filings.toolsItem 16. . Form 10-K Summary
265K characters. Original on sec.gov · Markdown
Item 16. . Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
February 21, 2018
| ON Semiconductor Corporation | ||
| By: | /s/ KEITH D. JACKSON | |
| Name: Keith D. Jackson | ||
| Title: President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Titles | Date | ||||
| /s/ KEITH D. JACKSON | President, Chief Executive Officer | February 21, 2018 | ||||
| Keith D. Jackson | and Director (Principal Executive Officer) | |||||
| /s/ BERNARD GUTMANN | Executive Vice President, Chief | February 21, 2018 | ||||
| Bernard Gutmann | Financial Officer and Treasurer (Principal Financial Officer) | |||||
| /s/ BERNARD R. COLPITTS, JR. | Chief Accounting Officer | February 21, 2018 | ||||
| Bernard R. Colpitts, Jr. | (Principal Accounting Officer) | |||||
| * | Chair of the Board of Directors | February 21, 2018 | ||||
| Alan Campbell | ||||||
| * | Director | February 21, 2018 | ||||
| Atsushi Abe | ||||||
| * | Director | February 21, 2018 | ||||
| Curtis J. Crawford | ||||||
| * | Director | February 21, 2018 | ||||
| Gilles Delfassy | ||||||
| * | Director | February 21, 2018 | ||||
| Emmanuel T. Hernandez | ||||||
| * | Director | February 21, 2018 | ||||
| Paul A. Mascarenas | ||||||
| * | Director | February 21, 2018 | ||||
| Daryl A. Ostrander | ||||||
| * | Director | February 21, 2018 | ||||
| Teresa M. Ressel | ||||||
| *By: | /s/ BERNARD GUTMANN | Attorney in Fact | February 21, 2018 | |||
| Bernard Gutmann |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
ON Semiconductor Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of ON Semiconductor Corporation and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive income, of stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2017 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 3: “Recent Accounting Pronouncements” to the consolidated financial statements, the Company changed the manner in which it accounts for excess tax benefits from share-based compensation in 2017.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
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that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
February 21, 2018
We have served as the Company’s auditor since 1999.
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
| December 31, 2017 | December 31, 2016 | |||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 949.2 | $ | 1,028.1 | ||||
| Receivables, net | 701.5 | 629.8 | ||||||
| Inventories | 1,089.5 | 1,030.2 | ||||||
| Other current assets | 193.0 | 181.0 | ||||||
| Total current assets | 2,933.2 | 2,869.1 | ||||||
| Property, plant and equipment, net | 2,279.1 | 2,159.1 | ||||||
| Goodwill | 916.9 | 924.7 | ||||||
| Intangible assets, net | 628.3 | 762.1 | ||||||
| Deferred tax assets | 339.1 | 138.9 | ||||||
| Other assets | 98.5 | 70.5 | ||||||
| Total assets | $ | 7,195.1 | $ | 6,924.4 | ||||
| Liabilities, Non-Controlling Interest and Stockholders’ Equity | ||||||||
| Accounts payable | $ | 548.0 | $ | 434.0 | ||||
| Accrued expenses | 612.8 | 405.0 | ||||||
| Deferred income on sales to distributors | — | 109.8 | ||||||
| Current portion of long-term debt | 248.1 | 553.8 | ||||||
| Total current liabilities | 1,408.9 | 1,502.6 | ||||||
| Long-term debt | 2,703.7 | 3,068.5 | ||||||
| Deferred tax liabilities | 55.1 | 288.9 | ||||||
| Other long-term liabilities | 226.4 | 186.5 | ||||||
| Total liabilities | 4,394.1 | 5,046.5 | ||||||
| Commitments and contingencies (Note 12) | ||||||||
| 2.625% Notes, Series B - Redeemable conversion feature | — | 32.9 | ||||||
| ON Semiconductor Corporation stockholders’ equity: | ||||||||
| Common stock ($0.01 par value, 1,250,000,000 and 750,000,000 shares authorized, 551,873,115 and 542,317,788 shares issued, 425,118,194 and 418,941,713 shares outstanding, respectively) | 5.5 | 5.4 | ||||||
| Additional paid-in capital | 3,593.5 | 3,473.3 | ||||||
| Accumulated other comprehensive loss | (40.6 | ) | (50.2) | |||||
| Accumulated earnings (deficit) | 351.5 | (527.3) | ||||||
| Less: Treasury stock, at cost; 126,754,921 and 123,376,075 shares, respectively | (1,131.1 | ) | (1,078.0) | |||||
| Total ON Semiconductor Corporation stockholders’ equity | 2,778.8 | 1,823.2 | ||||||
| Non-controlling interest in consolidated subsidiary | 22.2 | 21.8 | ||||||
| Total stockholders’ equity | 2,801.0 | 1,845.0 | ||||||
| Total liabilities and stockholders’ equity | $ | 7,195.1 | $ | 6,924.4 | ||||
See accompanying notes to consolidated financial statements
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in millions, except per share data)
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Revenues | $ | 5,543.1 | $ | 3,906.9 | $ | 3,495.8 | ||||||
| Cost of revenues (exclusive of amortization shown below) | 3,509.3 | 2,610.0 | 2,302.6 | |||||||||
| Gross profit | 2,033.8 | 1,296.9 | 1,193.2 | |||||||||
| Operating expenses: | ||||||||||||
| Research and development | 594.4 | 452.3 | 396.7 | |||||||||
| Selling and marketing | 315.9 | 238.0 | 204.3 | |||||||||
| General and administrative | 284.9 | 230.3 | 182.3 | |||||||||
| Amortization of acquisition-related intangible assets | 123.8 | 104.8 | 135.7 | |||||||||
| Restructuring, asset impairments and other, net | 20.8 | 33.2 | 9.3 | |||||||||
| Intangible asset impairment | 13.1 | 2.2 | 3.8 | |||||||||
| Total operating expenses | 1,352.9 | 1,060.8 | 932.1 | |||||||||
| Operating income | 680.9 | 236.1 | 261.1 | |||||||||
| Other (expense) income, net: | ||||||||||||
| Interest expense | (141.2) | (145.3) | (49.7) | |||||||||
| Interest income | 3.0 | 4.5 | 1.1 | |||||||||
| Gain on divestiture of business | 12.5 | 92.2 | — | |||||||||
| Loss on debt refinancing and prepayment | (47.2) | (6.3) | (0.4) | |||||||||
| Other (expense) income | (8.1) | (0.6) | 7.7 | |||||||||
| Licensing income | 47.6 | — | — | |||||||||
| Other (expense) income, net | (133.4) | (55.5) | (41.3) | |||||||||
| Income before income taxes | 547.5 | 180.6 | 219.8 | |||||||||
| Income tax (provision) benefit | 265.5 | 3.9 | (10.8) | |||||||||
| Net income | 813.0 | 184.5 | 209.0 | |||||||||
| Less: Net income attributable to non-controlling interest | (2.3) | (2.4) | (2.8) | |||||||||
| Net income attributable to ON Semiconductor Corporation | $ | 810.7 | $ | 182.1 | $ | 206.2 | ||||||
| Comprehensive income, net of tax: | ||||||||||||
| Net income | $ | 813.0 | $ | 184.5 | $ | 209.0 | ||||||
| Foreign currency translation adjustments | 7.0 | (8.0) | 0.3 | |||||||||
| Effects of cash flow hedges | 2.6 | 0.1 | 3.4 | |||||||||
| Effects of available-for-sale securities | — | — | (4.5) | |||||||||
| Other comprehensive (loss) income, net of tax of $0.0, $0.2 and $0.0, respectively | 9.6 | (7.9) | (0.8) | |||||||||
| Comprehensive income | 822.6 | 176.6 | 208.2 | |||||||||
| Comprehensive income attributable to non-controlling interest | (2.3) | (2.4) | (2.8) | |||||||||
| Comprehensive income attributable to ON Semiconductor Corporation | $ | 820.3 | $ | 174.2 | $ | 205.4 | ||||||
| Net income per common share attributable to ON Semiconductor Corporation: | ||||||||||||
| Basic | $ | 1.92 | $ | 0.44 | $ | 0.49 | ||||||
| Diluted | $ | 1.89 | $ | 0.43 | $ | 0.48 | ||||||
| Weighted-average common shares outstanding: | ||||||||||||
| Basic | 421.9 | 415.2 | 421.2 | |||||||||
| Diluted | 428.3 | 420.0 | 427.8 | |||||||||
See accompanying notes to consolidated financial statements
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions, except share data)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated (Deficit) Earnings | Treasury Stock | Non- Controlling Interest in Consolidated Subsidiary | Total Equity | ||||||||||||||||||||||||||||||
| Number of shares | At Par Value | Number of shares | At Cost | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2014 | 524,615,562 | $ | 5.2 | $ | 3,281.2 | $ | (41.5 | ) | $ | (915.6 | ) | (90,515,545 | ) | $ | (702.8 | ) | $ | 20.9 | $ | 1,647.4 | ||||||||||||||||
| Comprehensive (loss) income | — | — | — | (0.8 | ) | 206.2 | — | — | 2.8 | 208.2 | ||||||||||||||||||||||||||
| Stock option exercises | 3,487,238 | 0.1 | 27.0 | — | — | — | — | — | 27.1 | |||||||||||||||||||||||||||
| Shares issued pursuant to the employee stock purchase plan | 1,729,100 | — | 14.6 | — | — | — | — | — | 14.6 | |||||||||||||||||||||||||||
| RSUs and stock grant awards issued | 4,302,821 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Shares withheld for employee taxes on RSUs | — | — | — | — | — | (1,226,764 | ) | (14.7 | ) | — | (14.7 | ) | ||||||||||||||||||||||||
| Share-based compensation expense | — | — | 46.9 | — | — | — | — | — | 46.9 | |||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (30,352,607 | ) | (348.2 | ) | — | (348.2 | ) | ||||||||||||||||||||||||
| Warrants and bond hedge, net | — | — | (56.9 | ) | — | — | — | — | — | (56.9 | ) | |||||||||||||||||||||||||
| Issuance of convertible notes | — | — | 107.5 | — | — | — | — | 107.5 | ||||||||||||||||||||||||||||
| Balance at December 31, 2015 | 534,134,721 | 5.3 | 3,420.3 | (42.3 | ) | (709.4 | ) | (122,094,916 | ) | (1,065.7 | ) | 23.7 | 1,631.9 | |||||||||||||||||||||||
| Comprehensive (loss) income | — | — | — | (7.9 | ) | 182.1 | — | — | 2.4 | 176.6 | ||||||||||||||||||||||||||
| Stock option exercises | 1,849,777 | 0.1 | 14.8 | — | — | — | — | — | 14.9 | |||||||||||||||||||||||||||
| Shares issued pursuant to the employee stock purchase plan | 1,813,789 | — | 15.0 | — | — | — | — | — | 15.0 | |||||||||||||||||||||||||||
| RSUs and stock grant awards issued | 4,519,501 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Shares withheld for employee taxes on RSUs | — | — | — | — | — | (1,281,159 | ) | (12.3 | ) | — | (12.3 | ) | ||||||||||||||||||||||||
| Share-based compensation expense | — | — | 56.1 | — | — | — | — | — | 56.1 | |||||||||||||||||||||||||||
| Dividend to non-controlling shareholder | — | — | — | — | — | — | — | (4.3 | ) | (4.3 | ) | |||||||||||||||||||||||||
| Reclassification of 2.625% Notes, Series B, equity component to mezzanine equity | — | — | (32.9 | ) | — | — | — | — | — | (32.9 | ) | |||||||||||||||||||||||||
| Balance at December 31, 2016 | 542,317,788 | 5.4 | 3,473.3 | (50.2 | ) | (527.3 | ) | (123,376,075 | ) | (1,078.0 | ) | 21.8 | 1,845.0 | |||||||||||||||||||||||
| Comprehensive (loss) income | — | — | — | 9.6 | 810.7 | — | — | 2.3 | 822.6 | |||||||||||||||||||||||||||
| Stock option exercises | 2,213,859 | — | 18.0 | — | — | — | — | — | 18.0 | |||||||||||||||||||||||||||
| Shares issued pursuant to the employee stock purchase plan | 1,913,528 | — | 23.6 | — | — | — | — | — | 23.6 | |||||||||||||||||||||||||||
| RSUs and stock grant awards issued | 5,427,940 | 0.1 | (0.1 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Shares withheld for employee taxes on RSUs | — | — | — | — | — | (1,750,182 | ) | (28.1 | ) | — | (28.1 | ) | ||||||||||||||||||||||||
| Share-based compensation expense | — | — | 69.8 | — | — | — | — | — | 69.8 | |||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (1,628,664 | ) | (25.0 | ) | — | (25.0 | ) | ||||||||||||||||||||||||
| Repayment of 2.625% Notes, Series B - Equity Portion | — | — | (55.7 | ) | — | — | — | — | — | (55.7 | ) | |||||||||||||||||||||||||
| Dividend to non-controlling shareholder | — | — | — | — | — | — | — | (1.9 | ) | (1.9 | ) | |||||||||||||||||||||||||
| Impact of the adoption of ASU 2016-09 | — | — | — | — | 68.1 | — | — | — | 68.1 | |||||||||||||||||||||||||||
| Warrants and bond hedge, net | — | — | (59.5 | ) | — | — | — | — | — | (59.5 | ) | |||||||||||||||||||||||||
| Issuance of 2023 convertible notes | — | — | 113.1 | — | — | — | — | 113.1 | ||||||||||||||||||||||||||||
| Tax impact of 2023 convertible notes, warrants and bond hedge | — | — | 11.0 | — | — | — | — | — | 11.0 | |||||||||||||||||||||||||||
| Balance at December 31, 2017 | 551,873,115 | $ | 5.5 | $ | 3,593.5 | $ | (40.6 | ) | $ | 351.5 | (126,754,921 | ) | $ | (1,131.1 | ) | $ | 22.2 | $ | 2,801.0 | |||||||||||||||||
See accompanying notes to consolidated financial statements.
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 813.0 | $ | 184.5 | $ | 209.0 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities and other adjustments: | ||||||||||||
| Depreciation and amortization | 481.9 | 364.1 | 357.6 | |||||||||
| Loss (gain) on sale or disposal of fixed assets | 3.9 | 1.5 | (3.9) | |||||||||
| Gain on divestiture of business | (12.5) | (92.2) | — | |||||||||
| Loss on debt refinancing and prepayment | 47.2 | 6.3 | 0.4 | |||||||||
| Amortization of debt discount and issuance costs | 16.0 | 12.0 | 2.8 | |||||||||
| Payments for term debt modification | (3.8) | (26.4) | — | |||||||||
| Write-down of excess inventories | 67.0 | 66.2 | 52.4 | |||||||||
| Non-cash share-based compensation expense | 69.8 | 56.1 | 46.9 | |||||||||
| Non-cash interest on convertible notes | 30.8 | 26.0 | 17.5 | |||||||||
| Non-cash asset impairment charges | 7.9 | 0.5 | 0.2 | |||||||||
| Non-cash intangible asset impairment charges | 13.1 | 2.2 | 3.8 | |||||||||
| Change in deferred taxes | (348.3) | (38.1) | (9.2) | |||||||||
| Other | 2.2 | (4.6) | (2.8) | |||||||||
| Changes in assets and liabilities (exclusive of the impact of acquisitions and divestitures): | ||||||||||||
| Receivables | (57.9) | 28.1 | (11.3) | |||||||||
| Inventories | (126.9) | (7.9) | (72.5) | |||||||||
| Other assets | (86.0) | (24.9) | (10.2) | |||||||||
| Accounts payable | 51.8 | 42.4 | (32.2) | |||||||||
| Accrued expenses | 211.1 | (15.3) | (16.3) | |||||||||
| Deferred income on sales to distributors | (109.8) | 0.1 | (53.1) | |||||||||
| Other long-term liabilities | 23.7 | 0.6 | (8.5) | |||||||||
| Net cash provided by operating activities | 1,094.2 | 581.2 | 470.6 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Purchases of property, plant and equipment | (387.5) | (210.7) | (270.8) | |||||||||
| Proceeds from sales of property, plant and equipment | 14.3 | 0.4 | 11.1 | |||||||||
| Deposits made for purchases of property, plant and equipment | (8.2) | (2.2) | (1.4) | |||||||||
| Purchase of businesses, net of cash acquired | (0.8) | (2,284.0) | (31.3) | |||||||||
| Proceeds from divestiture of business, net of cash transferred | 20.0 | 104.0 | — | |||||||||
| Cash placed in escrow | — | (67.7) | — | |||||||||
| Cash received from escrow | — | 23.8 | 20.4 | |||||||||
| Proceeds from sale of available-for-sale securities | — | — | 5.5 | |||||||||
| Proceeds from sale of held-to-maturity securities | — | — | 2.8 | |||||||||
| Purchases of held-to-maturity securities | (1.6) | — | (0.8) | |||||||||
| Other | (0.7) | 1.8 | — | |||||||||
| Net cash used in investing activities | (364.5) | (2,434.6) | (264.5) | |||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of common stock under the ESPP | 23.6 | 15.0 | 14.6 | |||||||||
| Proceeds from exercise of stock options | 18.0 | 14.9 | 27.1 | |||||||||
| Payments of tax withholding for restricted shares | (28.1) | (12.3) | (14.7) | |||||||||
| Repurchase of common stock | (25.0) | — | (348.2) | |||||||||
| Proceeds from debt issuance | 1,106.2 | 2,586.9 | 816.5 | |||||||||
| Payments of debt issuance and other financing costs | — | (6.8) | (20.4) | |||||||||
| Repayment of long-term debt | (1,831.4) | (313.8) | (495.5) | |||||||||
| Purchase of convertible note hedges | (144.7) | — | (108.9) | |||||||||
| Proceeds from issuance of warrants | 85.2 | — | 52.0 | |||||||||
| Payment of capital lease obligations | (8.9) | (14.9) | (22.3) | |||||||||
| Payment of contingent consideration | (3.9) | — | — | |||||||||
| Dividend to non-controlling shareholder of consolidated subsidiary | (1.9) | (4.3) | — | |||||||||
| Net cash (used in) provided by financing activities | (810.9) | 2,264.7 | (99.8) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 2.3 | (0.8) | (0.4) | |||||||||
| Net (decrease) increase in cash and cash equivalents | (78.9) | 410.5 | 105.9 | |||||||||
| Cash and cash equivalents, beginning of period | 1,028.1 | 617.6 | 511.7 | |||||||||
| Cash and cash equivalents, end of period | $ | 949.2 | $ | 1,028.1 | $ | 617.6 | ||||||
See accompanying notes to consolidated financial statements
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Background and Basis of Presentation
ON Semiconductor Corporation (“ON Semiconductor”), together with its wholly and majority-owned subsidiaries (the “Company”), prepares its consolidated financial statements in accordance with generally accepted accounting principles in the United States of America. As of December 31, 2017, the Company was organized into three operating segments, which also represent its three reporting segments: Power Solutions Group**,** Analog Solutions Group and Image Sensor Group. Additional information about the Company’s operating and reporting segments is included in Note 18: “Segment Information”.
All dollar amounts in tabular presentations are in millions, except per share amounts and unless otherwise noted.
Note 2: Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the assets, liabilities, revenues and expenses of all wholly-owned and majority-owned subsidiaries over which the Company exercises control and, when applicable, entities in which the Company has a controlling financial interest or is the primary beneficiary. Investments in nonconsolidated affiliates that represent less than 20% of the related ownership interests and where the Company does not have the ability to exert significant influence are accounted for as cost method investments. All material intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with GAAP 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. Management evaluates these estimates and judgments on an ongoing basis and base its estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that management believes are reasonable under the circumstances. Significant estimates have been used by management in conjunction with the following: (i) estimates of future payouts for customer incentives and estimates of amounts subject to allowances, returns and warranties; (ii) measurement of valuation allowances relating to inventories and trade receivables; (iii) future cash flows used to assess and test for impairment of goodwill and indefinite-lived intangible assets and long-lived assets, if applicable; (iv) assumptions surrounding future pension obligations; (v) fair values of share-based compensation and of financial instruments (including derivative financial instruments); (vi) measurement of valuation allowances against deferred tax assets, evaluations of uncertain tax positions, and the impact of the U.S. tax reform; and (vii) estimates and assumptions used in connection with business combinations. Actual results may differ from the estimates and assumptions used in the consolidated financial statements and related notes.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity to the Company of three months or less to be cash equivalents. Cash and cash equivalents are maintained with reputable major financial
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institutions. If, due to current economic conditions, one or more of the financial institutions with which the Company maintains deposits fails, the Company’s cash and cash equivalents may be at risk. Deposits with these banks generally exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, as a result of the quality of the respective financial institutions, management believes these deposits bear minimal risk.
