filings.toolsItem 16. . Form 10-K Summary
279K characters. Original on sec.gov · Markdown
Item 16. . Form 10-K Summary
None.
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 19, 2020 | ||||||||
| 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 Keith D. Jackson | President, Chief Executive Officer and Director (Principal | February 19, 2020 | ||||||
| Executive Officer) | ||||||||
| /s/ BERNARD GUTMANN Bernard Gutmann | Executive Vice President, Chief Financial Officer and Treasurer | February 19, 2020 | ||||||
| (Principal Financial Officer and Principal Accounting Officer) | ||||||||
| * | Chair of the Board of Directors | February 19, 2020 | ||||||
| Alan Campbell | ||||||||
| * | Director | February 19, 2020 | ||||||
| Atsushi Abe | ||||||||
| * | Director | February 19, 2020 | ||||||
| Curtis J. Crawford | ||||||||
| * | Director | February 19, 2020 | ||||||
| Gilles Delfassy | ||||||||
| * | Director | February 19, 2020 | ||||||
| Emmanuel T. Hernandez | ||||||||
| * | Director | February 19, 2020 | ||||||
| Paul A. Mascarenas | ||||||||
| * | Director | February 19, 2020 | ||||||
| Daryl A. Ostrander | ||||||||
| * | Director | February 19, 2020 | ||||||
| Teresa M. Ressel | ||||||||
| * | Director | February 19, 2020 | ||||||
| Christine Y. Yan | ||||||||
| *By: /s/ BERNARD GUTMANN Bernard Gutmann | Attorney in Fact | February 19, 2020 |
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 (the “Company”) as of December 31, 2019 and 2018, 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, 2019, including the related notes and financial statement schedule listed in the index 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 4 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures 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.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Quantenna from its assessment of internal control over financial reporting as of December 31, 2019 because it was acquired by the Company in a purchase business combination during 2019. We have also excluded Quantenna from our audit of internal control over financial reporting. Quantenna is a wholly-owned subsidiary whose total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 1% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019.
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Ship and Credit Reserves
As described in Notes 2 and 8 to the consolidated financial statements, the Company’s ship and credit reserves are $178.7 million as of December 31, 2019. Sales returns and allowances, which include ship and credit reserves for distributors, are estimated by management based on historical claims data and expected future claims. Provisions for ship and credit claims are provided for in the same period the related revenue is recognized, and are netted against revenue.
The principal considerations for our determination that performing procedures relating to ship and credit reserves is a critical audit matter are there was significant judgment by management to estimate the reserves, which in turn led to significant auditor judgment, subjectivity and effort in performing procedures to evaluate management’s expected future claims assumptions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the ship and credit reserves. These procedures also included, among others, testing management’s process for determining the estimate, evaluating the appropriateness of the approach used by management in developing the estimate and the reasonableness of the expected future claims assumptions, and testing the completeness and accuracy of historical claims data. Evaluating the assumptions related to the expected future claims involved evaluating whether the assumptions used were reasonable considering the past claim activity.
Valuation of Inventories
As described in Notes 2 and 8 to the consolidated financial statements, the Company’s inventory balance of $1,232.4 million as of December 31, 2019, is stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or net realizable value. Management writes down excess and obsolete inventories based upon a regular analysis of inventory on hand compared to historical and projected end-user demand.
The principal considerations for our determination that performing procedures relating to the valuation of inventories is a critical audit matter are there was significant judgment by management in developing the write down for excess and obsolete inventories. This in turn led to significant auditor judgment, subjectivity and effort in performing procedures to evaluate the reasonableness of management’s analysis, including the inputs utilized and the significant assumptions related to projected end-user demand employed within the analysis.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of inventories. These procedures also included, among others, testing management’s process for developing the write down for excess and obsolete inventories, evaluating the appropriateness of the analysis and the reasonableness of the significant assumptions used by management in developing the write down for excess and obsolete inventories, including projected end-user demand. Evaluating the reasonableness of the assumptions related to projected end-user demand involved considering the performance of product sales and whether they were consistent with evidence obtained in other areas of the audit.
Acquisition of Quantenna – Valuation of Developed Technology
As described in Notes 2 and 5 to the consolidated financial statements, the Company acquired 100% of the outstanding shares of Quantenna for $1,039.3 million on June 19, 2019, which resulted in $58.3 million of developed technology intangible assets being recorded. Management determined the value assigned to developed technology using the income approach, which is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life. Determining the fair value is judgmental in nature and requires the use of significant estimates and assumptions, including the discount rate, revenue growth rates, projected gross margins, and estimated research and development expenses.
The principal considerations for our determination that performing procedures relating to the valuation of developed technology in connection with the acquisition of Quantenna is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the developed technology acquired. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s cash flow projections and significant assumptions, including the discount rate, revenue growth rates, projected gross margins, and estimated research and development expenses. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the acquired developed technology, as well as controls over the development of the significant assumptions, including the discount rate, revenue growth rates, projected gross margins, and estimated research and development expenses. These procedures also included, among others, reading the purchase agreement and testing management’s process for estimating the fair value of acquired developed technology. Testing management’s process included evaluating the appropriateness of the income approach; testing the completeness and accuracy of the underlying data used in the income approach; and evaluating the reasonableness of significant assumptions used by management, including the discount rate, revenue growth rates, projected gross margins, and estimated research and development expenses. Evaluating the reasonableness of management’s significant assumptions related to the discount rate, revenue growth rates, projected gross margins, and estimated research and development expenses involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the acquired business, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s income approach and certain significant assumptions, including the discount rate.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
February 19, 2020
We have served as the Company’s auditor since 1999.
ON SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
| December 31, 2019 | December 31, 2018 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 894.2 | $ | 1,069.6 | |||||||
| Receivables, net | 705.0 | 686.0 | |||||||||
| Inventories | 1,232.4 | 1,225.2 | |||||||||
| Other current assets | 188.4 | 187.0 | |||||||||
| Total current assets | 3,020.0 | 3,167.8 | |||||||||
| Property, plant and equipment, net | 2,591.6 | 2,549.6 | |||||||||
| Goodwill | 1,659.2 | 932.5 | |||||||||
| Intangible assets, net | 590.5 | 566.4 | |||||||||
| Deferred tax assets | 307.8 | 266.2 | |||||||||
| Other assets | 256.4 | 105.1 | |||||||||
| Total assets | $ | 8,425.5 | $ | 7,587.6 | |||||||
| Liabilities, Non-Controlling Interest and Stockholders’ Equity | |||||||||||
| Accounts payable | $ | 543.6 | $ | 671.7 | |||||||
| Accrued expenses and other current liabilities | 538.8 | 659.1 | |||||||||
| Current portion of long-term debt | 736.0 | 138.5 | |||||||||
| Total current liabilities | 1,818.4 | 1,469.3 | |||||||||
| Long-term debt | 2,876.5 | 2,627.6 | |||||||||
| Deferred tax liabilities | 60.2 | 54.8 | |||||||||
| Other long-term liabilities | 346.3 | 241.8 | |||||||||
| Total liabilities | 5,101.4 | 4,393.5 | |||||||||
| Commitments and contingencies (Note 13) | |||||||||||
| ON Semiconductor Corporation stockholders’ equity: | |||||||||||
| Common stock ($0.01 par value, 1,250,000,000 shares authorized, 565,562,607 and 558,701,620 shares issued, 411,312,664 and 413,834,227 shares outstanding, respectively) | 5.7 | 5.6 | |||||||||
| Additional paid-in capital | 3,809.5 | 3,702.3 | |||||||||
| Accumulated other comprehensive loss | (54.3) | (37.9) | |||||||||
| Accumulated earnings | 1,191.3 | 979.6 | |||||||||
| Less: Treasury stock, at cost; 154,249,943 and 144,867,393 shares, respectively | (1,650.5) | (1,478.0) | |||||||||
| Total ON Semiconductor Corporation stockholders’ equity | 3,301.7 | 3,171.6 | |||||||||
| Non-controlling interest | 22.4 | 22.5 | |||||||||
| Total stockholders' equity | 3,324.1 | 3,194.1 | |||||||||
| Total liabilities and stockholders' equity | $ | 8,425.5 | $ | 7,587.6 |
See accompanying notes to consolidated financial statements
ON SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in millions, except per share data)
| Year ended December 31, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Revenue | $ | 5,517.9 | $ | 5,878.3 | $ | 5,543.1 | ||||||||||||||||||||||||||
| Cost of revenue (exclusive of amortization shown below) | 3,544.3 | 3,639.6 | 3,507.5 | |||||||||||||||||||||||||||||
| Gross profit | 1,973.6 | 2,238.7 | 2,035.6 | |||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Research and development | 640.9 | 650.7 | 594.7 | |||||||||||||||||||||||||||||
| Selling and marketing | 301.0 | 324.7 | 316.6 | |||||||||||||||||||||||||||||
| General and administrative | 284.0 | 293.3 | 285.0 | |||||||||||||||||||||||||||||
| Litigation settlement (Note 13) | 169.5 | — | — | |||||||||||||||||||||||||||||
| Amortization of acquisition-related intangible assets | 115.2 | 111.7 | 123.8 | |||||||||||||||||||||||||||||
| Restructuring, asset impairments and other charges, net | 28.7 | 4.3 | 20.8 | |||||||||||||||||||||||||||||
| Goodwill and intangible asset impairment | 1.6 | 6.8 | 13.1 | |||||||||||||||||||||||||||||
| Total operating expenses | 1,540.9 | 1,391.5 | 1,354.0 | |||||||||||||||||||||||||||||
| Operating income | 432.7 | 847.2 | 681.6 | |||||||||||||||||||||||||||||
| Other income (expense), net: | ||||||||||||||||||||||||||||||||
| Interest expense | (148.3) | (128.2) | (141.2) | |||||||||||||||||||||||||||||
| Interest income | 10.2 | 6.1 | 3.0 | |||||||||||||||||||||||||||||
| Loss on debt refinancing and prepayment | (6.2) | (4.6) | (47.2) | |||||||||||||||||||||||||||||
| Gain on divestiture of business | — | 5.0 | 12.5 | |||||||||||||||||||||||||||||
| Licensing income | — | 36.6 | 47.6 | |||||||||||||||||||||||||||||
| Other expense | (11.8) | (7.1) | (8.8) | |||||||||||||||||||||||||||||
| Other income (expense), net | (156.1) | (92.2) | (134.1) | |||||||||||||||||||||||||||||
| Income before income taxes | 276.6 | 755.0 | 547.5 | |||||||||||||||||||||||||||||
| Income tax (provision) benefit | (62.7) | (125.1) | 265.5 | |||||||||||||||||||||||||||||
| Net income | 213.9 | 629.9 | 813.0 | |||||||||||||||||||||||||||||
| Less: Net income attributable to non-controlling interest | (2.2) | (2.5) | (2.3) | |||||||||||||||||||||||||||||
| Net income attributable to ON Semiconductor Corporation | $ | 211.7 | $ | 627.4 | $ | 810.7 | ||||||||||||||||||||||||||
| Comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||||
| Net income | $ | 213.9 | $ | 629.9 | $ | 813.0 | ||||||||||||||||||||||||||
| Foreign currency translation adjustments | 0.1 | 0.7 | 7.0 | |||||||||||||||||||||||||||||
| Effects of cash flow hedges | (16.5) | 2.0 | 2.6 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (16.4) | 2.7 | 9.6 | |||||||||||||||||||||||||||||
| Comprehensive income | 197.5 | 632.6 | 822.6 | |||||||||||||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | (2.2) | (2.5) | (2.3) | |||||||||||||||||||||||||||||
| Comprehensive income attributable to ON Semiconductor Corporation | $ | 195.3 | $ | 630.1 | $ | 820.3 | ||||||||||||||||||||||||||
| Net income per common share attributable to ON Semiconductor Corporation: | ||||||||||||||||||||||||||||||||
| Basic | $ | 0.52 | $ | 1.48 | $ | 1.92 | ||||||||||||||||||||||||||
| Diluted | $ | 0.51 | $ | 1.44 | $ | 1.89 | ||||||||||||||||||||||||||
| Weighted-average common shares outstanding: | ||||||||||||||||||||||||||||||||
| Basic | 410.9 | 423.8 | 421.9 | |||||||||||||||||||||||||||||
| Diluted | 416.0 | 435.9 | 428.3 |
See accompanying notes to consolidated financial statements
ON SEMICONDUCTOR CORPORATION
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, 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 | ||||||||||||||||||||||||||
| Stock option exercises | 266,363 | — | 1.7 | — | — | — | — | — | 1.7 | ||||||||||||||||||||||||||
| Shares issued pursuant to the ESPP | 1,666,559 | — | 26.2 | — | — | — | — | — | 26.2 | ||||||||||||||||||||||||||
| RSUs and stock grant awards issued | 4,928,065 | 0.1 | (0.1) | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Shares withheld for employee taxes on RSUs | — | — | — | — | — | (1,620,543) | (33.5) | — | (33.5) | ||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 79.4 | — | — | — | — | — | 79.4 | ||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (7,762,007) | (139.0) | — | (139.0) | ||||||||||||||||||||||||||
| Dividend to non-controlling shareholder | — | — | — | — | — | — | — | (2.3) | (2.3) | ||||||||||||||||||||||||||
| Comprehensive income (loss) | — | — | — | (16.4) | 211.7 | — | — | 2.2 | 197.5 | ||||||||||||||||||||||||||
| Balance at December 31, 2019 | 565,562,607 | $ | 5.7 | $ | 3,809.5 | $ | (54.3) | $ | 1,191.3 | (154,249,943) | $ | (1,650.5) | $ | 22.4 | $ | 3,324.1 |
See accompanying notes to consolidated financial statements.
