —          84.2   

Selling and marketing

     —          20.9        0.2        26.8        —          47.9   

General and administrative

     —          17.3        0.3        27.1        —          44.7   

Amortization of acquisition related intangible assets

     —          3.8        —          7.6        (1.0     10.4   

Restructuring, asset impairments and other, net

     —          0.9        —          3.2        —          4.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          56.1        3.4        132.8        (1.0     191.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     —          (21.8     0.3        106.1        2.2        86.8   

Other income (expense), net:

            

Interest expense

     (4.2     (3.1     —          (0.6     —          (7.9

Interest income

     —          —          —          0.2        —          0.2   

Other

     —          1.5        —          (1.7     —          (0.2

Equity in earnings

     98.3        103.2        2.3        —          (203.8     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     94.1        101.6        2.3        (2.1     (203.8     (7.9

Income before income taxes

     94.1        79.8        2.6        104.0        (201.6     78.9   

Income tax benefit (provision)

     —          18.9        (0.3     (2.4     —          16.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     94.1        98.7        2.3        101.6        (201.6     95.1   

Net income attributable to non-controlling interest

     —          —          —          —          (1.0     (1.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ON Semiconductor Corporation

   $ 94.1      $ 98.7      $ 2.3      $ 101.6      $ (202.6   $ 94.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to ON Semiconductor Corporation

   $ 95.2      $ 100.0      $ 2.3      $ 101.4      $ (203.7   $ 95.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

39


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 SIX MONTHS ENDED JULY 3, 2015

(in millions)

 

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

Revenues

   $ —        $ 488.8      $ 4.2      $ 2,239.0      $ (980.7   $ 1,751.3   

Cost of revenues (exclusive of amortization shown below)

     —          329.8        0.4        1,779.3        (963.0     1,146.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          159.0        3.8        459.7        (17.7     604.8   

Operating expenses:

            

Research and development

     —          64.1        6.6        130.1        —          200.8   

Selling and marketing

     —          49.8        0.4        53.5        —          103.7   

General and administrative

     —          22.1        0.6        69.0        —          91.7   

Amortization of acquisition related intangible assets

     —          7.0        —          62.6        (2.1     67.5   

Restructuring, asset impairments and other, net

     —          (0.7     —          1.9        —          1.2   

Goodwill and intangible asset impairment

     —          —          —          3.7        —          3.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          142.3        7.6        320.8        (2.1     468.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     —          16.7        (3.8     138.9        (15.6     136.2   

Other income (expense), net:

            

Interest expense

     (10.5     (5.3     —          (4.1     —          (19.9

Interest income

     —          0.3        —          0.3        —          0.6   

Other

     —          —          —          5.8        —          5.8   

Loss on debt extinguishment

     —          (0.4     —          —          —          (0.4

Equity in earnings

     116.3        107.5        5.7        —          (229.5     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     105.8        102.1        5.7        2.0        (229.5     (13.9

Income before income taxes

     105.8        118.8        1.9        140.9        (245.1     122.3   

Income tax provision

     —          (2.4     —          (14.0     1.3        (15.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     105.8        116.4        1.9        126.9        (243.8     107.2   

Net income attributable to non-controlling interest

     —          —          —          —          (1.4     (1.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ON Semiconductor Corporation

   $ 105.8      $ 116.4      $ 1.9      $ 126.9      $ (245.2   $ 105.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to ON Semiconductor Corporation

   $ 103.7      $ 114.3      $ 1.9      $ 123.5      $ (239.7   $ 103.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

40


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 SIX MONTHS ENDED JUNE 27, 2014

(in millions)

 

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

Revenues

   $ —        $ 347.2      $ 7.9      $ 2,024.2      $ (915.2   $ 1,464.1   

Cost of revenues (exclusive of amortization shown below)

     —          282.3        0.5        1,570.5        (915.5     937.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          64.9        7.4        453.7        0.3        526.3   

Operating expenses:

            

Research and development

     —          25.4        5.9        131.0        —          162.3   

Selling and marketing

     —          40.2        0.4        51.7        —          92.3   

General and administrative

     —          30.5        0.6        54.6        —          85.7   

Amortization of acquisition related intangible assets

     —          7.5        —          13.1        (2.0     18.6   

Restructuring, asset impairments and other, net

     —          1.3        —          8.6        —          9.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          104.9        6.9        259.0        (2.0     368.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     —          (40.0     0.5        194.7        2.3        157.5   