Short-Term Investments
Short-term investments include held-to-maturity securities and available-for-sale securities. Held-to-maturity securities have an original maturity to the Company between three months and one year and are carried at amortized cost as it is the intent of the Company to hold these securities until maturity. Available-for-sale securities are stated at fair value and the net unrealized gains or losses on available-for-sale securities are recorded as a component of accumulated other comprehensive loss or income, net of income taxes.
Allowance for Doubtful Accounts
In the ordinary course of business, the Company provides non-collateralized credit terms to its customers. Accordingly, the Company maintains an allowance for doubtful accounts for probable losses on uncollectible accounts receivable. The Company routinely analyzes accounts receivable and considers history, customer creditworthiness, facts and circumstances specific to outstanding balances, current economic trends and payment term changes when evaluating the adequacy of the allowance for doubtful accounts.
Inventories
Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or net realizable value. General market conditions, as well as the Company’s design activities, can cause certain of its products to become obsolete. The Company writes down excess and obsolete inventories based upon a regular analysis of inventory on hand compared to historical and projected end-user demand. These write downs can influence results from operations. For example, when demand for a given part falls, all or a portion of the related inventory that is considered to be in excess of anticipated demand is written down, impacting cost of revenues and gross profit. If demand recovers and the parts previously written down are sold, a higher than normal margin will generally be recognized. However, the majority of product inventory that has been previously written down is ultimately discarded. Although the Company does sell some products that have previously been written down, such sales have historically been consistently immaterial and the related impact on the Company’s gross profit has also been immaterial.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated over estimated useful lives of 30-50 years for buildings and 3-20 years for machinery and equipment using straight-line methods. Expenditures for maintenance and repairs are charged to operations in the period in which the expense is incurred. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.
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The Company evaluates the recoverability of the carrying amount of its property, plant and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fully recoverable. A potential impairment charge is evaluated when the undiscounted expected cash flows derived from an asset group are less than its carrying amount. Impairment losses, if applicable, are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of the asset group.
Business Combination Purchase Price Allocation
The allocation of the purchase price of business combinations is based on management estimates and assumptions, which utilize established valuation techniques appropriate for the high-technology industry. These techniques include the income approach, cost approach or market approach, depending upon which approach is the most appropriate based on the nature and reliability of available data. The income approach is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life. The cost approach takes into account the cost to replace (or reproduce) the asset and the effects on the asset’s value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date.
Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the Company’s acquisitions.
The Company evaluates its goodwill for potential impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The Company’s divisions, which are components of its operating segments, constitute reporting units for purposes of allocating and testing goodwill. The Company’s divisions are one level below the operating segments, constituting individual businesses, at which level the Company’s segment management conducts regular reviews of the operating results. The Company’s impairment evaluation of goodwill consists of a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. If this qualitative assessment indicates it is more likely than not the estimated fair value of a reporting unit exceeds its carrying value, no further analysis is required and goodwill is not impaired. Otherwise, the Company performs a quantitative goodwill impairment test to determine if goodwill is impaired. The quantitative test compares the fair value of a reporting unit with its carrying amount, including goodwill.
If the fair value of the reporting unit exceeds the carrying value of the net assets associated with that unit, goodwill is not considered impaired. If the carrying value of the net assets associated with the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and will be determined as the amount by which the reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Determining the fair value of the Company’s reporting units is subjective in nature and involves the use of significant estimates and assumptions, including projected net cash flows, discount and long-term growth rates. The Company determines the fair value of its reporting units based on an income approach, whereby the fair value of the reporting unit is derived from the present value of estimated future cash flows. The assumptions
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about estimated cash flows include factors such as future revenues, gross profits, operating expenses and industry trends. The Company considers historical rates and current market conditions when determining the discount and long-term growth rates to use in its analysis. The Company considers other valuation methods, such as the cost approach or market approach, if it is determined that these methods provide a more representative approximation of fair value. Changes in these estimates based on evolving economic conditions or business strategies could result in material impairment charges in future periods. The Company bases its fair value estimates on assumptions it believes to be reasonable. Actual results may differ from those estimates.
Intangible Assets
The Company’s acquisitions have resulted in intangible assets consisting of values assigned to customer relationships, patents, developed technology, IPRD and trademarks. IPRD is considered an indefinite-lived intangible asset until the abandonment or completion of the associated research and development efforts. If abandoned, the assets would be impaired. If the activities are completed, a determination is made regarding the useful lives of such assets and methods of amortization.
The Company is required to test its IPRD assets for impairment annually using the guidance for indefinite-lived intangible assets. An IPRD asset is considered to be impaired when the asset’s carrying amount is greater than its fair value. The Company’s impairment evaluation consists of first assessing qualitative factors to determine whether events and circumstances indicate that it is more likely than not that the IPRD asset is impaired. If it is more likely than not that the asset is impaired, the Company calculates the fair value of the IPRD asset and records an impairment charge if the carrying amount exceeds fair value. The Company determines the fair value based on an income approach, which is calculated as the present value of the estimated future cash flows of the IPRD asset. The assumptions about estimated cash flows include factors such as future revenues, gross profits, operating expenses and industry trends. The Company can bypass the qualitative assessment for any asset in any period and proceed directly to the quantitative impairment test.
The remaining intangible assets are stated at cost less accumulated amortization, are amortized over their estimated useful lives, and are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset group containing these assets may not be recoverable. A potential impairment charge is evaluated when the undiscounted expected cash flows derived from an asset group are less than its carrying amount. Impairment losses are measured as the amount by which the carrying value of an asset group exceeds its fair value and are recognized in operating results. Judgment is used when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an asset group. The dynamic economic environment in which the Company operates and the resulting assumptions used to estimate future cash flows impact the outcome of these impairment tests.
Treasury Stock
Treasury stock is recorded at cost, inclusive of fees, commissions and other expenses, when outstanding common shares are repurchased by the Company, including when outstanding shares are withheld to satisfy tax withholding obligations in connection with certain shares pursuant to RSUs under the Company’s share-based compensation plans.
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Debt Issuance Costs
Debt issuance costs for line-of-credit agreements, including the Company’s Revolving Credit Facility, are capitalized and amortized over the term of the underlying agreements on a straight-line basis. Amortization of these debt issuance costs is included in interest expense while the unamortized balance is included in other assets.
Debt issuance costs for the Company’s convertible notes are recorded as a direct deduction from the carrying amount of the convertible notes, consistent with debt discounts, and are amortized over the term of the convertible notes using the effective interest method. Amortization of these debt issuance costs is included in interest expense.
Revenue Recognition
The Company generates revenues from sales of its semiconductor products to OEMs, electronic manufacturing service providers and distributors. The Company also generates revenue, to a much lesser extent, from manufacturing and design services provided to customers. Revenue is recognized when persuasive evidence of an arrangement exists, title and risk of loss pass to the customer (generally upon shipment), the price is fixed or determinable and collectability is reasonably assured. Revenues are recorded net of provisions for related sales returns and allowances.
Prior to the first quarter of 2017, for products sold to distributors who are entitled to ship and credit rights, the Company recognized the related revenues and cost of revenues when it was informed by the distributor that it had resold the products to the end-user. This was due to the Company’s inability to reliably estimate up front the effects of the returns and allowances with these distributors for sales originating through the ON Semiconductor systems and processes. Legacy systems and processes of Fairchild enable the Company to estimate up front the effects of returns and allowances provided to these distributors and thereby record the net revenues at the time of sale related to a legacy Fairchild system and process. The Company acquired Fairchild on September 19, 2016.
When the Company adopts ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 (see Note 3: “Recent Accounting Pronouncements”), one of the more significant impacts would be that it would not have been permitted to defer revenue until sale by the distributor to the end customer, but rather, would be required to estimate the effects of returns and allowances provided to certain distributors and record revenue at the time of sale to the distributor. In anticipation of the adoption of the new standards, the Company had developed its internal systems, processes and controls for making the required estimates on the sales to these distributors. As a result of these process changes, during the first quarter of 2017, the Company was able to reliably estimate upfront the effects of returns and allowances and record revenues at the time of sales to these distributors. As a result of this change, the Company recognized $155.1 million in revenue during the first quarter of 2017. The impact of this change resulted in an increase of $59.0 million to income before income taxes, or $0.09 per basic and diluted share, for the year ended December 31, 2017. Additionally, the Company recorded accruals for the estimated returns from the distributors, which decreased revenues by $8.1 million and income before income taxes by $5.3 million for the year ended December 31, 2017.
Although payment terms vary, most distributor agreements require payment within 30 days. Sales returns and allowances are estimated based on historical experience. The Company’s OEM customers do not have the right to return products other than pursuant to the provisions of the Company’s standard warranty. Sales to
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distributors, however, are typically made pursuant to agreements that provide return rights with respect to discontinued or slow-moving products. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related revenues are recognized, and are netted against revenues. The Company reviews warranty and related claims activities and records provisions, as necessary.
Freight and handling costs are included in cost of revenues and are recognized as period expense when incurred. Taxes assessed by government authorities on revenue-producing transactions, including value-added and excise taxes, are presented on a net basis (excluded from revenues) in the statement of operations.
Warranty Reserves and Discounts
The Company generally warrants that products sold to its customers will, at the time of shipment, be free from defects in workmanship and materials and conform to specifications. The Company’s standard warranty extends for a period of two years from the date of delivery, except in the case of Image Sensor products, which are warrantied for one year from the date of delivery. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with its sales, recorded as a component of cost of revenues. In addition, the Company also offers cash discounts to certain customers for payments received within an agreed upon time, generally ten days after shipment. The Company records a reserve for cash discounts as a reduction to accounts receivable and a reduction to revenues based on experience with each customer.
Research and Development Costs
Research and development costs are expensed as incurred.
Share-Based Compensation
Share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period. The Company has outstanding awards with performance, time and service-based vesting provisions.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which management cannot conclude that it is more likely than not that such deferred tax assets will be realized.
In determining the amount of the valuation allowance, estimated future taxable income, as well as feasible tax planning strategies for each taxing jurisdiction are considered. If the Company determines it is more likely than not that all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be
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increased with a charge to income tax expense. Conversely, if the Company determines it is more likely than not to be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be recorded as a reduction to income tax expense.
The Company recognizes and measures benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that is it more likely than not that the tax positions will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Significant judgment is required to evaluate uncertain tax positions. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of tax audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense in the period in which the change is made, which could have a material impact to the Company’s effective tax rate.
Foreign Currencies
Most of the Company’s foreign subsidiaries conduct business primarily in U.S. dollars and, as a result, utilize the dollar as their functional currency. For the remeasurement of financial statements of these subsidiaries, assets and liabilities in foreign currencies that are receivable or payable in cash are remeasured at current exchange rates, while inventories and other non-monetary assets in foreign currencies are remeasured at historical rates. Gains and losses resulting from the remeasurement of such financial statements are included in the operating results, as are gains and losses incurred on foreign currency transactions.
The majority of the Company’s Japanese subsidiaries utilize Japanese Yen as their functional currency. The assets and liabilities of these subsidiaries are translated at current exchange rates, while revenues and expenses are translated at the average rates in effect for the period. The related translation gains and losses are included in other comprehensive income or loss within the Consolidated Statements of Operations and Comprehensive Income. Due to the changing profile of the operations of these subsidiaries, from time-to-time, the Company evaluates the economic indicators from a long-term perspective to determine if a change in functional currencies would be appropriate.
Defined Benefit Pension Plans
The Company maintains defined benefit pension plans covering certain of its foreign employees. For financial reporting purposes, net periodic pension costs and pension obligations are determined based upon a number of actuarial assumptions, including discount rates for plan obligations, assumed rates of return on pension plan assets and assumed rates of compensation increases for employees participating in plans. These assumptions are based upon management’s judgment and consultation with actuaries, considering all known trends and uncertainties.
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Contingencies
The Company is involved in a variety of legal matters, intellectual property matters, environmental, financing and indemnification contingencies that arise in the ordinary course of business. Based on the information available, management evaluates the relevant range and likelihood of potential outcomes and records the appropriate liability when the amount is deemed probable and reasonably estimable.
Fair Value Measurement
The Company measures certain of its financial and non-financial assets at fair value by using a fair value hierarchy that prioritizes certain inputs into individual fair value measurement approaches. Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, as follows:
| • | Level 1 - Quoted prices in active markets for identical assets or liabilities; |
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| • | Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
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| • | Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
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Companies may choose to measure certain financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected must be reported in earnings. The Company has elected not to carry any of its debt instruments at fair value.
Note 3: Recent Accounting Pronouncements
ASUs Adopted:
ASU No 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (‘ASU 2017-04’)
In January 2017, the FASB issued ASU 2017-04, which simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. The amendment is effective for calendar year-end SEC filers in 2020, and early adoption is permitted. The Company early adopted ASU 2017-04 during the first quarter of 2017. The adoption of this standard did not impact the Company’s financial statements.
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ASU No. 2016-09 - Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (‘ASU 2016-09’)
In March 2016, the FASB issued ASU 2016-09, which is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption was permitted. ASU 2016-09, which the Company adopted as of the first quarter of 2017, requires that excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. Excess tax benefits should be recognized regardless of whether the benefit reduces taxes payable in the current period. Previously, the Company followed the guidance that the tax benefit and credit to additional paid in capital for a windfall tax benefit should not be recorded until the deduction reduces income taxes payable. The Company has been historically in a net taxable loss. Therefore, the windfall tax benefit has not reduced income taxes payable. The new guidance requires all excess tax benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable to be recorded on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of the beginning of the period in which the new guidance was adopted. The financial statement impact of this change resulted in $68.1 million being recorded as a credit to retained earnings as of January 1, 2017. On a prospective basis, the impact of windfalls and shortfalls will be recorded to income tax expense on a discrete basis.
The Company will continue to classify employee taxes paid on the statement of cash flows when ON Semiconductor withholds shares for tax-withholding purposes as a financing activity. The Company will continue to estimate forfeitures as part of share based compensation expense recognition.
ASU No. 2015-11 - Inventory (Topic 330): Simplifying the Measurement of Inventory (‘ASU 2015-11’)
In July 2015, the FASB issued ASU 2015-11, which requires that an entity should measure in-scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price 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. Early adoption was permitted. The Company adopted ASU 2015-11 during the first quarter of 2017. The adoption of this standard did not have a material impact on the financial statements.
ASUs Pending Adoption:
ASU No. 2017-12 - Derivatives and Hedging (topic 815): Targeted Improvements to Accounting for Hedging Activities (‘ASU 2017-12’)
In August 2017, the FASB issued ASU No. 2017-12 to better align hedge accounting with risk management strategies, and as a result, more hedging strategies will be eligible for hedge accounting. Public business entities will have until the end of the first quarter in which a hedge is designated to perform an initial assessment of a hedge’s effectiveness. After initial qualification, the new guidance permits a qualitative effectiveness assessment for certain hedges instead of a quantitative test, if the Company can reasonably support an expectation of high
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effectiveness throughout the term of the hedge. An initial quantitative test to establish that the hedge relationship is highly effective is still required. The amendments are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2017-12 may have on its consolidated financial statements.
ASU No. 2017-09 - Scope of Modification Accounting (‘ASU 2017-09’)
In May 2017, the FASB issued ASU No. 2017-09 to reduce diversity in practice and provide clarity regarding existing guidance in ASC 718, “Stock Compensation.” The amendments clarify that an entity should apply modification accounting in response to a change in the terms and conditions of an entity’s share-based payment awards unless three newly specified criteria are met. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company does not anticipate the adoption of ASU 2017-09 will have a material impact on its consolidated financial statements.
ASU No 2017-07 - Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (‘ASU 2017-07’)
In March 2017, the FASB issued ASU 2017-07 primarily to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The guidance will require the net benefit cost to be split in the income statement. The service cost component will be included in operating income. The other components, including amortization of past service costs or credits, and settlement and curtailments amounts, will be reported separately outside of operating income. The amendment is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted at the beginning of an annual period (in the first interim period) for which financial statements have not yet been issued. The Company does not anticipate the adoption of ASU 2017-07 will have a material impact on its consolidated financial statements.
ASU No. 2016-18 - Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (‘ASU 2016-18’)
In November 2016, the FASB issued ASU 2016-18, which requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The ASU does not define the terms “restricted cash” and “restricted cash equivalents.” The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company does not anticipate the adoption of ASU 2016-18 will have a material impact on its consolidated financial statements.
ASU No. 2016-16 - Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (‘ASU 2016-16’)
In October 2016, the FASB issued ASU 2016-16, which eliminates the exception for all intra-entity sales of assets other than inventory. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be
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recognized at the time of the transfer. The new guidance does not apply to intra-entity transfers of inventory. The income tax consequences from the sale of inventory from one member of a consolidated entity to another will continue to be deferred until the inventory is sold to a third party. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company does not anticipate the adoption of ASU 2016-16 will have a material impact on its consolidated financial statements.
ASU No. 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (‘ASU 2016-15’)
In August 2016, the FASB issued ASU 2016-15, which changes how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company does not anticipate the adoption of ASU 2016-15 will have a material impact on its consolidated financial statements.
ASU No. 2016-02 - Leases (Topic 842) (‘ASU 2016-02’)
In February 2016, the FASB issued ASU 2016-02, which amends the accounting treatment for leases. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Lessees (for capital and operating leases) and lessors (for sales-type leases, direct financing leases, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 may have on its consolidated financial statements.
ASU No. 2014-09 - Revenue from Contracts with Customers (Topic 606) (‘ASU 2014-09’), ASU No. 2015-14 - Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (‘ASU 2015-14’), ASU No. 2016-08 - Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (‘ASU 2016-08’), ASU No. 2016-10 - Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (‘ASU 2016-10’) ASU No. 2016-12 - Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (‘ASU 2016-12’) and ASU No. 2016-20 - Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (‘ASU 2016-20’)
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 supersedes the existing revenue recognition requirements in ASC Topic 605, “Revenue Recognition.” 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. Subsequently, the FASB approved a deferral included in ASU 2015-14 that permits public entities to
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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 public entities to elect to adopt the amendments as of the original effective date as applicable to reporting periods beginning after December 15, 2016. The new guidance allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. In March 2016, the FASB issued ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, which clarifies identifying performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, which improves certain aspects of ASC Topic 606 “Revenue from Contracts with Customers.” In December 2016, the FASB issued ASU 2016-20, which improves certain aspects of ASC Topic 606 “Revenue from Contracts with Customers.” The effective date and transition requirements for ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 are the same as the effective date and transition requirements of ASU 2014-09 (collectively, “the standard”).
The Company has evaluated the impact of the standard and concluded that the adoption will not have a material impact on its consolidated financial statements. The impact on the timing of revenue recognition on certain product development agreements is not expected to be material. The Company is in the final stages of documenting its conclusions on the evaluation of the terms of the customer contracts and arrangements for adoption of the standard on a modified retrospective basis on January 1, 2018.
Note 4: Acquisitions, Divestitures and Licensing Transactions
The Company pursues strategic acquisitions and divestitures from time to time to leverage its existing capabilities and further build its business. Acquisitions are accounted for as business combinations pursuant to ASC 805 “Business Combinations.” Accordingly, acquisition costs are not included as components of consideration transferred and instead are accounted for as expenses in the period in which the costs are incurred. During the years ended December 31, 2017 and 2016, the Company incurred acquisition and divestiture related costs of approximately $3.2 million and $25.8 million, respectively, which are included in operating expenses on the Company’s Consolidated Statements of Operations and Comprehensive Income.
2017 Divestiture
On September 29, 2017, the Company entered into a Share Purchase Agreement with mCube, whereby mCube acquired 100% of the outstanding shares of Xsens Holding B.V., a wholly owned subsidiary of the Company, for cash consideration of $26.0 million (collectively, the “Xsens Transaction”). Twenty percent of the consideration, or $5.2 million, was deposited into an escrow account and the remaining $20.8 million was received on September 29, 2017. There were no indemnification liabilities identified and the escrow amount has been considered as part of the consideration in calculating the gain and included in other assets in the Consolidated Balance Sheet as of December 31, 2017. The escrow amount will be released to the Company upon satisfaction of any pending claims eighteen months after the date on which the Xsens Transaction closed. The Company recorded a gain of $12.5 million after writing off the carrying value of the assets and liabilities sold of $7.0 million and goodwill of $6.5 million. This gain has been presented as “Gain on divestiture of business” in the Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2017.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2016 Acquisition
On September 19, 2016, the Company acquired 100% of Fairchild, whereby Fairchild became a wholly-owned subsidiary of the Company. The purchase price totaled $2,532.2 million in cash and was funded by the Company’s borrowings against its Term Loan “B” Facility and a partial draw of the Revolving Credit Facility, as well as with cash on hand. See Note 8: “Long-Term Debt” for additional information.