ON SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| Year ended December 31, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||||||||
| Net income | $ | 213.9 | $ | 629.9 | $ | 813.0 | |||||||||||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities and other adjustments: | |||||||||||||||||||||||||||||
| Depreciation and amortization | 593.1 | 508.7 | 481.9 | ||||||||||||||||||||||||||
| Loss on sale or disposal of fixed assets | 1.9 | 2.4 | 3.9 | ||||||||||||||||||||||||||
| Gain on divestiture of business | — | (5.0) | (12.5) | ||||||||||||||||||||||||||
| Loss on debt refinancing and prepayment | 6.2 | 4.6 | 47.2 | ||||||||||||||||||||||||||
| Amortization of debt discount and issuance costs | 13.0 | 13.2 | 16.0 | ||||||||||||||||||||||||||
| Payments for term debt modification | — | (1.1) | (3.8) | ||||||||||||||||||||||||||
| Share-based compensation expense | 79.4 | 78.3 | 69.8 | ||||||||||||||||||||||||||
| Non-cash interest on convertible notes | 37.8 | 36.1 | 30.8 | ||||||||||||||||||||||||||
| Non-cash asset impairment charges | 3.4 | 2.4 | 7.9 | ||||||||||||||||||||||||||
| Goodwill and intangible asset impairment charges | 1.6 | 6.8 | 13.1 | ||||||||||||||||||||||||||
| Change in deferred taxes | 11.2 | 69.2 | (348.3) | ||||||||||||||||||||||||||
| Other | (0.1) | (1.6) | 2.2 | ||||||||||||||||||||||||||
| Changes in assets and liabilities (exclusive of the impact of acquisitions and divestitures): | |||||||||||||||||||||||||||||
| Receivables | 4.7 | (2.7) | (57.9) | ||||||||||||||||||||||||||
| Inventories | 34.6 | (129.5) | (59.9) | ||||||||||||||||||||||||||
| Other assets | (34.6) | (37.4) | (86.0) | ||||||||||||||||||||||||||
| Accounts payable | (79.9) | 44.8 | 51.8 | ||||||||||||||||||||||||||
| Accrued expenses and other current liabilities | (201.7) | 56.5 | 211.1 | ||||||||||||||||||||||||||
| Deferred income on sales to distributors | — | — | (109.8) | ||||||||||||||||||||||||||
| Other long-term liabilities | 10.2 | (1.4) | 23.7 | ||||||||||||||||||||||||||
| Net cash provided by operating activities | 694.7 | 1,274.2 | 1,094.2 | ||||||||||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||||||||
| Purchase of property, plant and equipment | (534.6) | (514.8) | (387.5) | ||||||||||||||||||||||||||
| Proceeds from sales of property, plant and equipment | 1.9 | 36.5 | 14.3 | ||||||||||||||||||||||||||
| Deposits utilized (made) for purchases of property, plant and equipment | 4.6 | 4.1 | (8.2) | ||||||||||||||||||||||||||
| Purchase of business, net of cash acquired | (888.0) | (70.9) | (0.8) | ||||||||||||||||||||||||||
| Purchase of equity interest and assets, net of cash acquired | — | (24.6) | — | ||||||||||||||||||||||||||
| Purchase of license and deposit made for manufacturing facility | (100.0) | — | — | ||||||||||||||||||||||||||
| Proceeds from divestiture of business and release of escrow | 5.2 | 8.4 | 20.0 | ||||||||||||||||||||||||||
| Proceeds from repayment of note receivable | — | 10.2 | — | ||||||||||||||||||||||||||
| Other | — | 2.2 | (2.6) | ||||||||||||||||||||||||||
| Net cash used in investing activities | (1,510.9) | (548.9) | (364.8) | ||||||||||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||||||||
| Proceeds for the issuance of common stock under the ESPP | 26.2 | 25.0 | 23.6 | ||||||||||||||||||||||||||
| Proceeds from exercise of stock options | 1.7 | 5.7 | 18.0 | ||||||||||||||||||||||||||
| Payments of tax withholding for restricted shares | (33.5) | (31.6) | (28.1) | ||||||||||||||||||||||||||
| Repurchase of common stock | (139.0) | (315.3) | (25.0) | ||||||||||||||||||||||||||
| Borrowings under debt agreements | 1,404.8 | 15.3 | 1,106.2 | ||||||||||||||||||||||||||
| Payment of debt issuance and other financing costs | (24.0) | — | — | ||||||||||||||||||||||||||
| Repayment of long-term debt | (594.4) | (298.4) | (1,831.4) | ||||||||||||||||||||||||||
| Release of escrow related to prior acquisition | (10.4) | — | — | ||||||||||||||||||||||||||
| Payment of finance lease obligations | (0.8) | (3.6) | (8.9) | ||||||||||||||||||||||||||
| Purchase of convertible note hedges | — | — | (144.7) | ||||||||||||||||||||||||||
| Proceeds from issuance of warrants | — | — | 85.2 | ||||||||||||||||||||||||||
| Payment of contingent consideration | — | — | (3.9) | ||||||||||||||||||||||||||
| Acquisition related payments | (5.2) | — | — | ||||||||||||||||||||||||||
| Dividend to non-controlling shareholder | (2.3) | (2.2) | (1.9) | ||||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 623.1 | (605.1) | (810.9) | ||||||||||||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 0.2 | 0.3 | 2.3 | ||||||||||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | (192.9) | 120.5 | (79.2) | ||||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash, beginning of period (Note 18) | 1,087.1 | 966.6 | 1,045.8 | ||||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash, end of period (Note 18) | 894.2 | 1,087.1 | 966.6 |
See accompanying notes to consolidated financial statements
ON SEMICONDUCTOR CORPORATION
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, 2019, the Company was organized into three operating segments, which also represent its three reportable segments: PSG**,** ASG and ISG. Additional information about the Company's operating and reportable segments is included in Note 3: ''Revenue and Segment Information''.
Unless otherwise noted, all dollar amounts are in millions, except per share amounts.
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 affiliates where the Company does not exert a controlling financial interest are not consolidated. All material intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of 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) future payouts for customer incentives and amounts subject to allowances, returns and warranties; (ii) measurement of valuation allowances relating to inventories; (iii) assumptions used in business combinations; (iv) fair values of share-based compensation; and (v) measurement of valuation allowances against deferred tax assets and evaluations of unrecognized tax benefits. 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. 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. The determination of projected end-user demand requires the use of estimates and assumptions related to projected unit sales for each product. 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
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
have previously been written down, such sales have historically been consistently insignificant and the related impact on the Company's gross profit has also been insignificant.
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 value 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. Management records the acquired assets and liabilities at fair value. If the income approach is used, the fair value determination 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 market transactions or offerings for economically comparable assets available as of the valuation date. Determining the fair value of acquired technology assets is judgmental in nature and requires the use of significant estimates and assumptions, including the discount rate, revenue growth rates, projected gross margins, and estimated research and development expenses.
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. 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 by comparing the fair value of a reporting unit with its carrying value, including goodwill. 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. The Company can bypass the qualitative assessment for any period and proceed directly to the quantitative impairment test.
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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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. 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.
Leases
The Company determines if an arrangement is a lease at its inception. Operating lease arrangements are comprised primarily of real estate and equipment agreements for which the right-of-use (“ROU”) assets are included in other assets and the corresponding lease liabilities, depending on their maturity, are included in accrued expenses and other current liabilities or other long-term liabilities in the Consolidated Balance Sheet.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The lease term includes options to extend the lease when it is reasonably certain that the option will be exercised. Leases with a term of 12 months or less are not recorded on the Consolidated Balance Sheet.
The Company uses its estimated incremental borrowing rate in determining the present value of lease payments considering the term of the lease, which is derived from information available at the lease commencement date, giving consideration to publicly available data for instruments with similar characteristics. The Company accounts for the lease and non-lease components as a single lease component.
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.
Contingencies
The Company is involved in a variety of legal matters, IP 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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
Revenue Recognition
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, as the performance obligation. For product development agreements, the Company has identified the completion of a service defined in the agreement as 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.
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 manufacturing 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.
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 ten 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. Sales returns and allowances, which include ship and credit reserves for distributors, are estimated based on historical claims data and expected future claims. 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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company records freight and handling costs associated with outbound freight after control over a product has transferred to a customer as a fulfillment cost and includes 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).
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.
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.
Some of the Company's Japanese subsidiaries utilize Japanese Yen as their functional currency. The assets and liabilities of these subsidiaries are translated at current exchange rates, while 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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 that vest based on service, performance and market conditions.
Defined Benefit Pension Plans
The Company maintains defined benefit pension plans covering certain of its foreign employees. Net periodic pension costs and pension obligations are determined based on 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. The service cost component of the net periodic pension 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.
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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 3: Revenue and Segment Information
Revenue recognized for sales agreements amounted to $5,492.0 million and $5,849.0 million for the years ended December 31, 2019 and 2018, respectively. Revenue recognized for product development agreements amounted to $25.9 million and $29.3 million for the years ended December 31, 2019 and 2018, respectively.
The Company is organized into three operating and reportable segments consisting of PSG, ASG and ISG. 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 allocate income taxes or interest expense to its operating segments as the operating segments are principally evaluated on gross profit. Additionally, restructuring, asset impairments and other charges, 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 reportable segments, the Company also operates global operations, sales and marketing, information systems and finance and administration groups. 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 reportable segments are as follows (in millions):
| PSG | ASG | ISG | Total | |||||||||||||||||||||||
| For year ended December 31, 2019: | ||||||||||||||||||||||||||
| Revenue from external customers | $ | 2,788.3 | $ | 1,972.3 | $ | 757.3 | $ | 5,517.9 | ||||||||||||||||||
| Segment gross profit | 976.0 | 794.8 | 275.4 | 2,046.2 | ||||||||||||||||||||||
| 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 | ||||||||||||||||||||||
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, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Gross profit for reportable segments | $ | 2,046.2 | $ | 2,305.5 | $ | 2,080.2 | |||||||||||||||||||||||
| Less: unallocated manufacturing costs | (72.6) | (66.8) | (44.6) | ||||||||||||||||||||||||||
| Consolidated gross profit | $ | 1,973.6 | $ | 2,238.7 | $ | 2,035.6 |
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Revenue for the Company's operating and reportable segments disaggregated into geographic locations based on sales billed from the respective country and sales channels are as follows (in millions):
| Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||
| PSG | ASG | ISG | Total | ||||||||||||||||||||||||||||||||||||||
| Geographic Location | |||||||||||||||||||||||||||||||||||||||||
| Singapore | $ | 864.7 | $ | 679.7 | $ | 168.7 | $ | 1,713.1 | |||||||||||||||||||||||||||||||||
| Hong Kong | 843.5 | 436.8 | 137.0 | 1,417.3 | |||||||||||||||||||||||||||||||||||||
| United Kingdom | 467.1 | 303.5 | 151.0 | 921.6 | |||||||||||||||||||||||||||||||||||||
| United States | 356.3 | 332.6 | 121.4 | 810.3 | |||||||||||||||||||||||||||||||||||||
| Other | 256.7 | 219.7 | 179.2 | 655.6 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 2,788.3 | $ | 1,972.3 | $ | 757.3 | $ | 5,517.9 | |||||||||||||||||||||||||||||||||
| Sales Channel | |||||||||||||||||||||||||||||||||||||||||
| Distributors | $ | 1,740.6 | $ | 971.5 | $ | 461.0 | $ | 3,173.1 | |||||||||||||||||||||||||||||||||
| OEM/ODM | 857.5 | 860.3 | 258.8 | 1,976.6 | |||||||||||||||||||||||||||||||||||||
| Electronic Manufacturing Service Providers | 190.2 | 140.5 | 37.5 | 368.2 | |||||||||||||||||||||||||||||||||||||
| Total | $ | 2,788.3 | $ | 1,972.3 | $ | 757.3 | $ | 5,517.9 |
| Year Ended December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||
| PSG | ASG | ISG | 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 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 reportable segments. Rather, assets used in operations are generally shared across the Company’s operating and reportable segments.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Property, plant and equipment, net by geographic location, are summarized as follows (in millions):
| As of December 31, | |||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||
| United States | $ | 616.7 | $ | 616.9 | |||||||||||||||||||
| South Korea | 485.4 | 383.1 | |||||||||||||||||||||
| Philippines | 433.5 | 474.5 | |||||||||||||||||||||
| China | 243.6 | 248.4 | |||||||||||||||||||||
| Japan | 218.1 | 205.0 | |||||||||||||||||||||
| Czech Republic | 213.4 | 194.5 | |||||||||||||||||||||
| Malaysia | 204.4 | 229.1 | |||||||||||||||||||||
| Other | 176.5 | 198.1 | |||||||||||||||||||||
| $ | 2,591.6 | $ | 2,549.6 |
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.
