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 20, 2019

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 20, 2019
		Keith D. Jackson		and Director (Principal Executive Officer)
		/s/ BERNARD GUTMANN		Executive Vice President, Chief		February 20, 2019
		Bernard Gutmann		Financial Officer and Treasurer (Principal Financial Officer)
		/s/ BERNARD R. COLPITTS, JR.		Chief Accounting Officer		February 20, 2019
		Bernard R. Colpitts, Jr.		(Principal Accounting Officer)
		*		Chair of the Board of Directors		February 20, 2019
		Alan Campbell
		*		Director		February 20, 2019
		Atsushi Abe
		*		Director		February 20, 2019
		Curtis J. Crawford
		*		Director		February 20, 2019
		Gilles Delfassy
		*		Director		February 20, 2019
		Emmanuel T. Hernandez
		*		Director		February 20, 2019
		Paul A. Mascarenas
		*		Director		February 20, 2019
		Daryl A. Ostrander
		*		Director		February 20, 2019
		Teresa M. Ressel
		*		Director		February 20, 2019
		Christine Y. Yan
*By:		/s/ BERNARD GUTMANN		Attorney in Fact		February 20, 2019
		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, 2018 and 2017, and the related consolidated statements of operations and comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the period ended December 31, 2018, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2018 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 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, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 11: “Share-Based Compensation” to the consolidated financial statements, the Company changed the manner in which it accounts for the 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 Financing 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.

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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 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 20, 2019

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, 2018				December 31, 2017
Assets
Cash and cash equivalents		$	1,069.6			$	949.2
Receivables, net			686.0				701.5
Inventories			1,225.2				1,089.5
Other current assets			187.0				193.0
Total current assets			3,167.8				2,933.2
Property, plant and equipment, net			2,549.6				2,279.1
Goodwill			932.5				916.9
Intangible assets, net			566.4				628.3
Deferred tax assets			266.2				339.1
Other assets			105.1				98.5
Total assets		$	7,587.6			$	7,195.1
Liabilities, Non-Controlling Interest and Stockholders’ Equity
Accounts payable		$	671.7			$	548.0
Accrued expenses			659.1				612.8
Current portion of long-term debt			138.5				248.1
Total current liabilities			1,469.3				1,408.9
Long-term debt			2,627.6				2,703.7
Deferred tax liabilities			54.8				55.1
Other long-term liabilities			241.8				226.4
Total liabilities			4,393.5				4,394.1
Commitments and contingencies (Note 13)
ON Semiconductor Corporation stockholders’ equity:
Common stock ($0.01 par value, 1,250,000,000 shares authorized, 558,701,620 and 551,873,115 shares issued, 413,834,227 and 425,118,194 shares outstanding, respectively)			5.6				5.5
Additional paid-in capital			3,702.3				3,593.5
Accumulated other comprehensive loss			(37.9)				(40.6)
Accumulated earnings			979.6				351.5
Less: Treasury stock, at cost; 144,867,393 and 126,754,921 shares, respectively			(1,478.0)				(1,131.1)
Total ON Semiconductor Corporation stockholders’ equity			3,171.6				2,778.8
Non-controlling interest in consolidated subsidiary			22.5				22.2
Total stockholders’ equity			3,194.1				2,801.0
Total liabilities and stockholders’ equity		$	7,587.6			$	7,195.1

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,
		2018				2017				2016
Revenue		$	5,878.3			$	5,543.1			$	3,906.9
Cost of revenue (exclusive of amortization shown below)			3,639.6				3,507.5				2,606.4
Gross profit			2,238.7				2,035.6				1,300.5
Operating expenses:
Research and development			650.7				594.7				446.8
Selling and marketing			324.7				316.6				236.7
General and administrative			293.3				285.0				230.0
Amortization of acquisition-related intangible assets			111.7				123.8				104.8
Restructuring, asset impairments and other, net			4.3				20.8				33.2
Goodwill and intangible asset impairment			6.8				13.1				2.2
Total operating expenses			1,391.5				1,354.0				1,053.7
Operating income			847.2				681.6				246.8
Other income (expense), net:
Interest expense			(128.2)				(141.2)				(145.3)
Interest income			6.1				3.0				4.5
Loss on debt refinancing and prepayment			(4.6)				(47.2)				(6.3)
Gain on divestiture of business			5.0				12.5				92.2
Licensing income			36.6				47.6				—
Other expense			(7.1)				(8.8)				(11.3)
Other income (expense), net			(92.2)				(134.1)				(66.2)
Income before income taxes			755.0				547.5				180.6
Income tax benefit (provision)			(125.1)				265.5				3.9
Net income			629.9				813.0				184.5
Less: Net income attributable to non-controlling interest			(2.5)				(2.3)				(2.4)
Net income attributable to ON Semiconductor Corporation		$	627.4			$	810.7			$	182.1
Comprehensive income, net of tax:
Net income		$	629.9			$	813.0			$	184.5
Foreign currency translation adjustments			0.7				7.0				(8.0)
Effects of cash flow hedges			2.0				2.6				0.1
Other comprehensive income (loss)			2.7				9.6				(7.9)
Comprehensive income			632.6				822.6				176.6
Comprehensive income attributable to non-controlling interest			(2.5)				(2.3)				(2.4)
Comprehensive income attributable to ON Semiconductor Corporation		$	630.1			$	820.3			$	174.2
Net income per common share attributable to ON Semiconductor Corporation:
Basic		$	1.48			$	1.92			$	0.44
Diluted		$	1.44			$	1.89			$	0.43
Weighted-average common shares outstanding:
Basic			423.8				421.9				415.2
Diluted			435.9				428.3				420.0

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								Treasury Stock								Non- Controlling Interest in Consolidated Subsidiary
		Number of shares				At Par Value				Accumulated (Deficit) Earnings				Number of shares				At Cost				Total Equity
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
Stock option exercises			1,849,777				0.1				14.8				—				—				—				—				—				14.9
Shares issued pursuant to the ESPP			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)
Comprehensive (loss) income			—				—				—				(7.9)				182.1				—				—				2.4				176.6
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
Impact of the adoption of ASU 2016-09			—				—				—				—				68.1				—				—				—				68.1
Stock option exercises			2,213,859				—				18.0				—				—				—				—				—				18.0
Shares issued pursuant to the ESPP			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)
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
Comprehensive income			—				—				—				9.6				810.7				—				—				2.3				822.6
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
Impact of the adoption of ASU 2016-16																			(1.4)																(1.4)
Impact of the Adoption of ASC 606			—				—				—				—				2.1				—				—				—				2.1
Stock option exercises			794,165				—				5.7				—				—				—				—				—				5.7
Shares issued pursuant to the ESPP			1,516,012				—				24.9				—				—				—				—				—				24.9
RSUs and stock grant awards issued			4,518,328				0.1				(0.1)				—				—				—				—				—				—
Shares withheld for employee taxes on RSUs			—				—				—				—				—				(1,343,961)				(31.6)				—				(31.6)
Share-based compensation expense			—				—				78.3				—				—				—				—				—				78.3
Repurchase of common stock			—				—				—				—				—				(16,768,511)				(315.3)				—				(315.3)
Dividend to non-controlling shareholder			—				—				—				—				—				—				—				(2.2)				(2.2)
Comprehensive income			—				—				—				2.7				627.4				—				—				2.5				632.6
Balance at December 31, 2018			558,701,620			$	5.6			$	3,702.3			$	(37.9)			$	979.6				(144,867,393)			$	(1,478.0)			$	22.5			$	3,194.1

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,
		2018				2017				2016
Cash flows from operating activities:
Net income		$	629.9			$	813.0			$	184.5
Adjustments to reconcile net income to net cash provided by operating activities and other adjustments:
Depreciation and amortization			508.7				481.9				364.1
Loss on sale or disposal of fixed assets			2.4				3.9				1.5
Gain on divestiture of business			(5.0)				(12.5)				(92.2)
Loss on debt refinancing and prepayment			4.6				47.2				6.3
Amortization of debt discount and issuance costs			13.2				16.0				12.0
Payments for term debt modification			(1.1)				(3.8)				(26.4)
Write-down of excess inventories			55.7				67.0				66.2
Share-based compensation expense			78.3				69.8				56.1
Non-cash interest on convertible notes			36.1				30.8				26.0
Non-cash asset impairment charges			2.4				7.9				0.5
Goodwill and intangible asset impairment charges			6.8				13.1				2.2
Change in deferred taxes			69.2				(348.3)				(38.1)
Other			(1.6)				2.2				(4.6)
Changes in operating assets and liabilities (exclusive of the impact of acquisitions and divestitures):
Receivables			(2.7)				(57.9)				28.1
Inventories			(185.2)				(126.9)				(7.9)
Other assets			(37.4)				(86.0)				(25.0)
Accounts payable			44.8				51.8				42.4
Accrued expenses			56.5				211.1				(15.3)
Deferred income on sales to distributors			—				(109.8)				0.1
Other long-term liabilities			(1.4)				23.7				0.6
Net cash provided by operating activities			1,274.2				1,094.2				581.1
Cash flows from investing activities:
Purchase of property, plant and equipment			(514.8)				(387.5)				(210.7)
Proceeds from sales of property, plant and equipment			36.5				14.3				0.4
Deposits utilized (made) for purchases of property, plant and equipment			4.1				(8.2)				(2.2)
Purchase of business, net of cash acquired			(70.9)				(0.8)				(2,284.0)
Purchase of equity interest and assets, net of cash acquired			(24.6)				—				—
Proceeds from divestiture of business, net of cash transferred			8.4				20.0				104.0
Proceeds from repayment of note receivable			10.2				—				—
Cash placed in escrow			—				—				(67.7)
Cash received from escrow			—				—				23.8
Other			2.2				(2.6)				—
Net cash used in investing activities			(548.9)				(364.8)				(2,436.4)
Cash flows from financing activities:
Proceeds for the issuance of common stock under the ESPP			25.0				23.6				15.0
Proceeds from exercise of stock options			5.7				18.0				14.9
Payments of tax withholding for restricted shares			(31.6)				(28.1)				(12.3)
Repurchase of common stock			(315.3)				(25.0)				—
Proceeds from debt issuance			15.3				1,106.2				2,586.9
Payment of debt issuance and other financing costs			—				—				(6.8)
Repayment of long-term debt			(298.4)				(1,831.4)				(313.8)
Purchase of convertible note hedges			—				(144.7)				—
Proceeds from issuance of warrants			—				85.2				—
Payment of capital lease obligations			(3.6)				(8.9)				(14.9)
Payment of contingent consideration			—				(3.9)				—
Dividend to non-controlling shareholder			(2.2)				(1.9)				(4.3)
Net cash (used in) provided by financing activities			(605.1)				(810.9)				2,264.7
Effect of exchange rate changes on cash, cash equivalents and restricted cash			0.3				2.3				(0.8)
Net increase (decrease) in cash, cash equivalents and restricted cash			120.5				(79.2)				408.6
Cash, cash equivalents and restricted cash, beginning of period (Note 18)			966.6				1,045.8				637.2
Cash, cash equivalents and restricted cash, end of period (Note 18)			1,087.1				966.6				1,045.8

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, together with its wholly and majority-owned subsidiaries (the “Company”), prepares its consolidated financial statements in accordance with GAAP. As of December 31, 2018, the Company was organized into three operating segments, which also represent its three reporting segments: the Power Solutions Group**,** the Analog Solutions Group and the Intelligent Sensing Group. Additional information about the Company’s operating and reporting segments is included in Note 3: “Revenue and Segment Information”.