Other income (expense), net:

            

Interest expense

     (8.2     (6.6     —          (1.2     —          (16.0

Interest income

     —          0.1        —          0.3        —          0.4   

Other

     —          0.9        —          (1.8     —          (0.9

Equity in earnings

     158.0        199.1        2.9        —          (360.0     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     149.8        193.5        2.9        (2.7     (360.0     (16.5

Income before income taxes

     149.8        153.5        3.4        192.0        (357.7     141.0   

Income tax benefit (provision)

     —          24.6        (0.3     (14.3     —          10.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     149.8        178.1        3.1        177.7        (357.7     151.0   

Net income attributable to non-controlling interest

     —          —          —          —          (1.2     (1.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ON Semiconductor Corporation

   $ 149.8      $ 178.1      $ 3.1      $ 177.7      $ (358.9   $ 149.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to ON Semiconductor Corporation

   $ 151.9      $ 180.6      $ 3.1      $ 177.1      $ (360.8   $ 151.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

41


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JULY 3, 2015

(in millions)

 

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

Net cash (used in) provided by operating activities

   $ (4.7   $ (63.6   $ —         $ 253.4      $ —        $ 185.1   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

             

Purchases of property, plant and equipment

     —          (35.9     —           (104.4     —          (140.3

Proceeds from sales of property, plant and equipment

     —          0.1        —           10.2        —          10.3   

Purchase of businesses, net of cash acquired

     —          —          —           (2.9     —          (2.9

Proceeds from sale of available-for-sale securities

     —          —          —           4.9        —          4.9   

Proceeds from sale of held-to maturity securities

     —          2.0        —           —          —          2.0   

Purchases of held-to-maturity securities

     —          (0.7     —           —          —          (0.7

Contribution to subsidiaries

     (405.2     —          —           —          405.2        —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (405.2     (34.5     —           (92.2     405.2        (126.7
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

             

Intercompany loans

     —          (214.6     —           214.6        —          —     

Intercompany loan repayments to guarantor

     —          407.6        —           (407.6     —          —     

Payments from parent

     —          405.2        —           —          (405.2     —     

Proceeds from issuance of common stock under the employee stock purchase plan

     7.0        —          —           —          —          7.0   

Proceeds from exercise of stock options

     23.7        —          —           —          —          23.7   

Payments of tax withholding for restricted shares

     (11.4     —          —           —          —          (11.4

Repurchase of common stock

     (225.1     —          —           —          —          (225.1

Proceeds from debt issuance

     690.0        41.6        —           24.3        —          755.9   

Purchases of convertible note hedges

     (108.9     —          —           —          —          (108.9

Proceeds from issuance of warrants

     52.0        —          —           —          —          52.0   

Payments of debt issuance and other financing costs

     (17.4     (2.1        —          —          (19.5

Repayment of long-term debt

     —          (424.7     —           (28.4     —          (453.1

Payment of capital leases obligations

     —          (8.1     —           (5.0     —          (13.1
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     409.9        204.9        —           (202.1     (405.2     7.5   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          —           (1.0     —          (1.0
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     —          106.8        —           (41.9     —          64.9   

Cash and cash equivalents, beginning of period

     —          199.9        —           311.8        —          511.7   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ —        $ 306.7      $ —         $ 269.9      $ —        $ 576.6   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 27, 2014

(in millions)

 

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

Net cash (used in) provided by operating activities

   $ (4.7   $ 14.1      $ 0.7      $ 216.4      $ —        $ 226.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

            

Purchases of property, plant and equipment

     —          (29.0     (0.7     (66.8     —          (96.5

Proceeds from sales of property, plant and equipment

     —          —          —          0.2        —          0.2   

Deposits utilized for purchases of property, plant and equipment

     —          —          —          1.3        —          1.3   

Purchase of businesses, net of cash acquired

     —          —          —          (90.9     —          (90.9

Proceeds from sale of held-to maturity securities

     —          116.2        —          —          —          116.2   

Purchase of held-to-maturity securities

     —          (2.3     —          —          —          (2.3

Contribution from subsidiaries

     23.0        —          —          —          (23.0     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     23.0        84.9        (0.7     (156.2     (23.0     (72.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

            