| PSG | ASG | ISG | ||||||||||||
| Analog products | Analog products | LSI products | ||||||||||||
| Discrete products | ASIC products | Sensors | ||||||||||||
| HD products | Connectivity products | |||||||||||||
| IPM products | ECL products | |||||||||||||
| Isolation products | Foundry products / services | |||||||||||||
| MOSFET products | Gate Driver products | |||||||||||||
| Memory products | LSI products | |||||||||||||
| PIM products | ||||||||||||||
| Sensors | ||||||||||||||
| Standard logic products |
Note 4: Recent Accounting Pronouncements
Adopted:
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. 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 "effective date method"). The New Leasing Standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
The Company adopted the New Leasing Standard as of January 1, 2019 using the effective date method by recording right-of-
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
use assets of $112.3 million, net of deferred rent liabilities of $5.1 million that were reclassified to right-of-use assets, and lease liabilities of $117.4 million. Under this method, periods prior to 2019 remain unchanged. The Company applied the practical expedients relating to the leases that commenced before January 1, 2019 whereby the Company elected 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. See Note 8: ''Balance Sheet Information'' for further information and disclosures relating to the New Leasing Standard.
Pending Adoption:
ASU 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments) (“ASU 2016-13”)
In June 2016, the FASB issued ASU 2016-13 and subsequently issued further clarifications and amendments which changed the incurred loss impairment methodology under current GAAP with a methodology that reflects a current expected credit loss (“CECL”) measurement to estimate the allowance for credit losses over the contractual life of the financial assets and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. There are no prescribed methods to develop an estimate of CECL. The CECL model, among others, applies to trade receivables and contract assets that result from revenue transactions, debt instruments except available for sale debt securities and loan commitments. The standard is effective for public companies on January 1, 2020. The Company has evaluated the provisions of the standard and does not anticipate the adoption of the ASU 2016-13 with its subsequent amendments to have a material impact on its consolidated financial statements.
ASU 2018-15 – Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40) (“ASU 2018-15”)
In 2018, the FASB issued ASU 2018-15 requiring a customer in a cloud computing arrangement (i.e. hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40: Intangibles – Goodwill and Other, Internal-Use Software to determine which implementation costs to capitalize as assets or expense as incurred. The capitalized costs will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. This standard is effective on January 1, 2020. Companies are permitted to apply either a retrospective or prospective transition approach to adopt the guidance. With the hosting arrangements currently in effect, the Company does not anticipate the adoption of ASU 2018-15 will have a material impact on its consolidated financial statements.
ASU 2019-12 – Income taxes (Topic 740): Simplifying the accounting for income taxes (“ASU 2019-12”)
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, provided that the Company reflects any adjustments as of the beginning of the annual period that includes the interim period for which such early adoption occurs. The Company does not anticipate the adoption of ASU 2019-12 will have a material impact on its consolidated financial statements.
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, 2019 and 2018, the Company incurred acquisition and divestiture related costs of approximately $11.3 million and $4.5 million, respectively, which are included in operating expenses in the Company's Consolidated Statements of Operations and Comprehensive Income.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2019 Acquisition
On June 19, 2019, the Company acquired 100% of the outstanding shares of Quantenna, a global leader and innovator of high performance Wi-Fi solutions, whereby Quantenna became a wholly-owned subsidiary of the Company. The acquisition of Quantenna creates a strong platform for addressing connectivity solutions for industrial IoT by combining the Company's expertise in power management and bluetooth technologies with Quantenna's Wi-Fi technologies and software capabilities. Following the acquisition, Quantenna changed its name to ON Semiconductor Connectivity Solutions, Inc.
The purchase price consideration for the acquisition totaled $1,039.3 million, of which $1,026.6 million was paid in cash during the year ended December 31, 2019. The remaining amount of $12.7 million will be paid in multiple installments through 2023. The acquisition was funded by a combination of a draw of $900.0 million against the Revolving Credit Facility and cash on hand. See Note 9: ''Long-Term Debt'' for further information on the Revolving Credit Facility.
From the closing date of the Quantenna acquisition through December 31, 2019, the Company recognized approximately $84.8 million in revenue and $39.3 million in net loss relating to Quantenna, which included the amortization of fair market value step-up of inventory and intangible assets and restructuring charges.
The following table presents the allocation of the purchase price of Quantenna for the assets acquired and liabilities assumed based on their relative fair values, which has been finalized during the year ended December 31, 2019 (in millions):
| Purchase Price Allocation | ||||||||||||||
| Cash and cash equivalents | $ | 133.4 | ||||||||||||
| Receivables | 22.2 | |||||||||||||
| Inventories | 41.8 | |||||||||||||
| Other current assets | 4.3 | |||||||||||||
| Property, plant and equipment | 16.9 | |||||||||||||
| Goodwill | 726.7 | |||||||||||||
| Intangible assets (excluding IPRD) | 87.1 | |||||||||||||
| IPRD | 23.8 | |||||||||||||
| Deferred tax assets | 29.2 | |||||||||||||
| Other non-current assets | 12.7 | |||||||||||||
| Total assets acquired | 1,098.1 | |||||||||||||
| Accounts payable | 22.6 | |||||||||||||
| Other current liabilities | 17.5 | |||||||||||||
| Deferred tax liabilities | 3.3 | |||||||||||||
| Other non-current liabilities | 15.4 | |||||||||||||
| Total liabilities assumed | 58.8 | |||||||||||||
| Net assets acquired/purchase price | $ | 1,039.3 |
Acquired intangible assets of $110.9 million include developed technology of $58.3 million (which are estimated to have a useful life of eight years). The value assigned to developed technology was determined using the income approach. The total weighted average amortization period for the acquired intangibles is eight 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 approximately 12.0%. The cash flows from IPRD’s significant products are expected to commence from 2020 onwards.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The acquisition produced $726.7 million of goodwill, which has been assigned to a reporting unit within ASG. The goodwill is attributable to a combination of Quantenna'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 arising from the Quantenna acquisition is not deductible for tax purposes.
Pro-Forma Results of Operations
The following unaudited pro-forma consolidated results of operations for the years ended December 31, 2019 and December 31, 2018 have been prepared as if the acquisition of Quantenna had occurred on January 1, 2018 and includes adjustments for amortization of intangibles, interest expense from financing, restructuring, and the effect of purchase accounting adjustments including the step-up of inventory (in millions, except per share data):
| Year Ended | |||||||||||
| December 31, 2019 | December 31, 2018 | ||||||||||
| Revenue | $ | 5,613.2 | $ | 6,098.8 | |||||||
| Net income | 218.2 | 567.2 | |||||||||
| Net income attributable to ON Semiconductor Corporation | 216.0 | 564.7 | |||||||||
| Net income per common share attributable to ON Semiconductor Corporation: | |||||||||||
| Basic | 0.53 | 1.33 | |||||||||
| Diluted | 0.52 | 1.30 |
Pending Acquisition of Manufacturing Facility and Related Assets
On April 22, 2019, through SCI LLC, the Company entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with GLOBALFOUNDRIES U.S. Inc. (“GFUS”) and GLOBALFOUNDRIES Inc. pursuant to which the Company will acquire GFUS’s East Fishkill, New York site and fabrication facilities, including a post-fabrication facility, support buildings and related assets (the “Transferred Assets”), and assume certain liabilities, including those relating to Company's ownership and operation of the Transferred Assets (collectively, the “Asset Purchase”). The closing of the Asset Purchase is expected to occur on or around December 31, 2022, subject to the satisfaction or waiver of the conditions to closing as specified in the Asset Purchase Agreement. The aggregate purchase price for the Asset Purchase is $400.0 million in cash, subject to adjustment as described in the Asset Purchase Agreement, of which a non-refundable deposit of $70.0 million, subject to downward adjustment, was paid by SCI LLC to GFUS in cash on April 22, 2019. The remaining $330.0 million will be paid on or around the closing date of the Asset Purchase.
In connection with the Asset Purchase Agreement, the parties entered into certain ancillary agreements (the "Ancillary Agreements") pursuant to which SCI LLC will be provided with technology transfer and development services as well as foundry services prior to the closing date, and GFUS will be provided foundry services for a limited period of time following the closing date. Pursuant to the Ancillary Agreements, on April 22, 2019, SCI LLC paid GFUS a license fee in the amount of $30.0 million in cash, subject to upward adjustment, for certain technology. This amount has been recorded as an intangible asset in the Consolidated Balance Sheet as of December 31, 2019 and will be amortized when the revenue from the sale of products under the Ancillary Agreement commences.
The Company incurred approximately $4.0 million of expenses in connection with these transactions and expects to incur an additional $5.0 million in legal fees, advisory fees and other third party costs on or around the closing date.
2018 Acquisition
On May 8, 2018, the Company acquired 100% of the outstanding shares of SensL, a company specializing in SiPM, 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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 weighted-average useful life of seven years). 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 commenced in 2019.
The acquisition produced $18.9 million of goodwill, which was allocated to ISG. 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 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 insignificant transactions resulting in a total gain of $5.0 million during the year ended December 31, 2018.
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 was considered as part of the consideration in calculating the 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. The escrow amount was released to the Company during the year ended December 31, 2019.
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, $42.5 million and $10.0 million was recognized as licensing income during the years ended December 31, 2017 and 2018, respectively.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, and the Company recognized licensing income of $22.7 million during the year ended December 31, 2018. The Company also recognized certain insignificant amounts of licensing income relating to other transactions during the year ended 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 2019 and 2018 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.
The following table summarizes goodwill by operating and reportable segments (in millions):
| As of December 31, 2019 | As of December 31, 2018 | As of December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill | Accumulated Impairment Losses | Carrying Value | Goodwill | Accumulated Impairment Losses | Carrying Value | Goodwill | Accumulated Impairment Losses | Carrying Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating and Reportable Segments: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ASG | $ | 1,563.4 | $ | (418.9) | $ | 1,144.5 | $ | 836.7 | $ | (418.9) | $ | 417.8 | $ | 836.7 | $ | (418.9) | $ | 417.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ISG | 114.4 | — | 114.4 | 114.4 | — | 114.4 | 95.5 | — | 95.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PSG | 432.2 | (31.9) | 400.3 | 432.2 | (31.9) | 400.3 | 432.2 | (28.6) | 403.6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 2,110.0 | $ | (450.8) | $ | 1,659.2 | $ | 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, 2017 | $ | 916.9 | ||||||
| Addition due to business combination | 18.9 | |||||||
| Goodwill impairment | (3.3) | |||||||
| Net balance as of December 31, 2018 | 932.5 | |||||||
| Addition due to business combination | 726.7 | |||||||
| Net balance as of December 31, 2019 | $ | 1,659.2 |
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 PSG.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Intangible Assets
Intangible assets, net, were as follows (in millions):
| As of December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Original Cost | Accumulated Amortization | Accumulated Impairment Losses | Carrying Value | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Customer relationships | $ | 585.2 | $ | (386.8) | $ | (20.1) | $ | 178.3 | |||||||||||||||||||||||||||||||||||||||||||||
| Developed technology | 779.5 | (440.3) | (2.6) | 336.6 | |||||||||||||||||||||||||||||||||||||||||||||||||
| IPRD | 64.7 | — | (24.1) | 40.6 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Licenses | 30.0 | — | — | 30.0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other intangibles | 79.3 | (59.1) | (15.2) | 5.0 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | 1,538.7 | $ | (886.2) | $ | (62.0) | $ | 590.5 |
| 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 |
During the year ended December 31, 2019, the Company abandoned two previously capitalized IPRD projects under ISG and recorded aggregate impairment losses in the amount of $1.6 million. The Company also completed certain of its IPRD projects resulting in the reclassification of $23.2 million from IPRD to developed technology.