During the year ended December 31, 2018, the Company adopted the provisions of 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”) retrospectively, which required the net benefit cost to be split in the income statement resulting in the service cost component to be included in operating income while the other components, including the interest cost and the expected return on plan assets, are reported separately outside of operating income. The Company utilized the practical expedient to estimate the impact of ASU 2017-07 for the years ended December 31, 2017 and 2016 using the information previously disclosed in the notes to the consolidated financial statements in the 2017 Form 10-K. This resulted in the operating income increasing by $0.7 million and $10.7 million for the years ended December 31, 2017 and 2016, respectively, compared to the amounts previously disclosed, with offsetting impact to other expense. The service cost is allocated between the cost of revenue, research and development, selling and marketing and general and administrative line items, while the other components are included in other expense in the Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2018, 2017 and 2016.

All dollar amounts 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, revenue 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.

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 revenue and expenses during the reporting period. Management evaluates these estimates and judgments on an ongoing basis and bases 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; (iii) fair values of share-based compensation and of financial instruments (including derivative financial instruments); and (iv) measurement of valuation allowances against deferred tax assets, evaluations of uncertain tax positions, and the impact of U.S. tax reform. Additionally, during periods where it becomes applicable, significant estimates will be used by management in determining the future cash flows used to assess and test for impairment of goodwill, indefinite-lived intangible assets and long-lived assets and in 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 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.

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 revenue 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.

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

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 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 a reporting unit may not be recoverable.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 divisions, either individually or in a combination, constitute reporting units for purposes of allocating and testing goodwill. 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.

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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 about estimated cash flows include factors such as future revenue, gross profit, 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 revenue, gross profit, 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 considered long-lived assets and 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.

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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.

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 and Term Loan “B” Facility are recorded as a direct deduction from the carrying amount of the convertible notes and the Term Loan “B” Facility, consistent with debt discounts, and are amortized over their term using the effective interest method. Amortization of these debt issuance costs is included in interest expense.

Revenue Recognition

On January 1, 2018, as required, the Company adopted 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”) (collectively, the “New Revenue Standard”).

The Company adopted the New Revenue Standard using the modified retrospective method, applying the guidance to all open contracts, and recognized the cumulative effect adjustment of $2.1 million to retained earnings and accrued expenses. The comparative financial information has not been restated and continues to be presented under the accounting standards in effect for the respective periods. The Company applied the practical expedient and has not disclosed the revenue allocated to future shipments of partially completed contracts.

In anticipation of the adoption of the New Revenue Standard, during the quarter ended March 31, 2017, the Company developed its internal systems, processes and controls to enable it to make the estimates required by the New Revenue Standard on sales to its distributors and was able to reliably estimate upfront the effects of returns and allowances and record revenue at the time of shipments to these distributors. Prior to this, the Company recognized revenue from distributors under the sell-through method as it did not have the ability to estimate the effects of returns and allowances. As a result of this change, the Company recognized an additional $155.1 million in revenue during the first quarter of 2017, which resulted in an increase of $59.0 million to income before income taxes.

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The Company generates revenue 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 product development agreements and manufacturing services provided to customers. The Company recognizes revenue when it satisfies a performance obligation in an amount reflecting the consideration to which it expects to be entitled. For sales agreements, the Company has identified the promise to transfer products, each of which is distinct, to be the performance obligation. For product development agreements, the Company has identified the completion of a service defined in the agreement to be the performance obligation. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when the performance obligation is satisfied.

Substantially all of the Company’s revenue continues to be recognized following the transfer of control of the products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. Under the New Revenue Standard, revenue from certain product development agreements, which was previously deferred as delivered, is now recognized over time. During year ended December 31, 2018, revenue increased by $4.6 million due to the impact of the adoption of the New Revenue Standard.

Sales agreements with customers are renewable periodically and contain terms and conditions with respect to payment, delivery, warranty and supply, but typically do not require minimum purchase commitments. In the absence of a sales agreement, the Company’s standard terms and conditions apply. The Company considers the customer purchase orders, governed by sales agreements or the Company’s standard terms and conditions, to be the contract with the customer. The Company evaluates certain factors including the customer’s ability to pay (or credit risk).

Most of the Company’s OEM customers negotiate pricing terms on an annual basis, distributors generally negotiate pricing terms on a quarterly basis, while the pricing terms for electronic manufacturer service providers are negotiated periodically during the year. Pricing terms on product development agreements are negotiated at the beginning of a project. The Company allocates the transaction price to each distinct product based on its relative stand-alone selling price.

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In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. 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 distributors, however, are typically made pursuant to agreements that provide return rights and stock rotation provisions permitting limited levels of product returns. Sales to certain distributors, primarily those with ship and credit rights, can also be subject to price adjustment on certain products. Although payment terms vary, most distributor agreements require payment within 30 days. In addition, the Company offers cash discounts to certain customers for payments received within an agreed upon time, generally 10 days after shipment. The Company recognizes revenue when it satisfies a performance obligation. The Company recognizes revenue from sales agreements upon transferring control of a product to the customer. This typically occurs when products are shipped or delivered, depending on the delivery terms, or when products that are consigned at customer locations are consumed. The Company recognizes revenue from product development agreements over time based on the cost-to-cost method. Revenue recognized during the year ended December 31, 2018 for sales agreements and product development agreements was $5,849.0 million and $29.3 million, respectively. Sales returns and allowances are estimated based on historical experience. Provisions for discounts and rebates to customers, estimated returns and allowances, ship and credit claims and other adjustments are provided for in the same period the related revenue are recognized, and are netted against revenue. For returns, the Company recognizes a related asset for the right to recover returned products with a corresponding reduction to cost of goods sold. The Company records a reserve for cash discounts as a reduction to accounts receivable and a reduction to revenue, based on the experience with each customer.

Frequently, the Company receives orders with multiple delivery dates that may extend across reporting periods. Since each delivery constitutes a performance obligation, the Company allocates the transaction price of the contract to each performance obligation based on the stand-alone selling price of the products. The Company invoices the customer for each delivery upon shipment and recognizes revenue in accordance with delivery terms. As scheduled delivery dates are within one year, revenue allocated to future shipments of partially completed contracts are not disclosed.

The Company has elected to record freight and handling costs associated with outbound freight after control over a product has transferred to a customer as a fulfillment cost and include it in cost of revenue. Taxes assessed by government authorities on revenue-producing transactions, including value-added and excise taxes, are presented on a net basis (excluded from revenue) in the Consolidated Statements of Operations and Comprehensive Income.

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 and records them as a component of the cost of revenue.

Research and Development Costs

Research and development costs are expensed as incurred.

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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 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.

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Historically, the majority of the Company’s Japanese subsidiaries utilized Japanese Yen as their functional currency. The assets and liabilities of these subsidiaries are translated at current exchange rates, while revenue 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. As a result of an analysis which took into account the economic indicators of these subsidiaries from a long-term perspective, the Company changed the functional currency for some of these subsidiaries from Japanese Yen to U.S. Dollars effective as of January 1, 2018.

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.

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 the 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;

	•		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

	•		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.

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.

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Note 3: Revenue and Segment Information

The Company is organized into three operating and reporting segments consisting of the Power Solutions Group, the Analog Solutions Group and the Intelligent Sensing Group.

The Company does not allocate income taxes or interest expense to its operating segments as the operating segments are principally evaluated on revenue and 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. In addition to the operating and reporting segments, 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.

Revenue and gross profit for the Company’s operating and reporting segments are as follows (in millions):

		Power Solutions Group				Analog Solutions Group				Intelligent Sensing Group				Total
For year ended December 31, 2018:
Revenue from external customers		$	3,038.2			$	2,071.2			$	768.9			$	5,878.3
Segment gross profit			1,110.1				878.3				317.1				2,305.5
For year ended December 31, 2017:
Revenue from external customers		$	2,819.3			$	1,950.9			$	772.9			$	5,543.1
Segment gross profit			959.8				817.8				302.6				2,080.2
For year ended December 31, 2016:
Revenue from external customers		$	1,708.6			$	1,481.5			$	716.8			$	3,906.9
Segment gross profit			567.5				590.2				237.7				1,395.4

Gross profit 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,
		2018				2017				2016
Gross profit for reportable segments		$	2,305.5			$	2,080.2			$	1,395.4
Less: unallocated manufacturing costs			(66.8)				(44.6)				(94.9)
Consolidated gross profit		$	2,238.7			$	2,035.6			$	1,300.5

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Revenue for the Company’s operating and reporting segments disaggregated into geographic locations and sales channels are as follows (in millions):

		Year Ended December 31, 2018
		Power Solutions Group				Analog Solutions Group				Intelligent Sensing Group				Total
Geographic Location
Singapore		$	1,086.6			$	704.2			$	164.2			$	1,955.0
Hong Kong			847.9				496.5				144.7				1,489.1
United Kingdom			488.5				319.8				138.2				946.5
United States			398.5				339.2				125.0				862.7
Other			216.7				211.5				196.8				625.0
Total		$	3,038.2			$	2,071.2			$	768.9			$	5,878.3
Sales Channel
Distributors		$	2,011.1			$	1,066.4			$	464.2			$	3,541.7
OEM			846.8				860.7				263.4				1,970.9
Electronic Manufacturing Service Providers			180.3				144.1				41.3				365.7
Total		$	3,038.2			$	2,071.2			$	768.9			$	5,878.3

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.