Intercompany loans

     —          (65.3     —          65.3        —          —     

Intercompany loan repayments to guarantor

     —          65.5        —          (65.5     —          —     

Payments to parent

     —          (23.0     —          —          23.0        —     

Proceeds from issuance of common stock under the employee stock purchase plan

     2.5        —          —          —          —          2.5   

Proceeds from exercise of stock options

     15.4        —          —          —          —          15.4   

Payments of tax withholding for restricted shares

     (5.4     —          —          —          —          (5.4

Repurchase of common stock

     (30.8     —          —          —          —          (30.8

Proceeds from debt issuance

     —          —          —          15.0        —          15.0   

Payment of capital leases obligations

     —          (19.2     —          (1.8     —          (21.0

Repayment of long-term debt

     —          (22.1     —          (18.6     —          (40.7

Dividend to non-controlling shareholder of consolidated subsidiary

     —          —          —          (1.2     —          (1.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (18.3     (64.1     —          (6.8     23.0        (66.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          —          1.1        —          1.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     —          34.9        —          54.5        —          89.4   

Cash and cash equivalents, beginning of period

     —          267.9        —          241.6        —          509.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ —        $ 302.8      $ —        $ 296.1      $ —        $ 598.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

 

Please refer to the chart below for the impact of the corrections to the Condensed Consolidating Statement of Operations for the quarter and six months ended June 27, 2014 (in millions):

 

     Quarter Ended June 27, 2014  
     Issuer      Guarantor
Subsidiaries
                     
     ON Semiconductor
Corporation
     SCI LLC      Other
Subsidiaries
     Non-
Guarantor
Subsidiaries
     Eliminations     Total  

Total change in gross profit

   $ —         $ —         $ —         $ 5.1       $ —        $ 5.1   

Total change in operating income

     —           —           —           —           —          —     

Total change in other income (expense), net

     6.1         6.1         —           1.0         (12.2     1.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total change in net income attributable to ON Semiconductor Corporation

   $ 6.1       $ 6.1       $ —         $ 6.1       $ (12.2   $ 6.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total change in comprehensive income attributable to ON Semiconductor Corporation

   $ 6.1       $ 6.1       $ —         $ 6.1       $ (12.2   $ 6.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Six Months Ended June 27, 2014  
     Issuer      Guarantor
Subsidiaries
                     
     ON Semiconductor
Corporation
     SCI LLC      Other
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Total  

Total change in gross profit

   $ —         $ —         $ —         $ 2.5       $ —        $ 2.5   

Total change in operating income

     —           —           —           —           —          —     

Total change in other income (expense), net

     3.4         3.4         —           0.9         (6.8     0.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total change in net income attributable to ON Semiconductor Corporation

   $ 3.4       $ 3.4       $ —         $ 3.4       $ (6.8   $ 3.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total change in comprehensive income attributable to ON Semiconductor Corporation

   $ 3.4       $ 3.4       $ —         $ 3.4       $ (6.8   $ 3.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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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, 2014 (“2014 Form 10-K”), filed with the Commission on February 27, 2015, and our unaudited consolidated financial statements for the fiscal quarter and six months ended July 3, 2015, 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 2014 Form 10-K.

Company Highlights for the Quarter Ended July 3, 2015

 

    Total revenues of approximately $880.5 million

 

    Gross margin of approximately 34.6%

 

    Net income of $0.12 per diluted share

 

    Issued $690.0 million of the Company’s 1.00% Notes

 

    Completed the repurchase of approximately 10.4 million shares of common stock for approximately $131.1 million under our previously announced share repurchase program

 

    Amended the Senior Revolving Credit Facility, increased the borrowing capacity to $1.0 billion and reset the five year maturity

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 2015 through 2017. 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 analog, digital and mixed signal ICs, standard products, image sensors 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 signal 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 automotive, wireless, industrial and consumer applications. 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 sensor and memory categories used by the WSTS group.

 

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

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 49,000 products as of July 3, 2015 and we shipped approximately 24.5 billion units in the first six months of 2015, as compared to 22.3 billion units in the first six months of 2014. 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 July 3, 2015, we were organized into four operating segments, which also represented our four reporting segments: Application Products Group, Standard Products Group, Image Sensor Group and System Solutions Group. Each of our major product lines has been assigned to a segment based on our operating strategy. The Company’s Image Sensor Group was established during the third quarter of 2014 following the Company’s acquisitions of Truesense and Aptina. Previously reported information has been recast to reflect the current reportable segments.