During the year ended December 31, 2018, the Company determined that the value of one of its IPRD projects under ISG was impaired and recorded a charge of $3.5 million. 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 recorded impairment charges of $13.1 million related to cancellation and impairment of certain of its previously capitalized IPRD projects under PSG and ASG. 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.
Amortization expense for intangible assets for the years ended December 31, 2019, 2018 and 2017 amounted to $115.2 million, $111.7 million and $123.8 million, respectively. Amortization expense for intangible assets, with the exception of the $40.6 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 | |||||
| 2020 | $ | 116.5 | |||
| 2021 | 94.9 | ||||
| 2022 | 80.6 | ||||
| 2023 | 63.2 | ||||
| 2024 | 52.1 | ||||
| Thereafter | 142.6 | ||||
| Total estimated amortization expense | $ | 549.9 |
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 7: Restructuring, Asset Impairments and Other Charges, net
Summarized activity included in the “Restructuring, asset impairments and other charges, net” caption on the Company's Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2019, 2018 and 2017 is as follows (in millions):
| Restructuring | Asset Impairments (1) | Other (2) | Total | ||||||||||||||||||||||||||
| Year Ended December 31, 2019 | |||||||||||||||||||||||||||||
| General workforce reduction | $ | 8.4 | $ | — | $ | — | $ | 8.4 | |||||||||||||||||||||
| Post-Quantenna acquisition restructuring | 15.7 | — | — | 15.7 | |||||||||||||||||||||||||
| Other | 0.8 | 3.4 | 0.4 | 4.6 | |||||||||||||||||||||||||
| Total | $ | 24.9 | $ | 3.4 | $ | 0.4 | $ | 28.7 | |||||||||||||||||||||
| 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 |
(1) Includes, among others, impairment charges for ROU assets of $2.5 million, asset impairment charges of $4.6 million, and held-for-sale asset impairment charges of $7.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
(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.
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, 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 | ||||||||||||||
| Charges | 24.9 | — | 24.9 | |||||||||||||||||
| Usage | (25.1) | (0.1) | (25.2) | |||||||||||||||||
| Balance as of December 31, 2019 | $ | 0.1 | $ | 0.1 | $ | 0.2 |
General workforce reduction
During the first quarter of 2019, the Company approved and began to implement certain restructuring actions aimed at cost savings, primarily through workforce reductions. As of December 31, 2019, the Company had notified approximately 143 employees of their employment termination, all of whom had exited by December 31, 2019. For the year ended December 31, 2019, the expense for this program amounted to $8.4 million, all of which was paid as of December 31, 2019.
The Company has initiated the next phase of this program during the first quarter of 2020. Approximately 100 employees were notified of their employment termination, most of whom are expected to exit before the end of the first quarter of 2020. Restructuring costs pertaining to this program are expected to be approximately $4.5 million for the first quarter of 2020.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Post-Quantenna acquisition restructuring
Following the acquisition of Quantenna and during the quarter ended June 28, 2019, the Company implemented a cost-reduction plan resulting in the elimination of approximately eight executive positions from Quantenna’s workforce, primarily as a result of redundancies. During the year ended December 31, 2019, the Company terminated an additional ten employees. The total restructuring expense of $15.7 million was attributable to the accelerated vesting of stock awards previously issued by Quantenna, executive retention and other severance benefits. All severance benefits for this program were paid as of December 31, 2019.
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 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, which were paid during the year ended December 31, 2019.
Manufacturing Relocation
During the first quarter of 2016, the Company announced a plan to relocate certain of its manufacturing operations to another existing location. During the first quarter of 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.
Former System Solutions Group Segment Voluntary Workforce Reduction
During the second quarter of 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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, 2019 | December 31, 2018 | ||||||||||||||||
| Inventories: | |||||||||||||||||
| Raw materials | $ | 138.4 | $ | 137.3 | |||||||||||||
| Work in process | 772.9 | 760.7 | |||||||||||||||
| Finished goods | 321.1 | 327.2 | |||||||||||||||
| $ | 1,232.4 | $ | 1,225.2 | ||||||||||||||
| Property, plant and equipment, net: | |||||||||||||||||
| Land | $ | 125.2 | $ | 125.5 | |||||||||||||
| Buildings | 860.6 | 820.4 | |||||||||||||||
| Machinery and equipment | 4,275.2 | 3,980.2 | |||||||||||||||
| Property, plant and equipment, gross | 5,261.0 | 4,926.1 | |||||||||||||||
| Less: Accumulated depreciation | (2,669.4) | (2,376.5) | |||||||||||||||
| $ | 2,591.6 | $ | 2,549.6 | ||||||||||||||
| Accrued expenses: | |||||||||||||||||
| Accrued payroll and related benefits | $ | 153.4 | $ | 240.8 | |||||||||||||
| Sales related reserves | 247.3 | 294.8 | |||||||||||||||
| Income taxes payable | 22.5 | 38.2 | |||||||||||||||
| Other | 115.6 | 85.3 | |||||||||||||||
| $ | 538.8 | $ | 659.1 |
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, 2019 was $1.4 million, and is reported as other current assets on the Company’s Consolidated Balance Sheet.
Depreciation expense for property, plant and equipment, including amortization of finance leases, totaled $409.7 million, $359.3 million and $325.2 million for 2019, 2018 and 2017, respectively.
Included within sales related reserves are ship and credit reserves for distributors amounting to $178.7 million and $230.8 million as of December 31, 2019 and 2018, respectively.
Leases
Operating lease arrangements are comprised primarily of real estate and equipment agreements. There are also certain insignificant finance leases recorded in the Consolidated Balance Sheet. The Company's existing leases do not contain significant restrictive provisions or residual value guarantees; however, certain leases contain renewal options and provisions for payment of real estate taxes, insurance and maintenance costs by the Company.
The components of lease expense are as follows (in millions):
| Year Ended | ||||||||||||||
| December 31, 2019 | ||||||||||||||
| Operating lease | $ | 35.0 | ||||||||||||
| Variable lease | 4.0 | |||||||||||||
| Short-term lease | 2.6 | |||||||||||||
| Total lease expense | $ | 41.6 |
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The lease liabilities included in the following captions in the Consolidated Balance Sheet are as follows (in millions):
| As of | |||||
| December 31, 2019 | |||||
| Accrued expenses and other current liabilities | $ | 26.1 | |||
| Other long-term liabilities | 87.9 | ||||
| $ | 114.0 |
Operating lease assets of $110.2 million are included in other assets in the Consolidated Balance Sheet as of December 31, 2019. As of December 31, 2019, the weighted-average remaining lease-term was 6.4 years and the weighted-average discount rate was 5.4%.
As of December 31, 2019, there are additional operating lease commitments of approximately $0.4 million that have not yet commenced. The reconciliation of the maturities of the operating leases to the lease liabilities recorded in the Consolidated Balance Sheet as of December 31, 2019 is as follows (in millions):
| 2020 | $ | 31.3 | |||
| 2021 | 26.0 | ||||
| 2022 | 21.4 | ||||
| 2023 | 15.1 | ||||
| 2024 | 14.1 | ||||
| Thereafter | 36.9 | ||||
| Total lease payments | $ | 144.8 | |||
| Less: Interest | (30.8) | ||||
| Amounts recorded in the Consolidated Balance Sheet | $ | 114.0 |
Total rent expense associated with operating leases for 2018 and 2017 was $43.6 million and $45.3 million, respectively. As of December 31, 2018, future minimum lease obligations under non-cancelable operating leases were as follows:
| 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.
ON SEMICONDUCTOR CORPORATION
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, 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 | |||||||
| Provision | 3.3 | |||||||
| Usage | (4.1) | |||||||
| Balance as of December 31, 2019 | $ | 4.4 |
Note 9: Long-Term Debt
The Company's long-term debt consists of the following (annualized interest rates, dollars in millions):
| As of | |||||||||||||||||
| December 31, 2019 | December 31, 2018 | ||||||||||||||||
| Amended Credit Agreement: | |||||||||||||||||
| Revolving Credit Facility due 2024, interest payable monthly at 3.30% and 3.77%, respectively | $ | 800.0 | $ | 400.0 | |||||||||||||
| Term Loan “B” Facility due 2026, interest payable monthly at 3.80% and 4.27%, respectively | 1,630.9 | 1,134.5 | |||||||||||||||
| 1.00% Notes due 2020 (1) | 690.0 | 690.0 | |||||||||||||||
| 1.625% Notes due 2023 (2) | 575.0 | 575.0 | |||||||||||||||
| Other long-term debt (3) | 53.3 | 139.5 | |||||||||||||||
| Gross long-term debt, including current maturities | 3,749.2 | 2,939.0 | |||||||||||||||
| Less: Debt discount (4) | (102.7) | (139.4) | |||||||||||||||
| Less: Debt issuance costs (5) | (34.0) | (33.5) | |||||||||||||||
| Net long-term debt, including current maturities | 3,612.5 | 2,766.1 | |||||||||||||||
| Less: Current maturities | (736.0) | (138.5) | |||||||||||||||
| Net long-term debt | $ | 2,876.5 | $ | 2,627.6 |
(1)Interest is payable on June 1 and December 1 of each year at 1.00% annually.
(2)Interest is payable on April 15 and October 15 of each year at 1.625% annually.
(3)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 2022.
(4)Debt discount of $20.4 million and $41.6 million for the 1.00% Notes, $71.8 million and $88.5 million for the 1.625% Notes and $10.5 million and $9.3 million for the Term Loan "B" Facility, in each case as of December 31, 2019 and December 31, 2018, respectively.
(5)Debt issuance costs of $2.8 million and $5.8 million for the 1.00% Notes, $6.9 million and $8.5 million for the 1.625% Notes and $24.3 million and $19.2 million for the Term Loan "B" Facility, in each case as of December 31, 2019 and December 31, 2018, respectively.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Maturities
Expected maturities relating to the Company’s gross long-term debt (including current maturities) as of December 31, 2019 are as follows (in millions):
| Annual Maturities | ||||||||
| 2020 | $ | 759.6 | ||||||
| 2021 | 16.4 | |||||||
| 2022 | 16.4 | |||||||
| 2023 | 591.4 | |||||||
| 2024 | 816.3 | |||||||
| Thereafter | 1,549.1 | |||||||
| Total | $ | 3,749.2 |
Amended Credit Agreement
On April 15, 2016, the Company obtained capital for the acquisition of Fairchild and other general corporate purposes. The acquisition of Fairchild on September 19, 2016, was funded with cash on hand and by borrowings under a Credit Agreement, dated as of April 15, 2016, by and among the Company, as borrower, the several lenders party thereto, Deutsche Bank AG, New York Branch, as administrative agent and collateral agent, and certain other parties (as subsequently amended, the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $1.97 billion revolving credit facility (the “Revolving Credit Facility”) and a $2.4 billion term loan “B” facility (the “Term Loan “B” Facility”). The acquisition of Fairchild was funded with the proceeds from the Term Loan “B” Facility of $2.2 billion, Company-funded amounts previously deposited into escrow accounts of $67.7 million, proceeds from a $200.0 million draw against the Revolving Credit Facility and existing cash on hand.