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 revenue 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. 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 operating and reporting segments.

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

		As of December 31,
		2018				2017
United States		$	616.9			$	547.9
Philippines			474.5				439.5
Korea			383.1				380.5
China			248.4				246.0
Malaysia			229.1				230.0
Other			597.6				435.2
		$	2,549.6			$	2,279.1

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The following table illustrates the product technologies under each of the Company’s reportable segments 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.

Power Solutions Group		Analog Solutions Group		Intelligent Sensing Group
Analog products		Analog products		LSI products
Discrete products		ASIC products		Sensors
HD products		ECL products
IPM products		Foundry products / services
Memory products		LSI products
PIM products		Standard logic products
Sensors		TMOS products
Standard logic products
TMOS products
WBG products

Note 4: Recent Accounting Pronouncements

ASUs Adopted:

New Revenue Standard

The Company adopted the New Revenue Standard on a modified retrospective basis on January 1, 2018. The cumulative-effect adjustment related to the timing of revenue recognition on certain product development agreements recorded to beginning retained earnings and accrued expenses as of January 1, 2018, was $2.1 million. The Company expects the ongoing impact of the New Revenue Standard to be immaterial to the 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. The Company adopted ASU 2017-09 during the first quarter of 2018. The adoption of this standard did not have a material impact on the consolidated financial statements.

ASU No 2017-07

The Company adopted ASU 2017-07 during the first quarter of 2018, applying the standard retrospectively to all periods presented. The adoption of this standard did not have a material impact on the current period or prior period consolidated financial statements.

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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. The Company adopted ASU 2016-18 during the first quarter of 2018, applying the standard retrospectively to all periods presented. The adoption of this standard did not have a material impact on the current period or prior period consolidated financial statements. See Note 18: “Supplemental Disclosures” for further information on the adoption of ASU 2016-18.

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 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. The Company adopted ASU 2016-16 during the first quarter of 2018 and recorded the cumulative-effect adjustment of $1.4 million as a reduction to the beginning retained earnings.

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. The Company adopted ASU 2016-15 during the first quarter of 2018. The adoption of this standard did not have a material impact on the consolidated financial statements.

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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 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 does not anticipate the adoption of ASU 2017-12 will have a material impact on its consolidated financial statements.

ASU No. 2016-02 - Leases (Topic 842) (“ASU 2016-02”), ASU No. 2018-10 - Codification improvements to Topic 842, Leases (“ASU 2018-10”), ASU No. 2018-11 - Leases (Topic 842) (“ASU 2018-11”) (collectively, the “New Leasing Standard”)

In February 2016, the FASB issued ASU 2016-02, which amended the accounting treatment for leases. ASU 2016-02 requires that a lessee should recognize on its balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. Lessees 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. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11. ASU 2018-10 provides certain areas for improvement in ASU 2016-02 and ASU 2018-11 provides an additional optional transition method by allowing entities to initially apply the New Leasing Standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The New Leasing Standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. The Company will adopt the standard beginning January 1, 2019 utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first quarter of 2019.

The Company currently plans to apply the package of practical expedients to leases that commenced before the effective date whereby we will elect to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The Company expects the adoption of this standard will result in the inclusion of a significant component of the Company’s future minimum lease obligations, as disclosed in Note 13: “Commitments and Contingencies” on its Consolidated Balance Sheets, as right-of-use assets and lease liabilities with no material impact to its Consolidated Statements of Operations and Comprehensive Income. The Company is continuing to assess the potential impacts of the New Leasing Standard. We anticipate disclosing additional information, as necessary, to comply with the New Leasing Standard.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Note 5: 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. 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, 2018 and 2017, the Company incurred acquisition and divestiture related costs of approximately $4.5 million and $3.2 million, respectively, which are included in operating expenses on the Company’s Consolidated Statements of Operations and Comprehensive Income.

2018 Acquisition

On May 8, 2018, the Company acquired 100% of the outstanding shares of SensL Technologies Ltd. (“SensL”), a company specializing in silicon photomultipliers, single photon avalanche diode and LiDAR sensing products for the automotive, medical, industrial and consumer markets, for $71.6 million, funded with cash on hand. This acquisition positions the Company to extend its products in automotive sensing applications for ADAS and autonomous driving by adding LiDAR capabilities to the Company’s existing capabilities in imaging and radar.

The following table presents the allocation of the purchase price of SensL for the assets acquired and liabilities assumed based on their fair values (in millions):

		Purchase Price Allocation
Current assets (including cash and cash equivalents of $0.7)		$	4.2
Property, plant and equipment and other non-current assets			1.8
Goodwill			18.9
Intangible assets (excluding IPRD)			31.4
IPRD			20.0
Total assets acquired			76.3
Current liabilities			0.7
Other non-current liabilities			4.0
Total liabilities assumed			4.7
Net assets acquired/purchase price		$	71.6

Acquired intangible assets of $31.4 million include developed technology of $30.0 million (which are estimated to have a seven year weighted-average useful life). The total weighted average amortization period for the acquired intangibles is seven years. IPRD assets are amortized over the estimated useful life of the assets upon successful completion of the related projects. The value assigned to IPRD was determined by estimating the net cash flows from the projects when completed and discounting the net cash flows to their present value using a discount rate of 30.0%. The cash flows from IPRD’s significant products are expected to commence in 2019.

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The acquisition produced $18.9 million of goodwill, which was allocated to the Intelligent Sensing Group. Goodwill is attributable to a combination of SensL’s assembled workforce, expectations regarding a more meaningful engagement by the customers due to the scale of the combined company and other product and operating synergies. Goodwill will not be amortized but instead tested for impairment at least annually (more frequently if certain indicators are present). Goodwill arising from the SensL acquisition is not deductible for tax purposes.

Unaudited pro-forma consolidated results of operations for the years ended December 31, 2018 and 2017 are not included considering the significance of the acquisition to the results of the Company.

2018 Divestiture

On June 25, 2018, the Company divested the transient voltage suppressing diodes business it acquired from Fairchild to TSC America, Inc. for $5.6 million in cash and recorded a gain of $4.6 million after writing off the carrying values of the assets and liabilities disposed. There were certain other immaterial transactions resulting in a total gain of $5.0 million during the year ended December 31, 2018.

Licensing Transactions

During 2016 and 2017, the Company entered into an Asset Purchase Agreement with Huaian Imaging Device Manufacturer Corporation (“HIDM”) pursuant to which the Company received $52.5 million in cash in 2017 and provided perpetual, non-exclusive licenses relating to certain technologies to HIDM. Of this amount, $10.0 million was recorded as deferred licensing income to be recognized in the period in which certain qualification requirements of the technologies are achieved (or refunded to HIDM, if such qualification did not occur by June 21, 2018). Prior to this date, the Company achieved such qualification requirements for the technologies transferred and recognized $10.0 million as licensing income.

On November 29, 2017, the Company and QST Co. Ltd (“QST”) entered into an IP license and technology transfer agreement (“IP Agreement”) to grant QST patent licenses and IP rights to certain of the Company’s technologies. Pursuant to the IP Agreement, QST receives perpetual, worldwide, nonexclusive and nontransferable patents licenses and IP rights upon the payment of license fees of $13.0 million and other fees of $8.5 million in its entirety. Such amounts were paid by QST during the years ended December 31, 2017 and 2018. As a result, the Company recognized licensing income of $22.7 million relating to licensing and other fees and certain other aspects of the transaction during the year ended December 31, 2018. The Company also recognized certain immaterial amounts of licensing income relating to other transactions during the year ended December 31, 2018.

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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 current assets in the Consolidated Balance Sheet as of December 31, 2018. 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.

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 9: “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.

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The following table presents the allocation of the purchase price for the acquisition of Fairchild 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
IPRD			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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

See Note 13: “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 years ended December 31, 2018 and 2017 are not required because the results of Fairchild are included in the Consolidated Statements of Operations and Comprehensive Income for these periods. The following unaudited pro-forma consolidated results of operations for the year ended December 31, 2016 has 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
Revenue		$	4,912.8
Net Income			196.6
Net income attributable to ON Semiconductor Corporation			194.2
Net income per common share attributable to ON Semiconductor Corporation:
Basic			0.47
Diluted			0.46

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 on divestiture of $92.2 million after, among other things, transferring inventory of $4.1 million to Littelfuse, writing off goodwill of $3.4 million and deferring $4.3 million of the proceeds representing the fair value of manufacturing services which has been recognized in the Consolidated Statements of Operations and Comprehensive Income through December 31, 2018.

Note 6: 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 qualitative assessments for the annual impairment analysis during the fourth quarters of 2018 and 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.

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The following table summarizes goodwill by relevant reportable segment (in millions):

		As of December 31, 2018												As of December 31, 2017
		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
Intelligent Sensing Group			114.4				—				114.4				95.5				—				95.5
Power Solutions Group			432.2				(31.9)				400.3				432.2				(28.6)				403.6
Total		$	1,383.3			$	(450.8)			$	932.5			$	1,364.4			$	(447.5)			$	916.9

The following table summarizes the change in goodwill (in millions):

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
Addition due to business combination			18.9
Goodwill Impairment			(3.3)
Net balance as of December 31, 2018		$	932.5

The goodwill impairment charge of $3.3 million in 2018 was the result of the licensing transaction with QST and represented the entire goodwill assigned to a reporting unit within the Power Solutions Group. The measurement period adjustment of $1.3 million in 2017 was related to an immaterial acquisition that occurred on December 29, 2016.