For the period from September 19, 2016 to December 31, 2016, the Company recognized revenue of $411.5 million and a net loss of $34.5 million relating to Fairchild, which included charges for the amortization of fair market value step-up of inventory of $67.5 million, the amortization of acquired intangible assets and restructuring.
The following table presents the allocation of the purchase price for the acquisition of Fairchild, including the effects of the measurement period adjustments recorded in 2016 for the assets acquired and liabilities assumed based on their fair values (in millions):
| Purchase Price Allocation | ||||
| Cash and cash equivalents | $ 255.0 | |||
| Receivables | 227.3 | |||
| Inventories | 342.3 | |||
| Other current assets | 61.0 | |||
| Property, plant and equipment | 925.8 | |||
| Goodwill | 656.1 | |||
| Intangible assets (excluding IPRD) | 413.6 | |||
| In-process research and development | 134.2 | |||
| Other non-current assets | 13.1 | |||
| Total assets acquired | 3,028.4 | |||
| Accounts payable | 79.4 | |||
| Other current liabilities | 168.1 | |||
| Deferred tax liabilities | 213.5 | |||
| Other non-current liabilities | 35.2 | |||
| Total liabilities assumed | 496.2 | |||
| Net assets acquired/purchase price | $ 2,532.2 | |||
Acquired intangible assets included $134.2 million of IPRD assets, which are to be amortized over the useful life 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, estimating costs to develop the purchased IPRD into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The Company utilized a discount rate of 14.5% and cash flows from its significant products were expected to commence from 2017 and beyond.
Other acquired intangible assets of $413.6 million consisted of developed technology of $272.7 million (eleven year weighted-average useful life), customer relationships of $135.5 million (fifteen year useful life) and backlog
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
of $3.0 million (six month useful life). The total weighted-average amortization period for the acquired intangibles is 12.1 years.
The acquisition produced $656.1 million of goodwill, of which $366.1 million was assigned to the Power Solutions Group and $290.0 million to the Analog Solutions Group. Goodwill is attributable to a combination of Fairchild’s assembled workforce, expectations regarding a more meaningful engagement with customers due to the scale of the combined Company and other synergies. Goodwill arising from the Fairchild acquisition is not deductible for tax purposes.
During the year ended December 31, 2016, the Company incurred $24.7 million in acquisition-related costs from the Fairchild acquisition. These costs are recorded in general and administrative expense in the Consolidated Statements of Operations and Comprehensive Income.
See Note 12: “Commitments and Contingencies” for information on contingent liabilities assumed from the acquisition of Fairchild.
Pro-Forma Results of Operations
Unaudited pro-forma consolidated results of operations for the year ended December 31, 2017 is not required because the results of the acquired business are included in the Consolidated Statements of Operations and Comprehensive Income for this period. The following unaudited pro-forma consolidated results of operations for the years ended December 31, 2016 and December 31, 2015 have been prepared as if the acquisition of Fairchild had occurred on January 1, 2015 and includes adjustments for depreciation expense, amortization of intangibles, interest expense from financing, and the effect of purchase accounting adjustments, including the step-up of inventory (in millions, except per share data):
| Year Ended | ||||||||
| December 31, 2016 | December 31, 2015 | |||||||
| Revenue | $ | 4,912.8 | $ | 4,866.0 | ||||
| Net Income | $ | 196.6 | $ | 58.2 | ||||
| Net income attributable to ON Semiconductor Corporation | $ | 194.2 | $ | 55.4 | ||||
| Net income per common share attributable to ON Semiconductor Corporation: | ||||||||
| Basic | $ | 0.47 | $ | 0.13 | ||||
| Diluted | $ | 0.46 | $ | 0.13 |
2016 Divestiture
On August 25, 2016, the U.S. Federal Trade Commission (“FTC”) accepted a proposed consent order whereby, prior to the closing of the acquisition of Fairchild, the FTC required the Company to dispose of its IGBT business. In satisfaction of this requirement, on August 29, 2016, the Company sold the ignition IGBT business to Littelfuse. On the same day, the Company sold its transient voltage suppression diode and switching thyristor product lines (“Thyristor”) to Littelfuse. The sale of the ignition IGBT and Thyristor businesses was for $104.0 million in cash. In connection with the sale, the Company recorded a gain of $92.2 million after, among other things, transferring inventory of $4.1 million to Littelfuse, writing off goodwill of $3.4 million and
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deferring $4.3 million of the proceeds representing the fair value of manufacturing services to be recognized in the future. This gain has been presented separately as “Gain on divestiture of business” in the Consolidated Statements of Operations and Comprehensive Income.
2016 Licensing Transaction
On December 19, 2016, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with HSET Electronic Tech (Hong Kong) Limited (“HSET”) to sell inventory and license patents related to its Mobile CIS business for $75.0 million. On April 7, 2017, the Company and HSET along with Huaian Imaging Device Manufacturer Corporation (“HIDM”) entered into the First Amendment to the Asset Purchase Agreement. The arrangement included the sale of $22.5 million of inventory, which has been recorded as revenue for the year ended December 31, 2017.
During 2017, the Company received the remaining $52.5 million and provided perpetual, non-exclusive licenses to certain technologies to HIDM. Of this, $10.0 million has been recorded as deferred licensing income to be recognized in the period in which certain qualification requirements of the technologies are achieved, or refunded to the buyer if qualification does not occur by June 21, 2018. The remaining $42.5 million, along with $2.6 million of withholding taxes borne by HIDM on the Company’s behalf, has been recognized as licensing income in the Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2017. The value of the licensed technologies in intangible assets amounting to $8.2 million has been fully amortized during 2017 as there are no additional expected future cash flows associated with these technologies.
Note 5: Goodwill and Intangible Assets
Goodwill
Goodwill is tested for impairment at the reporting unit level, which is one level below the Company’s operating segments. The Company performed a qualitative assessment as part of the annual impairment analysis during the fourth quarter of 2017 and concluded that it is more likely than not that the fair value of its reporting units exceed their carrying amounts and a quantitative impairment test was not required. During 2016, a quantitative impairment test was performed to determine that the carrying amount of the Company’s goodwill for all of its reporting units was recoverable and a step two test was not required for any reporting unit.
The Company uses the income approach, based on estimated future cash flows, to perform the quantitative impairment test. These estimates include assumptions about future conditions such as future revenues, gross profits, operating expenses and industry trends. The Company considers other valuation methods, such as the cost approach or market approach, if it determines that these methods provide a more representative approximation of fair value. The material assumptions used for the income approach for periods when no impairment was necessary included projected net cash flows, a weighted-average discount rate of approximately 10.5% and a weighted-average long-term growth rate of 3%. The Company considered historical rates and current market conditions when determining the discount and growth rates to use in the Company’s analysis.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table summarizes goodwill by relevant reportable segment as of December 31, 2017 and December 31, 2016 (in millions):
| Balance as of December 31, 2017 | Balance as of December 31, 2016 | |||||||||||||||||||||||
| Goodwill | Accumulated Impairment Losses | Carrying Value | Goodwill | Accumulated Impairment Losses | Carrying Value | |||||||||||||||||||
| Operating Segment | ||||||||||||||||||||||||
| Analog Solutions Group | $ | 836.7 | $ | (418.9) | $ | 417.8 | $ | 836.7 | $ | (418.9) | $ | 417.8 | ||||||||||||
| Image Sensor Group | 95.5 | — | 95.5 | 96.8 | — | 96.8 | ||||||||||||||||||
| Power Solutions Group | 432.2 | (28.6) | 403.6 | 438.7 | (28.6) | 410.1 | ||||||||||||||||||
| Total | $ | 1,364.4 | $ | (447.5) | $ | 916.9 | $ | 1,372.2 | $ | (447.5) | $ | 924.7 | ||||||||||||
The following table summarizes the change in goodwill from December 31, 2015 to December 31, 2017 (in millions):
| Net balance as of December 31, 2015 | $ | 270.6 | ||
| Addition due to business combinations | 657.5 | |||
| Divestiture of business | (3.4) | |||
| Net balance as of December 31, 2016 | 924.7 | |||
| Measurement period adjustment | (1.3) | |||
| Divestiture of business | (6.5) | |||
| Net balance as of December 31, 2017 | $ | 916.9 | ||
The measurement period adjustment of $1.3 million related to an immaterial acquisition that occurred on December 29, 2016.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Intangible Assets
Intangible assets, net, were as follows as of December 31, 2017 and December 31, 2016 (in millions):
| December 31, 2017 | ||||||||||||||||
| Original Cost | Accumulated Amortization | Accumulated Impairment Losses | Carrying Value | |||||||||||||
| Intellectual property | $ | 13.9 | $ | (11.8) | $ | (0.4) | $ | 1.7 | ||||||||
| Customer relationships | 555.9 | (328.5) | (20.1) | 207.3 | ||||||||||||
| Patents | 43.7 | (26.8) | (13.7) | 3.2 | ||||||||||||
| Developed technology | 657.6 | (278.2) | (2.6) | 376.8 | ||||||||||||
| Trademarks | 17.2 | (12.4) | (1.1) | 3.7 | ||||||||||||
| Backlog | 3.3 | (3.3) | — | — | ||||||||||||
| Favorable Leases | 1.7 | (1.6) | — | 0.1 | ||||||||||||
| IPRD | 54.5 | — | (19.0) | 35.5 | ||||||||||||
| Total intangibles | $ | 1,347.8 | $ | (662.6) | $ | (56.9) | $ | 628.3 | ||||||||
| December 31, 2016 | ||||||||||||||||
| Original Cost | Accumulated Amortization | Accumulated Impairment Losses | Carrying Value | |||||||||||||
| Intellectual property | $ | 13.9 | $ | (11.2) | $ | (0.4) | $ | 2.3 | ||||||||
| Customer relationships | 549.0 | (283.3) | (19.5) | 246.2 | ||||||||||||
| Patents | 43.7 | (25.4) | (13.7) | 4.6 | ||||||||||||
| Developed technology | 566.9 | (201.6) | (2.6) | 362.7 | ||||||||||||
| Trademarks | 17.2 | (11.6) | (1.1) | 4.5 | ||||||||||||
| Backlog | 3.3 | (2.4) | — | 0.9 | ||||||||||||
| Favorable Leases | 1.5 | (0.4) | — | 1.1 | ||||||||||||
| IPRD | 145.8 | — | (6.0) | 139.8 | ||||||||||||
| Total intangibles | $ | 1,341.3 | $ | (535.9) | $ | (43.3) | $ | 762.1 | ||||||||
During the year ended December 31, 2017, the Company canceled certain of its previously capitalized IPRD projects under the Power Solutions Group and Analog Solutions Group and recorded impairment losses of $7.7 million. Additionally, as a result of the annual impairment test performed during the fourth quarter of 2017, the Company determined that the value of certain of its projects under the Analog Solutions Group were impaired and recorded charges of $5.4 million. During the year ended December 31, 2017, the Company completed certain of its IPRD projects, resulting in the reclassification of $99.4 million from IPRD to developed technology. Also, during the year ended December 31, 2017, the Company disposed of $8.7 million of intangible assets as part of the Xsens Transaction. See Note 4: “Acquisitions, Divestitures and Licensing Transactions” for more information.
During the year ended December 31, 2016, the Company canceled certain of its previously capitalized IPRD projects under the Image Sensor Group and recorded impairment losses of $2.2 million. Also, during the year ended December 31, 2016, the Company completed certain of its IPRD projects, resulting in the reclassification of $21.6 million from IPRD to developed technology. The Company acquired $547.8 million of intangibles from the acquisition of Fairchild and the resulting purchase accounting.
Amortization expense for intangible assets amounted to $123.8 million for the year ended December 31, 2017, $104.8 million for the year ended December 31, 2016 and $135.7 million for the year ended December 31, 2015.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Amortization expense for intangible assets, with the exception of the $35.5 million of IPRD assets that will be amortized once the corresponding projects have been completed, is expected to be as follows over the next five years, and thereafter (in millions):
| Total | ||||
| 2018 | $ | 109.1 | ||
| 2019 | 99.8 | |||
| 2020 | 84.9 | |||
| 2021 | 70.0 | |||
| 2022 | 57.9 | |||
| Thereafter | 171.1 | |||
| Total estimated amortization expense | $ | 592.8 | ||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 6: 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 years ended December 31, 2017, 2016 and 2015 is as follows (in millions):
| Restructuring | Asset Impairments (1) | Other (2) | Total | |||||||||||||
| Year Ended December 31, 2017 | ||||||||||||||||
| Post-Fairchild acquisition restructuring costs | $ | 9.7 | $ | — | $ | — | $ | 9.7 | ||||||||
| Manufacturing relocation | (2.1 | ) | — | — | (2.1 | ) | ||||||||||
| Former System Solutions Group segment voluntary workforce reduction | 2.2 | — | — | 2.2 | ||||||||||||
| Other | 0.1 | 7.3 | 3.6 | 11.0 | ||||||||||||
| Total | $ | 9.9 | $ | 7.3 | $ | 3.6 | $ | 20.8 | ||||||||
| Year Ended December 31, 2016 | ||||||||||||||||
| Post-Fairchild acquisition restructuring costs | $ | 25.7 | $ | — | $ | — | $ | 25.7 | ||||||||
| Former System Solutions Group segment voluntary workforce reduction | 5.3 | — | — | 5.3 | ||||||||||||
| Manufacturing relocation | 2.1 | — | — | 2.1 | ||||||||||||
| General Workforce Reductions | 0.3 | — | — | 0.3 | ||||||||||||
| Other | (0.2 | ) | — | — | (0.2 | ) | ||||||||||
| Total | $ | 33.2 | $ | — | $ | — | $ | 33.2 | ||||||||
| Year Ended December 31, 2015 | ||||||||||||||||
| General Workforce Reductions | $ | 4.8 | $ | — | $ | — | $ | 4.8 | ||||||||
| European Marketing Organization Relocation | 3.5 | — | — | 3.5 | ||||||||||||
| Business Combination Severance | 1.0 | — | — | 1.0 | ||||||||||||
| KSS Facility Closure | 0.3 | — | (3.4) | (3.1) | ||||||||||||
| Other | 1.4 | 0.2 | 1.5 | 3.1 | ||||||||||||
| Total | $ | 11.0 | $ | 0.2 | $ | (1.9) | $ | 9.3 | ||||||||
(1) Includes impairment charges of $7.3 million for the year ended December 31, 2017, to write down certain held-for-sale assets to fair value less costs to sell.
(2) Includes charges related to certain other reductions in workforce, other facility closures, asset disposal activity and certain other activities which are not considered to be significant. Also includes curtailment gains and non-cash foreign currency translation gains for the year ended December 31, 2015. See Note 11: “Employee Benefit Plans” for additional information.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Changes in accrued restructuring charges from December 31, 2015 to December 31, 2017 are summarized as follows (in millions):
| Estimated employee separation charges | Estimated costs to exit | Total | ||||||||||
| Balance as of December 31, 2015 | $ | 5.3 | $ | 0.5 | $ | 5.8 | ||||||
| Charges | 33.2 | — | 33.2 | |||||||||
| Usage | (30.4) | (0.5) | (30.9) | |||||||||
| Balance as of December 31, 2016 | $ | 8.1 | $ | — | $ | 8.1 | ||||||
| Charges | 7.6 | 2.3 | 9.9 | |||||||||
| Usage | (13.8) | (2.1) | (15.9) | |||||||||
| Balance as of December 31, 2017 | $ | 1.9 | $ | 0.2 | $ | 2.1 | ||||||
Activity related to the Company’s significant restructuring programs that were either initiated during 2017 or had not been completed as of December 31, 2017 are as follows:
Post-Fairchild Acquisition Restructuring Costs
Following the acquisition of Fairchild, the Company approved the implementation of a cost-reduction plan, which eliminated approximately 225 positions from its workforce as a result of redundancies. Restructuring charges of $25.7 million were recorded during the year ended December 31, 2016. During the year ended December 31, 2017, an additional 111 positions were eliminated, totaling 336 pursuant to the plan. As of December 31, 2017, a total of 331 employees had exited, and the remaining five are expected to exit during 2018. The restructuring expense attributable to severance and termination benefits was $7.9 million and to other exit costs was $1.8 million for the year ended December 31, 2017. The total expense for this program amounted to $35.4 million and the Company paid $13.4 million and $20.2 million during the years ended December 31, 2017 and 2016, respectively. Accrued severance benefits for this program are $1.8 million as of December 31, 2017.
Manufacturing Relocation
During March 2016, the Company announced a plan to relocate certain of its manufacturing operations to another existing location. During the quarter ended March 31, 2017, the Company made the decision to cancel the plans for relocation and announced all workforce would remain intact. As a result, the accrued balance of $2.1 million was released as of March 31, 2017.
Former System Solutions Group Segment Voluntary Workforce Reduction
During the quarter ended June 30, 2017, the Company announced a voluntary resignation program for the former System Solutions Group. A total of 36 employees had signed employee separation agreements as of December 31, 2017 and the related expense for the year was $2.2 million, of which $2.0 million had been paid as of December 31, 2017. The remaining amounts will be paid during 2018. No further expenses are expected for this program.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
During March 2016, the Company had announced a voluntary resignation program for the former System Solutions Group. A total of 75 employees volunteered and signed employee separation agreements. The total expense of the plan was $5.3 million and all employees exited and were paid during the 2016.
General Workforce Reductions
During the third quarter of 2015, the Company approved and began to implement certain restructuring actions, primarily targeted at workforce reductions. As of December 31, 2016, the Company had notified 150 employees of their employment termination, all of which had exited by December 31, 2016. The total expense for the program was $5.1 million, with no additional expenses expected. The Company paid $1.3 million and $3.8 million during the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, there was no remaining unpaid liability due to the completion of the program.
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 were eliminated and the total expense of the plan was $3.5 million. The Company did not record any related employee separation charges during the year ended December 31, 2016. All impacted employees have exited as of 2016. The Company paid $2.9 million and $0.6 million during the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, there is no remaining unpaid liability due to the completion of this program.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 7: Balance Sheet Information
Certain significant amounts included in the Company’s Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016 consist of the following (in millions):
| December 31, 2017 | December 31, 2016 | |||||||
| Receivables, net: | ||||||||
| Accounts receivable | $ | 704.2 | $ | 632.0 | ||||
| Less: Allowance for doubtful accounts | (2.7) | (2.2) | ||||||
| $ | 701.5 | $ | 629.8 | |||||
| Inventories: | ||||||||
| Raw materials | $ | 117.7 | $ | 121.4 | ||||
| Work in process | 660.8 | 606.9 | ||||||
| Finished goods | 311.0 | 301.9 | ||||||
| $ | 1,089.5 | $ | 1,030.2 | |||||
| Property, plant and equipment, net: | ||||||||
| Land | $ | 148.4 | $ | 146.3 | ||||
| Buildings | 744.0 | 713.7 | ||||||
| Machinery and equipment | 3,454.6 | 3,131.1 | ||||||
| Total property, plant and equipment | 4,347.0 | 3,991.1 | ||||||
| Less: Accumulated depreciation | (2,067.9) | (1,832.0) | ||||||
| $ | 2,279.1 | $ | 2,159.1 | |||||
| Accrued expenses: | ||||||||
| Accrued payroll and related benefits | $ | 201.8 | $ | 155.3 | ||||
| Sales related reserves | 280.0 | 124.8 | ||||||
| Income taxes payable | 29.9 | 30.0 | ||||||
| Other | 101.1 | 94.9 | ||||||
| $ | 612.8 | $ | 405.0 | |||||
As described in Note 2: “Significant Accounting Policies”, during 2017, the Company began recognizing revenue upon shipment of products to the distributors, and along with it, recognized accruals for returns and allowances, which is included in sales related reserves as of December 31, 2017.
Assets classified as held-for-sale, consisting primarily of properties, are required to be recorded at the lower of carrying value or fair value less any costs to sell. The carrying value of these assets as of December 31, 2017 and 2016 was $5.3 million and $34.1 million, respectively, and is reported as other current assets on the Company’s Consolidated Balance Sheet. The Company sold the remaining assets in January 2018 for $5.5 million. Also included in other current assets is $17.4 million relating to the consideration held in escrow for the Aptina acquisition to be released upon satisfaction of certain outstanding items contained in the merger agreement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Depreciation expense for property, plant and equipment, including amortization of capital leases, totaled $325.2 million, $239.6 million and $201.7 million for 2017, 2016 and 2015, respectively.
As of December 31, 2017 and 2016, total property, plant and equipment included $4.2 million and $13.0 million, respectively, of assets financed under capital leases. Accumulated depreciation associated with these assets is included in total accumulated depreciation in the table above.