As 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 reportable segments and may move product families or individual devices from one reportable 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, has often experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions, and may experience significant uncertainty and volatility in the future. 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.

We have historically taken significant actions to align our overall cost structure with our expected revenue levels. Such actions continued in 2014 within our System Solutions Group and certain less significant activities occurred during 2015. See “Results of Operations” under the heading “Restructuring, Asset Impairments and Other, Net” below for further details relating to our most recent cost saving actions.

Outlook

ON Semiconductor Third Quarter 2015 Outlook

Based upon product booking trends, backlog levels, and estimated turns levels, we estimate that our revenues will be approximately $890 to $930 million in the third quarter of 2015. Backlog levels for the third quarter of 2015 represent approximately 80% to 85% of our anticipated third quarter 2015 revenues. For the third quarter of 2015, we estimate that gross margin as a percentage of revenues will be approximately 34% to 36%.

 

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Table of Contents

Results of Operations

Our results of operations for the quarter and six months ended July 3, 2015 include the results of operations from our acquisitions of Aptina and Truesense on August 15, 2014 and April 30, 2014, respectively.

Revision of Previously-Issued Financial Statements

As disclosed in our 2014 Form 10-K, we identified errors in our financial statements for first three quarters of the fiscal year ended December 31, 2014, as included in our 2014 quarterly reports on Form 10-Q, and revised our previously issued financial statements to record a deferred tax asset in a foreign subsidiary in a prior period, and to make adjustments in each successive period related to the foreign currency exchange rate changes associated with that item. The interim period ended June 27, 2014 also includes revised amounts from a change in the application of an accounting convention related to manufacturing variances.

All financial information contained herein has been revised to reflect the correction of these errors. See Note 1: “Background and Basis of Presentation” of the notes to our unaudited consolidated financial statements included elsewhere in this report for additional information.

 

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Table of Contents

Quarter Ended July 3, 2015 Compared to the Quarter Ended June 27, 2014

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 July 3, 2015 and June 27, 2014 (in millions):

 

     Quarter Ended         
     July 3,
2015
     June 27,
2014
     Dollar Change  

Revenues

   $ 880.5       $ 757.6       $ 122.9   

Cost of revenues (exclusive of amortization shown below)

     576.1         479.5         96.6   
  

 

 

    

 

 

    

 

 

 

Gross profit

     304.4         278.1         26.3   

Operating expenses:

        

Research and development

     100.4         84.2         16.2   

Selling and marketing

     50.4         47.9         2.5   

General and administrative

     45.0         44.7         0.3   

Amortization of acquisition-related intangible assets

     33.6         10.4         23.2   

Restructuring, asset impairments and other, net

     3.5         4.1         (0.6

Goodwill and intangible asset impairment

     3.7         —           3.7   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     236.6         191.3         45.3   
  

 

 

    

 

 

    

 

 

 

Operating income

     67.8         86.8         (19.0
  

 

 

    

 

 

    

 

 

 

Other (expense) income, net:

        

Interest expense

     (10.7      (7.9      (2.8

Interest income

     0.3         0.2         0.1   

Other

     2.1         (0.2      2.3   

Loss on debt extinguishment

     (0.4      —           (0.4
  

 

 

    

 

 

    

 

 

 

Other (expense) income, net

     (8.7      (7.9      (0.8
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     59.1         78.9         (19.8

Income tax (provision) benefit

     (7.7      16.2         (23.9
  

 

 

    

 

 

    

 

 

 

Net income

     51.4         95.1         (43.7

Less: Net income attributable to non-controlling interest

     (0.7      (1.0      0.3   
  

 

 

    

 

 

    

 

 

 

Net income attributable to ON Semiconductor Corporation

   $ 50.7       $ 94.1       $ (43.4
  

 

 

    

 

 

    

 

 

 

Revenues

Revenues were $880.5 million and $757.6 million for the quarters ended July 3, 2015 and June 27, 2014, respectively. The increase in revenues for the quarter ended July 3, 2015 compared to the quarter ended June 27, 2014 was primarily attributed to approximately $149.3 million of additional revenue in the Image Sensor Group provided by the acquisitions of Aptina and Truesense, along with increases from our Standard Products Group, which experienced greater revenue as a result of an improved demand environment. The increase in revenue was partially offset by decreased revenue from our Application Products Group in the wireless and computing end-markets and decreases in our System Solutions Group due to a devaluation of the Yen and a softening of the Japanese consumer end-markets.