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Intangible Assets

Intangible assets, net, were as follows (in millions):

		As of December 31, 2018
		Original Cost				Accumulated Amortization				Accumulated Impairment Losses				Carrying Value
Customer relationships		$	556.7			$	(359.1)			$	(20.1)			$	177.5
Developed technology			698.0				(356.4)				(2.6)				339.0
IPRD			64.1				—				(22.5)				41.6
Other intangibles			82.3				(58.8)				(15.2)				8.3
Total intangible assets		$	1,401.1			$	(774.3)			$	(60.4)			$	566.4
		As of December 31, 2017
		Original Cost				Accumulated Amortization				Accumulated Impairment Losses				Carrying Value
Customer relationships		$	555.9			$	(328.5)			$	(20.1)			$	207.3
Developed technology			657.6				(278.2)				(2.6)				376.8
IPRD			54.5				—				(19.0)				35.5
Other intangibles			79.8				(55.9)				(15.2)				8.7
Total intangible assets		$	1,347.8			$	(662.6)			$	(56.9)			$	628.3

During the year ended December 31, 2018, the Company determined that the value of one of its IPRD projects under the Intelligent Sensing Group was impaired and recorded a charge of $3.5 million, and the Company also completed certain of its IPRD projects resulting in the reclassification of $10.4 million from IPRD to developed technology.

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, 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 also completed certain of its IPRD projects, resulting in the reclassification of $99.4 million from IPRD to developed technology and, disposed of $8.7 million of intangible assets as part of the Xsens Transaction.

During the year ended December 31, 2016, the Company canceled certain of its previously capitalized IPRD projects under the Intelligent Sensing Group and recorded impairment losses of $2.2 million, and the Company also completed certain of its IPRD projects resulting in the reclassification of $21.6 million from IPRD to developed technology.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Amortization expense for intangible assets for the years ended December 31, 2018, 2017 and 2016 amounted to $111.7 million, $123.8 million and $104.8 million, respectively. Amortization expense for intangible assets, with the exception of the $41.6 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
2019		$	106.2
2020			95.8
2021			78.7
2022			63.8
2023			47.0
Thereafter			133.3
Total estimated amortization expense		$	524.8

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Note 7: 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, 2018, 2017 and 2016 is as follows (in millions):

		Restructuring				Asset Impairments (1)				Other (2)				Total
Year Ended December 31, 2018
Other		$	3.9			$	4.6			$	(4.2)			$	4.3
Total		$	3.9			$	4.6			$	(4.2)			$	4.3
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

(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 gain on sale of certain held-for-sale assets for the year ended December 31, 2018 and charges related to other facility closures and asset disposal activities for the year ended December 31, 2017.

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Summary of changes in accrued restructuring charges as follows (in millions):

		Estimated employee separation charges				Estimated costs to exit				Total
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
Charges			3.9				—				3.9
Usage			(5.5)				—				(5.5)
Balance as of December 31, 2018		$	0.3			$	0.2			$	0.5

The Company did not have any significant restructuring activities during the year ended December 31, 2018. Activity related to the Company’s significant restructuring programs that were initiated during 2016 or 2017 was 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 exited 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 was $1.8 million as of December 31, 2017, of which $1.3 million was paid during the year ended December 31, 2018.

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 were paid during 2018.

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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.

Note 8: Balance Sheet Information

Certain significant amounts included in the Company’s Consolidated Balance Sheets consist of the following (in millions):

		As of
		December 31, 2018				December 31, 2017
Inventories:
Raw materials		$	137.3			$	117.7
Work in process			760.7				660.8
Finished goods			327.2				311.0
		$	1,225.2			$	1,089.5
Property, plant and equipment, net:
Land		$	125.5			$	148.4
Buildings			820.4				744.0
Machinery and equipment			3,980.2				3,454.6
Property, plant and equipment, gross			4,926.1				4,347.0
Less: Accumulated depreciation			(2,376.5)				(2,067.9)
		$	2,549.6			$	2,279.1
Accrued expenses:
Accrued payroll and related benefits		$	240.8			$	201.8
Sales related reserves			294.8				280.0
Income taxes payable			38.2				29.9
Other			85.3				101.1
		$	659.1			$	612.8

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, 2018 and 2017 was $1.4 million and $5.3 million, respectively, and is reported as other current assets on the Company’s Consolidated Balance Sheet. The Company sold the assets held-for-sale at December 31, 2017 in January 2018 for $5.5 million.

Depreciation expense for property, plant and equipment, including amortization of capital leases, totaled $359.3 million, $325.2 million and $239.6 million for 2018, 2017 and 2016, respectively.

As of December 31, 2018 and 2017, total property, plant and equipment included $0.9 million and $4.2 million, respectively, of assets financed under capital leases. Accumulated depreciation associated with these assets is included in total accumulated depreciation in the table above.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Warranty Reserves

The activity related to the Company’s warranty reserves are as follows (in millions):

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
Provision			0.4
Usage			(3.2)
Balance as of December 31, 2018		$	5.2

Note 9: Long-Term Debt

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

		As of
		December 31, 2018				December 31, 2017
Amended Credit Agreement:
Revolving Credit Facility due 2021, interest payable monthly at 3.77% and 3.07%, respectively		$	400.0			$	400.0
Term Loan “B” Facility due 2023, interest payable monthly at 4.27% and 3.57%, respectively			1,134.5				1,204.5
1.00% Notes due 2020 (1)			690.0				690.0
1.625% Notes due 2023 (2)			575.0				575.0
Note payable to SMBC due 2018, interest payable quarterly at 0% and 3.09%, respectively (3)			—				122.7
Other long-term debt (4)			139.5				182.8
Gross long-term debt, including current maturities			2,939.0				3,175.0
Less: Debt discount (5)			(139.4)				(178.8)
Less: Debt issuance costs (6)			(33.5)				(44.4)
Net long-term debt, including current maturities			2,766.1				2,951.8
Less: Current maturities			(138.5)				(248.1)
Net long-term debt		$	2,627.6			$	2,703.7

	(1)	Interest is payable on June 1 and December 1 of each year at 1.00% anually.

	(2)	Interest is payable on April 15 and October 15 of each year at 1.625% annually.

	(3)	This loan represented SCI LLC’s non-collateralized loan with SMBC, which was guaranteed by the Company.

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	(4)	Consists of U.S. real estate mortgages, term loans, revolving lines of credit, notes payable and other facilities at certain international locations where interest is payable weekly, monthly or quarterly, with interest rates between 1.00% and 4.00% and maturity dates between 2019 and 2020.

	(5)	Debt discount of $41.6 million and $61.9 million for the 1.00% Notes, $88.5 million and $104.4 million for the 1.625% Notes and $9.3 million and $12.5 million for the Term Loan “B” Facility, in each case as of December 31, 2018 and December 31, 2017, respectively.

	(6)	Debt issuance costs of $5.8 million and $8.6 million for the 1.00% Notes, $8.5 million and $10.0 million for the 1.625% Notes and $19.2 million and $25.8 million for the Term Loan “B” Facility, in each case as of December 31, 2018 and December 31, 2017, respectively.

Maturities

Expected maturities relating to the Company’s gross long-term debt (including current maturities) as of December 31, 2018 are as follows (in millions):

		Annual Maturities
2019		$	138.5
2020			690.9
2021			400.0
2022			—
2023			1,709.6
Thereafter			—
Total		$	2,939.0

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 proceeds from the Term Loan “B” Facility, along with $67.7 million funded by the Company, were deposited into escrow accounts 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. 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 (“Eurocurrency Loans”) or alternate base rate loans (“ABR Loans”).

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Amendments to the Amended Credit Agreement

On September 30, 2016, the Company, and certain of the Company’s subsidiaries, as guarantors (the “Guarantors”), entered into the First Amendment to the Amended Credit Agreement with the several lenders party thereto and Deutsche Bank AG New York Branch, as the administrative agent (the “Agent”). 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 were 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 Revolving Credit Facility.

On March 31, 2017, the Company, the Guarantors, the several lenders party thereto and the Agent entered into the Second Amendment to the Amended Credit Agreement (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. 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 the 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.

On November 30, 2017, the Company, the Guarantors, the several lenders party thereto and the Agent entered into the Third Amendment to the Amended Credit Agreement (the “Third Amendment”). The Third Amendment provided 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. The Third Amendment reduced the applicable margins on Eurocurrency Loans to 1.50% and 2.00% for borrowings under the Revolving Credit Facility and the Term Loan “B” Facility, respectively, and reduced applicable margins on ABR Loans to 0.50% and 1.00% for borrowings under the Revolving Credit Facility and the Term Loan “B” Facility, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

On May 31, 2018, the Company, the Guarantors, the several lenders party thereto and the Agent entered into the Fourth Amendment to the Amended Credit Agreement (the “Fourth Amendment”). Pursuant to the Fourth Amendment, for any interest period ending after the date of the Fourth Amendment, Eurocurrency Loans will accrue interest at (i) a base rate per annum equal to the Adjusted LIBO Rate (as defined in the Amended Credit Agreement) plus (ii) an applicable margin equal to (x) 1.25% 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) 1.75% with respect to borrowings under the Term Loan “B” Facility. Pursuant to the Fourth Amendment, 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 the Agent 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) 0.25% 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) 0.75% with respect to borrowings under the Term Loan “B” Facility.

The obligations under the Amended Credit Agreement are guaranteed by the Guarantors and collateralized 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 mortgage on certain real property assets of the Company and its domestic subsidiaries.

The Amended Credit Agreement includes financial maintenance covenants, including, among others, a maximum 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, 2018. The Term Loan “B” Facility will mature on March 31, 2023 and the Revolving Credit Facility will mature on September 19, 2021.

Debt Refinancing and Prepayments

The Company incurred third-party, legal and other fees of $1.1 million related to the Fourth Amendment and recorded debt extinguishment charges of $2.6 million, which included a write-off of $1.5 million of unamortized debt discount and issuance costs and $1.1 million in third-party fees. The Company also prepaid $70.0 million of borrowings under the Term Loan “B” Facility during the year ended December 31, 2018 and expensed $2.0 million of unamortized debt discount and issuance costs attributed to the partial pay-down as loss on debt refinancing and prepayment.

The Company incurred third-party, legal and other fees of $3.3 million related to the Third Amendment and capitalized $1.9 million of closing costs relating to the Revolving Credit Facility which will be amortized straight-line over its term and expensed $1.4 million of third-party fees and expenses relating to the Term Loan “B” Facility. 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. The Company prepaid $200.0 million of borrowings under the Term Loan “B” Facility during the year ended December 31, 2017 and expensed $6.7 million of unamortized debt discount and issuance costs attributed to the partial pay-down as loss on debt refinancing and prepayment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

The Company incurred legal and other fees of $2.4 million related to the Second Amendment and recorded debt extinguishment charges 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 and recorded debt extinguishment charges 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 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.