Warranty Reserves
The activity related to the Company’s warranty reserves for 2015, 2016 and 2017 follows (in millions):
| Balance as of December 31, 2014 | $ | 5.5 | ||
| Provision | 2.7 | |||
| Usage | (2.9) | |||
| Balance as of December 31, 2015 | $ | 5.3 | ||
| Provision | 6.3 | |||
| Usage | (10.8) | |||
| Warranty reserves from acquired businesses | 8.0 | |||
| Balance as of December 31, 2016 | $ | 8.8 | ||
| Provision | 6.8 | |||
| Usage | (7.6) | |||
| Balance as of December 31, 2017 | $ | 8.0 | ||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 8: Long-Term Debt
The Company’s long-term debt consists of the following (annualized rates, dollars in millions):
| December 31, 2017 | December 31, 2016 | |||||||
| Amended Credit Agreement: | ||||||||
| Revolving Credit Facility due 2021 | $ | 400.0 | $ | — | ||||
| Term Loan “B” Facility due 2023, interest payable monthly at 3.57% and 4.02%, respectively | 1,204.5 | 2,394.0 | ||||||
| 1.00% Notes due 2020 | 690.0 | 690.0 | ||||||
| 2.625% Notes, Series B | — | 356.4 | ||||||
| 1.625% Notes due 2023 | 575.0 | — | ||||||
| Note payable to SMBC due 2016 through 2018, interest payable quarterly at 3.09% and 2.75%, respectively | 122.7 | 160.4 | ||||||
| U.S. real estate mortgages payable monthly through 2019 at an average rate of 3.12% and 3.12%, respectively | 34.2 | 38.9 | ||||||
| Philippine term loans due 2016 through 2020, interest payable quarterly at 3.73% and 2.88%, respectively (3) | 32.4 | 44.1 | ||||||
| Loan with Singapore bank, interest payable weekly at 2.80% and 2.01%, respectively (2) (6) | 25.0 | 25.0 | ||||||
| Loan with Hong Kong bank, interest payable weekly at 2.78% and 2.01%, respectively (2) (6) | 25.0 | 25.0 | ||||||
| Malaysia revolving line of credit, interest payable quarterly at 3.14% and 2.45%, respectively (3) | 25.0 | 25.0 | ||||||
| Vietnam revolving line of credit, interest payable quarterly at an average rate of 2.88% and 2.43%, respectively (3) (6) | 24.9 | 17.0 | ||||||
| Loan with Philippine bank due 2016 through 2019, interest payable quarterly at 4.20% and 3.22%, respectively (1) | 9.4 | 14.1 | ||||||
| Loan with Japanese bank due 2016 through 2020, interest payable quarterly at 1.10% | 2.7 | 3.4 | ||||||
| Canada equipment financing payable monthly through 2017 at 3.81% (1) | — | 0.5 | ||||||
| Capital lease obligations | 4.2 | 13.0 | ||||||
| Gross long-term debt, including current maturities | 3,175.0 | 3,806.8 | ||||||
| Less: Debt discount (4) | (178.8) | (111.4) | ||||||
| Less: Debt issuance costs (5) | (44.4) | (73.1) | ||||||
| Net long-term debt, including current maturities | 2,951.8 | 3,622.3 | ||||||
| Less: Current maturities | (248.1) | (553.8) | ||||||
| Net long-term debt | $ | 2,703.7 | $ | 3,068.5 | ||||
| (1) | Debt collateralized by equipment. |
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| (2) | Debt arrangement collateralized by certain accounts receivable. |
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| (3) | Non-collateralized debt arrangement. |
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| (4) | Discount of $61.9 million and $81.5 million for the 1.00% Notes as of December 31, 2017 and December 31, 2016, respectively. Discount of $104.3 million and zero for the 1.625% Notes as of December 31, 2017 and December 31, 2016, respectively. Discount of $12.5 million and $29.9 million for the Term Loan “B” Facility as of December 31, 2017 and December 31, 2016, respectively. |
|---|
| (5) | Debt issuance costs of $8.6 million and $11.3 million for the 1.00% Notes as of December 31, 2017 and December 31, 2016, respectively. Debt issuance costs of $10.0 million and zero for the 1.625% Notes as of December 31, 2017 and December 31, 2016. Debt issuance costs of $25.8 million and $61.8 million for the Term Loan “B” Facility as of December 31, 2017 and December 31, 2016, respectively. |
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| (6) | The Company has historically renewed these arrangements annually. |
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Maturities
Expected maturities relating to the Company’s gross long-term debt (including current maturities) as of December 31, 2017 are as follows (in millions):
| Annual Maturities | ||||
| 2018 | $ | 248.1 | ||
| 2019 | 47.6 | |||
| 2020 | 699.7 | |||
| 2021 | 400.0 | |||
| 2022 | — | |||
| Thereafter | 1,779.6 | |||
| Total | $ | 3,175.0 | ||
Amended Credit Agreement
Fairchild Transaction Financing
On April 15, 2016, the Company obtained capital for the Fairchild Transaction purchase consideration and other general corporate purposes by entering into the Amended Credit Agreement and the Guarantee and Collateral Agreement. The obligations under the Amended Credit Agreement are also collateralized by mortgages on certain real property assets of the Company and its domestic subsidiaries. The proceeds from the Term Loan “B” Facility, along with $67.7 million funded by the Company, were deposited into escrow accounts and included within restricted cash on the Company’s Consolidated Balance Sheet until the close of the Fairchild Transaction. Upon the close of the Fairchild Transaction, the Company’s then current senior revolving credit facility was terminated and replaced by the Revolving Credit Facility, which became immediately available to the Company.
The acquisition of Fairchild was funded with proceeds from the Term Loan “B” Facility, Company-funded amounts previously deposited into escrow accounts, proceeds from a $200.0 million draw against the Company’s Revolving Credit Facility and existing cash on hand. Proceeds from the Term Loan “B” Facility were also used to pay for debt issuance costs, transaction fees and expenses.
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First Amendment to Credit Agreement
On September 30, 2016, the Company, the Guarantors, the several lenders party thereto and the Agent entered into the first amendment (the “First Amendment”) to the Amended Credit Agreement. The First Amendment reduced the applicable margins on Eurocurrency Loans to 2.75% and 3.25% for borrowings under the Revolving Credit Facility and the Term Loan “B” Facility, respectively, and reduced applicable margins on ABR Loans to 1.75% and 2.25% for borrowings under the Revolving Credit Facility and the Term Loan “B” Facility, respectively. Additionally, under the First Amendment: (i) the Term Loan “B” Facility was increased to $2.4 billion; (ii) certain restructuring transactions and intercompany intellectual property transfers are permitted in order to achieve efficient integration of the Company, its subsidiaries and acquired entities; and (iii) certain changes were made to the provisions regarding hedge agreements to allow the Company and each of the Guarantors to enter into certain hedge arrangements that shall be deemed to be “obligations” for purposes of the Amended Credit Agreement which may be collateralized by the collateral granted pursuant to the Guarantee and Collateral Agreement. The Company used the additional $200.0 million proceeds under the Term Loan “B” Facility to pay off the outstanding balance under the Company’s Revolving Credit Facility. As of December 31, 2016, the Company had $2.4 billion outstanding under the Term Loan “B” Facility and no amounts outstanding under the Revolving Credit Facility.
Second Amendment to Credit Agreement
On March 31, 2017, the Company, the Guarantors, the several lenders party thereto and the Agent entered into the Second Amendment. The Second Amendment provided for, among other things, modifications to the Amended Credit Agreement to allow the 1.625% Notes to rank pari passu with borrowings under the Amended Credit Agreement and to reduce the interest rates payable under the Term Loan “B” Facility and the Revolving Credit Facility. Pursuant to the Amended Credit Agreement, for any interest period ending after the date of the Second Amendment, the Second Amendment reduced the applicable margins on Eurocurrency Loans to 1.75% and 2.25% for borrowings under the Revolving Credit Facility and the Term Loan “B” Facility, respectively, and reduced applicable margins on ABR Loans to 0.75% and 1.25% for borrowings under the Revolving Credit Facility and the Term Loan “B” Facility, respectively.
Third Amendment to Credit Agreement
On November 30, 2017, the Company, the Guarantors, the several lenders party thereto and the Agent entered into the Third Amendment. The Third Amendment provides for, among other things, modifications to the Amended Credit Agreement to reduce the interest rate payable under the Term Loan “B” Facility and to increase the amount that may be borrowed pursuant to the Revolving Credit Facility to $1.0 billion.
Borrowings under the Amended Credit Agreement may be incurred in U.S. Dollars, Euros, Pounds Sterling, Japanese Yen or any other currency approved by the Agent and the lenders under the Revolving Credit Facility, subject to certain qualifications described in the Amended Credit Agreement. Regardless of currency, all borrowings under the Amended Credit Agreement may, at the Company’s option, be incurred as either Eurocurrency Loans or ABR Loans. Pursuant to the Amended Credit Agreement, for any interest period ending after the date of the Third Amendment, Eurocurrency Loans will accrue interest at (i) a base rate per annum equal to the Adjusted LIBO Rate (as defined below) plus (ii) an applicable margin equal to (x) 1.50% with respect to
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borrowings under the Revolving Credit Facility (with step-downs and step-ups as set forth in the Amended Credit Agreement) or (y) 2.00% with respect to borrowings under the Term Loan “B” Facility.
Pursuant to the Amended Credit Agreement, ABR Loans will accrue interest at (i) a base rate per annum equal to the highest of (x) the Federal funds rate plus 0.50%, (y) the prime commercial lending rate announced by Deutsche Bank AG, New York Branch from time to time as its prime lending rate and (z) the Adjusted LIBO Rate for a one month interest period (or if such day is not a business day, the immediately preceding business day) (determined after giving effect to any applicable “floor”) plus 1.00%; provided that, the Adjusted LIBO Rate for any day shall be based on the LIBO Rate, subject to the interest rate floors set forth in the Amended Credit Agreement, plus (ii) an applicable margin equal to (x) 0.50% with respect to borrowings under the Revolving Credit Facility (with step-downs and step-ups as set forth in the Amended Credit Agreement) or (y) 1.00% with respect to borrowings under the Term Loan “B” Facility.
“Adjusted LIBO Rate” means (x) the LIBO Rate for such interest period multiplied by (y) a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve, liquid asset, fees or similar requirements (including any marginal, special, emergency or supplemental reserves or other requirements) established by any central bank, monetary authority, the Board of Governors of the Federal Reserve System of the United States, the Financial Conduct Authority, the Prudential Regulation Authority, the European Central Bank or other governmental authority for any category of deposits or liabilities customarily used to fund loans in the applicable currency, expressed in the case of each such requirement as a decimal. Such reserve, liquid asset, fees or similar requirements shall include those imposed pursuant to Regulation D of the Board of Governors of the Federal Reserve System of the United States.
The obligations under the Amended Credit Agreement are guaranteed by the Guarantors and secured by a pledge of substantially all of the assets of the Company and the Guarantors, including a pledge of the equity interests in certain of the Company’s domestic and first-tier foreign subsidiaries, subject to customary exceptions. The obligations under the Amended Credit Agreement are also collateralized by mortgages on certain real property assets of the Company and its domestic subsidiaries. The Amended Credit Agreement includes financial maintenance covenants including a maximum consolidated total net leverage ratio and a minimum interest coverage ratio. It also contains other customary affirmative and negative covenants and events of default. The Company was in compliance with its covenants as of December 31, 2017.
The Term Loan “B” Facility matures on March 31, 2023 and the Revolving Credit Facility will mature on September 19, 2021. As of December 31, 2017, the Company had aggregate borrowings of $400.0 million under the Revolving Credit Facility and $1.2 billion under the Term Loan “B” Facility.
Debt Refinancing and Prepayment
The Company incurred third party, legal and other fees of $3.3 million related to the Third Amendment. The Company performed an analysis for the Revolving Credit Facility and capitalized $1.9 million of closing costs which will be amortized straight-line over the term of the Revolving Credit Facility. The Company performed an analysis for the Term Loan “B” Facility and expensed $1.4 million of third party fees and expenses. The Company also expensed $12.9 million of unamortized debt discount and issuance costs attributed to the partial pay down of $400.0 million of the Term Loan “B” Facility.
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During the quarter ended September 29, 2017, the Company prepaid $200.0 million of borrowings under the Term Loan “B” Facility and expensed $6.7 million of unamortized debt discount and issuance costs attributed to the partial pay down.
The Company incurred legal and other fees of $2.4 million related to the Second Amendment. The Company performed an analysis and recorded a debt extinguishment charge of $5.6 million, which included a $3.2 million write-off of unamortized debt issuance costs and $2.4 million in third party fees. On March 31, 2017, the Company used the proceeds from the issuance of the 1.625% Notes, amounting to $562.1 million, and cash on hand of $12.9 million to prepay $575.0 million of the outstanding balance of the Term Loan “B” Facility and expensed $20.6 million of unamortized debt discount and issuance costs.
The Company incurred debt issuance costs consisting of legal, underwriting and other fees of $66.6 million related to the Term Loan “B” Facility, including $22.0 million toward lender fees for the First Amendment. The Company recorded the Term Loan “B” Facility debt issuance costs as a direct deduction from the carrying amount of the debt and is amortizing them using the effective interest rate method over the term of the loan. The Company performed an analysis and recorded a debt extinguishment charge of $4.7 million during the year ended December 31, 2016.
The Company incurred debt issuance costs consisting of legal, underwriting and other fees of $8.2 million for the Revolving Credit Facility and recognized them as deferred costs, which are included in other assets on the Consolidated Balance Sheet. The Company accounted for the termination and replacement of its senior revolving credit facility by the Revolving Credit Facility as a debt modification and wrote off $1.6 million in unamortized debt issuance costs.
The Company recorded debt refinancing and prepayment charges of $47.2 million and $6.3 million for the years ended December 31, 2017 and 2016, respectively.
1.00% Notes due 2020
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. The Company was the sole issuer in the private unregistered offering of the 1.00% Notes. The Company incurred issuance costs of $18.3 million in connection with the issuance of the 1.00% Notes, of which $15.4 million were recorded 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, the guarantors named therein and Wells Fargo Bank, National Association, as trustee (the “1.00% Indenture”).
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 was intended for general corporate purposes, including additional share repurchases and potential acquisitions.
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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 1.00% Notes are fully and unconditionally guaranteed on a senior unsecured obligation basis by certain existing subsidiaries of the Company.
The 1.00% 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 1.00% 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 1.00% 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 1.00% 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 1.00% Indenture; or (iv) on and after September 1, 2020. Upon conversion of the 1.00% Notes, the Company will deliver cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. For a discussion of the dilutive effects for earnings per share calculations, see Note 9: “Earnings Per Share and Equity.”
The 1.00% Notes will mature on December 1, 2020. If a holder elects to convert its 1.00% 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 1.00% Indenture. Notwithstanding these conversion rate adjustments, the 1.00% Notes contain an explicit limit on the number of shares issuable upon conversion.
In connection with the occurrence of specified fundamental changes, holders may require the Company to repurchase for cash all or part of their 1.00% Notes at a purchase price equal to 100% of the principal amount of the 1.00% Notes to be repurchased, plus accrued and unpaid interest to, but not including, the fundamental change repurchase date.
The 1.00% 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 1.00% 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. ON Semiconductor was the sole issuer of the 1.00% Notes.
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’
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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 1.00% Notes.
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 the 1.00% 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. All 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.
2.625% Notes, Series B
On November 17, 2016, the Company announced that it would be exercising its option to redeem the entire $356.9 million outstanding principal amount of the 2.625% Notes, Series B on December 20, 2016 pursuant to the terms of the 2.625% Notes, Series B Indenture. The holders of the 2.625% Notes, Series B had the right to convert their 2.625% Notes, Series B into shares of common stock of the Company at a conversion rate of 95.2381 shares per $1,000 principal amount until the close of business on December 19, 2016, which was equivalent to an initial conversion price of approximately $10.50 per share of common stock. The Company, at its election, could settle its conversion obligation with respect to the 2.625% Notes, Series B, with shares of common stock, cash or a combination thereof. The Company satisfied its obligation with respect to the 2.625% Notes, Series B tendered for conversion with cash. The final conversion was settled on January 26, 2017, resulting in an aggregate payment of approximately $445.0 million for the redemption and conversion of the 2.625% Notes, Series B. The equity component of the 2.625% Notes, Series B amounting to $32.9 million, representing the amounts previously recorded to additional paid in capital, was reclassified to mezzanine equity as of December 31, 2016. There was no loss on extinguishment of debt, and upon settlement, the balance in the mezzanine equity was reduced to zero and the remaining $55.7 million was recorded as a reduction to APIC.
1.625% Notes due 2023
On March 31, 2017, the Company completed a private placement of $575.0 million of its 1.625% Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The Company incurred issuance costs of $13.7 million in connection with the issuance of the 1.625% Notes, of which $11.1 million was capitalized as debt issuance costs and is being amortized using the effective interest method, and $2.6 million was allocated to the conversion option (as further described below) and was recorded as equity. The 1.625% Notes are governed by the 1.625% Indenture.
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The net proceeds from the offering of the 1.625% Notes were used to repay $562.1 million of borrowings outstanding under the Term Loan “B” Facility. The 1.625% Notes bear interest at the rate of 1.625% per year from the date of issuance, payable semiannually in arrears on April 15 and October 15 of each year, beginning on October 15, 2017. The 1.625% Notes are fully and unconditionally guaranteed, on a joint and several basis, by each of the Company’s subsidiaries that is a borrower or guarantor under the Amended Credit Agreement.
The initial conversion rate of the 1.625% Notes is 48.2567 shares of common stock per $1,000 principal amount of 1.625% Notes (subject to adjustment in certain events), which is equivalent to an initial conversion price of approximately $20.72 per share of common stock. Prior to the close of business on the business day immediately preceding July 15, 2023, the 1.625% Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2017 (and only during such calendar quarter), if the last reported sale price of the Company’s 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; (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 1.625% Notes for each trading day of such period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate transactions described in the 1.625% Indenture. On or after July 15, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 1.625% Notes may convert all or a portion of their 1.625% Notes at any time. Upon conversion of the 1.625% Notes, the Company will deliver cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. For a discussion of the dilutive effects for earnings per share calculations, see Note 9: “Earnings Per Share and Equity”.
The 1.625% Notes will mature on October 15, 2023. If a holder elects to convert its 1.625% Notes in connection with the occurrence of specified fundamental changes that occur prior to July 15, 2023, the holder will be entitled to receive, in addition to cash and/or shares of common stock equal to the conversion rate, an additional number of shares of common stock, as described in the 1.625% Indenture. Notwithstanding these conversion rate adjustments, the 1.625% Notes contain an explicit limit on the number of shares issuable upon conversion.
In connection with the occurrence of specified fundamental changes, holders may require the Company to repurchase for cash all or a portion of their 1.625% Notes at a purchase price equal to 100% of the principal amount of the 1.625% Notes to be repurchased, plus accrued and unpaid interest to, but not including, the fundamental change repurchase date.
The 1.625% Notes, which are the Company’s unsecured obligations, rank equally in right of payment to all of the Company’s existing and future unsubordinated indebtedness and are senior in right of payment to all of the Company’s existing and future subordinated obligations. The 1.625% Notes are 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 1.625% Notes from the respective host debt instrument, which is referred to as the debt discount, and initially recorded the conversion option of $115.7 million in stockholders’
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equity. The resulting debt discount is being amortized to interest expense at an effective interest rate of 5.38% over the contractual terms of the notes.
Concurrently with the offering of the 1.625% Notes, the Company used $59.5 million of borrowings under the Revolving Credit Facility to enter into convertible note hedge and warrant transactions with certain of the initial purchasers of the 1.625% Notes. Pursuant to these transactions, the Company has the option to purchase (subject to adjustment for certain specified transactions) an aggregate of 27.7 million shares of its common stock at a price of $20.72 per share. The total cost of the convertible note hedge transactions was $144.7 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 27.7 million shares of the Company’s common stock at a price of $30.70 per share. The Company received $85.2 million in cash proceeds from the sale of these warrants. The tax impact of the conversion option and the convertible note hedge and warrant transactions amounted to $11.0 million and was recorded in stockholders’ equity.
Together, the purchase of the convertible note hedges and the sale of the warrants are intended to offset potential dilution from the conversion of the 1.625% 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. All of the shares subject to the conversion of the 1.625% Notes and hedging transactions were reserved from the Company’s unallocated shares.