As compared to the quarter ended June 27, 2014, we experienced an increase in revenue of approximately 16% resulting from the revenue contribution from our acquisitions of Aptina and Truesense along with favorable changes in volume and mix, partially offset by a decline in average selling prices of approximately 1%.

 

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Table of Contents

Revenues by reportable segment for the quarters ended July 3, 2015 and June 27, 2014 were as follows (dollars in millions):

 

     Quarter Ended
July 3, 2015
     As a % of
Total Revenue (1)
    Quarter Ended
June 27, 2014
     As a % of
Total Revenue (1)
 

Application Products Group

   $ 263.5         29.9   $ 276.9         36.5

Image Sensor Group

     173.2         19.7     24.3         3.2

Standard Products Group

     307.8         35.0     303.7         40.1

System Solutions Group

     136.0         15.4     152.7         20.2
  

 

 

      

 

 

    

Total revenues

   $ 880.5         $ 757.6      
  

 

 

      

 

 

    

 

(1) Certain amounts may not total due to rounding of individual amounts.

Revenues from the Application Products Group decreased by $13.4 million, or approximately 5%, from the second quarter of 2014 to the second quarter of 2015. This decrease is primarily attributable to a $13.0 million, or approximately 12%, decrease in revenues from our analog products.

Revenues from the Image Sensor Group increased by $148.9 million from the second quarter of 2014 to the second quarter of 2015. This increase is attributable to revenue provided by the 2014 acquisitions of Aptina and Truesense, which generated approximately $149.3 million of revenue during the second quarter of 2015.

Revenues from the Standard Products Group increased by $4.1 million, or approximately 1%, from the second quarter of 2014 to the second quarter of 2015. This increase is primarily attributable to a $7.7 million, or approximately 48%, increase in revenue from our memory products, combined with an increase in revenues from our analog products of $4.3 million, or approximately 5%. These increases are the result of an improved demand environment and are partially offset by a $7.9 million, or approximately 13%, decrease in revenues from our TMOS products.

Revenues from the System Solutions Group decreased by $16.7 million, or approximately 11%, from the second quarter of 2014 to the second quarter of 2015. This decrease resulted from a decrease in demand from the Japanese consumer end-markets and an increase in competition in other regions, causing a decrease in revenue from LSI products of approximately $16.4 million, or approximately 17%.

Revenues by geographic location, including local sales made by operations within each area, based on sales billed from the respective country for the quarters ended July 3, 2015 and June 27, 2014 are summarized as follows (dollars in millions):

 

     Quarter Ended
July 3, 2015
     As a % of
Total Revenue (1)
    Quarter Ended
June 27, 2014
     As a % of
Total Revenue (1)
 

United States

   $ 140.8         16.0   $ 126.1         16.6

Japan

     64.8         7.4     66.8         8.8

Hong Kong

     224.0         25.4     220.9         29.2

Singapore

     294.6         33.5     189.7         25.0

United Kingdom

     119.2         13.5     118.3         15.6

Other

     37.1         4.2     35.8         4.7
  

 

 

      

 

 

    

Total

   $ 880.5         $ 757.6      
  

 

 

      

 

 

    

 

(1)  Certain amounts may not total due to rounding of individual amounts.

A majority of our end customers, served directly or through distribution channels, are manufacturers of electronic devices. For the quarters ended July 3, 2015 and June 27, 2014, we had no single customer that accounted for 10% or more of our total revenues.

 

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Gross Profit and Gross Margin (exclusive of amortization of acquisition-related intangible assets described below)

Our gross profit by reportable segment for the quarters ended July 3, 2015 and June 27, 2014 was as follows (dollars in millions):

 

     Quarter Ended
July 3, 2015
     As a % of
Segment Revenue (1)
    Quarter Ended
June 27, 2014
     As a % of
Segment Revenue (1)
 

Application Products Group

   $ 117.2         44.5   $ 125.2         45.2

Image Sensor Group

     51.7         29.8     11.7         48.1

Standard Products Group

     104.3         33.9     110.2         36.3

System Solutions Group

     26.2         19.3     31.0         20.3
  

 

 

      

 

 

    

Gross profit by segment

   $ 299.4         $ 278.1      

Unallocated manufacturing benefit (costs) (2)

     5.0         0.6     —           —  
  

 

 

      

 

 

    

Total gross profit

   $ 304.4         34.6   $ 278.1         36.7
  

 

 

      

 

 

    

 

(1)  Certain amounts may not total due to rounding of individual amounts.
(2) Unallocated manufacturing benefit (costs) are shown as a percentage of total revenue.