As a result of the above, the Company recorded debt refinancing and prepayment charges of $4.6 million, $47.2 million and $6.3 million for the years ended December 31, 2018, 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.

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 10: “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, ranks 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 1.00% 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. 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’ 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 reduce the 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.

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.

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.

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 10: “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. ON Semiconductor was the sole issuer of the 1.625% Notes.

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’ 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 reduce the 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 as of December 31, 2017. The entire balance was repaid on the due date of January 2, 2018.

Other Long-term Debt

Note Payable to Fujitsu

On October 1, 2018, the Company assumed a yen-denominated non-collateralized loan obligation amounting to $50.6 million as a result of the Company acquiring a majority ownership in OSA. See Note 10: “Earnings Per Share and Equity” for more information on the acquisition of OSA. Amortization and maturity of the loan is at the request of the lender, FSL. The loan bears a variable interest rate which is payable monthly and the ending balance amounting to $51.6 million has been classified as current portion of long-term debt in the Consolidated Balance Sheet as of December 31, 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 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 balance as of December 31, 2018 was $29.5 million and the loan bears interest which is payable monthly at a rate of approximately 3.12% per annum, with a balloon payment of approximately $26.7 million in 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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 $50.0 million available under the term loans and the balance was repaid in full during the year ended December 31, 2018. Borrowings under the loans bear interest based on the 3-month LIBO Rate 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, 2018 was $25.0 million. Borrowings under the Malaysia Line of Credit bear interest based on the 3-month LIBO Rate, 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, 2018, the Company’s Vietnamese subsidiary had an outstanding balance of $10.7 million under the Vietnam Line of Credit. Borrowings under the Vietnam Line of Credit bear interest based on the 3-month LIBO Rate and 12-month LIBO Rate, as established at the commencement of each borrowing period, plus 1.45% per annum, with interest payable quarterly and annually. The outstanding amount is payable within 5 business days of demand.

Capital Lease Obligations

The Company has various capital lease obligations primarily for buildings, which, as of December 31, 2018, totaled $0.9 million, with interest rates ranging from 1.0% to 5.2% and maturities from the first quarter of 2019 until the fourth quarter of 2022. Future payments for the Company’s capital lease obligations are included in the annual maturities table.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Note 10: 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):

		Year ended December 31,
		2018				2017				2016
Net income attributable to ON Semiconductor Corporation		$	627.4			$	810.7			$	182.1
Basic weighted average common shares outstanding			423.8				421.9				415.2
Add: Incremental shares for:
Dilutive effect of share-based awards			4.3				5.5				3.8
Dilutive effect of convertible notes			7.8				0.9				1.0
Diluted weighted average common shares outstanding			435.9				428.3				420.0
Net income per common share attributable to ON Semiconductor Corporation:
Basic		$	1.48			$	1.92			$	0.44
Diluted		$	1.44			$	1.89			$	0.43

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.

To calculate the diluted weighted-average common shares outstanding, 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 0.6 million, 0.2 million and 1.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.

The dilutive impact related to the Company’s 1.00% Notes and 1.625% Notes is determined in accordance with the net share settlement requirements, under which 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. 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, during the relevant reporting period, the effect of the additional potential shares that may be issued related to the warrants that were issued concurrently with the issuance of the convertible notes will also be included in the calculation of diluted weighted-average common shares outstanding. Prior to conversion, the convertible note hedges are not considered for purposes of the earnings per share calculations, as their effect would be anti-dilutive. Upon conversion, the convertible note hedges are expected to offset the dilutive effect of the 1.00% Notes 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Equity

Share Repurchase Programs

On December 1, 2014, the Company announced 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 the strategic plans, market and economic conditions and the discretion of the Company’s board of directors. 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.

On December 1, 2014, the Company announced the 2014 Share Repurchase Program pursuant to the Capital Allocation Policy. Under the Company’s 2014 Share Repurchase Program, the Company had the ability to repurchase up to $1.0 billion (exclusive of fees, commissions and other expenses) of the Company’s common stock over a period of four years from December 1, 2014, subject to certain contingencies. The 2014 Share Repurchase Program, which did not require the Company to purchase any particular amount of common stock and was subject to the discretion of the board of directors, expired on November 30, 2018 with approximately $288.2 million remaining unutilized.

The Company repurchased common stock worth approximately $315.0 million under the 2014 Share Repurchase Program during the year ended December 31, 2018. The Company repurchased shares worth $25.0 million of the Company’s common stock under the 2014 Share Repurchase Program in connection with the offering of the 1.625% Notes during the year ended December 31, 2017.

On November 15, 2018, the Company announced the 2018 Share Repurchase Program pursuant to the Capital Allocation Policy. Under the 2018 Share Repurchase Program, the Company is authorized to repurchase up to $1.5 billion of its common shares over a four-year period, exclusive of any fees, commissions or other expenses. The Company may repurchase its common stock from time to time in privately negotiated transactions or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 of the Exchange Act, or by any combination of such methods or other methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including the Company’s stock price, corporate and regulatory requirements, restrictions under the Company’s debt obligations and other market and economic conditions. The 2018 Share Repurchase Program became effective on December 1, 2018. There were no repurchases made under the 2018 Share Repurchase Program during the year ended December 31, 2018.

The Company repurchased 4.2 million shares of its common stock for $71.7 million under the 2018 Share Repurchase Program subsequent to December 31, 2018 through February 15, 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

		Year ended December 31,
		2018				2017				2016
Number of repurchased shares (1)			16.8				1.6				—
Beginning accrued share repurchases (2)		$	—			$	—			$	—
Aggregate purchase price			315.0				25.0			$	—
Fees, commissions and other expenses			0.3				—			$	—
Less: ending accrued share repurchases (3)			—				—				—
Total cash used for share repurchases		$	315.3			$	25.0			$	—
Weighted-average purchase price per share (4)		$	18.78			$	15.35			$	—
Available for future purchases at period end		$	1,500.0			$	603.2			$	628.2

	(1)	None of these shares had been reissued or retired as of December 31, 2018, but may be reissued or retired by the Company at a later date.

	(2)	Represents unpaid amounts recorded in accrued expenses on the Company’s Consolidated Balance Sheet as of the beginning of the period.

	(3)	Represents unpaid amounts recorded in accrued expenses on the Company’s Consolidated Balance Sheet as of the end of the period.

	(4)	Exclusive of fees, commissions and other expenses.

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 amount of the employee withholding taxes due are withheld by the Company upon the vesting of RSUs to pay the applicable amount of employee withholding taxes and are considered common stock repurchases. The Company then pays the applicable amount of withholding taxes in cash. The amounts remitted in the years ended December 31, 2018 and 2017 were $31.6 million and $28.1 million, respectively, for which the Company withheld approximately 1.3 million and 1.8 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, 2018, but may be reissued or retired by the Company at a later date. These deemed repurchases do not count against the Company’s Share Repurchase Programs.

Non-Controlling Interest

The Company owns 80% of the outstanding equity interests in Leshan, and the results of Leshan have been consolidated in the Company’s financial statements. Leshan operates assembly and test operations in Leshan, China.

At December 31, 2018, the Leshan non-controlling interest balance was $22.5 million. This balance included the Leshan non-controlling interest’s $2.5 million share of the earnings for the year ended December 31, 2018 offset by $2.2 million of dividends paid to the non-controlling shareholder of Leshan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

At December 31, 2017, the Leshan non-controlling interest balance was $22.2 million. This balance included the Leshan 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 of Leshan.

As of December 31, 2017, the Company owned 10% of the equity interest in OSA. During 2018, the Company acquired an incremental 50% equity interest for approximately $24.6 million, net of cash acquired. OSA operates a front-end wafer fabrication facility in Aizuwakamatsu, Japan. As the Company acquired a controlling financial interest on October 1, 2018, the results of OSA have been consolidated in the Company’s financial statements. This acquisition has been accounted for as an acquisition of assets. Due to the terms of the agreement with FSL, the former parent of OSA, there is no non-controlling interest balance recorded for the remaining 40% held by FSL. Subject to the fulfillment of certain conditions, the Company is required to increase its ownership in OSA to 100% between nine and eighteen months following the date it acquired the controlling financial interest.

Note 11: Share-Based Compensation

Total share-based compensation expense related to the Company’s stock options, RSUs, stock grant awards and ESPP were recorded within the Consolidated Statements of Operations and Comprehensive Income as follows (in millions):

		Year Ended December 31,
		2018				2017				2016
Cost of revenue		$	7.0			$	6.0			$	8.0
Research and development			14.3				12.5				11.1
Selling and marketing			14.1				11.7				9.8
General and administrative			42.9				39.6				27.2
Share-based compensation expense before income taxes			78.3				69.8				56.1
Related income tax benefits (1)			(16.4	)			(24.4	)			—
Share-based compensation expense, net of taxes		$	61.9			$	45.4			$	56.1

(1)	Recognition of related income tax benefits are the result of the adoption of ASU 2016-09 during the first quarter of 2017 through a cumulative effect adjustment of $68.1 million recorded as a credit to retained earnings as of January 1, 2017. Tax benefit is calculated using the federal statutory rate of 21% and 35% during the years ended December 31, 2018 and December 31, 2017, respectively.

At December 31, 2018, 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 $78.8 million, which is expected to be recognized over a weighted-average period of 1.4 years. The total intrinsic value of stock options exercised during the year ended December 31, 2018 was $12.5 million. The Company received cash of $5.7 million and $24.9 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.

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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, 2018, 2017 and 2016.

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. The annualized pre-vesting forfeitures for RSUs were estimated to be approximately 5% for the years ended December 31, 2018, 2017 and 2016.

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 seven 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).

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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, 2018, there was an aggregate of 33.7 million shares of common stock available for grant under the Amended and Restated SIP.

Stock Options

The number of options outstanding at December 31, 2017 was 1.1 million at a weighted average exercise price of $6.95 per option, of which 0.8 million options were exercised at a weighted average exercise price of $7.13 per option during the year ended December 31, 2018. The number of options outstanding at December 31, 2018 was 0.3 million, at a weighted average exercise price of $6.41 per option and had an aggregate intrinsic value of $2.8 million. All outstanding options had exercise prices below $16.51 per share, the closing price of the Company’s common stock at December 31, 2018, and will expire at varying times between 2019 and 2021.