Note Payable to SMBC
On January 31, 2013, the Company amended and restated its seven-year, non-collateralized loan obligation with SANYO Electric. In connection with the amendment and restatement of the loan agreement, SANYO Electric assigned all of its rights under the loan agreement to SMBC. The loan had an original principal amount of approximately $377.5 million and had a principal balance of $122.7 million and $160.4 million as of December 31, 2017 and December 31, 2016, respectively. The outstanding balance was repaid on January 2, 2018.
U.S. Real Estate Mortgages
On August 4, 2014, one of the Company’s U.S. subsidiaries entered into an amended and restated loan agreement with a Scottish Bank for approximately $49.4 million, which was collateralized by real estate, including certain of the Company’s facilities in California, Oregon, and Idaho. The loan bears interest payable monthly at an interest rate of approximately 3.12% per annum, with a balloon payment of approximately $26.7 million in 2019.
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. During the third quarter of 2015, the Company borrowed the full
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$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.
Malaysia Revolving Line of Credit
On September 23, 2014, one of the Company’s wholly-owned Malaysian subsidiaries and ON Semiconductor, as guarantor, entered into a non-collateralized and uncommitted $25.0 million line of credit (the “Malaysia Line of Credit”), the terms of which were set forth in an agreement by and between the Company’s Malaysian subsidiary and a Japanese bank. During the third quarter of 2014, the Company’s Malaysian subsidiary borrowed the full $25.0 million available under the Malaysia Line of Credit. The balance as of December 31, 2017 was $25.0 million. Borrowings under the Malaysia Line of Credit bear interest based on 3-month LIBOR, as established at the commencement of each borrowing period, plus 1.45% per annum, with interest payable quarterly. The borrowed amount is payable within 21 business days of demand.
Vietnam Revolving Line of Credit
On September 3, 2014, one of the Company’s wholly-owned Vietnamese subsidiaries and ON Semiconductor, as guarantor, entered into a non-collateralized and uncommitted $25.0 million line of credit (the “Vietnam Line of Credit”), the terms of which were set forth in an agreement by and between the Company’s Vietnamese subsidiary and a Japanese bank. As of December 31, 2017, the Company’s Vietnamese subsidiary had an outstanding balance of $24.9 million under the Vietnam Line of Credit. Borrowings under the Vietnam Line of Credit bear interest based on 3-month LIBOR and 12-month LIBOR, as established at the commencement of each borrowing period, plus 1.45% per annum, with interest payable quarterly and annually. The borrowed amount is payable within 5 business days of demand.
Capital Lease Obligations
The Company has various capital lease obligations primarily for software, which, as of December 31, 2017, totaled $4.2 million, with interest rates ranging from 2.0% to 5.2% and maturities from the first quarter of 2018 until the fourth quarter of 2020. Future payments for the Company’s capital lease obligations are included in the annual maturities table.
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Note 9: Earnings Per Share and Equity
Earnings Per Share
Calculations of net income per common share attributable to ON Semiconductor Corporation are as follows (in millions, except per share data):
| For the years ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net income attributable to ON Semiconductor Corporation | $ | 810.7 | $ | 182.1 | $ | 206.2 | ||||||
| Basic weighted average common shares outstanding | 421.9 | 415.2 | 421.2 | |||||||||
| Add: Incremental shares for: | ||||||||||||
| Dilutive effect of share-based awards | 5.5 | 3.8 | 4.6 | |||||||||
| Dilutive effect of convertible notes | 0.9 | 1.0 | 2.0 | |||||||||
| Diluted weighted average common shares outstanding | 428.3 | 420.0 | 427.8 | |||||||||
| Net income per common share attributable to ON Semiconductor Corporation: | ||||||||||||
| Basic | $ | 1.92 | $ | 0.44 | $ | 0.49 | ||||||
| Diluted | $ | 1.89 | $ | 0.43 | $ | 0.48 | ||||||
Basic 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 RSUs is calculated by applying the treasury stock method. Share-based awards whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income per share calculation. The excluded number of anti-dilutive share-based awards was approximately 0.2 million, 1.7 million and 1.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The dilutive impact related to the Company’s 1.00% Notes, 1.625% 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 series 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 the Company’s common stock exceeds $25.96 per share, with respect to the 1.00% Notes, or $30.70 per share, with respect to the 1.625% Notes, 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 and 1.625% Notes, respectively. 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
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conversion, the convertible note hedges are expected to offset the dilutive effect of the 1.00% Notes and 1.625% Notes, respectively, when the stock price is above $18.50 per share, with respect to the 1.00% Notes, and $20.72 per share, with respect to the 1.625% Notes.
Equity
Share Repurchase Program
On December 1, 2014, the Company announced a capital allocation policy (the “Capital Allocation Policy”) under which the Company intends to return to stockholders approximately 80 percent of free cash flow, less repayments of long-term debt, subject to a variety of factors, including our strategic plans, market and economic conditions and the Board’s discretion. For the purposes of the Capital Allocation Policy, the Company defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. The Company also announced the 2014 Share Repurchase Program pursuant to the Capital Allocation Policy. Under the 2014 Share Repurchase Program, the Company is authorized to repurchase approximately $1.0 billion of its common shares over a four year period, exclusive of any fees, commissions or other expenses, subject to the same factors and considerations described above. The 2014 Share Repurchase Program was effective December 1, 2014.
The Company repurchased shares worth $25.0 million of the Company’s common stock in connection with the offering of the 1.625% Notes during the year ended December 31, 2017. Other than this, there were no repurchases of the Company’s common stock under its share repurchase program during the years ended December 31, 2017 and 2016, respectively, as the Company focused on the funding required for the Fairchild Transaction, and its associated debt.
Information relating to the Company’s share repurchase programs is as follows (in millions, except per share data):
| For the years ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 (5) | ||||||||||
| Number of repurchased shares (1) | 1.6 | — | 30.4 | |||||||||
| Beginning accrued share repurchases (2) | $ | — | $ | — | $ | — | ||||||
| Aggregate purchase price | 25.0 | — | 347.8 | |||||||||
| Fees, commissions and other expenses | — | — | 0.4 | |||||||||
| Less: ending accrued share repurchases (3) | — | — | — | |||||||||
| Total cash used for share repurchases | $ | 25.0 | $ | — | $ | 348.2 | ||||||
| Weighted-average purchase price per share (4) | $ | 15.35 | $ | — | $ | 11.46 | ||||||
| Available for future purchases at period end | $ | 603.2 | $ | 628.2 | $ | 628.2 |
| (1) | None of these shares had been reissued or retired as of December 31, 2017, 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. |
|---|
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| (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 8: “Long-Term Debt” for information with respect to the Company’s 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 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 RSUs 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 amounts remitted in the years ended December 31, 2017 and 2016 were $28.1 million and $12.3 million, respectively, for which the Company withheld approximately 1.8 million and 1.3 million shares of common stock, respectively, that were underlying the RSUs that vested. None of these shares had been reissued or retired as of December 31, 2017, but may be reissued or retired by the Company at a later date. These repurchases do not count against the Company’s share repurchase program.
Non-Controlling Interest
The Company’s entity which operates assembly and test operations in Leshan, China is owned by Leshan. The Company owns 80%, of the outstanding equity interests in Leshan and its investment in Leshan has been consolidated in the Company’s financial statements.
At December 31, 2017, the non-controlling interest balance was $22.2 million. This balance included the non-controlling interest’s $2.3 million share of the earnings for the year ended December 31, 2017 offset by $1.9 million of dividends paid to the non-controlling shareholder.
At December 31, 2016, the non-controlling interest balance was $21.8 million. This balance included the non-controlling interest’s $2.4 million share of the earnings for the year ended December 31, 2016 offset by $4.3 million of dividends paid to the non-controlling shareholder.
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Note 10: Share-Based Compensation
Total share-based compensation expense related to the Company’s employee stock options, RSUs, stock grant awards and ESPP for the years ended December 31, 2017, 2016 and 2015 was comprised as follows (in millions):
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Cost of revenues | $ | 6.0 | $ | 8.0 | $ | 7.7 | ||||||
| Research and development | 12.5 | 11.1 | 9.2 | |||||||||
| Selling and marketing | 11.7 | 9.8 | 8.5 | |||||||||
| General and administrative | 39.6 | 27.2 | 21.5 | |||||||||
| Share-based compensation expense before income taxes | 69.8 | 56.1 | 46.9 | |||||||||
| Related income tax benefits (1) | 24.4 | — | — | |||||||||
| Share-based compensation expense, net of taxes | $ | 45.4 | $ | 56.1 | $ | 46.9 | ||||||
| (1) | Recognition of related income tax benefits are the result of the adoption of ASU 2016-09 during the first quarter of 2017. Tax benefit is calculated using the federal statutory rate of 35%. See Note 3: “Recent Accounting Pronouncements” for more information. |
|---|
At December 31, 2017, total unrecognized estimated share-based compensation expense, net of estimated forfeitures, related to non-vested stock options was less than $0.1 million, which is expected to be recognized over a weighted-average period of 3 months. At December 31, 2017, total unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested RSUs with time-based service conditions and performance-based vesting criteria was $76.1 million, which is expected to be recognized over a weighted-average period of 1.6 years. The total intrinsic value of stock options exercised during the year ended December 31, 2017 was $20.1 million. The Company received cash of $18.0 million and $23.6 million from the exercise of stock options and the issuance of shares under the ESPP, respectively. Upon option exercise, release of RSUs, stock grant awards, or completion of a purchase under the ESPP, the Company issues new shares of common stock.
Share-Based Compensation Information
The fair value per unit of each time based and performance based RSU and stock grant award is determined on the grant date and is equal to the Company’s closing stock price on the grant date. There were no employee stock options granted during the years ended December 31, 2017, 2016 and 2015.
Share-based compensation expense is based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures for RSUs were estimated to be approximately 5% for the years ended December 31, 2017, 2016 and 2015.
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Plan Descriptions
On February 17, 2000, the Company adopted the 2000 SIP which provided key employees, directors and consultants with various equity-based incentives as described in the plan document. Prior to February 17, 2010, stockholders had approved amendments to the 2000 SIP which increased the number of shares of the Company’s common stock reserved and available for grant to 30.5 million, plus an additional number of shares of the Company’s common stock equal to 3% of the total number of outstanding shares of common stock effective automatically on January 1st of each year beginning January 1, 2005 and ending January 1, 2010. On February 17, 2010, the 2000 SIP expired and the Company ceased granting under the plan. Options granted pursuant to the 2000 SIP that remain outstanding continue to be exercisable or subject to vesting pursuant to the underlying option agreements.
On March 23, 2010, the Company adopted the Amended and Restated SIP, which was subsequently approved by the Company’s stockholders at the annual stockholder meeting on May 18, 2010 and reapproved by the Company’s stockholders at the annual stockholder meeting on May 20, 2015. The Amended and Restated SIP provides key employees, directors and consultants with various equity-based incentives as described in the plan document. The Amended and Restated SIP is administered by the Board of Directors or a committee thereof, which is authorized to determine, among other things, the key employees, directors or consultants who will receive awards under the plan, the amount and type of award, exercise prices or performance criteria, if applicable, and vesting schedules. On May 15, 2012, stockholders approved certain amendments to the Amended and Restated SIP to increase the number of shares of common stock subject to all awards under the Amended and Restated SIP by 33.0 million. On May 17, 2017, stockholders approved certain amendments to the Amended and Restated SIP to increase the number of shares of common stock subject to all awards under the Amended and Restated SIP by 27.9 million to 87.0 million, exclusive of shares of common stock subject to awards that were previously granted pursuant to the 2000 SIP that have or will become available for grant pursuant to the Amended and Restated SIP.
Generally, the options granted under the 2000 SIP and Amended and Restated SIP vest over a period of three to four years and have a contractual term of 10 years and 7 years, respectively. Under both plans, certain outstanding options vest automatically upon a change of control, as defined in the respective plan document, provided the option holder is employed by the Company on the date of the change of control. Certain other outstanding options may also vest upon a change of control if the Board of Directors of the Company, at its discretion, provides for acceleration of the vesting of said options. Generally, upon the termination of an option holder’s employment, all unvested options will immediately terminate and vested options will generally remain exercisable for a period of 90 days after the date of termination (one year in the case of death or disability).
Generally, RSUs granted under the 2000 SIP and the Amended and Restated SIP vest over three years or based on the achievement of certain performance criteria and are payable in shares of the Company’s stock upon vesting.
As of December 31, 2017, there was an aggregate of 39.0 million shares of common stock available for grant under the Amended and Restated SIP.
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Stock Options
A summary of stock option transactions for all stock option plans follows (in millions except per share and contractual term data):
| Year Ended December 31, 2017 | ||||||||||||||||
| Number of Shares | Weighted-Average Exercise Price Per Share | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2016 | 3.3 | $ | 7.75 | |||||||||||||
| Granted | — | — | ||||||||||||||
| Exercised | (2.2 | ) | 8.13 | |||||||||||||
| Canceled | — | — | ||||||||||||||
| Outstanding at December 31, 2017 | 1.1 | $ | 6.95 | 1.15 | $ | 15.1 | ||||||||||
| Exercisable at December 31, 2017 | 1.1 | $ | 6.95 | 1.15 | $ | 15.1 | ||||||||||
As of December 31, 2017, the Company had 1.1 million of outstanding stock options, representing stock options that previously vested and those which are expected to vest, with a weighted-average exercise price of $6.95. Information about the outstanding stock options with exercise prices less than or above $20.94 per share, the closing price of the Company’s common stock at December 31, 2017, 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 $20.94 | 1.1 | $ | 6.95 | — | $ | — | 1.1 | $ | 6.95 | |||||||||||||||
| Above $20.94 | — | $ | — | — | $ | — | — | $ | — | |||||||||||||||
| Total outstanding | 1.1 | $ | 6.95 | — | $ | — | 1.1 | $ | 6.95 | |||||||||||||||
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Restricted Stock Units
A summary of the RSU transactions for the year ended December 31, 2017 follows (number of shares in millions):
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||
| Nonvested shares of RSUs at December 31, 2016 | 9.7 | $ | 10.10 | |||||
| Granted | 4.6 | 15.58 | ||||||
| Achieved | 1.2 | 9.01 | ||||||
| Released | (5.4) | 9.81 | ||||||
| Canceled | (0.3) | 12.16 | ||||||
| Nonvested shares of RSUs at December 31, 2017 | 9.8 | $ | 12.63 | |||||
During 2017, the Company awarded 1.5 million RSUs to certain officers and employees of the Company that vest upon the achievement of certain performance criteria. The number of units expected to vest is evaluated each reporting period and compensation expense is recognized for those units for which achievement of the performance criteria is considered probable.
As of December 31, 2017, unrecognized compensation expense, net of estimated forfeitures related to non-vested RSUs granted under the Amended and Restated SIP with time-based and performance-based conditions, was $53.8 million and $22.3 million, respectively. For RSUs with time-based service conditions, expense is being recognized over the vesting period; for RSUs with performance criteria, expense is recognized over the period during which the performance criteria is expected to be achieved. Unrecognized compensation cost related to awards with certain performance criteria that are not expected to be achieved is not included here. Total compensation expense related to both performance-based and service-based RSUs was $62.2 million for the year ended December 31, 2017, which included $36.4 million for RSUs with time-based service conditions that were granted in 2017 and prior that are expected to vest.
Stock Grant Awards
During the year ended December 31, 2017, 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 $16.11 per share. Total compensation expense related to stock grant awards for the year ended December 31, 2017 was approximately $1.6 million.
Employee Stock Purchase Plan
On February 17, 2000, the Company adopted the ESPP. Subject to local legal requirements, each of the Company’s eligible employees may elect to contribute up to 10% of eligible payroll applied towards the purchase of shares of the Company’s common stock at a price equal to 85% of the fair market value of such shares as determined under the plan. Employees are limited to annual purchases of $25,000 under this plan. In addition, during each quarterly offering period, employees may not purchase stock exceeding the lesser of: (i) 500 shares;
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or (ii) the number of shares equal to $6,250 divided by the fair market value of the stock on the first day of the offering period. During the year ended December 31, 2017, employees purchased approximately 1.9 million shares under the ESPP. During the years ended December 31, 2016 and 2015, employees purchased approximately 1.8 million and 1.7 million shares, respectively, under the ESPP. Through May 2013, stockholders had approved amendments to the ESPP, which increased the number of shares of the Company’s common stock issuable thereunder to 18.0 million shares. On May 20, 2015, stockholders 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 to a total of 23.5 million. Again on May 17, 2017 stockholders 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 5.0 million to a total of 28.5 million. As of December 31, 2017, there were approximately 8.0 million shares available for issuance under the ESPP.
Note 11: Employee Benefit Plans
Defined Benefit Plans
The Company maintains defined benefit plans for employees of certain of its foreign subsidiaries. Such plans conform to local practice in terms of providing minimum benefits mandated by law, collective agreements or customary practice. 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. The Company’s expected long-term rate of return on plan assets is updated at least annually, taking into consideration its asset allocation, historical returns on similar types of assets and the current economic environment. For estimation purposes, the Company assumes its long-term asset mix will generally be consistent with the current mix. The Company determines its discount rates using highly rated corporate bond yields and government bond yields.
Benefits under all of the Company’s plans are valued utilizing the projected unit credit cost method. The Company’s policy is to fund its defined benefit plans in accordance with local requirements and regulations. The funding is primarily driven by the Company’s current assessment of the economic environment and projected benefit payments of its foreign subsidiaries. The Company’s measurement date for determining its defined benefit obligations for all plans is December 31 of each year.
The Company recognizes actuarial gains and losses in the period the Company’s annual pension plan actuarial valuations are prepared, which generally occurs during the fourth quarter of each year, or during any interim period where a revaluation is deemed necessary.
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The following is a summary of the status of the Company’s foreign defined benefit pension plans and the net periodic pension cost (dollars in millions):
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Service cost | $ | 10.0 | $ | 9.0 | $ | 8.4 | ||||||
| Interest cost | 4.3 | 4.5 | 3.8 | |||||||||
| Expected return on plan assets | (5.5) | (3.9) | (3.5) | |||||||||
| Actuarial and other (gain) loss | 1.9 | 10.1 | (5.0) | |||||||||
| Total net periodic pension cost | $ | 10.7 | $ | 19.7 | $ | 3.7 | ||||||
| Weighted average assumptions | ||||||||||||
| Discount rate | 1.66% | 1.60% | 1.82% | |||||||||
| Expected return on plan assets | 3.22% | 3.20% | 2.46% | |||||||||
| Rate of compensation increase | 3.22% | 3.05% | 2.96% |
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The long term rate of return on plan assets was determined using the weighted-average method, which incorporates factors that include the historical inflation rates, interest rate yield curve and current market conditions.
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Change in projected benefit obligation (PBO) | ||||||||
| Projected benefit obligation at the beginning of the year | $ | 261.8 | $ | 234.4 | ||||
| Service cost | 10.0 | 9.0 | ||||||
| Interest cost | 4.3 | 4.5 | ||||||
| Net actuarial (gain) loss | 6.4 | 10.6 | ||||||
| Acquired PBO from Fairchild | — | 17.4 | ||||||
| Benefits paid by plan assets | (4.7) | (4.9) | ||||||
| Benefits paid by the Company | (4.2) | (5.9) | ||||||
| Translation and other (gain) loss | 19.1 | (3.3) | ||||||
| Projected benefit obligation at the end of the year | $ | 292.7 | $ | 261.8 | ||||
| Accumulated benefit obligation at the end of the year | $ | 245.8 | $ | 222.4 | ||||
| Change in plan assets | ||||||||
| Fair value of plan assets at the beginning of the year | $ | 159.7 | $ | 147.2 | ||||
| Acquired assets from Fairchild | — | 9.1 | ||||||
| Actual return on plan assets | 10.0 | 4.4 | ||||||
| Benefits paid from plan assets | (4.7) | (4.9) | ||||||
| Employer contributions | 6.0 | 6.1 | ||||||
| Translation and other (gain) loss | 12.4 | (2.2) | ||||||
| Fair value of plan assets at the end of the year | $ | 183.4 | $ | 159.7 | ||||
| Plans with underfunded or non-funded projected benefit obligation | ||||||||
| Projected benefit obligation | $ | 283.3 | $ | 256.1 | ||||
| Fair value of plan assets | 173.7 | 152.9 | ||||||
| Plans with underfunded or non-funded accumulated benefit obligation | ||||||||
| Accumulated benefit obligation | $ | 174.8 | $ | 138.9 | ||||
| Fair value of plan assets | $ | 104.3 | $ | 63.7 | ||||
| Amounts recognized in the balance sheet consist of | ||||||||
| Non-current assets | $ | 0.1 | $ | — | ||||
| Current liabilities | (0.2) | (0.1) | ||||||
| Non-current liabilities | (109.2) | (102.0) | ||||||
| Funded status | $ | (109.3) | $ | (102.1) | ||||
As of December 31, 2017 and 2016, respectively, the assets of the Company’s foreign plans were invested 20% and 18% in equity securities, 18% and 20% in debt securities, including corporate bonds, 45% and 44% in insurance and investment contracts, 3% and 3% in cash and 14% and 15% in other investments, including foreign government securities, equity securities and mutual funds. This asset allocation is based on the anticipated
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required funding amounts, timing of benefit payments, historical returns on similar assets and the influence of the current economic environment.