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 (the “First Amendment”) with the several lenders party thereto and Deutsche Bank AG New York Branch, as the administrative agent (the “Agent”). Among other things, the First Amendment reduced the interest rates payable under the Term Loan “B” Facility and the Revolving Credit Facility and increased the Term Loan “B” Facility to $2.4 billion. 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, November 30, 2017 and May 31, 2018, the Company, the Guarantors, the several lenders party thereto and the Agent entered into the Second Amendment, Third Amendment and Fourth Amendment, respectively, to the Amended Credit Agreement. These amendments, among other things, reduced the interest rates payable under the Term Loan “B” Facility and the Revolving Credit Facility. The Third Amendment also increased the amount that may be borrowed pursuant to the Revolving Credit Facility to $1.0 billion.
On June 12, 2019, the Company entered into the Fifth Amendment to the Amended Credit Agreement (the “Fifth Amendment”), with the subsidiary guarantors party thereto, Deutsche Bank AG New York Branch, as administrative agent, collateral agent and issuing lender, the “2019 Incremental Revolving Lenders” party thereto, and the “New Required Lenders” party thereto. The Fifth Amendment provided for, among other things, modifications to the Amended Credit Agreement to: (i) increase the amount that may be borrowed pursuant to the Revolving Credit Facility to $1.9 billion; (ii) extend the maturity date of borrowings under the Revolving Credit Facility to the later of (x) December 30, 2022 or (y) June 12, 2024 so long as the borrowings under the Term Loan “B” Facility have been fully repaid or otherwise redeemed, discharged or defeased on or prior to December 30, 2022, or if the maturity date of borrowings under the Term Loan “B” Facility has been extended prior to December 30, 2022, to a date no earlier than June 12, 2024; and (iii) amend certain financial covenants, including deleting the minimum Interest Coverage Ratio and increasing the maximum Consolidated Total Net Leverage Ratio (as such terms are defined in the Amended Credit Agreement) from 4.00 to 1.00 to 4.50 to 1.00 during any period of four consecutive fiscal quarters commencing after a Permitted Acquisition (as defined in the Amended Credit Agreement) with consideration in excess of $250.0 million.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
On August 15, 2019, the Company entered into the Sixth Amendment to the Amended Credit Agreement (the “Sixth Amendment”), which increased amounts that may be borrowed under the Revolving Credit Facility by $70.0 million to $1.97 billion.
On September 19, 2019, the Company entered into the Seventh Amendment to the Amended Credit Agreement (the “Seventh Amendment”). The Seventh Amendment provided for, among other things, modifications to the Amended Credit Agreement to (i) increase the amount that may be borrowed pursuant to the Term Loan “B” Facility by approximately $500.5 million, up to an aggregate principal amount of $1.635 billion; (ii) extend the maturity date of borrowings under the Term Loan “B” Facility to September 19, 2026; (iii) for any interest period ending after the date of the Seventh Amendment, increase the interest rate for borrowings under the Term Loan “B” Facility to (a) with respect to eurocurrency loans, a base rate per annum equal to the Adjusted LIBO Rate (as defined in the Amended Credit Agreement) plus an applicable margin of 2.00% and (b) with respect to alternate base rate loans, a base rate per annum equal to the Alternate Base Rate (as defined in the Amended Credit Agreement) plus an applicable margin equal to 1.00%; and (iv) make certain amendments providing for the determination of an alternate interest rate to the Adjusted LIBO Rate and/or the LIBO Rate (as defined in the Amended Credit Agreement) in the event of certain circumstances that result in the inability to adequately and reasonably determine such rates or such rates no longer adequately and fairly reflecting the cost of the applicable loans. In addition, pursuant to the Fifth Amendment, as a result of the extension described in (ii) above, the maturity date of borrowings under the Revolving Credit Facility was extended to June 12, 2024.
The Company utilized the additional borrowings pursuant to the Seventh Amendment to repay $500.0 million of the outstanding balance under the Revolving Credit 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, 2019.
Debt Refinancing and Prepayments
In connection with the Seventh Amendment, the Company incurred fees to lenders, third parties, legal and other costs amounting to $17.5 million, of which a significant portion was capitalized. Management performed an analysis and recorded a loss on debt refinancing amounting to $5.8 million related to the Seventh Amendment, which included a proportionate write-off of the unamortized debt discount and issuance costs represented by the exited lenders, and the third party fees incurred for the transaction. The remaining costs will be amortized over the term of the loan using the effective interest method. The Company did not incur significant costs in connection with the Sixth Amendment.
The Company incurred third party, legal and other fees of $6.6 million and recorded $0.4 million as loss on extinguishment of debt related to the Fifth Amendment. The remaining unamortized debt issuance costs along with the additional costs incurred for the Fifth Amendment will be amortized straight-line over the term of the Revolving Credit Facility.
The loss on debt refinancing and prepayment amounted to $6.2 million for the year ended December 31, 2019.
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 loss on debt refinancing and prepayment amounted to $4.6 million for the year ended December 31, 2018.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 $19.6 million of unamortized debt discount and issuance costs attributed to the partial pay down of $600.0 million of the Term Loan “B” Facility on multiple dates during the year ended December 31, 2017.
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.
As a result of the above, the Company recorded debt refinancing and prepayment charges of $47.2 million for the year ended December 31, 2017.
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 notes bear interest at the rate of 1.00% per year from the date of issuance, payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2015. The 1.00% Notes are fully and unconditionally guaranteed on a senior unsecured obligation basis by certain existing subsidiaries of the Company.
The 1.00% Notes are convertible by holders into cash and shares of the Company’s common stock at a conversion rate of 54.0643 shares of common stock per $1,000 principal amount of notes (subject to adjustment in certain events), which is equivalent to an initial conversion price of $18.50 per share of common stock. The Company will settle conversion of all 1.00% Notes validly tendered for conversion in cash and shares of the Company’s common stock, if applicable, subject to the Company’s right to pay the share amount in additional cash. Holders may convert their 1.00% Notes only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2015, if the last reported sale price of common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business-day period immediately following any five consecutive trading-day period in which the trading price per $1,000 principal amount of 1.00% Notes for each day of such period was less than 98% of the product of the closing sale price of the Company’s common stock and the conversion rate; (iii) upon occurrence of the specified transactions described in the 1.00% Indenture; or (iv) on and after September 1, 2020. Upon conversion of the 1.00% Notes, the Company will deliver cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company's election. For a discussion of the dilutive effects for earnings per share calculations, see Note 10: "Earnings Per Share and Equity."
The 1.00% Notes will mature on December 1, 2020 and has been reclassified as current portion of long-term debt along with the corresponding debt discount and issuance costs in the Consolidated Balance Sheet as of December 31, 2019. 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.
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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The net proceeds from the offering of the 1.625% Notes were used to repay $562.1 million of borrowings outstanding under the Term Loan “B” Facility. The 1.625% Notes bear interest at the rate of 1.625% per year from the date of issuance, payable semiannually in arrears on April 15 and October 15 of each year, beginning on October 15, 2017. The 1.625% Notes are fully and unconditionally guaranteed, on a joint and several basis, by each of the Company’s subsidiaries that is a borrower or guarantor under the Amended Credit Agreement.
The initial conversion rate of the 1.625% Notes is 48.2567 shares of common stock per $1,000 principal amount of 1.625% Notes (subject to adjustment in certain events), which is equivalent to an initial conversion price of approximately $20.72 per share of common stock. Prior to the close of business on the business day immediately preceding July 15, 2023, the 1.625% Notes will be convertible only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2017 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the 1.625% Notes for each trading day of such period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate transactions described in the 1.625% Indenture. On or after July 15, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 1.625% Notes may convert all or a portion of their 1.625% Notes at any time. Upon conversion of the 1.625% Notes, the Company will deliver cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. For a discussion of the dilutive effects for earnings per share calculations, see Note 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.
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
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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.
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. 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 $52.3 million has been classified as current portion of long-term debt in the Consolidated Balance Sheet as of December 31, 2019.
U.S. Real Estate Mortgages
During 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 was paid in full during the year ended December 31, 2019.
Philippine Term Loans
During 2015, the Company borrowed $50.0 million under two non-collateralized term loans entered into by the Company's wholly-owned Philippine subsidiaries and ON Semiconductor, as guarantor. The balance was repaid in full during the year ended December 31, 2018.
Malaysia Revolving Line of Credit
During 2014, one of the Company’s wholly-owned Malaysian subsidiaries and ON Semiconductor, as guarantor, borrowed $25.0 million under a non-collateralized and uncommitted line of credit. The balance was repaid in full during the year ended December 31, 2019, and the facility was closed.
Vietnam Revolving Line of Credit
During 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 balance was repaid in full during the year ended December 31, 2019, and the facility was closed.
Finance Lease Obligations
The Company has finance lease obligations primarily for buildings, which, as of December 31, 2019, totaled $0.1 million, with interest rates ranging from 1.0% to 5.2% and maturing in 2022. Future payments for the Company's finance lease obligations are included in the annual maturities table.
ON SEMICONDUCTOR CORPORATION
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, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Net income attributable to ON Semiconductor Corporation | $ | 211.7 | $ | 627.4 | $ | 810.7 | ||||||||||||||||||||||||||
| Basic weighted average common shares outstanding | 410.9 | 423.8 | 421.9 | |||||||||||||||||||||||||||||
| Add: Incremental shares for: | ||||||||||||||||||||||||||||||||
| Dilutive effect of share-based awards | 1.9 | 4.3 | 5.5 | |||||||||||||||||||||||||||||
| Dilutive effect of convertible notes | 3.2 | 7.8 | 0.9 | |||||||||||||||||||||||||||||
| Diluted weighted average common shares outstanding | 416.0 | 435.9 | 428.3 | |||||||||||||||||||||||||||||
| Net income per common share attributable to ON Semiconductor Corporation: | ||||||||||||||||||||||||||||||||
| Basic | $ | 0.52 | $ | 1.48 | $ | 1.92 | ||||||||||||||||||||||||||
| Diluted | $ | 0.51 | $ | 1.44 | $ | 1.89 |
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 0.8 million, 0.6 million and 0.2 million for the years ended December 31, 2019, 2018 and 2017, 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.
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 (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
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 and $25.0 million under the 2014 Share Repurchase Program during the years ended December 31, 2018 and December 31, 2017, respectively.
On November 15, 2018, the Company announced the 2018 Share Repurchase Program (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 from December 1, 2018 through December 31, 2022, 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. There were $138.9 million in repurchases of the Company's common stock under the 2018 Share Repurchase Program during the year ended December 31, 2019. As of December 31, 2019, the remaining authorized amount under the 2018 Share Repurchase Program was $1,361.1 million.
Information relating to the Company's 2018 and 2014 Share Repurchase Programs is as follows (in millions, except per share data):
| Year ended December 31, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Number of repurchased shares (1) | 7.8 | 16.8 | 1.6 | |||||||||||||||||||||||||||||
| Aggregate purchase price | $ | 138.9 | $ | 315.0 | $ | 25.0 | ||||||||||||||||||||||||||
| Fees, commissions and other expenses | 0.1 | 0.3 | — | |||||||||||||||||||||||||||||
| Total cash used for share repurchases | $ | 139.0 | $ | 315.3 | $ | 25.0 | ||||||||||||||||||||||||||
| Weighted-average purchase price per share | $ | 17.89 | $ | 18.78 | $ | 15.35 | ||||||||||||||||||||||||||
| Available for future purchases at period end | $ | 1,361.1 | $ | 1,500.0 | $ | 603.2 |
(1) None of these shares had been reissued or retired as of December 31, 2019, but may be reissued or retired by the Company at a later date.
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, 2019, 2018 and 2017 were $33.5 million, $31.6 million and $28.1 million, respectively, for which the Company withheld approximately 1.6 million, 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, 2019, but may be reissued or retired by the Company at a later date. These deemed repurchases in connection with tax withholding upon vesting were not made under the 2018 or 2014 Share Repurchase Programs, and the amounts spent in connection with such deemed repurchases did not reduce the authorized amount remaining under the 2018 Share Repurchase Program.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, 2019, the Leshan non-controlling interest balance was $22.4 million. This balance included the Leshan non-controlling interest's $2.2 million share of the earnings for the year ended December 31, 2019 offset by $2.3 million of dividends paid to the non-controlling shareholder of Leshan. 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.
During 2018, the Company acquired an incremental 50% equity interest in OSA for approximately $24.6 million, net of cash acquired. The Company is currently the majority owner with 60% of the equity interest in OSA. OSA operates a front-end wafer fabrication facility in Aizuwakamatsu, Japan. The results of OSA have been consolidated in the Company’s financial statements. 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 equity interest in OSA to 100% by no later than April 1, 2020.