Our gross profit was $304.4 million in the second quarter of 2015 compared to $278.1 million in the second quarter of 2014. The gross profit increase of $26.3 million, or approximately 9%, during the second quarter of 2015 is primarily due to the impact of our recent acquisitions.

Gross profit as a percentage of revenues decreased from approximately 36.7% in the second quarter of 2014 to approximately 34.6% in the second quarter of 2015. This decrease was primarily driven by a larger proportion of revenues generated from our Image Sensor Group which experienced lower gross margin levels than our Application Products Group and Standard Products Group, partially offset by changes in volume and mix across certain product lines.

Operating Expenses

Research and development expenses were $100.4 million for the second quarter of 2015, compared to $84.2 million for the second quarter of 2014, representing an increase of $16.2 million, or approximately 19%. This increase is primarily associated with approximately $21.3 million of expenses attributable to the operations of Aptina and Truesense, partially offset by decreased performance-based compensation and decreases in our System Solutions Group attributable to decreased payroll related expenses resulting from our 2014 restructuring and cost saving activities along with the impact from a devaluation of the Yen.

Selling and marketing expenses were $50.4 million for the second quarter of 2015, compared to $47.9 million for the second quarter of 2014, representing an increase of $2.5 million, or approximately 5%. This increase is primarily associated with approximately $7.9 million of expenses attributable to the operations of Aptina and Truesense, partially offset by decreased performance-based compensation in our Application Products Group, Standard Products Group and System Solutions Group.

General and administrative expenses were $45.0 million for the second quarter of 2015, compared to $44.7 million in the second quarter of 2014, representing an increase of $0.3 million, or approximately 1%. This increase is primarily associated with approximately $4.4 million of expenses attributable to the operations of Aptina and Truesense, partially offset by $3.7 million of acquisition related expenses which were incurred during the second quarter of 2014 that were not also incurred during the second quarter of 2015.

Other Operating Expenses

Amortization of Acquisition—Related Intangible Assets

Amortization of acquisition-related intangible assets was $33.6 million and $10.4 million for the quarters ended July 3, 2015 and June 27, 2014, respectively. The increase in amortization of acquisition-related intangible assets is attributable to the amortization of intangible assets assumed as a result of our acquisitions of Aptina and Truesense. See Note 4: “Goodwill and Intangible Assets” of the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.

 

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Restructuring, Asset Impairments and Other, Net

Restructuring, asset impairments and other, net resulted in expense of $3.5 million for the quarter ended July 3, 2015 compared to expense of $4.1 million for the quarter ended June 27, 2014. The information below summarizes certain activities for each respective quarter. See Note 5: “Restructuring, Asset Impairments and Other, Net” of the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.

Quarter Ended July 3, 2015

During the quarter ended July 3, 2015, we recorded approximately $3.2 million of charges related to our restructuring programs, primarily consisting of $2.7 million of employee separation charges from our European marketing organization relocation plan and $0.3 million of business combination severance charges.

Quarter Ended June 27, 2014

During the fourth quarter of 2013, we initiated a voluntary retirement program for certain employees of our System Solutions Group subsidiaries in Japan (the “Q4 2013 Voluntary Retirement Program”). Approximately 350 employees opted to retire pursuant to the Q4 2013 Voluntary Retirement Program, all of which had retired by December 31, 2014.

During the quarter ended June 27, 2014, we recorded net charges of approximately $0.6 million in connection with the Q4 2013 Voluntary Retirement Program, which consisted of employee severance charges of $2.3 million, partially offset by pension and related retirement liability adjustments associated with the affected employees, which resulted in a pension curtailment benefit of $1.7 million.

Additionally, during the quarter ended June 27, 2014, we recorded approximately $1.7 million of restructuring charges related to our previously announced plan to close our KSS facility.

Goodwill and Intangible Asset Impairment

During the quarter ended July 3, 2015, the Company canceled certain of its previously capitalized IPRD projects and recorded a related impairment loss of $3.7 million included in the “Goodwill and intangible asset impairment” caption on the Company’s Consolidated Statements of Operations and Comprehensive Income, see Note 4: “Goodwill and Intangible Assets” of the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.