Plan Assets
The Company’s overall investment strategy is to focus on stable and low credit risk investments aimed at providing a positive rate of return to the plan assets. The Company has an investment mix with a wide diversification of asset types and fund strategies that are aligned with each region and foreign location’s economy and market conditions. Investments in government securities are generally guaranteed by the respective government offering the securities. Investments in corporate bonds, equity securities, and foreign mutual funds are made with the expectation that these investments will give an adequate rate of long-term returns despite periods of high volatility. Other types of investments include investments in cash deposits, money market funds and insurance contracts. Asset allocations are based on the anticipated required funding amounts, timing of benefit payments, historical returns on similar assets and the influence of the current economic environment.
The following table sets forth, by level within the fair value hierarchy, a summary of investments measured at fair value and the asset allocations of the plan assets in the Company’s foreign pension plans (in millions):
| December 31, 2017 | ||||||||||||||||
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Asset Category | ||||||||||||||||
| Cash/Money Markets | $ | 4.9 | $ | 4.9 | $ | — | $ | — | ||||||||
| Foreign Government/Treasury Securities (1) | 20.1 | 20.1 | — | — | ||||||||||||
| Corporate Bonds, Debentures (2) | 32.5 | — | 32.5 | — | ||||||||||||
| Equity Securities (3) | 36.8 | — | 36.8 | — | ||||||||||||
| Mutual Funds | 6.7 | — | 6.7 | — | ||||||||||||
| Investment and Insurance Annuity Contracts (4) | 82.4 | — | 27.2 | 55.2 | ||||||||||||
| $ | 183.4 | $ | 25.0 | $ | 103.2 | $ | 55.2 | |||||||||
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| December 31, 2016 | ||||||||||||||||
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Asset Category | ||||||||||||||||
| Cash/Money Markets | $ | 4.9 | $ | 4.9 | $ | — | $ | — | ||||||||
| Foreign Government/Treasury Securities (1) | 15.6 | 15.6 | — | — | ||||||||||||
| Corporate Bonds, Debentures (2) | 32.0 | — | 32.0 | — | ||||||||||||
| Equity Securities (3) | 28.8 | — | 28.8 | — | ||||||||||||
| Mutual Funds | 8.8 | — | 8.8 | — | ||||||||||||
| Investment and Insurance Annuity Contracts (4) | 69.6 | — | 22.4 | 47.2 | ||||||||||||
| $ | 159.7 | $ | 20.5 | $ | 92.0 | $ | 47.2 | |||||||||
| (1) | Includes investments primarily in guaranteed return securities. |
|---|
| (2) | Includes investments in government bonds and corporate bonds of developed countries, emerging market government bonds, emerging market corporate bonds and convertible bonds. |
|---|
| (3) | Includes investments in equity securities of developed countries and emerging markets. |
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| (4) | Includes certain investments with insurance companies which guarantee a minimum rate of return on the investment. |
|---|
When available, the Company uses observable market data, including pricing on recently closed market transactions and quoted prices, which are included in Level 2. When data is unobservable, valuation methodologies using comparable market data are utilized and included in Level 3. Activity during the year ended December 31, 2017 for plan assets with fair value measurement using significant unobservable inputs (Level 3) was as follows (in millions):
| Corporate Bonds, Debentures | Investment and Insurance Contracts | Total | ||||||||||
| Balance at December 31, 2015 | $ | 0.6 | $ | 47.0 | $ | 47.6 | ||||||
| Actual return on plan assets | — | 3.3 | 3.3 | |||||||||
| Purchase, sales and settlements | (0.6) | (0.4) | (1.0) | |||||||||
| Foreign currency impact | — | (2.7) | (2.7) | |||||||||
| Balance at December 31, 2016 | $ | — | $ | 47.2 | $ | 47.2 | ||||||
| Actual return on plan assets | — | 1.5 | 1.5 | |||||||||
| Purchase, sales and settlements | — | (0.3) | (0.3) | |||||||||
| Foreign currency impact | — | 6.8 | 6.8 | |||||||||
| Balance at December 31, 2017 | $ | — | $ | 55.2 | $ | 55.2 | ||||||
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The expected benefit payments for the Company’s defined benefit plans by year from 2018 through 2022 and the five years thereafter are as follows (in millions):
| 2018 | $ | 4.2 | ||
| 2019 | 5.6 | |||
| 2020 | 7.3 | |||
| 2021 | 10.9 | |||
| 2022 | 12.5 | |||
| Five years thereafter | 86.9 | |||
| Total | $ | 127.4 | ||
The total underfunded status was $109.3 million at December 31, 2017. The Company expects to contribute $12.2 million during 2018 to its foreign defined benefit plans.
Defined Contribution Plans
The Company has a deferred compensation savings plan for all eligible U.S. employees established under the provisions of Section 401(k) of the Internal Revenue Code (the “Code”). Eligible employees may contribute a percentage of their salary subject to certain limitations. The Company has elected to match 100% of employee contributions between 0% and 4% of their salary, with an annual limit of $10,800. The Company recognized $18.4 million, $14.0 million and $13.6 million of expense relating to matching contributions in 2017, 2016 and 2015, respectively.
Certain foreign subsidiaries have defined contribution plans in which eligible employees participate. The Company recognized compensation expense of $16.8 million, $8.9 million and $3.1 million relating to these plans for the years ended 2017, 2016 and 2015, respectively.
Note 12: Commitments and Contingencies
Leases
The following is a schedule by year of future minimum lease obligations under non-cancelable operating leases as of December 31, 2017 (in millions):
| Year Ending December 31, | ||||
| 2018 | $ | 33.4 | ||
| 2019 | 28.6 | |||
| 2020 | 20.6 | |||
| 2021 | 16.5 | |||
| 2022 | 12.4 | |||
| Thereafter | 49.0 | |||
| Total (1) | $ | 160.5 | ||
| (1) | Excludes $13.0 million of expected sublease income. |
|---|
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The Company’s existing leases do not contain significant restrictive provisions; however, certain leases contain renewal options and provisions for payment by the Company of real estate taxes, insurance and maintenance costs. Total rent expense associated with operating leases for 2017, 2016, and 2015 was $45.3 million, $31.1 million, and $27.7 million, respectively.
Purchase Obligations
The Company has agreements with suppliers, external manufacturers and other parties to purchase inventory, manufacturing services and other goods and services. The following is a schedule by year of future minimum purchase obligations under non-cancelable arrangements in the ordinary course of business as of December 31, 2017 (in millions):
| Year Ending December 31, | ||||
| 2018 | $ | 417.1 | ||
| 2019 | 55.4 | |||
| 2020 | 23.4 | |||
| 2021 | 22.1 | |||
| 2022 | 10.9 | |||
| Thereafter | 14.5 | |||
| Total | $ | 543.4 | ||
Environmental Contingencies
The Company’s headquarters in Phoenix, Arizona are 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 CERCLA. Motorola and Freescale have been involved in the cleanup 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 separation from Motorola in 1999, 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.
The Company’s former front-end manufacturing location in Aizu, Japan is located on property where soil and ground water contamination was detected. The Company believes that the contamination originally occurred during a time when the facility was operated by a prior owner. The Company worked with local authorities to implement a remediation plan and has completed remaining remediation. The majority of the cost of remediation was covered by insurance. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
The Company’s manufacturing facility in the Czech Republic has ongoing remediation projects to respond to releases of hazardous substances that occurred during the years that this facility was operated by government-owned entities. The remediation projects consist 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. The government of the Czech Republic has agreed to indemnify the Company and its respective subsidiaries, subject to specified limitations, for remediation costs associated with this historical contamination. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
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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. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
As a result of the acquisition of AMIS of 2008, the Company is a “primary responsible party” to an environmental remediation and cleanup at AMIS’s former corporate headquarters in Santa Clara, California. Costs incurred by AMIS include 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 cleanup at this location. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
Through its acquisition of Fairchild, the Company acquired a facility in South Portland, Maine. This facility has ongoing environmental remediation projects to respond to certain releases of hazardous substances that occurred prior to the leveraged recapitalization of Fairchild from its former parent company, National Semiconductor Corporation, which is now owned by Texas Instruments, Inc. Although the Company may incur certain liabilities with respect to these remediation projects, pursuant to the asset purchase agreement entered into in connection with the Fairchild recapitalization, National Semiconductor Corporation agreed to indemnify Fairchild, without limitation and for an indefinite period of time, for all future costs related to these projects. Under a 1999 asset purchase agreement pursuant to which Fairchild purchased the power device business of Samsung, Samsung agreed to indemnify Fairchild in an amount up to $150.0 million for remediation costs and other liabilities related to historical contamination at Samsung’s Bucheon, South Korea operations. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
Under a 2001 asset purchase agreement pursuant to which Fairchild purchased a manufacturing facility in Mountain Top, Pennsylvania, Intersil Corp. agreed to indemnify Fairchild for remediation costs and other liabilities related to historical contamination at the facility. Any costs to the Company incurred to respond to the above conditions and projects have not been, and are not expected to be, material, and any future payments the Company makes in connection with such liabilities are not expected to be material.
The Company was notified by the EPA that it has been identified as a PRP under CERCLA in the Chemetco Superfund matter. Chemetco, a defunct reclamation services supplier that operated in Illinois at what is now a Superfund site, has performed reclamation services for the Company in the past. 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. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be, material.
Financing Contingencies
In the ordinary 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
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limited to, material purchase commitments, agreements to mitigate collection risk, leases, utilities or customs guarantees. As of December 31, 2017, the Company’s Revolving Credit Facility included $15.0 million of availability for the issuance of letters of credit. There were $0.4 million letters of credit outstanding under the Revolving Credit Facility as of December 31, 2017, which reduces the Company’s borrowing capacity. The Company also had outstanding guarantees and letters of credit outside of its Revolving Credit Facility totaling $5.7 million as of December 31, 2017.
As part of obtaining financing in the ordinary course of business, the Company has issued guarantees related to certain of its capital lease obligations, equipment financing, lines of credit and real estate mortgages, which totaled $120.6 million as of December 31, 2017. The Company is also a guarantor of SCI LLC’s non-collateralized loan with SMBC, which had a balance of $122.7 million as of December 31, 2017. See Note 8: “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.
The Company and its subsidiaries provide for indemnification of directors, officers and other persons in accordance with limited liability company operating agreements, certificates of incorporation, by-laws, articles of association or similar organizational documents, as the case may be. Section 145 of the Delaware General Corporation Law (“DGCL”) authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers under certain circumstances and subject to certain limitations. The terms of Section 145 of the DGCL are sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement of expenses incurred, arising under the Exchange Act. As permitted by the DGCL, the Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), contains provisions relating to the limitation of liability and indemnification of directors and officers. The Certificate of Incorporation eliminates the personal liability of each of the Company’s directors to the fullest extent permitted by Section 102(b)(7) of the DGCL, as it may be amended or supplemented, and provides that the Company will indemnify its directors and officers to the fullest extent permitted by Section 145 of the DGCL, as amended from time to time.
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The Company has entered into indemnification agreements with each of its directors and executive officers. The form of agreement (the “Indemnification Agreement”) provides, subject to certain exceptions and conditions specified in the Indemnification Agreement, that the Company will indemnify each indemnitee to the fullest extent permitted by Delaware law against all expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with a proceeding or claim in which such person is involved because of his or her status as one of the Company’s directors or executive officers. In addition, the Indemnification Agreement provides that the Company will, to the extent not prohibited by law and subject to certain exceptions and repayment conditions, advance specified indemnifiable expenses incurred by the indemnitee in connection with such proceeding or claim. The foregoing description of the Indemnification Agreement does not purport to be complete and is qualified in its entirety by reference to the full and complete terms of the Indemnification Agreement, which is filed as Exhibit 10.1 to the Current Report on Form 8-K filed by the Company on February 25, 2016 and is incorporated by reference herein.
The Company also maintains directors’ and officers’ insurance policies that indemnify its directors and officers against various liabilities, including certain liabilities under the Exchange Act, that might be incurred by any director or officer in his or her capacity as such.
The Fairchild Agreement provides for indemnification and insurance rights in favor of Fairchild’s then current and former directors, officers and employees. Specifically, the Company has agreed that, for no fewer than six years following the Fairchild acquisition, the Company will: (a) indemnify and hold harmless each such indemnitee against losses and expenses (including advancement of attorneys’ fees and expenses) in connection with any proceeding asserted against the indemnified party in connection with such person’s servings as a director, officer, employee or other fiduciary of Fairchild or its subsidiaries prior to the effective time of the acquisition; (b) maintain in effect all provisions of the certificate of incorporation or bylaws of Fairchild or any of its subsidiaries or any other agreements of Fairchild or any of its subsidiaries with any indemnified party regarding elimination of liability, indemnification of officers, directors and employees and advancement of expenses in existence on the date of the Fairchild Agreement for acts or omissions occurring prior to the effective time of the acquisition; and (c) subject to certain qualifications, provide to Fairchild’s then current directors and officers an insurance and indemnification policy that provides coverage for events occurring prior to the effective time of the acquisition that is no less favorable than Fairchild’s then-existing policy, or, if insurance coverage that is no less favorable is unavailable, the best available coverage.
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
From time to time, the Company is party to various legal proceedings arising in the ordinary course of business, including indemnification claims, claims of alleged infringement of patents, trademarks, copyrights and other
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intellectual property rights, claims of alleged non-compliance with contract provisions and claims related to alleged violations of laws and regulations. The Company regularly evaluates the status of the legal proceedings in which it is involved to assess whether a loss is probable or there is a reasonable possibility that a loss, or an additional loss, may have been incurred and determine if accruals are appropriate. If accruals are not appropriate, the Company further evaluates each legal proceeding to assess whether an estimate of possible loss or range of possible loss can be made for disclosure. Although litigation is inherently unpredictable, the Company believes that it has adequate provisions for any probable and estimable losses. It is possible, nevertheless, that the Company’s consolidated financial position, results of operations or liquidity could be materially and adversely affected in any particular period by the resolution of a legal proceeding. The Company’s estimates do not represent its maximum exposure. Legal expenses related to defense, negotiations, settlements, rulings and advice of outside legal counsel are expensed as incurred.
The Company is currently involved in a variety of legal matters that arise in the ordinary course of business. Based on information currently available, except as disclosed below, the Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations or liquidity. The litigation process and the administrative process at the USPTO are inherently uncertain, and the Company cannot guarantee that the outcome of these matters will be favorable to it.
Patent Litigation with Power Integrations, Inc.
There are eight outstanding civil litigation proceedings with PI, five of which were pending between PI and various Fairchild entities (including Fairchild Semiconductor International, Inc., Fairchild Semiconductor Corporation, and Fairchild (Taiwan) Corporation, f/k/a System General Corporation (collectively referred to in this sub-section as “Fairchild”)), prior to the acquisition of Fairchild. The Company is vigorously defending the lawsuits filed by PI and believes that it has strong defenses. There are also over two dozen outstanding administrative proceedings between the parties at the USPTO in which each party is challenging the validity of the other party’s patents.
The outcome of any litigation is inherently uncertain and difficult to predict. Any estimate or statement regarding any reserve or the estimated range of possible losses is made solely in compliance with applicable GAAP requirements, and is not a statement or admission that the Company is or should be liable in any amount, or that any arguments, motions or appeals before any Court lack merit or are subject to impeachment. To the contrary, the Company believes that it has significant and meritorious grounds for judgment in its favor with respect to all of the PI cases and that the Company’s appeals or motions currently pending at the district court level will significantly reduce or eliminate all prior adverse jury verdicts. Subject to the foregoing, as of the date of the filing of this Form 10-K, the Company estimates its range of possible losses for all PI cases to be between approximately $4 million and $20 million in the aggregate.
Power Integrations v. Fairchild Semiconductor International, Inc. et al. (October 20, 2004, Delaware, 1:04-cv-01371-LPS): PI filed this lawsuit in 2004 in the U.S. District Court for the District of Delaware against Fairchild, alleging that certain of Fairchild’s pulse width modulation (“PWM”) integrated circuit products infringed U.S. patents owned by PI. The lawsuit sought a permanent injunction as well as money damages for Fairchild’s alleged infringement. In October 2006, a jury returned a willful infringement verdict and assessed damages against Fairchild. Fairchild voluntarily stopped U.S. sales and importation of those products in 2007 and
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has been offering replacement products since 2006. In December 2008, the judge overseeing the case reduced the jury’s 2006 damages award from $34.0 million to approximately $6.1 million and ordered a new trial on the issue of willfulness. Following the new trial held in June 2009, the court found Fairchild’s infringement to have been willful, and in January 2011 the court awarded PI final damages in the amount of $12.2 million. Fairchild appealed the final damages award, willfulness finding, and other issues to the U.S. Court of Appeals for the Federal Circuit. In March 2013, the Court of Appeals vacated substantially all of the damages award, ruling that there was no basis upon which a reasonable jury could find Fairchild liable for induced infringement. The Court of Appeals also vacated the earlier judgment of willful patent infringement. The full Court of Appeals and the Supreme Court of the United States later denied PI’s request to review the Court of Appeals ruling. The Court of Appeals instructed the lower court to conduct further proceedings to determine damages based on approximately $750,000 worth of sales and imports of affected products, and to re-assess its finding that the infringement was willful. In December 2017, the lower court reinstated the willfulness finding, and the parties are currently working with the court to set a schedule to resolve the outstanding issues, including damages adequate to compensate PI.
Power Integrations v. Fairchild Semiconductor International, Inc. et al. (May 23, 2008, Delaware, 1:08-cv-00309-LPS): This lawsuit was initiated by PI in 2008 in the U.S. District Court for the District of Delaware against Fairchild, alleging that certain other PWM products infringed several U.S. patents owned by PI. On October 14, 2008, Fairchild filed a patent infringement lawsuit against PI in the U.S. District Court for the District of Delaware, alleging that certain PI products infringed U.S. patents owned by Fairchild. Each lawsuit included claims for money damages and a request for a permanent injunction. These two lawsuits were consolidated and heard together in a jury trial in April 2012, during which the jury found that PI infringed one of the two U.S. patents owned by Fairchild and upheld the validity of both of the Fairchild patents. In the same verdict, the jury found that Fairchild infringed two of four U.S. patents asserted by PI and that Fairchild had induced its customers to infringe the asserted patents. (The court later ruled that Fairchild infringed one other asserted PI patent that the jury found was not infringed.) The jury also upheld the validity of the asserted PI patents, and the court entered a permanent injunction against Fairchild. Willfulness and damages were not considered in the April 2012 trial, but were reserved for subsequent proceedings. Fairchild and PI appealed the liability phase of this litigation to the U.S. Court of Appeals for the Federal Circuit, which heard arguments in July 2016 and issued a decision in December 2016. In the decision, the appeals court vacated the jury’s finding that Fairchild induced infringement of PI’s patents, held that one of PI’s patents was invalid, vacated the permanent injunction against Fairchild, reversed the jury’s finding that PI infringed the Fairchild patent, and remanded the case back to the lower court for further proceedings consistent with these rulings.
The Company is preparing for a trial later this year at which willfulness, inducement and money damages are expected to be addressed.
Power Integrations v. Fairchild Semiconductor International Inc. et al. (November 4, 2009, Northern District of California, 3:09-cv-05235-MMC): In 2009, PI sued Fairchild in the U.S. District Court for the Northern District of California, alleging that several of Fairchild’s products infringe three of PI’s patents. Fairchild filed counterclaims asserting that PI infringed two Fairchild patents. During the initial trial in this matter in 2014, a jury found that Fairchild willfully infringed two PI patents, awarded PI $105.0 million in damages and found that PI did not infringe any Fairchild patent. In September 2014, the court granted a motion filed by Fairchild that sought to set aside the jury’s determination that it acted willfully, and held that, as a matter of law, Fairchild’s actions were not willful. In November 2014, in response to another post-trial motion filed by Fairchild, the trial
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court ruled that the jury lacked sufficient evidence on which to base its damages award and, consequently, vacated the $105.0 million verdict and ordered a second trial on damages. The second damages trial was held in December 2015, in which a jury awarded PI $139.8 million in damages. Fairchild filed a number of post-trial motions challenging the second damages verdict, but the court ruled against Fairchild on these motions and awarded PI approximately $7.0 million in pre-judgment interest. Following the court’s rulings on these issues, PI moved the court to reinstate the jury’s willfulness finding and sought enhanced damages and attorneys’ fees. On January 23, 2017, the court reinstated the jury’s willful infringement finding, but denied PI’s motion for enhanced damages and attorneys’ fees in its entirety. The Company has filed a notice of appeal with the U.S. Court of Appeals for the Federal Circuit with respect to the current damages award as well as the 2014 verdict finding that PI’s patents were infringed and valid. The appeal briefing is complete, and the parties are currently waiting for the Federal Circuit to schedule oral arguments. On May 26, 2017, the district court ordered Fairchild to obtain a bond for the judgment pending appeal, and on June 22, 2017, the district court accepted Fairchild’s bond and stayed execution of judgment. All claims of the two PI patents found to be infringed by Fairchild and that support the damages verdict have since been determined to be unpatentable in several inter partes review administrative proceedings described below. The impact of the USPTO’s unpatentability determinations on the district court judgment is uncertain at this stage of the proceedings.