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, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Cost of revenue | $ | 10.6 | $ | 7.0 | $ | 6.0 | ||||||||||||||||||||||||||
| Research and development | 17.0 | 14.3 | 12.5 | |||||||||||||||||||||||||||||
| Selling and marketing | 14.8 | 14.1 | 11.7 | |||||||||||||||||||||||||||||
| General and administrative | 37.0 | 42.9 | 39.6 | |||||||||||||||||||||||||||||
| Share-based compensation expense | 79.4 | 78.3 | 69.8 | |||||||||||||||||||||||||||||
| Related income tax benefits at federal rate (1) | (16.7) | (16.4) | (24.4) | |||||||||||||||||||||||||||||
| Share-based compensation expense, net of taxes | $ | 62.7 | $ | 61.9 | $ | 45.4 |
(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% during the years ended December 31, 2019 and December 31, 2018, and 35% for the year ended December 31, 2017.
At December 31, 2019, total unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested RSUs with service, performance and market conditions was $74.9 million, which is expected to be recognized over a weighted-average period of 1.3 years. The total intrinsic value of stock options exercised during the year ended December 31, 2019 was $3.9 million. The Company received cash of $1.7 million and $26.2 million from the exercise of stock options and the issuance of shares under the ESPP, respectively. Upon option exercise, vesting of RSUs, stock grant awards, or completion of a purchase under the ESPP, the Company issues new shares of common stock.
Share-Based Compensation Information
The fair value per unit of RSU and stock grant award is determined on the grant date. There were no employee stock options granted during the years ended December 31, 2019, 2018 and 2017. 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, 2019, 2018 and 2017.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Plan Descriptions
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, RSUs granted under the Amended and Restated SIP vest over three years or based on the achievement of certain performance or market-based conditions and are payable in shares of the Company's stock upon vesting. The options granted under the Amended and Restated SIP vest over a period of three to four years and have a contractual term of seven years. Under the plan, certain outstanding options vest automatically upon a change of control, as defined in the 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).
As of December 31, 2019, there was an aggregate of 25.5 million shares of common stock available for grant under the Amended and Restated SIP.
Stock Options
The number of options outstanding at December 31, 2018 was 0.3 million at a weighted average exercise price of $6.41 per option, of which 0.3 million options were exercised at a weighted average exercise price of $6.37 per option during the year ended December 31, 2019. There were an insignificant number of options outstanding as of December 31, 2019, at a weighted average exercise price of $8.19 per option and had an aggregate intrinsic value of $0.2 million. All outstanding options had exercise prices below $24.38 per share, the closing price of the Company’s common stock at December 31, 2019, and will expire at varying times between 2020 and 2021.
Restricted Stock Units
A summary of the RSU transactions for the year ended December 31, 2019 are as follows (number of shares in millions):
| Number of Shares | Weighted-Average Grant Date Fair Value | |||||||||||||
| Nonvested shares of RSUs at December 31, 2018 | 8.6 | $ | 16.59 | |||||||||||
| Granted | 5.4 | 21.64 | ||||||||||||
| Achieved | 0.2 | 24.46 | ||||||||||||
| Released | (4.8) | 14.41 | ||||||||||||
| Canceled | (0.5) | 19.74 | ||||||||||||
| Nonvested shares of RSUs at December 31, 2019 | 8.9 | 20.84 |
During 2019, the Company awarded 2.6 million RSUs to certain officers and employees of the Company that vest upon the achievement of certain performance criteria and market conditions. 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. Compensation expense for RSUs with market conditions are recognized based on the grant date fair value
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
irrespective of the achievement of the condition.
As of December 31, 2019, unrecognized compensation expense, net of estimated forfeitures related to non-vested RSUs granted under the Amended and Restated SIP with service, performance and market conditions, was $60.9 million, $10.1 million and $3.9 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; for RSUs with market conditions expense is recognized over the period in which the condition is assessed irrespective of whether it would be achieved or not. 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 performance-based, service-based, and market-based RSUs was $69.8 million for the year ended December 31, 2019, which included $48.4 million for RSUs with time-based service conditions that were granted in 2019 and prior that are expected to vest.
Stock Grant Awards
During the year ended December 31, 2019, 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 $18.08 per share. Total compensation expense related to stock grant awards for the year ended December 31, 2019 was $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, 2019, employees purchased approximately 1.7 million shares under the ESPP. During the years ended December 31, 2018 and 2017, employees purchased approximately 1.5 million and 1.9 million shares, respectively, under the ESPP. 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 to a total of 28.5 million. As of December 31, 2019, there were approximately 4.8 million shares available for issuance under the ESPP. Total compensation expense related to the ESPP for the year ended December 31, 2019 was $7.8 million.
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.
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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Service cost | $ | 9.4 | $ | 9.6 | $ | 10.0 | ||||||||||||||||||||||||||
| Interest cost | 5.0 | 4.7 | 4.3 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (6.0) | (6.1) | (5.5) | |||||||||||||||||||||||||||||
| Curtailment gain | — | (0.3) | — | |||||||||||||||||||||||||||||
| Actuarial and other loss | 15.6 | 6.1 | 1.9 | |||||||||||||||||||||||||||||
| Total net periodic pension cost | $ | 24.0 | $ | 14.0 | $ | 10.7 | ||||||||||||||||||||||||||
| Weighted average assumptions | ||||||||||||||||||||||||||||||||
| Discount rate used for net periodic pension costs | 1.74 | % | 1.66 | % | 1.60 | % | ||||||||||||||||||||||||||
| Discount rate used for pension benefit obligations | 1.43 | % | 1.74 | % | 1.66 | % | ||||||||||||||||||||||||||
| Expected return on plan assets | 3.23 | % | 3.18 | % | 3.22 | % | ||||||||||||||||||||||||||
| Rate of compensation increase | 3.07 | % | 3.22 | % | 3.22 | % |
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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
| 2019 | 2018 | |||||||||||||||||||
| Change in projected benefit obligation (PBO) | ||||||||||||||||||||
| Projected benefit obligation at the beginning of the year | $ | 290.8 | $ | 292.7 | ||||||||||||||||
| Service cost | 9.4 | 9.6 | ||||||||||||||||||
| Interest cost | 5.0 | 4.7 | ||||||||||||||||||
| Net actuarial (gain) loss | 25.8 | (6.1) | ||||||||||||||||||
| Benefits paid by plan assets | (5.7) | (5.6) | ||||||||||||||||||
| Benefits paid by the Company | (3.8) | (1.7) | ||||||||||||||||||
| Curtailments and settlements | (0.2) | (0.6) | ||||||||||||||||||
| Translation and other (gain) loss | 1.6 | (2.2) | ||||||||||||||||||
| Projected benefit obligation at the end of the year | $ | 322.9 | $ | 290.8 | ||||||||||||||||
| Accumulated benefit obligation at the end of the year | $ | 258.8 | $ | 249.2 | ||||||||||||||||
| Change in plan assets | ||||||||||||||||||||
| Fair value of plan assets at the beginning of the year | $ | 174.9 | $ | 183.4 | ||||||||||||||||
| Actual return (loss) on plan assets | 16.2 | (6.1) | ||||||||||||||||||
| Benefits paid from plan assets | (5.7) | (5.6) | ||||||||||||||||||
| Employer contributions | 4.6 | 5.0 | ||||||||||||||||||
| Settlements | (0.2) | (0.3) | ||||||||||||||||||
| Translation and other gain (loss) | 0.4 | (1.5) | ||||||||||||||||||
| Fair value of plan assets at the end of the year | $ | 190.2 | $ | 174.9 | ||||||||||||||||
| As of December 31, | ||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
| Plans with underfunded or non-funded projected benefit obligation | ||||||||||||||||||||
| Projected benefit obligation | $ | 314.7 | $ | 282.6 | ||||||||||||||||
| Fair value of plan assets | 180.5 | 166.2 | ||||||||||||||||||
| Plans with underfunded or non-funded accumulated benefit obligation | ||||||||||||||||||||
| Accumulated benefit obligation | $ | 193.6 | $ | 181.4 | ||||||||||||||||
| Fair value of plan assets | 115.2 | 102.1 | ||||||||||||||||||
| Amounts recognized in the balance sheet consist of | ||||||||||||||||||||
| Non-current assets | $ | — | $ | 0.3 | ||||||||||||||||
| Current liabilities | (0.3) | (0.2) | ||||||||||||||||||
| Non-current liabilities | (132.4) | (116.0) | ||||||||||||||||||
| Funded status | $ | (132.7) | $ | (115.9) | ||||||||||||||||
As of December 31, 2019 and 2018, respectively, the assets of the Company's foreign plans were invested 21% and 18% in equity securities, 19% and 19% in debt securities, including corporate bonds, 43% and 46% 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
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
securities, and foreign mutual funds are made with the expectation that these investments will give an adequate rate of long-term returns despite periods of high volatility. Other types of investments include investments in cash deposits, money market funds and insurance contracts. Asset allocations are based on the anticipated required funding amounts, timing of benefit payments, historical returns on similar assets and the influence of the current economic environment.
The following table sets forth, by level within the fair value hierarchy, a summary of investments measured at fair value and the asset allocations of the plan assets in the Company's foreign pension plans (in millions):
| As of December, 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | 4.5 | $ | 4.5 | $ | — | $ | — | ||||||||||||||||||||||||||||||||||||
| Foreign Government/Treasury Securities (1) | 19.4 | 19.4 | — | — | ||||||||||||||||||||||||||||||||||||||||
| Corporate Bonds, Debentures (2) | 35.3 | — | 35.3 | — | ||||||||||||||||||||||||||||||||||||||||
| Equity Securities (3) | 40.4 | — | 40.4 | — | ||||||||||||||||||||||||||||||||||||||||
| Mutual Funds | 8.0 | — | 8.0 | — | ||||||||||||||||||||||||||||||||||||||||
| Investment and Insurance Annuity Contracts (4) | 82.6 | — | 30.6 | 52.0 | ||||||||||||||||||||||||||||||||||||||||
| $ | 190.2 | $ | 23.9 | $ | 114.3 | $ | 52.0 | |||||||||||||||||||||||||||||||||||||
| 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 |
(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.
ON SEMICONDUCTOR CORPORATION
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 years ended December 31, 2019 and 2018, 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, 2017 | $ | 55.2 | ||||||||||||||||||||||||
| Actual return on plan assets | (0.5) | |||||||||||||||||||||||||
| Purchase, sales and settlements. net | (2.0) | |||||||||||||||||||||||||
| Foreign currency impact | (2.1) | |||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | 50.6 | ||||||||||||||||||||||||
| Actual return on plan assets | 3.3 | |||||||||||||||||||||||||
| Purchase, sales and settlements, net | (0.9) | |||||||||||||||||||||||||
| Foreign currency impact | (1.0) | |||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 52.0 |
The expected benefit payments for the Company's defined benefit plans by year from 2020 through 2024 and the five years thereafter are as follows (in millions):
| 2020 | $ | 5.0 | ||||||
| 2021 | 9.9 | |||||||
| 2022 | 12.0 | |||||||
| 2023 | 15.3 | |||||||
| 2024 | 15.6 | |||||||
| Five years thereafter | 110.7 | |||||||
| Total | $ | 168.5 |
The total underfunded status was $132.7 million at December 31, 2019. The Company expects to contribute $17.3 million during 2020 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 $11,200. The Company recognized $18.1 million, $19.2 million and $18.4 million of expense relating to matching contributions in 2019, 2018 and 2017, respectively.
Certain foreign subsidiaries have defined contribution plans in which eligible employees participate. The Company recognized compensation expense of $20.6 million, $20.5 million and $16.8 million relating to these plans for the years ended 2019, 2018 and 2017, respectively.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 13: Commitments and Contingencies
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, 2019 (in millions):
| Year Ending December 31, | |||||
| 2020 | $ | 275.0 | |||
| 2021 | 24.3 | ||||
| 2022 (1) | 345.2 | ||||
| 2023 | 8.8 | ||||
| 2024 | 6.8 | ||||
| Thereafter | 5.5 | ||||
| Total | $ | 665.6 |
(1) During 2019, the Company incurred additional commitments of $330.0 million relating to the pending acquisition of a manufacturing facility.
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 clean-up activities 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. 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 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. During 2018, semi-annual groundwater monitoring indicated that the treatment was effective, and accordingly, we ceased such monitoring and have determined that this remediation project is complete. 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 certain contamination 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. The Company has completed remediation on this project, and accordingly, has 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 in 2008, the Company is a “primary responsible party” to an environmental remediation
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
and clean-up plan 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 clean-up activities at this location. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be material.