Restricted Stock Units

A summary of the RSU transactions for the year ended December 31, 2018 are as follows (number of shares in millions):

		Number of Shares				Weighted-Average Grant Date Fair Value
Nonvested shares of RSUs at December 31, 2017			9.8			$	12.63
Granted			3.2				23.90
Achieved			0.7				15.26
Released			(4.5)				13.09
Canceled			(0.6)				15.48
Nonvested shares of RSUs at December 31, 2018			8.6				16.59

During 2018, the Company awarded 1.1 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, 2018, 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 $56.7 million and $22.1 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 $70.3 million for the year ended December 31, 2018, which included $42.1 million for RSUs with time-based service conditions that were granted in 2018 and prior that are expected to vest.

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Stock Grant Awards

During the year ended December 31, 2018, 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 $25.51 per share. Total compensation expense related to stock grant awards for the year ended December 31, 2018 was approximately $1.8 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; 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, 2018, employees purchased approximately 1.5 million shares under the ESPP. During the years ended December 31, 2017 and 2016, employees purchased approximately 1.9 million and 1.8 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, 2018, there were approximately 6.5 million shares available for issuance under the ESPP.

Note 12: Employee Benefit Plans

Defined Benefit Pension Plans

The Company maintains defined benefit pension 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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.

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,
		2018				2017				2016
Service cost		$	9.6			$	10.0			$	9.0
Interest cost			4.7				4.3				4.5
Expected return on plan assets			(6.1)				(5.5)				(3.9)
Curtailment gain			(0.3)				—				—
Actuarial and other loss			6.1				1.9				10.1
Total net periodic pension cost		$	14.0			$	10.7			$	19.7
Weighted average assumptions
Discount rate			1.56%				1.66%				1.60%
Expected return on plan assets			3.18%				3.22%				3.20%
Rate of compensation increase			3.22%				3.22%				3.05%

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.

		2018				2017
Change in projected benefit obligation (PBO)
Projected benefit obligation at the beginning of the year		$	292.7			$	261.8
Service cost			9.6				10.0
Interest cost			4.7				4.3
Net actuarial (gain) loss			(6.1)				6.4
Benefits paid by plan assets			(5.6)				(4.7)
Benefits paid by the Company			(1.7)				(4.2)
Curtailments and settlements			(0.6)				—
Translation and other (gain) loss			(2.2)				19.1
Projected benefit obligation at the end of the year		$	290.8			$	292.7
Accumulated benefit obligation at the end of the year		$	249.2			$	245.8
Change in plan assets
Fair value of plan assets at the beginning of the year		$	183.4			$	159.7
Actual return on plan assets			(6.1)				10.0
Benefits paid from plan assets			(5.6)				(4.7)
Employer contributions			5.0				6.0
Settlements			(0.3)				—
Translation and other gain (loss)			(1.5)				12.4
Fair value of plan assets at the end of the year		$	174.9			$	183.4

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

		As of December 31,
		2018				2017
Plans with underfunded or non-funded projected benefit obligation
Projected benefit obligation		$	282.6			$	283.3
Fair value of plan assets			166.2				173.7
Plans with underfunded or non-funded accumulated benefit obligation
Accumulated benefit obligation		$	181.4			$	174.8
Fair value of plan assets			102.1				104.3
Amounts recognized in the balance sheet consist of
Non-current assets		$	0.3			$	0.1
Current liabilities			(0.2)				(0.2)
Non-current liabilities			(116.0)				(109.2)
Funded status		$	(115.9)			$	(109.3)

As of December 31, 2018 and 2017, respectively, the assets of the Company’s foreign plans were invested 18% and 20% in equity securities, 19% and 18% in debt securities, including corporate bonds, 46% and 45% in insurance and investment contracts, 3% and 3% in cash and 14% and 14% in other investments, including foreign government securities, equity securities and mutual funds. This asset allocation is based on the anticipated 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.

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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):

		As of
		December 31, 2018
		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		$	4.6			$	4.6				—				—
Foreign Government/Treasury Securities (1)			17.3				17.3				—				—
Corporate Bonds, Debentures (2)			33.3				—				33.3				—
Equity Securities (3)			32.3				—				32.3				—
Mutual Funds			7.3				—				7.3				—
Investment and Insurance Annuity Contracts (4)			80.1				—				29.5				50.6
		$	174.9			$	21.9			$	102.4			$	50.6

		As of 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

(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.

(4)	Includes certain investments with insurance companies which guarantee a minimum rate of return on the investment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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, 2018 and 2017, respectively for plan assets with fair value measurement using significant unobservable inputs (Level 3) were as follows (in millions):

		Investment and Insurance Contracts
Balance at December 31, 2016		$	47.2
Actual return on plan assets			1.5
Purchase, sales and settlements			(0.3)
Foreign currency impact			6.8
Balance at December 31, 2017		$	55.2
Actual return on plan assets			(0.5)
Purchase, sales and settlements			(2.0)
Foreign currency impact			(2.1)
Balance at December 31, 2018		$	50.6

The expected benefit payments for the Company’s defined benefit plans by year from 2019 through 2023 and the five years thereafter are as follows (in millions):

2019		$	4.7
2020			6.4
2021			10.6
2022			12.0
2023			15.6
Five years thereafter			95.9
Total		$	145.2

The total underfunded status was $115.9 million at December 31, 2018. The Company expects to contribute $15.3 million during 2019 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 $11,000. The Company recognized $19.2 million, $18.4 million and $14.0 million of expense relating to matching contributions in 2018, 2017 and 2016, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Certain foreign subsidiaries have defined contribution plans in which eligible employees participate. The Company recognized compensation expense of $20.5 million, $16.8 million and $8.9 million relating to these plans for the years ended 2018, 2017 and 2016, respectively.

Note 13: 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, 2018 (in millions):

Year Ending December 31,
2019		$	36.8
2020			27.6
2021			21.9
2022			16.8
2023			12.3
Thereafter			45.4
Total (1)		$	160.8

(1)	Excludes $12.3 million of expected sublease income.

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 2018, 2017, and 2016 was $43.6 million, $45.3 million, and $31.1 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, 2018 (in millions):

Year Ending December 31,
2019		$	373.7
2020			38.2
2021			23.0
2022			9.3
2023			8.2
Thereafter			10.9
Total		$	463.3

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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 the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). Motorola and Freescale (acquired by NXP Semiconductors N.V.) 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 undergone remediation to respond to releases of hazardous substances that occurred during the years that this facility was operated by government-owned entities. The remediation projects consisted 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. We have completed remediation on this project, and accordingly, have ceased all related monitoring efforts. 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 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.

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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 Incorporated. 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. (subsequently acquired by Renesas Electronics Corporation) 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 Environmental Protection Agency (“EPA”) that it has been identified as a “potentially responsible party” (“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 and other guarantee instruments to certain parties initiated by either the Company or its subsidiaries, as required for transactions such as, but not limited to, material purchase commitments, agreements to mitigate collection risk, leases, utilities or customs guarantees. As of December 31, 2018, the Company’s Revolving Credit Facility included $15.0 million of availability for the issuance of letters of credit. There were $1.0 million letters of credit outstanding under the Revolving Credit Facility as of December 31, 2018, which reduces the Company’s borrowing capacity. The Company also had outstanding guarantees and letters of credit outside of its Revolving Credit Facility totaling $6.1 million as of December 31, 2018.

As part of obtaining financing in the ordinary course of business, the Company has issued guarantees related to certain of its subsidiaries’ capital lease obligations, equipment financing, lines of credit and real estate mortgages, which totaled $68.6 million as of December 31, 2018.

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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.

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.

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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 agreement and plan of merger relating to the acquisition of Fairchild (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 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.

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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 United States Patent and Trademark Office (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 Power Integrations, Inc. (“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 numerous 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 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 but stayed resolution of the other

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outstanding issues, including damages. In June 2018, the Supreme Court of the United States decided WesternGeco LLC v. ION Geophysical Corp., in which the Court determined that certain extraterritorial conduct may be relevant to some United States patent litigation. On October 4, 2018, the lower court issued an order finding that WesternGeco implicitly overruled the Court of Appeals’ 2013 decision in this case and stated that PI would be allowed to seek recovery of worldwide damages in a future retrial on damages. The lower court also, however, certified its October 4, 2018 order for interlocutory review by the Court of Appeals. The Court of Appeals has accepted the interlocutory appeal, and briefing in that appeal is underway.

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. A second jury trial was held in this matter from November 5-9, 2018, with the jury finding that Fairchild induced infringement of both remaining PI patents and that Fairchild’s infringement was willful. The jury also awarded PI damages in the amount of $24.3 million. In the parties’ post-trial motions, PI is seeking a trebling of the jury verdict in view of the jury’s willfulness finding, pre- and post- judgment interest, and its attorneys’ fees, whereas Fairchild is seeking judgment as a matter of law in its favor, or a new trial, on inducement, willfulness, and damages.

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 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

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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 appealed the infringement and damages judgments, and in July 2018, the U.S. Court of Appeals for the Federal Circuit affirmed the judgment with respect to infringement of both PI patents but vacated the damages judgment because PI had presented legally insufficient evidence to support its damages claim. The appellate court thus remanded the case back to the lower court for a new trial on damages. In August 2018, PI requested that the Federal Circuit rehear, en banc, the issues of the vacated damages award, but this request was denied in September 2018. In December 2018, PI filed a petition for certiorari in the United States Supreme Court for review of the Federal Circuit’s decision, to which the Company responded in January 2019. All claims of the two PI patents found to be infringed by Fairchild 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. A jury trial was held in November 2018 to resolve several outstanding issues prior to appeal in this case. The jury in that trial found that Fairchild induced infringement of the sole PI patent Fairchild had previously been found to infringe and awarded PI damages in the amount of $719,029.10. In the parties’ post-trial motions, PI is seeking pre- and post-judgment interest and a permanent injunction, whereas Fairchild is seeking judgment as a matter of law in its favor, or a new trial, on inducement and damages.