Fairchild Semiconductor International Inc. et al. v. Power Integrations (May 1, 2012, Delaware, 1:12-cv-00540-LPS): In May 2012, Fairchild sued PI in the U.S. District Court for the District of Delaware, and alleged that various PI products infringe Fairchild’s U.S. patents. PI filed counterclaims of patent infringement against Fairchild, asserting five PI patents. Of those five patents, the court granted Fairchild summary judgment of no infringement on one, and PI voluntarily withdrew a second and was forced to remove a third patent during the trial, which began in May 2015. In that trial, the jury found that PI induced infringement of Fairchild’s patent rights and awarded Fairchild $2.4 million in damages. The same jury found that Fairchild infringed a PI patent and awarded PI damages of $100,000. Based on the December 2016 appellate court decision in the litigation filed in Delaware in 2008 (described above), on July 13, 2017, the district court vacated the jury’s finding that PI infringed Fairchild’s patent. The court has yet to enter a final judgment in this case.
Power Integrations v. Fairchild Semiconductor International Inc. et al. (October 21, 2015, Northern District of California, 3:15-cv-04854 MMC): In 2015, PI filed another complaint for patent infringement against Fairchild in the U.S. District Court for the Northern District of California, alleging Fairchild’s products willfully infringe two PI patents. In the complaint, PI is seeking a permanent injunction, unspecified damages, a trebling of damages, and an accounting of costs and fees. Fairchild answered and counterclaimed, alleging infringement by PI of four Fairchild patents related to aspects of PI’s products, and also seeking damages and a permanent injunction. The lawsuit is in its earliest stages, and has been stayed pending the outcome of the Company’s administrative challenges to the two PI patents asserted against Fairchild, which are described below. PI has also filed administrative challenges to Fairchild’s asserted patents.
Power Integrations v. ON Semiconductor Corporation, and Semiconductor Components Industries, LLC (November 1, 2016, Northern District of California, 5:16-cv-06371-BLF and 5:17-cv-03189): On August 11, 2016, ON Semiconductor Corporation and SCILLC (collectively, “ON Semi”) filed a lawsuit against PI in the U.S. District Court for the District of Arizona, alleging that PI infringed six patents and seeking a permanent injunction and money damages for the alleged infringement. The lawsuit also sought a claim for a declaratory judgment that ON Semi does not infringe several of PI’s patents. Rather than responding to ON Semi’s lawsuit in Arizona, PI filed a separate lawsuit in the U.S. District Court for the Northern District of California in November
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2016, alleging that ON Semi infringes six PI patents, including two of the three of ON Semi’s declaratory judgment non-infringement claims, and then moved the Arizona court to dismiss ON Semi’s lawsuit. Following various procedural motions, ON Semi’s Arizona action has been transferred to the U.S. District Court for the Northern District of California and consolidated with PI’s November 2016 lawsuit. The lawsuit is in its early stages, but the parties have begun to engage in discovery, with substantive developments expected throughout the course of 2018.
ON Semiconductor Corporation and Semiconductor Components Industries, LLC v. Power Integrations, Inc. (March 9, 2017, District of Delaware, 1:17-cv-00247-LPS-CJB): On March 9, 2017, ON Semi filed a lawsuit against PI in the U.S. District Court for the District of Delaware, alleging that PI’s InnoSwitch family of products infringe six of ON Semi’s U.S. patents. Following some procedural motions, PI has since counterclaimed alleging infringement by ON Semi of seven of PI’s U.S. Patents. Both parties seek money damages and a permanent injunction. The lawsuit is in its early stages, but the parties have begun to engage in discovery, with substantive developments expected throughout the course of 2018.
Semiconductor Components Industries, LLC v. Power Integrations, Inc. (November 2017, Taiwan Intellectual Property Court, 106-Ming-min-bu-Tzu-238): In November 2017, Semiconductor Components Industries, LLC filed a lawsuit against PI in Taiwan, alleging infringement by PI of certain of ON Semi’s Taiwanese patents. The lawsuit is in its early stages.
Administrative Challenges to PI’s Patents
In addition to the eight court proceedings described above, there are over two dozen pending inter partes review administrative proceedings between PI and ON Semi/Fairchild at the USPTO. Each of these administrative proceedings seeks to invalidate certain claims asserted in the various court proceedings. For two of the proceedings filed by ON Semi, both of which relate to the case filed in 2009 in the Northern District of California, the USPTO has issued a Final Written Decision finding that all of the claims challenged in those proceedings are unpatentable. PI may appeal the USPTO’s Final Written Decision regarding the unpatentability of those claims during 2018. In three of the proceedings, the USPTO has instituted a review of three ON Semi patents that are being asserted against PI, but the USPTO has not rendered a Final Written Decision in any of those three cases. All of the other proceedings remain pending, with further developments expected during 2018.
Litigation with Acbel Polytech, Inc.
On November 27, 2013, Fairchild and Fairchild Semiconductor Corporation were named as defendants in a complaint filed by Acbel Polytech, Inc. (“Acbel”) in the U.S. District Court for the District of Massachusetts. The lawsuit alleged a number of causes of action, including breach of warranty, fraud, negligence and strict liability, and has been docketed as Acbel Polytech, Inc. v. Fairchild Semiconductor International, Inc. et al, Case # 1:13-CV-13046-DJC. On December 10, 2016, the Court issued an order on the Company’s motion for summary judgment dismissing all of Acbel’s claims except for claims alleging breach of implied warranties. A bench trial was held in June 2017. On December 27, 2017, the Court rendered a verdict in favor of the Fairchild defendants on the remaining implied warranty claims. On January 24, 2018, Acbel filed a notice of appeal.
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Intellectual Property Matters
The Company faces risk to exposure from claims of infringement of the IP rights of others. In the ordinary course of business, the Company receives letters asserting that the Company’s products or components breach another party’s rights. These threats may seek that the Company make royalty payments, stop use of such rights, or other remedies.
Note 13: Fair Value Measurements
Fair Value of Financial Instruments
The following table summarizes the Company’s financial assets and liabilities, excluding pension assets, measured at fair value on a recurring basis as of December 31, 2017 and December 31, 2016 (in millions):
| Fair Value Measurements as of December 31, 2017 | ||||||||||||||||
| Description | Balance as of December 31, 2017 | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets: | ||||||||||||||||
| Cash, cash equivalents: | ||||||||||||||||
| Demand and time deposits | $ | 71.7 | $ | 71.7 | — | — | ||||||||||
| Money market funds | $ | 0.2 | $ | 0.2 | — | — | ||||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration | $ | 2.3 | — | — | $ | 2.3 |
| Fair Value Measurements as of December 31, 2016 | ||||||||||||||||
| Description | Balance as of December 31, 2016 | Level 1 | Level 2 | Level 3 | ||||||||||||
| Assets: | ||||||||||||||||
| Cash, cash equivalents: | ||||||||||||||||
| Demand and time deposits | $ | 67.2 | $ | 67.2 | — | — | ||||||||||
| Money market funds | $ | 30.3 | $ | 30.3 | — | — | ||||||||||
| Liabilities: | ||||||||||||||||
| Contingent consideration | $ | 4.5 | — | — | $ | 4.5 |
During the year ended December 31, 2017, the Company paid the first earn-out amount of approximately $3.9 million relating to the contingent consideration for the AXSEM acquisition and increased the second earn-out amount by $1.7 million due to the revision of the Company’s expectations of the earn-out achievement.
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.
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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) at December 31, 2017 and December 31, 2016 are as follows (in millions):
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
| Long-term debt, including current portion | ||||||||||||||||
| Convertible notes (1) | $ | 1,080.1 | $ | 1,596.7 | $ | 953.6 | $ | 1,160.9 | ||||||||
| Long-term debt (1) | $ | 1,833.2 | $ | 1,845.4 | $ | 2,616.3 | $ | 2,731.5 |
(1) Carrying amount shown is net of debt discounts and debt issuance costs. See Note 8: “Long-Term Debt” for additional information.
The fair value of the Company’s 1.00% Notes and 1.625% Notes were estimated based on market prices in active markets (Level 1). The fair value of other long-term debt was estimated based on discounting the remaining principal and interest payments using current market rates for similar debt (Level 2) at December 31, 2017 and December 31, 2016.
Fair Values Measured on a Non-Recurring Basis
Our non-financial assets, such as property, plant and equipment, goodwill and intangible assets are recorded at fair value upon acquisition and are remeasured at fair value only if an impairment charge is recognized. The Company uses unobservable inputs to the valuation methodologies that are significant to the fair value measurements, and the valuations require management’s judgment due to the absence of quoted market prices. We determine the fair value of our held and used assets, goodwill and intangible assets using an income, cost or market approach as determined reasonable. See Note 5: “Goodwill and Intangible Assets” for a discussion of certain asset impairments.
As of December 31, 2017 and December 31, 2016, there were no non-financial assets included in the Company’s Consolidated Balance Sheet that were remeasured at fair value on a nonrecurring basis.
The following table shows the adjustments to fair value of certain of the Company’s non-financial assets that had an impact on the Company’s results of operations during the years ended December 31, 2017, 2016 and 2015, respectively (in millions):
| Year Ended | ||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||
| Nonrecurring fair value measurements | ||||||||||||
| Impairment of property, plant and equipment held-for-sale or disposal (Level 3) | $ | 7.9 | $ | 0.5 | $ | 0.2 | ||||||
| IPRD (Level 3) | 13.1 | 2.2 | 3.8 | |||||||||
| $ | 21.0 | $ | 2.7 | $ | 4.0 | |||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
See Note 5: “Goodwill and Intangible Assets” and Note 6: “Restructuring, Asset Impairments and Other, Net” for additional information with respect to impairment charges.
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 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 each of December 31, 2017 and 2016, the Company’s cost method investments had a carrying value of $12.6 million and $12.3 million, respectively.
On October 10, 2017, ON Semiconductor and Fujitsu Semiconductor Limited (“Fujitsu”) announced that ON Semiconductor will purchase a 30 percent incremental share of Fujitsu’s 8-inch wafer fab in Aizu-Wakamatsu, resulting in a 40 percent ownership when the purchase is completed, at which time the Company would pay a purchase price of approximately $20.0 million in cash. The purchase is scheduled to be completed on April 1, 2018 (the “second closing date”), subject to certain regulatory approvals and other customary closing conditions. Subject to the fulfillment of certain conditions, the Company will be required to increase its ownership to 60 percent between one and six months following the second closing date (the “third closing date”) and will be required to increase its ownership to 100 percent between nine and 18 months following the third closing date.
Note 14: 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.
At December 31, 2017 and 2016, the Company had net outstanding foreign exchange contracts with net notional amounts of $130.5 million and $95.9 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following schedule summarizes the Company’s net foreign exchange positions in U.S. dollars as of December 31, 2017 and 2016 (in millions):
| December 31, | ||||||||||||||||
| 2017 Buy (Sell) | 2017 Notional Amount | 2016 Buy (Sell) | 2016 Notional Amount | |||||||||||||
| Euro | $ | (22.9) | $ | 22.9 | $ | (25.4) | $ | 25.4 | ||||||||
| Japanese Yen | (40.0) | 40.0 | (33.7) | 33.7 | ||||||||||||
| Philippine Peso | 26.4 | 26.4 | 15.8 | 15.8 | ||||||||||||
| Other currencies - Buy | 30.9 | 30.9 | (6.1) | 6.1 | ||||||||||||
| Other currencies - Sell | (10.3) | 10.3 | 14.9 | 14.9 | ||||||||||||
| $ | (15.9) | $ | 130.5 | $ | (34.5) | $ | 95.9 | |||||||||
The Company is exposed to credit-related losses if counterparties to its foreign exchange contracts fail to perform their obligations. As of December 31, 2017, the counterparties to the Company’s foreign exchange 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 years ended December 31, 2017, 2016 and 2015, realized and unrealized foreign currency transactions totaled a $6.3 million loss, a $0.7 million gain and a $1.5 million loss, respectively, and are included in other income and expenses in the Company’s Consolidated Statements of Operations and Comprehensive Income.
Cash Flow Hedges
All derivatives are recognized on the balance sheet at their fair value and classified based on the instrument’s maturity date.
Interest rate risk
The Company uses interest rate swap contracts to mitigate its exposure to interest rate fluctuations associated with the Term Loan “B” Facility. The Company does not use such swap contracts for speculative or trading purposes.
To partially offset the variability of future interest payments on the outstanding Term Loan “B” Facility arising from changes in LIBOR rates, on January 11, 2017, the Company entered into interest rate swap agreements with three financial institutions for notional amounts totaling $500.0 million (effective as of January 11, 2017), $750.0 million (effective as of December 29, 2017) and $1.0 billion (effective as of December 31, 2018) with expiry dates of December 29, 2017, December 31, 2018 and December 31, 2019, respectively. These agreements effectively hedge some of the future variable rate LIBOR interest expense to a fixed rate interest expense. The derivative instruments qualified for accounting as a cash flow hedge in accordance with ASC 815, and the Company designated it as such. The Company has performed an effectiveness assessment and concluded that there is no ineffectiveness during the year ended December 31, 2017.
The Company did not have any interest rate swap contracts outstanding during the year ended December 31, 2016.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Foreign currency risk
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.
For the years ended December 31, 2017 and 2016, the Company recorded a net loss of zero and $0.2 million, respectively, associated with cash flow hedges recognized as a component of cost of revenues. The Company did not have outstanding derivatives for its foreign currency exposure designated as cash flow hedges as of December 31, 2017 and 2016.
See Note 16: “Changes in Accumulated Other Comprehensive Loss” for the effective amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive loss and the Company’s Consolidated Statements of Operations and Comprehensive Income for the year ended December 31, 2017.
Convertible Note Hedges
The Company entered into convertible note hedges in connection with the issuance of the 1.00% Notes and 1.625% Notes. See Note 8: “Long-Term Debt” for further details.
Other
At December 31, 2017, the Company had no outstanding commodity derivatives, currency swaps or options relating to either its debt instruments or investments. The Company does not hedge the value of its equity investments in its subsidiaries or affiliated companies.
Note 15: Income Taxes
The Company’s geographic sources of income before income taxes and non-controlling interest are as follows (in millions):
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| United States | $ | (270.1) | $ | (287.0) | $ | (102.7) | ||||||
| Foreign | 817.6 | 467.6 | 322.5 | |||||||||
| $ | 547.5 | $ | 180.6 | $ | 219.8 | |||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company’s provision (benefit) for income taxes is as follows (in millions):
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 26.3 | $ | (0.1) | $ | — | ||||||
| State and local | 0.2 | 0.1 | 2.0 | |||||||||
| Foreign | 53.1 | 34.4 | 21.3 | |||||||||
| 79.6 | 34.4 | 23.3 | ||||||||||
| Deferred: | ||||||||||||
| Federal | (356.3) | 60.8 | 0.4 | |||||||||
| State and local | 0.4 | — | (1.4) | |||||||||
| Foreign | 10.8 | (99.1) | (11.5) | |||||||||
| (345.1) | (38.3) | (12.5) | ||||||||||
| Total provision (benefit) | $ | (265.5) | $ | (3.9) | $ | 10.8 | ||||||
A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate is as follows:
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| U.S. federal statutory rate | 35.0% | 35.0% | 35.0% | |||||||||
| Increase (decrease) resulting from: | ||||||||||||
| State and local taxes, net of federal tax benefit | 2.2 | (3.6) | (1.0) | |||||||||
| Impact of U.S. Tax Reform and related effects (1) | (82.2) | — | — | |||||||||
| Impact of foreign operations | (1.5) | (8.1) | (39.8) | |||||||||
| Reversal of prior years’ indefinite reinvestment assertion | — | 172.1 | — | |||||||||
| Dividend income from foreign subsidiaries | — | 0.2 | 85.5 | |||||||||
| Change in valuation allowance and related effects (2) | 0.4 | (190.7) | (75.3) | |||||||||
| Nondeductible acquisition costs | — | 1.9 | 0.1 | |||||||||
| Nondeductible share-based compensation costs | (1.6) | 0.7 | 0.9 | |||||||||
| U.S. federal R&D credit | (1.5) | (10.1) | — | |||||||||
| Other | 0.7 | 0.4 | (0.5) | |||||||||
| Total | (48.5)% | (2.2)% | 4.9% | |||||||||
(1) Includes the benefit of $744.1 million, or 135.9% for the reduction in the Company’s deferred tax liability for undistributed current and prior years’ earnings of the Company’s foreign subsidiaries and the benefit of $33.0 million, or 6.0% for the release of valuation allowance on federal foreign tax credit carryforwards which were utilized against the mandatory repatriation tax. These benefits are offset by the expense for the mandatory repatriation tax, net of uncertain tax positions, of $207.1 million, or 37.8% and expense related to the change in the federal rate from 35% to 21% of $120.1 million, or 21.9% on the Company’s remaining net federal deferred tax asset balances.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(2) The Company has included the benefit related to the change in valuation allowance on federal foreign tax credits which were previously set to expire unutilized but were utilized against the expense related to the mandatory repatriation tax $33.0 million or 6.0%, in the line “Impact of U.S. Tax Reform and related effects”
The Company’s effective tax rate for 2017 was a benefit of 48.5%, which differs from the U.S. federal statutory income tax rate of 35% primarily due to U.S. tax reform codified under the Tax Act. The Company’s effective tax rate for 2016 was a benefit of 2.2%, which differs from the U.S. federal statutory income tax rate of 35% primarily due to the release of its U.S. and Japan valuation allowances, partially offset by the reversal of the prior years’ indefinite reinvestment assertion. The Company’s effective tax rate for 2015 was a provision of 4.9%, which differs from the U.S. federal statutory income tax rate of 35% primarily due to its change in valuation allowance, deemed dividend income from foreign subsidiaries and tax rate differential in its foreign subsidiaries.
The tax effects of temporary differences in the recognition of income and expense for tax and financial reporting purposes that give rise to significant portions of the net deferred tax asset (liability) as of December 31, 2017 and December 31, 2016 are as follows (in millions):
| Year ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| Net operating loss and tax credit carryforwards | $ | 738.4 | $ | 978.1 | ||||
| Tax-deductible goodwill and amortizable intangibles | (29.1) | (57.1) | ||||||
| Reserves and accruals | 49.8 | 51.7 | ||||||
| Property, plant and equipment | (42.8) | (60.9) | ||||||
| Inventories | 24.5 | 42.1 | ||||||
| Undistributed earnings of foreign subsidiaries | (32.5) | (639.1) | ||||||
| Share-based compensation | 9.2 | 14.3 | ||||||
| Pension | 21.1 | 21.5 | ||||||
| Debt financing costs | (9.9) | (40.8) | ||||||
| Other | 17.6 | 14.3 | ||||||
| Deferred tax assets and liabilities before valuation allowance | 746.3 | 324.1 | ||||||
| Valuation allowance | (462.3) | (474.1) | ||||||
| Net deferred tax asset (liability) | $ | 284.0 | $ | (150.0) | ||||
On December 22, 2017, the U.S. enacted comprehensive tax legislation, the Tax Act. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, and requires companies to pay a one-time mandatory repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain future foreign earnings. In December 2017 the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As of December 31, 2017, the Company has not completed its accounting for the tax effects of the enactment of the Tax Act; however, in certain cases, specifically as follows, the Company has made a reasonable estimate of (i) the effects on its existing deferred tax balances and (ii) the effects of the one-time mandatory repatriation tax. The Company has recognized a provisional tax benefit of $449.9 million in the year ended December 31, 2017 associated with the items it could reasonably estimate as described in the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate table. The Company is still analyzing the Tax Act and refining its calculations, which could potentially impact the measurement of its tax balances. The Company expects to complete its analysis within the measurement period in accordance with SAB 118.