Through its acquisition of Fairchild, the Company acquired a facility in South Portland, Maine. This facility has ongoing environmental remediation projects to respond to certain releases of hazardous substances that occurred prior to the leveraged recapitalization of Fairchild from its former parent company, National Semiconductor Corporation, which is now owned by Texas Instruments Incorporated. Although the Company may incur certain liabilities with respect to these remediation projects, pursuant to a 1997 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 EPA that it has been identified as a PRP under CERCLA in the Chemetco Superfund matter. Chemetco, a defunct reclamation services supplier that operated in Hartford, 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 clean-up activities. The Company has joined a PRP group, which is cooperating with the EPA in the evaluation and funding of the clean-up activities. Any costs to the Company in connection with this matter have not been, and, based on the information available, are not expected to be material.
Financing Contingencies
In the ordinary course of business, the Company provides standby letters of credit or other guarantee instruments to certain parties initiated by either the Company or its subsidiaries, as required for transactions, including, but not limited to, material purchase commitments, agreements to mitigate collection risk, leases, utilities or customs guarantees. As of December 31, 2019, 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, 2019, which reduces the Company's borrowing capacity. The Company also had outstanding guarantees and letters of credit outside of its Revolving Credit Facility totaling $11.7 million as of December 31, 2019.
As part of obtaining financing in the ordinary course of business, the Company issued guarantees related to certain of its subsidiaries' finance lease obligations, and a line of credit, which totaled $1.8 million as of December 31, 2019.
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
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 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.
Similarly, the agreement and plan of merger relating to the acquisition of Quantenna (the “Quantenna Agreement”) provides for indemnification and insurance rights in favor of Quantenna’s then current and former directors, officers, employees and agents. Specifically, the Company has agreed that, for no fewer than six years following the Quantenna acquisition, the Company will: (a) indemnify and hold harmless each such indemnified party to the fullest extent permitted by Delaware law in the event of any threatened or actual claim suit, action, proceeding or investigation against the indemnified party based in whole or in part on, or pertaining to, such person’s serving as a director, officer, employee or agent of Quantenna or its subsidiaries or predecessors prior to the effective time of the acquisition or in connection with the Quantenna Agreement; (b) maintain in effect provisions of the certificate of incorporation and bylaws of Quantenna and each of its subsidiaries regarding the elimination of liability of directors and indemnification of officers, directors and employees that are no less advantageous to the intended beneficiaries than the corresponding provisions in the certificate of incorporation and bylaws of Quantenna and each of its subsidiaries in existence on the date of the Quantenna Agreement; and (c) obtain and fully pay the premium for a non-cancelable extension of directors’ and officers’ liability coverage of Quantenna’s directors’ and officers’ policies and Quantenna’s fiduciary liability
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
insurance policies in effect as of the date of the Quantenna Agreement.
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 IP 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 determines 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. Nevertheless, it is possible that the Company’s consolidated financial position, results of operations or liquidity could be materially and adversely affected in any particular period by the resolution of a legal proceeding. The Company’s estimates do not represent its maximum exposure. Legal expenses related to defense, negotiations, settlements, rulings and advice of outside legal counsel are expensed as incurred.
The Company is currently involved in a variety of legal matters that arise in the ordinary course of business. Based on information currently available, except as disclosed below, the Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations or liquidity. The litigation process and the administrative process at the 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.
On October 19, 2019, the Company and Power Integrations, Inc. ("PI") entered into a Settlement Agreement (the “Settlement Agreement”) pursuant to which the parties agreed to withdraw all outstanding legal and administrative disputes on the terms set forth in a binding term sheet previously entered into by and among the Company and PI on October 4, 2019 (the “Term Sheet”). Prior to entering into the Settlement Agreement, there were eleven outstanding civil litigation proceedings with PI, six of which were between SCI LLC and PI and 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. There were also numerous outstanding administrative proceedings between the parties at the USPTO in which each party challenged the validity of the other party’s patents.
Pursuant to the Settlement Agreement, the Company paid PI $175.0 million in cash on October 22, 2019, and the parties have dismissed all previously pending litigation and administrative proceedings. In addition, each party agreed to release the other party from any claims to damages or monetary relief for alleged acts of patent infringement across the various patent infringement litigations and not to file any additional action for legal or equitable relief until June 30, 2023. Neither party granted any licenses to the other. The Company believes that the settlement will likely result in meaningful cost savings due to the elimination of litigation costs related to the previously pending civil litigation proceedings with PI. Further, the Company believes that the settlement will eliminate distractions to management resulting from uncertainty of the previously pending court actions and ensuing appeals, allowing management to focus more fully on pursuing business opportunities.
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,
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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. On June 20, 2019, the First Circuit vacated the decision of the District Court in favor of Fairchild and remanded the matter for additional discovery and a new trial. The First Circuit also reversed the District Court’s dismissal of the fraud, fraudulent misrepresentation and negligent misrepresentation claims at the summary judgment phase and remanded those claims for trial. The District Court scheduled a new trial for July 2020. The Company will continue to vigorously defend itself in this matter.
In parallel to the litigation with AcBel, Fairchild filed an arbitration against its distributor, Synnex Technology International Corp (“Synnex”), in Hong Kong in response to Synnex’s failure to pass along Fairchild’s limited warranty to AcBel. The arbitration was held in December 2017. On August 17, 2018, the arbitrator ruled in favor of Fairchild and ordered Synnex to indemnify Fairchild for any damages Fairchild is required to pay AcBel in connection with the litigation between Fairchild and AcBel. On November 16, 2018, Synnex appealed the arbitrator’s ruling. A hearing was held on October 23, 2019, and on November 1, 2019, a Hong Kong court affirmed the arbitrator’s ruling in favor of Fairchild.
Intellectual Property Matters
The Company faces risk of 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 IP 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, 2019 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||
| Cash, cash equivalents: | ||||||||||||||||||||||||||||||||||||||
| Demand and time deposits | $ | 28.2 | $ | 28.2 | — | — | ||||||||||||||||||||||||||||||||
| 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 | — | — | ||||||||||||||||||||||||||||||||
During the year ended December 31, 2018, the contingent consideration payable relating to the 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.
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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Fair Value of Long-Term Debt, Including Current Portion
The carrying amounts and fair values of the Company’s long-term borrowings (excluding finance lease obligations, real estate mortgages and equipment financing) are as follows (in millions):
| As of December 31, | |||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||||||||||||||||||||
| Long-term debt, including current portion | |||||||||||||||||||||||||||||||||||||||||
| Convertible notes (1) | $ | 1,163.1 | $ | 1,730.2 | $ | 1,120.6 | $ | 1,368.5 | |||||||||||||||||||||||||||||||||
| Long-term debt (1) | 2,449.3 | 2,427.8 | 1,615.1 | 1,585.9 |
(1) Carrying amount shown is net of debt discounts and debt issuance costs.
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, 2019 and December 31, 2018.
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.
As of December 31, 2019 and December 31, 2018, 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, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Nonrecurring fair value measurements | ||||||||||||||||||||||||||||||||
| Impairment of property, plant and equipment held-for-sale or disposal (Level 3) | $ | 3.4 | $ | 2.4 | $ | 7.9 | ||||||||||||||||||||||||||
| Goodwill and IPRD (Level 3) | 1.6 | 6.8 | 13.1 | |||||||||||||||||||||||||||||
| $ | 5.0 | $ | 9.2 | $ | 21.0 |
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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, 2019 and 2018, the Company had net outstanding foreign exchange contracts with net notional amounts of $183.3 million and $157.3 million, respectively. Such contracts were obtained through financial institutions and were scheduled to mature within one to three months from the time of purchase. Management believes that these financial instruments should not subject the Company to increased risks from foreign exchange movements because gains and losses on these contracts should offset losses and gains on the underlying assets, liabilities and transactions to which they are related.
The following schedule summarizes the Company's net foreign exchange positions in U.S. dollars (in millions):
| As of December 31, | ||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||
| Buy (Sell) | Notional Amount | Buy (Sell) | Notional Amount | |||||||||||||||||||||||||||||||||||||||||
| Japanese Yen | $ | 49.8 | $ | 49.8 | $ | 29.9 | $ | 29.9 | ||||||||||||||||||||||||||||||||||||
| Philippine Peso | 36.4 | 36.4 | 30.1 | 30.1 | ||||||||||||||||||||||||||||||||||||||||
| Malaysian Ringgit | 20.4 | 20.4 | — | — | ||||||||||||||||||||||||||||||||||||||||
| Chinese Yuan | 20.2 | 20.2 | 20.4 | 20.4 | ||||||||||||||||||||||||||||||||||||||||
| Korean Won | 18.1 | 18.1 | 20.8 | 20.8 | ||||||||||||||||||||||||||||||||||||||||
| Czech Koruna | 11.9 | 11.9 | 9.2 | 9.2 | ||||||||||||||||||||||||||||||||||||||||
| Euro | — | — | 13.1 | 13.1 | ||||||||||||||||||||||||||||||||||||||||
| Other currencies - Buy | 21.9 | 21.9 | 26.3 | 26.3 | ||||||||||||||||||||||||||||||||||||||||
| Other currencies - Sell | (4.6) | 4.6 | (7.5) | 7.5 | ||||||||||||||||||||||||||||||||||||||||
| $ | 174.1 | $ | 183.3 | $ | 142.3 | $ | 157.3 |
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, 2019, 2018 and 2017, realized and unrealized foreign currency transactions totaled a loss of $5.0 million, $8.0 million and $6.3 million, 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. On February 25, 2019, the Company entered into interest rate swap agreements for notional amounts totaling $1.0 billion (effective as of December 31, 2019) and $750.0 million (effective as of December 31, 2020) with expiry dates of December 31, 2020 and December 31, 2021, respectively. The notional amounts of the interest rate swap agreements outstanding amounted to $1.0 billion as of December 31, 2019 and December 31, 2018, respectively. The Company performed effectiveness assessments and concluded that there was no ineffectiveness during the year ended December 31, 2019.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Foreign currency risk
The purpose of the Company's foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies will be adversely affected by changes in exchange rates. The Company enters into forward contracts that are designated as foreign currency cash flow hedges of selected forecasted payments denominated in currencies other than U.S. dollars.
The Company did not have outstanding derivatives for its foreign currency exposure designated as cash flow hedges as of December 31, 2019 and 2018.
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, 2019.
Convertible Note Hedges
The Company entered into convertible note hedges in connection with the issuance of the 1.00% Notes and 1.625% Notes.
Other
At December 31, 2019, 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, 2019, 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 (loss) before income taxes and non-controlling interest are as follows (in millions):
| Year ended December 31, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| United States | $ | (308.2) | $ | (181.8) | $ | (270.1) | |||||||||||||||||||||||
| Foreign | 584.8 | 936.8 | 817.6 | ||||||||||||||||||||||||||
| $ | 276.6 | $ | 755.0 | $ | 547.5 |
The Company's provision (benefit) for income taxes is as follows (in millions):
| Year ended December 31, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||||||||||||||||
| Current: | |||||||||||||||||||||||||||||
| Federal | $ | 1.2 | $ | (2.0) | $ | 26.3 | |||||||||||||||||||||||
| State and local | — | (2.2) | 0.2 | ||||||||||||||||||||||||||
| Foreign | 48.5 | 55.3 | 53.1 | ||||||||||||||||||||||||||
| 49.7 | 51.1 | 79.6 | |||||||||||||||||||||||||||
| Deferred: | |||||||||||||||||||||||||||||
| Federal | (5.0) | 99.4 | (356.3) | ||||||||||||||||||||||||||
| State and local | — | — | 0.4 | ||||||||||||||||||||||||||
| Foreign | 18.0 | (25.4) | 10.8 | ||||||||||||||||||||||||||
| 13.0 | 74.0 | (345.1) | |||||||||||||||||||||||||||
| Total provision (benefit) | $ | 62.7 | $ | 125.1 | $ | (265.5) |
ON SEMICONDUCTOR CORPORATION
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, | |||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||
| U.S. federal statutory rate | 21.0 | % | 21.0 | % | 35.0 | % | |||||||||||||||||||||||||||||
| Increase (decrease) resulting from: | |||||||||||||||||||||||||||||||||||
| State and local taxes, net of federal tax benefit | (2.6) | (1.0) | 2.2 | ||||||||||||||||||||||||||||||||
| Impact of U.S. Tax Reform and related effects (1) | — | 4.7 | (82.2) | ||||||||||||||||||||||||||||||||
| Impact of foreign operations | 3.8 | (1.2) | (1.5) | ||||||||||||||||||||||||||||||||
| Impact of U.S. tax method changes (2) | — | (6.4) | — | ||||||||||||||||||||||||||||||||
| Change in valuation allowance and related effects (3) (4) | 1.8 | 0.6 | 0.4 | ||||||||||||||||||||||||||||||||
| Non-deductible share-based compensation costs | (0.5) | (0.5) | (1.6) | ||||||||||||||||||||||||||||||||
| U.S. federal R&D credit | (3.7) | (1.1) | (1.5) | ||||||||||||||||||||||||||||||||
| Nondeductible officer compensation | 1.5 | 0.4 | 0.8 | ||||||||||||||||||||||||||||||||
| Other | 1.4 | 0.1 | (0.1) | ||||||||||||||||||||||||||||||||
| Total | 22.7 | % | 16.6 | % | (48.5) | % |
(1) For the year ended December 31, 2018, this primarily included 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 included 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.