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, which are described below, to the two PI patents asserted against Fairchild. 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 referred to in this subsection as “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

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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 2016, alleging that ON Semi infringes six PI patents, including two of the three PI patents in ON Semi’s declaratory judgment claims from Arizona. PI also moved the Arizona court to dismiss ON Semi’s lawsuit, or in the alternative to transfer the lawsuit to California. 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, in which PI has subsequently asserted a claim for infringement on the last of the three PI patents in ON Semi’s original declaratory judgment claims. In late 2018, the parties received a claim construction order, which included a finding that claims from several of PI’s asserted patents are invalid. Fact discovery is ongoing and will be followed by infringement, validity, and damages expert discovery. The trial is scheduled for December 2019.

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. One of those seven patents was dropped by PI because it is asserted against ON Semi in a separate litigation. Both parties seek money damages and a permanent injunction. In late 2018, the parties received a claim construction order, following which ON Semi was forced to stipulate to non-infringement of two of ON Semi’s original six patents. PI also voluntarily dropped their claims of infringement on two of PI’s patents, leaving both parties with four asserted patents each as of January 2019. Fact discovery is ongoing and will be followed by infringement, validity, and damages expert discovery. The trial is scheduled for February 2020.

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 Taiwanese IP Court has held hearings concerning ON Semi’s claim of infringement against PI for all three patents and is now evaluating PI’s claims concerning the validity of those three patents. A first-instance judgment concerning infringement and validity in this matter is expected by April 2019. In January 2019, ON Semi withdrew its claim for damages under Taiwanese law in order to expedite injunctive relief in the event that relief is granted in a first-instance judgment.

Administrative Challenges to PI’s Patents

In addition to the eight court proceedings described above, there are presently numerous inter partes review administrative proceedings between PI and ON Semi/Fairchild. Each of these administrative proceedings seeks to invalidate certain claims asserted in the various court proceedings. For the two proceedings filed by ON Semi involving claims asserted in 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, and PI filed a notice of appeal for those decisions. The USPTO has also issued Final Written Decisions in seven additional proceedings initiated by ON Semi, all in ON Semi’s favor. PI’s appeals in all but one of those cases are ongoing, and PI failed to appeal one such Final Written Decision. In five of the proceedings initiated by PI, the USPTO has instituted a review of five ON Semi/Fairchild patents that are being asserted against PI. In two of those five proceedings, the USPTO recently found all of the claims challenged by PI to be unpatentable. In one of those two cases, ON Semi has filed an appeal to challenge the unpatentability finding, but elected to forego an appeal in the other case. With regard to a third instituted proceeding initiated by PI, the USPTO found one

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challenged patent claim unpatentable over the prior art and two claims patentable. PI is pursuing an appeal for this third administrative proceeding, but ON Semi decided to forego an appeal with respect to the claim that was found unpatentable. All of the other administrative proceedings between PI and the Company remain pending or were terminated without institution of an administrative trial by the USPTO.

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. Acbel appealed the Court’s ruling and on September 11, 2018, the U.S. Court of Appeals for the First Circuit heard arguments in this matter from Fairchild and Acbel.

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. Such letters may request royalty payments from the Company, that the Company cease and desist using certain intellectual property or other remedies.

Note 14: 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 (in millions):

						Fair Value Hierarchy
Description		As of December 31, 2018				Level 1				Level 2				Level 3
Assets:
Cash, cash equivalents:
Demand and time deposits		$	21.2			$	21.2				—				—
Money market funds			0.2				0.2				—				—

						Fair Value Hierarchy
Description		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

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During the year ended December 31, 2018, the contingent consideration payable relating to the second earn-out for the AXSEM acquisition was reduced to zero due to a revision in the Company’s expectations regarding the likelihood that the earn-out would be achieved. 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.

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) are as follows (in millions):

		As of
		December 31, 2018								December 31, 2017
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Long-term debt, including current portion
Convertible notes (1)		$	1,120.6			$	1,368.5			$	1,080.1			$	1,596.7
Long-term debt (1)			1,615.1				1,585.9				1,833.2				1,845.4

(1) Carrying amount shown is net of debt discounts and debt issuance costs. See Note 9: “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, 2018 and December 31, 2017.

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 6: “Goodwill and Intangible Assets” for a discussion of certain asset impairments.

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As of December 31, 2018 and December 31, 2017, 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 (in millions):

		Year Ended
		December 31, 2018				December 31, 2017				December 31, 2016
Nonrecurring fair value measurements
Impairment of property, plant and equipment held-for-sale or disposal (Level 3)		$	2.4			$	7.9			$	0.5
Goodwill and IPRD (Level 3)			6.8				13.1				2.2
		$	9.2			$	21.0			$	2.7

See Note 6: “Goodwill and Intangible Assets” and Note 7: “Restructuring, Asset Impairments and Other, Net” for additional information with respect to impairment charges.

Cost Method Investments

The Company accounts for investments in companies that it does not control, or have significant influence over, under the cost method, as applicable. As of each of December 31, 2018 and 2017, the Company’s cost method investments had a carrying value of $7.5 million and $12.6 million, respectively.

Note 15: 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 and entering into trades for any currency to intentionally increase the underlying exposure.

The Company primarily hedges existing assets and liabilities associated with transactions currently on its balance sheet, which are undesignated hedges for accounting purposes.

As of December 31, 2018 and 2017, the Company had net outstanding foreign exchange contracts with net notional amounts of $157.3 million and $130.5 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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The following schedule summarizes the Company’s net foreign exchange positions in U.S. dollars (in millions):

		As of December 31,
		2018								2017
		Buy (Sell)				Notional Amount				Buy (Sell)				Notional Amount
Euro		$	13.1			$	13.1			$	(22.9)			$	22.9
Japanese Yen			29.9				29.9				(40.0)				40.0
Philippine Peso			30.1				30.1				26.4				26.4
Chinese Yuan			20.4				20.4				5.3				5.3
Czech Koruna			9.2				9.2				7.6				7.6
Other currencies - Buy			47.1				47.1				18.0				18.0
Other currencies - Sell			(7.5)				7.5				(10.3)				10.3
		$	142.3			$	157.3			$	(15.9)			$	130.5

Amounts receivable or payable under the contracts are included in other current assets or accrued expenses in the accompanying Consolidated Balance Sheets. For the years ended December 31, 2018, 2017 and 2016, realized and unrealized foreign currency transactions totaled a $8.0 million loss, a $6.3 million loss and a $0.7 million gain, respectively. The realized and unrealized foreign currency transactions are included in other income and expenses in the Company’s Consolidated Statements of Operations and Comprehensive Income.

Cash Flow Hedges

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. These contracts effectively hedge some of the future variable LIBO Rate 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 notional amounts of the interest rate swap agreements outstanding as of December 31, 2018 and December 31, 2017 amounted to $1.0 billion and $750.0 million, respectively. The Company performed effectiveness assessments and concluded that there was no ineffectiveness during the year ended December 31, 2018.

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.

The Company did not have outstanding derivatives for its foreign currency exposure designated as cash flow hedges as of December 31, 2018 and 2017.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

See Note 17: “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, 2018.

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 9: “Long-Term Debt” for further details.

Other

At December 31, 2018, 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. The Company is exposed to credit-related losses if counterparties to hedge contracts fail to perform their obligations. As of December 31, 2018, the counterparties to the Company’s hedge contracts are held at financial institutions which the Company believes to be highly rated, and no credit related losses are anticipated.

Note 16: 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,
		2018				2017				2016
United States		$	(181.8)			$	(270.1)			$	(287.0)
Foreign			936.8				817.6				467.6
		$	755.0			$	547.5			$	180.6

The Company’s provision (benefit) for income taxes is as follows (in millions):

		Year ended December 31,
		2018				2017				2016
Current:
Federal		$	(2.0)			$	26.3			$	(0.1)
State and local			(2.2)				0.2				0.1
Foreign			55.3				53.1				34.4
			51.1				79.6				34.4
Deferred:
Federal			99.4				(356.3)				60.8
State and local			—				0.4				—
Foreign			(25.4)				10.8				(99.1)
			74.0				(345.1)				(38.3)
Total provision (benefit)		$	125.1			$	(265.5)			$	(3.9)

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

On December 22, 2017, the U.S. enacted comprehensive tax legislation, (the “Tax Act”). The Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%, and required companies to pay a one-time mandatory repatriation tax on earnings of certain foreign subsidiaries that were previously tax deferred and created 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 allowed 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 had not completed its accounting for the tax effects of the enactment of the Tax Act; however, in certain cases, specifically as follows, the Company had 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 had 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 reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate table.

The Company completed its accounting for the provisions of the Tax Act as of December 22, 2018, which marked the end of the measurement period pursuant to SAB 118. With respect to (i) the effects on its existing deferred tax asset balances, the Company recognized an additional tax expense of $31.8 million related to the Company’s deferred tax liability for undistributed prior years’ earnings of the Company’s foreign subsidiaries and $1.8 million for the impact to deferred taxes related to an increase in the limitation on deductibility of prior years’ executive compensation. With respect to (ii) the tax effects of the one-time mandatory repatriation tax, the Company recognized an additional expense of $1.5 million. The Company has concluded on the policy to record Global Intangible Low Tax Income (“GILTI”) as a period cost. The Company has also concluded on the policy of tax law ordering for reflecting the realization of the net operating losses related to GILTI as a permanent adjustment.

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,
		2018				2017				2016
U.S. federal statutory rate			21.0%				35.0%				35.0%
Increase (decrease) resulting from:
State and local taxes, net of federal tax benefit			(1.0)				2.2				(3.6)
Impact of U.S. Tax Reform and related effects (1)			4.7				(82.2)				—
Impact of foreign operations			(1.2)				(1.5)				(8.1)
Reversal of prior years’ indefinite reinvestment assertion			—				—				172.1
Impact of U.S. tax method changes (2)			(6.4)				—				—
Change in valuation allowance and related effects (3) (4)			0.6				0.4				(190.7)
Non-deductible acquisition costs			—				—				1.9
Non-deductible share-based compensation costs			(0.5)				(1.6)				0.7
U.S. federal R&D credit			(1.1)				(1.5)				(10.1)
Other			0.5				0.7				0.6
Total			16.6%				(48.5)%				(2.2)%

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(1)

For the year ended December 31, 2018, this primarily includes expense of $31.8 million, or 4.2%, related to the recognition of the Company’s deferred tax liability for undistributed prior years’ earnings of the Company’s foreign subsidiaries, $1.8 million, or 0.3% related to the limitation on deductibility of prior years’ executive compensation, and $1.5 million, or 0.2% related to the impact of the mandatory repatriation tax. These adjustments were made pursuant to SAB 118. For the year ended December 31, 2017, this included 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 were offset by the expense for the mandatory repatriation tax, net of unrecognized tax benefits, 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.