As of December 31, 2017, all benefits related to excess tax deductions from employee equity exercises are included in the Company’s NOL deferred tax asset due to the adoption of ASU 2016-09 as of the first quarter of 2017. As of December 31, 2016, the Company’s deferred tax assets do not include $194.5 million of excess tax deductions from employee equity exercises.
As of December 31, 2017 and 2016, the Company had approximately $1,198.6 million and $1,203.6 million, respectively, of federal NOL carryforwards, before reduction for uncertain tax positions, which are subject to annual limitations prescribed in Section 382 of the Code. If not utilized, a portion of the NOLs will expire in varying amounts from 2021 to 2036.
As of December 31, 2017 and 2016, the Company had approximately $46.0 million and $211.9 million, respectively, of federal credit carryforwards, before consideration of valuation allowance or reduction for uncertain tax positions, which are subject to annual limitations prescribed in Section 383 of the Code. The decrease is primarily due to utilization of $191.1 million of credits to offset the mandatory repatriation tax liability. If not utilized, a portion of the credits will expire in varying amounts from 2033 to 2037.
As of December 31, 2017 and 2016, the Company had approximately $790.3 million and $1,191.2 million, respectively, of state NOL carryforwards, before consideration of valuation allowance or reduction for uncertain tax positions. The decrease is primarily due to expiration. If not utilized, a portion of the NOLs will expire in varying amounts from 2018 to 2037. As of December 31, 2017 and 2016, the Company had $107.2 million and $129.0 million, respectively, of state credit carryforwards before consideration of valuation allowance or reduction for uncertain tax positions. If not utilized, a portion of the credits will begin to expire in varying amounts starting in 2018.
As of December 31, 2017 and 2016, the Company had approximately $1,103.0 million and $1,078.8 million, respectively, of foreign NOL carryforwards, before consideration of valuation allowance or reduction for uncertain tax positions. If not utilized, a portion of the NOLs will begin to expire in varying amounts starting in 2018. As of December 31, 2017 and 2016, the Company had $65.3 million and $50.5 million, respectively, of foreign credit carryforwards before consideration of valuation allowance. The majority of these credits have an indefinite life and do not expire.
In 2016, the Company reassessed its need for a valuation allowance for the Japan consolidated group. Due to the Company’s recent trend of positive operating results, which resulted in the Japan group being in a cumulative twelve-quarter income position as of the period ended December 31, 2016, as well as the realignment of the former System Solutions Group segment, the Company realized an $89.4 million net tax benefit related to the release of a portion of its valuation allowance, to reflect the amount of its deferred tax assets which are expected to be realized in future years. The Company continues to maintain a valuation allowance on a portion of its Japan NOLs, or $302.0 million, which expire in varying amounts from 2018 to 2024.
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In addition to the valuation allowance mentioned above on Japan NOLs, as of December 31, 2017 and 2016, the Company continues to maintain a full valuation allowance on its U.S. state deferred tax assets, and a valuation allowance on foreign NOLs and tax credits in certain other foreign jurisdictions.
The consummation of the Fairchild acquisition during 2016 caused the Company to reassess its prior years’ indefinite reinvestment assertion because of the U.S. debt incurred to fund the acquisition. See Note 8: “Long-Term Debt” for additional information. This resulted in a change in judgment regarding the Company’s future cash flows by jurisdiction and its prior years’ indefinite reinvestment assertion. The change in assertion, which resulted in recording a deferred tax liability for future U.S. taxes, had a direct impact on the Company’s judgment about the realizability of its U.S. federal deferred tax assets which resulted in a release of valuation allowance. The change in the Company’s prior years’ indefinite reinvestment assertion resulted in an increase to income tax expense of $310.8 million, which was partially offset by a benefit of $267.9 million relating to the release of valuation allowance. The reversal of the prior years’ indefinite reinvestment assertion and release of the U.S. federal valuation allowance did not have an effect on the Company’s cash taxes. At December 31, 2016, the Company was not indefinitely reinvested with respect to any of its foreign earnings.
In 2017, the Company reevaluated its indefinite reinvestment assertion because of the fundamental change in the U.S. approach to taxing international operations under the Tax Act. As a result, the Company has indefinitely reinvested certain foreign earnings. Therefore, tax has not been recognized on the excess of the amount for financial reporting over the tax basis of investments in its foreign subsidiaries that are considered indefinitely reinvested. The excess of the amount for financial reporting over the tax basis for which the Company is indefinitely reinvested is $226.3 million as of December 31, 2017, and the related unrecognized deferred income tax liability is $9.9 million. However, substantially all of the Company’s foreign earnings continue to not be indefinitely reinvested at December 31, 2017.
The Company maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available, including changes in tax regulations, the outcome of relevant court cases, and other information. The Company is currently under examination by various taxing authorities. Although the outcome of any tax audit is uncertain, the Company believes that it has adequately provided in its consolidated financial statements for any additional taxes that the Company may be required to pay as a result of such examinations. If the payment ultimately proves not to be necessary, the reversal of these tax liabilities would result in tax benefits being recognized in the period the Company determines such liabilities are no longer necessary. However, if an ultimate tax assessment exceeds the Company’s estimate of tax liabilities, additional tax expense will be recorded. The impact of such adjustments could have a material impact on the Company’s results of operations in future periods.
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The activity for unrecognized gross tax benefits for 2017, 2016, and 2015 is as follows (in millions):
| 2017 | 2016 | 2015 | ||||||||||
| Balance at beginning of year | $ | 136.7 | $ | 33.5 | $ | 31.2 | ||||||
| Acquired balances | — | 86.9 | — | |||||||||
| Additions for tax positions related to the current year | 23.6 | 4.6 | 9.2 | |||||||||
| Additions for tax positions of prior years | 4.7 | 13.7 | 3.4 | |||||||||
| Reductions for tax positions of prior years | (1.6) | (0.4) | (6.9) | |||||||||
| Lapse of statute | (16.3) | (1.6) | (3.3) | |||||||||
| Settlements | (4.9) | — | (0.1) | |||||||||
| Change in rate due to U.S. Tax Reform | (27.4) | — | — | |||||||||
| Balance at end of year | $ | 114.8 | $ | 136.7 | $ | 33.5 | ||||||
For the period ended December 31, 2016, the Company performed a U.S. R&D tax credit study which covered the years from 2012 to 2015. The results of the study were recorded during the period ended December 31, 2016. As a result the uncertain tax position related to the outcome of the prior year study was also recorded.
Included in the December 31, 2017 balance of $114.8 million is $114.0 million related to unrecognized tax positions that, if recognized, would impact the annual effective tax rate. Although the Company cannot predict the timing of resolution with taxing authorities, if any, the Company believes it is reasonably possible that its unrecognized tax positions will be reduced by $8.3 million in the next 12 months due to settlement with tax authorities or expiration of the applicable statute of limitations.
The Company recognizes interest and penalties accrued in relation to unrecognized tax benefits in tax expense. The Company recognized approximately $1.5 million of tax expenses for interest and penalties during the year ended December 31, 2017, and recognized approximately $0.5 million and $0.9 million of tax expenses for interest and penalties during the years ended December 31, 2016 and 2015, respectively. The Company had approximately $5.9 million, $4.4 million, and $3.9 million of accrued interest and penalties at December 31, 2017, 2016, and 2015, respectively.
Tax years prior to 2013 are generally not subject to examination by IRS except for items involving tax attributes that have been carried forward to tax years whose statute of limitations remains open. The Company is not currently under IRS examination. For state returns, the Company is generally not subject to income tax examinations for years prior to 2012. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates. With respect to major jurisdictions outside the United States, the Company’s subsidiaries are no longer subject to income tax audits for years prior to 2007. The Company is currently under audit in the following significant jurisdictions: China, Malaysia, Philippines, Singapore and Vietnam.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 16: Changes in Accumulated Other Comprehensive Loss
Amounts comprising the Company’s accumulated other comprehensive loss and reclassifications for the years ended December 31, 2017 and December 31, 2016 are as follows (in millions):
| Foreign Currency Translation Adjustments | Effects of Cash Flow Hedges | Unrealized Gains and Losses on Available-for- Sale Securities | Total | |||||||||||||
| Balance as of December 31, 2015 | $ | (42.2) | $ | (0.1) | $ | — | $ | (42.3) | ||||||||
| Other comprehensive income (loss) prior to reclassifications (1) | (8.0) | 0.3 | — | (7.7) | ||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | (0.2) | — | (0.2) | ||||||||||||
| Net current period other comprehensive income (loss) | (8.0) | 0.1 | — | (7.9) | ||||||||||||
| Balance as of December 31, 2016 | $ | (50.2) | $ | — | $ | — | $ | (50.2) | ||||||||
| Other comprehensive income prior to reclassifications (1) (2) | 7.0 | 2.2 | — | 9.2 | ||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | 0.4 | — | 0.4 | ||||||||||||
| Net current period other comprehensive income | 7.0 | 2.6 | — | 9.6 | ||||||||||||
| Balance as of December 31, 2017 | $ | (43.2) | $ | 2.6 | $ | — | $ | (40.6) | ||||||||
| (1) | Foreign currency translation adjustments are net of tax of zero and $0.2 million for the years ended December 31, 2017 and December 31, 2016, respectively. |
|---|
| (2) | Effects of cash flow hedges are net of tax of $0.7 million and zero of tax expense for the years ended December 31, 2017 and December 31, 2016, respectively. |
|---|
Amounts which were reclassified from accumulated other comprehensive loss to the Company’s Consolidated Statements of Operations and Comprehensive Income during the years ended December 31, 2017 and December 31, 2016 were as follows (net of tax of $0.2 million and zero in 2017 and 2016, respectively, in millions):
| Amounts Reclassified from Accumulated Other Comprehensive Loss | ||||||||||
| December 31, 2017 | December 31, 2016 | Statement of Operations and Comprehensive Income Line Item | ||||||||
| Foreign currency hedges | $ | — | $ | 0.2 | Cost of revenues | |||||
| Interest rate swaps | (0.4) | — | Other income and expense | |||||||
| Total reclassifications | $ | (0.4) | $ | 0.2 | ||||||
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 17: Supplemental Disclosures
Supplemental Disclosure of Cash Flow Information
The Company’s non-cash financing activities and cash payments for interest and income taxes during the years ended December 31, 2017, 2016 and 2015 are as follows (in millions):
| Year ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Non-cash financing activities: | ||||||||||||
| Debt issuance costs paid directly from escrow accounts | $ | — | $ | 46.0 | $ | — | ||||||
| Capital expenditures in accounts payable and other liabilities | 165.6 | 105.9 | 102.2 | |||||||||
| Equipment acquired or refinanced through capital leases | — | — | 12.5 | |||||||||
| Cash (received) paid for: | ||||||||||||
| Interest income | $ | (3.0) | $ | (4.5) | $ | (1.1) | ||||||
| Interest expense | 92.1 | 106.7 | 28.4 | |||||||||
| Income taxes | 67.8 | 27.3 | 20.0 |
Note 18: Segment Information
During the third quarter of 2016, the Company realigned its segments into three operating segments to optimize efficiencies resulting from the acquisition of Fairchild. These operating segments also represent its three reporting segments: Power Solutions Group, Analog Solutions Group and Image Sensor Group. The results of the System Solutions Group, which was previously the Company’s fourth operating segment, and which did not have goodwill, are now part of the three operating segments and previously-reported information has been presented based on the new structure to reflect the current organizational structure. The Company’s Power and Analog Solutions Groups include the business acquired in the Fairchild Transaction. See Note 4: “Acquisitions, Divestitures and Licensing Transactions” for additional information with respect to the Company’s recent acquisitions.
Each of the Company’s major product lines has been examined and each product line has been assigned to a reportable segment, as illustrated in the table below, 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.
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
| Power Solutions Group | Analog Solutions Group | Image Sensor Group | ||
| Bipolar Power (8) | Automotive ASSPs (1) | CCD Image Sensors (7) | ||
| Thyristor (8) | Analog Automotive (2) | CMOS Image Sensors (7) | ||
| Small Signal (8) | Automotive Power Switching (3) | Proximity Sensors (13) | ||
| Zener (8) | Automotive Mixed-Signal Solutions (1) | Linear Light Sensors (7) | ||
| Protection (3) | Medical ASICs & ASSPs (1) | Image Stabilizer ICs (12) | ||
| Rectifier (8) | Mixed-Signal ASICs (1) | Auto Focus ICs (12) | ||
| Filters (3) | Industrial ASSPs (1) | |||
| MOSFETs (3) | High Frequency / Timing (4) | |||
| Signal & Interface (2) | IPDs (5) | |||
| Standard Logic (6) | Foundry and Manufacturing Services (5) | |||
| LDO’s & VREGs (2) | Hearing Components (1) | |||
| EE Memory and Programmable Analog (9) | DC-DC Conversion (2) | |||
| IGBTs (3) | Analog Switches (6) | |||
| Power MOSFETs (10) | AC-DC Conversion (2) | |||
| Power and Signal Discretes (10) | Low Voltage Power Management (2) | |||
| Intelligent Power Modules (11) | Power Switching (2) | |||
| Smart Passive Sensors (13) | RF Antenna Tuning Solutions (1) | |||
| PIM (14) | Motor Driver ICs (12) | |||
| Display Drivers (12) | ||||
| ASICs (12) | ||||
| Microcontrollers (12) | ||||
| Flash Memory (12) | ||||
| Touch Sensor (12) | ||||
| Power Supply IC (12) | ||||
| Audio DSP (12) | ||||
| Audio Tuners (12) |
| (1) ASIC products | (8) Discrete products | |||
| (2) Analog products | (9) Memory products | |||
| (3) TMOS products | (10) HD products | |||
| (4) ECL products | (11) IPM products | |||
| (5) Foundry products / services | (12) LSI products | |||
| (6) Standard logic products | (13) Other sensor products | |||
| (7) Image sensor / ASIC products | (14) PIM Products |
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on segment revenues and gross profit.
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company’s wafer manufacturing facilities fabricate ICs for all business units, as necessary, and their operating costs are reflected in the segments’ cost of revenues on the basis of product costs. Because operating segments are generally defined by the products they design and sell, they do not make sales to each other. The Company does not discretely allocate assets to its operating segments, nor does management evaluate operating segments using discrete asset information.
In addition to the operating and reporting segments mentioned above, the Company also operates global operations, sales and marketing, information systems, finance and administration groups that are led by vice presidents who report to the Chief Executive Officer. A portion of the expenses of these groups are allocated to the segments based on specific and general criteria and are included in the segment results reported below. The Company does not allocate income taxes or interest expense to its operating segments as the operating segments are principally evaluated on gross profit. Additionally, restructuring, asset impairments and other, net and certain other manufacturing and operating expenses, which include corporate research and development costs, unallocated inventory reserves and miscellaneous nonrecurring expenses, are not allocated to any segment.
Revenues and gross profit for the Company’s reportable segments for the years ended December 31, 2017, 2016 and 2015, respectively, are as follows (in millions):
| Power Solutions Group | Analog Solutions Group | Image Sensor Group | Total | |||||||||||||
| For year ended December 31, 2017: | ||||||||||||||||
| Revenues from external customers | $ | 2,819.3 | $ | 1,950.9 | $ | 772.9 | $ | 5,543.1 | ||||||||
| Segment gross profit | 959.2 | 817.2 | 302.0 | 2,078.4 | ||||||||||||
| For year ended December 31, 2016: | ||||||||||||||||
| Revenues from external customers | $ | 1,708.6 | $ | 1,481.5 | $ | 716.8 | $ | 3,906.9 | ||||||||
| Segment gross profit | 566.3 | 589.0 | 236.5 | 1,391.8 | ||||||||||||
| For year ended December 31, 2015: | ||||||||||||||||
| Revenues from external customers | $ | 1,409.9 | $ | 1,338.6 | $ | 747.3 | $ | 3,495.8 | ||||||||
| Segment gross profit | 428.7 | 537.9 | 242.4 | 1,209.0 |
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):
| Year Ended | ||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||
| Gross profit for reportable segments | $ | 2,078.4 | $ | 1,391.8 | $ | 1,209.0 | ||||||
| Less: unallocated manufacturing costs | (44.6) | (94.9) | (15.8) | |||||||||
| Consolidated gross profit | $ | 2,033.8 | $ | 1,296.9 | $ | 1,193.2 | ||||||
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.
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company operates in various geographic locations. Sales to unaffiliated customers have little correlation with the location of manufacturers. It is, therefore, not meaningful to present operating profit by geographical location.
Revenues by geographic location, including local sales made by operations within each area, based on sales billed from the respective country, are summarized as follows (in millions):
| Year Ended | ||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||
| United States | $ | 748.8 | $ | 588.4 | $ | 544.3 | ||||||
| United Kingdom | 668.8 | 541.1 | 503.2 | |||||||||
| Hong Kong | 1,785.0 | 1,086.8 | 874.4 | |||||||||
| Japan | 429.0 | 334.5 | 281.7 | |||||||||
| Singapore | 1,466.9 | 1,110.4 | 1,120.7 | |||||||||
| Other | 444.6 | 245.7 | 171.5 | |||||||||
| $ | 5,543.1 | $ | 3,906.9 | $ | 3,495.8 | |||||||
Property, plant and equipment, net by geographic location, are summarized as follows (in millions):
| December 31, 2017 | December 31, 2016 | |||||||
| United States | $ | 547.9 | $ | 548.1 | ||||
| Korea | 380.5 | 385.9 | ||||||
| Malaysia | 230.0 | 224.0 | ||||||
| Philippines | 439.5 | 381.7 | ||||||
| China | 246.0 | 217.7 | ||||||
| Other | 435.2 | 401.7 | ||||||
| $ | 2,279.1 | $ | 2,159.1 | |||||
For the years ended December 31, 2017, 2016 and 2015, there were no individual customers, including distributors, which accounted for more than 10% of the Company’s total consolidated revenues.
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 19: Supplementary Financial Information - Selected Quarterly Financial Data (Unaudited)
Consolidated unaudited quarterly financial information for 2017 and 2016 is as follows (in millions, except per share data):
| Quarters ended in 2017 | ||||||||||||||||
| March 31 | June 30 | September 29 | December 31 | |||||||||||||
| Revenues | $ | 1,436.7 | $ | 1,338.0 | $ | 1,390.9 | $ | 1,377.5 | ||||||||
| Gross Profit (exclusive of the amortization of acquisition related intangible assets) | 503.3 | 492.1 | 524.2 | 514.2 | ||||||||||||
| Net income attributable to ON Semiconductor Corporation | 78.2 | 93.9 | 108.7 | 529.9 | ||||||||||||
| Diluted net income per common share attributable to ON Semiconductor Corporation | 0.18 | 0.22 | 0.25 | 1.22 | ||||||||||||
| Quarters ended in 2016 | ||||||||||||||||
| April 1 | July 1 | September 26 | December 31 | |||||||||||||
| Revenues | $ | 817.2 | $ | 877.8 | $ | 950.9 | $ | 1,261.0 | ||||||||
| Gross Profit (exclusive of the amortization of acquisition related intangible assets) | 275.5 | 307.9 | 329.0 | 384.5 | ||||||||||||
| Net income attributable to ON Semiconductor Corporation | 36.0 | 25.1 | 10.1 | 110.9 | ||||||||||||
| Diluted net income per common share attributable to ON Semiconductor Corporation | 0.09 | 0.06 | 0.02 | 0.26 |
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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in millions)
| Description | Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Deductions /Write-offs | Balance at End of Period | |||||||||||||||
| Allowance for doubtful accounts | ||||||||||||||||||||
| Year ended December 31, 2015 | $ | 1.6 | $ | 3.7 | $ | 0.9 | $ | — | $ | 6.2 | ||||||||||
| Year ended December 31, 2016 | 6.2 | (2.0) | (2.0) | — | 2.2 | |||||||||||||||
| Year ended December 31, 2017 | 2.2 | 0.5 | — | — | 2.7 | |||||||||||||||
| Allowance for deferred tax assets | ||||||||||||||||||||
| Year ended December 31, 2015 | $ | 977.5 | $ | (242.5) | $ | 0.7 | $ | — | $ | 735.7 | ||||||||||
| Year ended December 31, 2016 | 735.7 | (356.0) | 94.4 | (1) | — | 474.1 | ||||||||||||||
| Year ended December 31, 2017 | 474.1 | (30.6) | 18.8 | (2) | — | 462.3 |
(1) Represents the effects of cumulative translation adjustments. This also includes $81.6 million of additional allowance for deferred tax assets arising from the Fairchild acquisition in 2016.
(2) Represents the effects of cumulative translation adjustments.
Previous: Item 15. Exhibits and Financial Statement Schedules