Interest Expense

Interest expense increased by $2.8 million to $10.7 million during the quarter ended July 3, 2015 compared to $7.9 million during the quarter ended June 27, 2014. Our average long-term debt balance (including current maturities and net of debt discount) during the quarter ended July 3, 2015 was $1,270.5 million at a weighted-average interest rate of approximately 3.3%, compared to $912.6 million at a weighted-average interest rate of approximately 3.5% during the quarter ended June 27, 2014.

Other

Other income increased by $2.3 million from an expense of $0.2 million for the quarter ended June 27, 2014 to income of $2.1 million for the quarter ended July 3, 2015, primarily attributable to the gain on sale of available-for-sale securities.

Loss on Debt Extinguishment

During the quarter ended July 3, 2015, we amended our senior revolving credit facility to, among other things, increase the borrowing capacity to $1 billion and reset the Facility’s five year maturity. As a result of the amendment, we wrote-off $0.4 million of existing debt issuance costs associated with the Facility, resulting in a loss on debt extinguishment during the quarter ended July 3, 2015.

 

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Provision for Income Taxes

We recorded an income tax provision of $7.7 million and an income tax benefit of $16.2 million during the quarters ended July 3, 2015 and June 27, 2014, respectively.

The income tax provision for the quarter ended July 3, 2015, consisted of $8.5 million for income and withholding taxes of certain of our foreign and domestic operations and $0.7 million of new reserves and interest on existing reserves for uncertain tax positions in foreign taxing jurisdictions, partially offset by the reversal of $1.4 million for reserves and interest for uncertain tax positions in foreign taxing jurisdictions which were effectively settled or for which the statute lapsed during the quarter ended July 3, 2015 and $0.1 million for the effects of income tax rate changes in certain of our foreign jurisdictions.

The income tax benefit for the quarter ended June 27, 2014 consisted of the reversal of $21.5 million of our previously established valuation allowance against our U.S. deferred tax assets as a result of a net deferred tax liability recorded as part of the Truesense acquisition and the reversal of $3.2 million for reserves and interest for uncertain tax positions in foreign taxing jurisdictions that were effectively settled or for which the statute lapsed during the quarter ended June 27, 2014, partially offset by $6.6 million for income and withholding taxes of certain of our foreign and domestic operations and $1.9 million of new reserves and interest on existing reserves for uncertain tax positions in foreign taxing jurisdictions.

Our provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower than anticipated in countries that have lower tax rates and earnings being higher than anticipated in countries that have higher tax rates. Our effective tax rate for the quarter ended July 3, 2015 was 13.0%, which differs from the U.S. statutory federal income tax rate of 35%. We continue to maintain a full valuation allowance on all of our domestic and substantially all of our Japan related deferred tax assets; however, it is reasonably possible that a substantial portion of the valuation allowance will be reversed within one year of July 3, 2015, which is not expected to have a material effect on our cash taxes. As of December 31, 2014, the valuation allowance on our domestic deferred tax assets was approximately $461.9 million.

 

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Results of Operations

Six Months Ended July 3, 2015 Compared to the Six Months Ended June 27, 2014

The following table summarizes certain information relating to our operating results that has been derived from our unaudited consolidated financial statements for the six months ended July 3, 2015 and June 27, 2014 (in millions):

 

     Six Months Ended         
     July 3,
2015
     June 27,
2014
     Dollar Change  

Revenues

   $ 1,751.3       $ 1,464.1       $ 287.2   

Cost of revenues (exclusive of amortization shown below)

     1,146.5         937.8         208.7   
  

 

 

    

 

 

    

 

 

 

Gross profit

     604.8         526.3         78.5   

Operating expenses:

        

Research and development

     200.8         162.3         38.5   

Selling and marketing

     103.7         92.3         11.4   

General and administrative

     91.7         85.7         6.0   

Amortization of acquisition-related intangible assets

     67.5         18.6         48.9   

Restructuring, asset impairments and other, net

     1.2         9.9         (8.7

Goodwill and intangible asset impairment

     3.7         —           3.7   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     468.6         368.8         99.8   
  

 

 

    

 

 

    

 

 

 

Operating income

     136.2         157.5         (21.3
  

 

 

    

 

 

    

 

 

 

Other (expense) income, net:

        

Interest expense

     (19.9      (16.0      (3.9

Interest income

     0.6         0.4         0.2   

Other

     5.8         (0.9      6.7