(2)	For the year ended December 31, 2018, this includes a one-time benefit of $48.2 million, or 6.4%, related to U.S. tax method changes made during the year that impacted the Company’s GILTI inclusion.

(3)

For the year ended December 31, 2018, this includes an expense of $135.2 million, or 17.9%, primarily related to the expiration of Japan net operating losses, netted with the offsetting benefit of $135.2 million, or 17.9%, primarily for the write-off of the valuation allowance for those same Japan net operating losses. See Note 19: “Supplementary Financial Information—Selected Quarterly Financial Data (Unaudited).”

(4)	For the year ended December 31, 2017, the Company 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 6.0%, in the line “Impact of U.S. Tax Reform and related effects”

The Company’s effective tax rate for 2018 was 16.6%, which differs from the U.S. federal statutory income tax rate of 21% primarily due to a one-time benefit of U.S. tax method changes made during the year that impacted the Company’s GILTI inclusion. 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.

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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) are as follows (in millions):

		As of December 31,
		2018				2017
Net operating loss and tax credit carryforwards		$	584.9			$	738.4
Tax-deductible goodwill and amortizable intangibles			(29.4)				(29.1)
Reserves and accruals			57.4				49.8
Property, plant and equipment			(63.5)				(42.8)
Inventories			20.2				24.5
Undistributed earnings of foreign subsidiaries			(48.7)				(32.5)
Share-based compensation			7.7				9.2
Pension			24.3				21.1
Debt financing costs			(8.5)				(9.9)
Other			14.5				17.6
Deferred tax assets and liabilities before valuation allowance			558.9				746.3
Valuation allowance			(347.5)				(462.3)
Net deferred tax asset		$	211.4			$	284.0

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, 2018 and 2017, the Company had approximately $768.9 million and $1,198.6 million, respectively, of federal NOL carryforwards, before reduction for unrecognized tax benefits, which are subject to annual limitations prescribed in Section 382 of the Internal Revenue Code. The decrease is due to NOL utilization in 2018. If not utilized, a portion of the NOLs will expire in varying amounts from 2024 to 2036.

As of December 31, 2018 and 2017, the Company had approximately $83.7 million and $46.0 million, respectively, of federal credit carryforwards, before consideration of valuation allowance or reduction for unrecognized tax benefits, which are subject to annual limitations prescribed in Section 383 of the Internal Revenue Code. The increase is primarily due to research and development credits and foreign tax credits generated during 2018. If not utilized, the credits will expire in varying amounts from 2028 to 2038.

As of December 31, 2018 and 2017, the Company had approximately $801.0 million and $790.3 million, respectively, of state NOL carryforwards, before consideration of valuation allowance or reduction for unrecognized tax benefits. The increase is due to NOL generated during 2018 partially offset by expiration. If not utilized, a portion of the NOLs will expire in varying amounts starting in 2019. Certain states have adopted the federal rule allowing unlimited NOL carryover for NOLs generated in tax years beginning after December 31, 2017. Therefore, a portion of the state NOLs generated during 2018 carry forward indefinitely. As of December 31, 2018 and 2017, the Company had $115.8 million and $107.2 million, respectively, of state credit carryforwards before consideration of valuation allowance or reduction for unrecognized tax benefits. If not utilized, a portion of the credits will begin to expire in varying amounts starting in 2019.

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

As of December 31, 2018 and 2017, the Company had approximately $734.4 million and $1,103.0 million, respectively, of foreign NOL carryforwards, before consideration of valuation allowance. The decrease is primarily due to the expiration of $369.2 million of NOL carryforwards in Japan. If not utilized, a portion of the NOLs will begin to expire in varying amounts starting in 2019. A significant portion of these NOLs will expire by 2025. As of December 31, 2018 and 2017, the Company had $68.8 million and $65.3 million, respectively, of foreign credit carryforwards before consideration of valuation allowance. If not utilized, the majority of these credits will expire by 2026.

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 $172.6 million, which expire in varying amounts from 2019 to 2024.

In addition to the valuation allowance mentioned above on Japan NOLs, as of December 31, 2018 and 2017, 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.

At December 31, 2018, the Company is not indefinitely reinvested with respect to the earnings of its foreign subsidiaries and has therefore accrued withholding taxes that would be owed upon future distributions of such earnings. In 2017, substantially all of the Company’s foreign earnings were also not indefinitely reinvested. After the adjustments made during 2018 pursuant to SAB118, the Company was not indefinitely reinvested with respect to any of its foreign earnings from prior years.

The Company maintains liabilities for unrecognized tax benefits. 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 is as follows (in millions):

		2018				2017				2016
Balance at beginning of year		$	114.8			$	136.7			$	33.5
Acquired balances			—				—				86.9
Additions for tax benefits related to the current year			7.4				23.6				4.6
Additions for tax benefits of prior years			2.8				4.7				13.7
Reductions for tax benefits of prior years			(1.9)				(1.6)				(0.4)
Lapse of statute			(10.9)				(16.3)				(1.6)
Settlements			—				(4.9)				—
Change in rate due to U.S. Tax Reform			—				(27.4)				—
Balance at end of year		$	112.2			$	114.8			$	136.7

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 unrecognized tax benefits related to the outcome of the prior year study was also recorded.

Included in the December 31, 2018 balance of $112.2 million is $82.6 million related to unrecognized tax benefits that, if recognized, would impact the annual effective tax rate. Also included in the balance of unrecognized tax benefits as of December 31, 2018 is $29.6 million of benefit that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes. 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 benefits will be reduced by $3.3 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 $0.8 million of tax benefit for interest and penalties during the year ended December 31, 2018, and recognized approximately $1.5 million and $0.5 million of tax expenses for interest and penalties during the years ended December 31, 2017 and 2016, respectively. The Company had approximately $5.1 million, $5.9 million, and $4.4 million of accrued interest and penalties at December 31, 2018, 2017, and 2016, respectively.

Tax years prior to 2015 are generally not subject to examination by the 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 2014. 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 2008. The Company is currently under audit in the following significant jurisdictions: China, the Czech Republic, Japan, Malaysia, Mauritius, Philippines and Singapore.

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Note 17: Changes in Accumulated Other Comprehensive Loss

Amounts comprising the Company’s accumulated other comprehensive loss and reclassifications are as follows (in millions):

		Foreign Currency Translation Adjustments				Effects of Cash Flow Hedges				Total
Balance as of December 31, 2016		$	(50.2)				—			$	(50.2)
Other comprehensive income prior to reclassifications			7.0				2.2				9.2
Amounts reclassified from accumulated other comprehensive loss			—				0.4				0.4
Net current period other comprehensive income (1)			7.0				2.6				9.6
Balance as of December 31, 2017		$	(43.2)			$	2.6			$	(40.6)
Other comprehensive income prior to reclassifications			0.7				(1.3)				(0.6)
Amounts reclassified from accumulated other comprehensive loss			—				3.3				3.3
Net current period other comprehensive income (1)			0.7				2.0				2.7
Balance as of December 31, 2018		$	(42.5)			$	4.6			$	(37.9)

(1)	Effects of cash flow hedges are net of tax of $0.5 million and $0.7 million of tax expense for the years ended December 31, 2018 and December 31, 2017, respectively.

Amounts which were reclassified from accumulated other comprehensive loss to the Company’s Consolidated Statements of Operations and Comprehensive Income were as follows (net of tax of $0.8 million and $0.2 million in 2018 and 2017, respectively, in millions):

		Amounts Reclassified from Accumulated Other Comprehensive Loss—Year Ended
		December 31, 2018				December 31, 2017				Statement of Operations and Comprehensive Income Line Item
Interest rate swaps		$	(3.3)			$	(0.4)			Other income and expense
Total reclassifications		$	(3.3)			$	(0.4)

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ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Note 18: Supplemental Disclosures

Supplemental Disclosure of Cash Flow Information

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

		Year ended December 31,
		2018				2017				2016
Non-cash financing activities:
Debt issuance costs paid directly from escrow accounts		$	—			$	—			$	46.0
Capital expenditures in accounts payable and other liabilities			233.9				165.6				105.9
Debt assumed through purchase of equity interest and assets			50.6				—				—
Cash (received) paid for:
Interest income		$	(6.1)			$	(3.0)			$	(4.5)
Interest expense			80.0				92.1				106.7
Income taxes			53.2				67.8				27.3

The Company adopted ASU 2016-18 on a retrospective basis during the quarter ended March 30, 2018. The following is a reconciliation of the captions in the Consolidated Balance Sheets to the Consolidated Statements of Cash Flows (in millions):

		As of December 31,
		2018				2017				2016
Consolidated Balance Sheets:
Cash and cash equivalents		$	1,069.6			$	949.2			$	1,028.1
Restricted cash (included in other current assets)			17.5				17.4				17.7
Cash, cash equivalents and restricted cash in Consolidated Statements of Cash Flows		$	1,087.1			$	966.6			$	1,045.8

The restricted cash balance relates to the consideration held in escrow for the Aptina acquisition that occurred in 2014 to be released upon satisfaction of certain outstanding items contained in the merger agreement.

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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 is as follows (in millions, except per share data):

		Quarters ended in 2018
		March 30				June 29				September 28				December 31
Revenue		$	1,377.6			$	1,455.9			$	1,541.7			$	1,503.1
Gross Profit (exclusive of the amortization of acquisition-related intangible assets)			517.4				555.0				596.6				569.7
Net income attributable to ON Semiconductor Corporation			139.6				155.3				166.9				165.6
Diluted net income per common share attributable to ON Semiconductor Corporation			0.31				0.35				0.38				0.39
		Quarters ended in 2017
		March 31				June 30				September 29				December 31
Revenue		$	1,436.7			$	1,338.0			$	1,390.9			$	1,377.5
Gross Profit (exclusive of the amortization of acquisition-related intangible assets)			503.1				492.0				524.0				516.5
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

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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 deferred tax assets
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
Year ended December 31, 2018			462.3				4.6				15.8	(2)			(135.2	)(3)			347.5

(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) Primarily represents the effects of cumulative translation adjustments.

(3) Primarily relates to the expiration of Japan net operating losses. See Note 16: “Income Taxes”.