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(3) For the year ended December 31, 2019, this included an expense of $11.2 million, or 4.0%, primarily related to the write-off of Hong Kong net operating loss (“NOL") and expiration of Japan NOL, netted with the offsetting benefit of $11.2 million, or 4.0%, primarily for the decrease in related valuation allowance for those same Hong Kong and Japan net operating losses. For the year ended December 31, 2018, this included 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 decrease in the related valuation allowance for those same Japan net operating losses.
(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 of $33.0 million or 6.0%, in the line “Impact of U.S. Tax Reform and related effects”
The Company’s effective tax rate for 2019 was 22.7%, which differs from the U.S. federal income tax rate of 21.0%, primarily due to foreign taxes for which the Company will not receive a U.S. tax credit as well as period costs related to the Company's GILTI inclusion.
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 impact of the U.S. tax reform codified under the Tax Act.
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, | ||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
| Net operating loss and tax credit carryforwards | $ | 612.9 | $ | 584.9 | ||||||||||||||||
| 163 (j) interest expense carryforward | 49.3 | — | ||||||||||||||||||
| Tax-deductible goodwill and amortizable intangibles | (48.6) | (29.4) | ||||||||||||||||||
| Capitalization of research and development expenses | 42.7 | — | ||||||||||||||||||
| Reserves and accruals | 27.5 | 57.4 | ||||||||||||||||||
| Property, plant and equipment | (81.2) | (63.5) | ||||||||||||||||||
| Inventories | 22.0 | 20.2 | ||||||||||||||||||
| Undistributed earnings of foreign subsidiaries | (63.7) | (48.7) | ||||||||||||||||||
| Share-based compensation | 10.3 | 7.7 | ||||||||||||||||||
| Pension | 26.3 | 24.3 | ||||||||||||||||||
| Other | 8.0 | 6.0 | ||||||||||||||||||
| Deferred tax assets and liabilities before valuation allowance | 605.5 | 558.9 | ||||||||||||||||||
| Valuation allowance | (357.9) | (347.5) | ||||||||||||||||||
| Net deferred tax asset | $ | 247.6 | $ | 211.4 |
As of December 31, 2019 and 2018, the Company had approximately $521.9 million and $768.9 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 current year utilization. If not utilized, a portion of the NOLs will expire in varying amounts from 2024 to 2036; however, a small portion of the NOL that was generated after December 31, 2017 is carried forward indefinitely.
As of December 31, 2019 and 2018, the Company had approximately $134.5 million and $83.7 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. If not utilized, the credits will expire in varying amounts from 2028 to 2039.
As of December 31, 2019 and 2018, the Company had approximately $825.8 million and $801.0 million, respectively, of state NOL carryforwards, before consideration of valuation allowance or reduction for unrecognized tax benefits. If not utilized, a
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
portion of the NOLs will expire in varying amounts starting in 2020. 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 after 2017 carry forward indefinitely. As of December 31, 2019 and 2018, the Company had $138.6 million and $115.8 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 2020.
As of December 31, 2019 and 2018, the Company had approximately $757.1 million and $734.4 million, respectively, of foreign NOL carryforwards, before consideration of valuation allowance. If not utilized, a portion of the NOLs will begin to expire in varying amounts starting in 2020. A significant portion of these NOLs will expire by 2025. As of December 31, 2019 and 2018, the Company had $76.8 million and $68.8 million, respectively, of foreign credit carryforwards before consideration of valuation allowance. If not utilized, the majority of these credits will expire by 2026.
The Company continues to maintain a valuation allowance of $186.3 million on a portion of its Japan NOLs, which expire in varying amounts from 2020 to 2024.
In addition to the valuation allowance mentioned above on Japan NOLs, 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, 2019, 2018 and 2017, respectively, the Company was 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.
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.
The activity for unrecognized gross tax benefits is as follows (in millions):
| 2019 | 2018 | 2017 | |||||||||||||||
| Balance at beginning of year | $ | 112.2 | $ | 114.8 | $ | 136.7 | |||||||||||
| Acquired balances | 15.5 | — | — | ||||||||||||||
| Additions for tax benefits related to the current year | 9.4 | 7.4 | 23.6 | ||||||||||||||
| Additions for tax benefits of prior years | 8.0 | 2.8 | 4.7 | ||||||||||||||
| Reductions for tax benefits of prior years | (0.2) | (1.9) | (1.6) | ||||||||||||||
| Lapse of statute | (8.2) | (10.9) | (16.3) | ||||||||||||||
| Settlements | (6.7) | — | (4.9) | ||||||||||||||
| Change in rate due to U.S. Tax Reform | — | — | (27.4) | ||||||||||||||
| Balance at end of year | $ | 130.0 | $ | 112.2 | $ | 114.8 |
Included in the December 31, 2019 balance of $130.0 million is $97.2 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, 2019 is $32.8 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 $1.5 million in the next 12 months due to settlement with tax authorities or expiration of the applicable statute of limitations.
The Company did not recognize any additional tax benefit or expense for interest and penalties during the year ended
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
December 31, 2019. The Company recognized approximately $0.8 million of tax benefit and $1.5 million of tax expense for interest and penalties during the years ended December 31, 2018 and 2017, respectively. The Company had approximately $5.1 million, $5.1 million, and $5.9 million of accrued interest and penalties at December 31, 2019, 2018, and 2017, respectively. The Company recognizes interest and penalties accrued in relation to unrecognized tax benefits in tax expense.
Tax years prior to 2016 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 2015. The Company is also subject to routine examinations by various foreign tax jurisdictions in which it operates. With respect to jurisdictions outside the United States, the Company's subsidiaries are generally no longer subject to income tax audits for years prior to 2009. The Company is currently under audit in the following jurisdictions including, but not limited to, Canada, China, the Czech Republic, the Philippines, Singapore and the United Kingdom.
ON SEMICONDUCTOR CORPORATION
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 December 31, 2017 | $ | (43.2) | 2.6 | $ | (40.6) | |||||||||||||||||||||||||||
| Other comprehensive income (loss) 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 December 31, 2018 | (42.5) | 4.6 | (37.9) | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) prior to reclassifications | 0.1 | (19.6) | (19.5) | |||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | 3.1 | 3.1 | |||||||||||||||||||||||||||||
| Net current period other comprehensive income (loss) (1) | 0.1 | (16.5) | (16.4) | |||||||||||||||||||||||||||||
| Balance December 31, 2019 | $ | (42.4) | $ | (11.9) | $ | (54.3) |
(1)Effects of cash flow hedges are net of tax benefit of $4.4 million and net of tax expense of $0.5 million for the years ended December 31, 2019 and December 31, 2018, 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 $0.7 million and $0.8 million in 2019 and 2018, respectively, in millions):
| Amounts Reclassified from Accumulated Other Comprehensive Loss - Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | Statement of Operations and Comprehensive Income Line Item | ||||||||||||||||||||||||||||||
| Interest rate swaps | $ | (3.1) | $ | (3.3) | Interest expense | |||||||||||||||||||||||||||
| Total reclassifications | $ | (3.1) | $ | (3.3) |
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):
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
| Year ended December 31, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Non-cash financing activities: | ||||||||||||||||||||||||||||||||
| Liability incurred for purchase of business | $ | 12.7 | $ | — | $ | — | ||||||||||||||||||||||||||
| Debt assumed through purchase of equity interest and assets | — | 50.6 | — | |||||||||||||||||||||||||||||
| Non-cash activities: | ||||||||||||||||||||||||||||||||
| Capital expenditures in accounts payable and other liabilities | $ | 155.3 | $ | 233.9 | $ | 165.6 | ||||||||||||||||||||||||||
| Right-of-use assets obtained in exchange of lease liabilities (1) | 17.5 | |||||||||||||||||||||||||||||||
| Cash (received) paid for: | ||||||||||||||||||||||||||||||||
| Interest income | $ | (10.2) | $ | (6.1) | $ | (3.0) | ||||||||||||||||||||||||||
| Interest expense | 97.2 | 80.0 | 92.1 | |||||||||||||||||||||||||||||
| Income taxes, net of refunds | 62.9 | 53.2 | 67.8 | |||||||||||||||||||||||||||||
| Operating lease payments in operating cash flows (1) | 37.6 |
(1) These disclosures are not applicable for the years ended December 31, 2018 and 2017 due to the method of adoption of the New Leasing Standard.
The Company adopted ASU 2016-18 on a retrospective basis during the year ended December 31, 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, | ||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
| Consolidated Balance Sheets: | ||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 894.2 | $ | 1,069.6 | $ | 949.2 | ||||||||||||||||||||||||||
| Restricted cash (included in other current assets) | — | 17.5 | 17.4 | |||||||||||||||||||||||||||||
| Cash, cash equivalents and restricted cash in Consolidated Statements of Cash Flows | $ | 894.2 | $ | 1,087.1 | $ | 966.6 |
The restricted cash balance, which included the consideration held in escrow for the acquisition of Aptina in 2014, was settled during the year ended December 31, 2019, upon satisfaction of certain outstanding items contained in the merger agreement relating to such acquisition.
Note 19: Supplementary Financial Information - Selected Quarterly Financial Data (Unaudited)
Consolidated unaudited quarterly financial information is as follows (in millions, except per share data):
ON SEMICONDUCTOR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
| Quarters ended in 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| March 29 | June 28 | September 27 (1) | December 31 | |||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 1,386.6 | $ | 1,347.7 | $ | 1,381.8 | $ | 1,401.8 | ||||||||||||||||||||||||||||||||||||
| Gross Profit (exclusive of the amortization of acquisition-related intangible assets) | 513.7 | 499.0 | 475.2 | 485.7 | ||||||||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to ON Semiconductor Corporation | 114.1 | 101.8 | (60.7) | 56.5 | ||||||||||||||||||||||||||||||||||||||||
| Diluted net income (loss) per common share attributable to ON Semiconductor Corporation | 0.27 | 0.24 | (0.15) | 0.14 | ||||||||||||||||||||||||||||||||||||||||
| (1) The net loss for the quarter ended September 27, 2019 was primarily due to the expensing of $169.5 million relating to the settlement of litigation with PI. | ||||||||||||||||||||||||||||||||||||||||||||
| 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 |
ON SEMICONDUCTOR CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in millions)
| Description | Balance at Beginning of Period | Charged (Credited) 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, 2017 | $ | 474.1 | $ | (30.6) | $ | 18.8 | (1) | $ | — | $ | 462.3 | |||||||||||||||||||||
| Year ended December 31, 2018 | 462.3 | 4.6 | 15.8 | (1) | (135.2) | (2) | 347.5 | |||||||||||||||||||||||||
| Year ended December 31, 2019 | 347.5 | 5.0 | 16.6 | (3) | (11.2) | (4) | 357.9 |
(1) Primarily represents the effects of cumulative translation adjustments.
(2) Primarily relates to the expiration of Japan net operating losses. See Note 16: “Income Taxes”.
(3) Primarily represents the effects of cumulative translation adjustments and includes $14.0 million of additional allowance for deferred tax assets arising from the Quantenna acquisition.
(4) Primarily relates to the write-off of Hong Kong net operating losses upon the liquidation of Sanyo Semiconductor (H.K.) Co., Ltd. as well as the expiration of Japan net operating losses.
Previous: Item 14. Principal Accountant Fees and Services