Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with our audited historical consolidated financial statements, including the notes thereto, which are included elsewhere in this Form 10-K. Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties, and other factors. Actual results could differ materially because of the factors discussed in "Risk Factors" included elsewhere in this Form 10-K.

Executive Overview

This executive overview presents summarized information regarding our industry, markets, business, and operating trends only. For further information relating to the information summarized herein, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in its entirety.

Industry Overview

According to WSTS (an industry research firm), worldwide semiconductor industry sales were $412.1 billion in 2019, a decrease of approximately 12.1% from $468.8 billion in 2018. We participate in unit and revenue surveys and use data summarized by WSTS to evaluate overall semiconductor market trends and to track our progress against the market in the areas we provide semiconductor components. The following table sets forth total worldwide semiconductor industry revenue since 2015:

Year Ended December 31,						Worldwide Semiconductor Industry Sales (1)						Percentage Change
						(in billions)
2019						$412.1						(12.1)%
2018						$468.8						13.7%
2017						$412.2						21.6%
2016						$338.9						1.1%
2015						$335.2						(0.2)%

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(1)Based on shipment information published by WSTS. We believe the data provided by WSTS is reliable, but we have not independently verified it. WSTS periodically revises its information. We assume no obligation to update such information.

As indicated above, worldwide semiconductor sales increased from $335.2 billion in 2015 to $412.1 billion in 2019. The decrease of 12.1% from 2018 to 2019 was the result of decreased demand for semiconductor products. Our revenue decreased by $360.4 million, or 6.1%, from 2018 to 2019.

ON Semiconductor Overview

Our new product development efforts continue to be focused on building solutions in product areas that appeal to customers in focused market segments and across multiple high-growth applications. We collaborate with our customers to identify desired innovations in electronic systems in each end-market that we serve. This enables us to participate in the fastest growing sectors of the market. We also innovate in advanced packaging technologies to support ongoing size reduction in electronic systems and in advanced thermal packaging to support high performance power conversion applications. It is our practice to regularly re-evaluate our research and development spending, to assess the deployment of resources and to review the funding of high-growth technologies. We deploy people and capital with the goal of maximizing our investment in research and development in order to facilitate continued growth by targeting innovative products and solutions for high growth applications that position us to outperform the industry. Our design expertise in analog, digital, mixed signal and imaging ICs, combined with our extensive portfolio of standard products enable the company to offer comprehensive, value-added solutions to our global customers for their electronics systems.

We believe that some of the key factors and trends affecting our current and future results of operations include, but not limited to:

• Macroeconomic conditions affecting the semiconductor industry;

• The cyclicality and seasonality of the semiconductor industry;

• The global economic climate;

• Our significant indebtedness, including the indebtedness incurred for the acquisition of Fairchild and Quantenna;

• The impact of U.S. corporate tax reform and an uncertain corporate tax environment abroad;

• An uncertain political climate and related impacts on global trade, such as tariffs on imports into the U.S. from China;

• The effects of trends in the automotive and industrial end-markets on our revenue;

• Competitive conditions, and in particular, consolidation, within our industry; and

• Underutilization of installed capacity and competitive pricing environment.

Acquisition of Quantenna

On June 19, 2019, we completed our acquisition of Quantenna pursuant to the definitive Agreement and Plan of Merger with each of Quantenna and Raptor Operations Sub, Inc., our wholly-owned subsidiary (“Raptor”), which provided for the merger of Quantenna with Raptor, whereby Quantenna continued as the surviving corporation and our wholly-owned subsidiary. Following the acquisition, Quantenna changed its name to ON Semiconductor Connectivity Solutions, Inc. The purchase price totaled $1,039.3 million, of which $1,026.6 million was paid through December 31, 2019, with the proceeds from a $900.0 million draw against our Revolving Credit Facility and cash on hand. We believe the acquisition of Quantenna creates a strong platform for addressing connectivity solutions for industrial IoT by combining our expertise in power management and bluetooth technologies with Quantenna's Wi-Fi technologies and software capabilities.

Recent ON Semiconductor Results

Our total revenue for the year ended December 31, 2019 was $5,517.9 million, a decrease of 6.1% from $5,878.3 million from the year ended December 31, 2018. The decrease was primarily attributable to reduced demand for our products across PSG, ASG and ISG. During 2019, we reported net income attributable to ON Semiconductor of $211.7 million compared to $627.4 million in 2018. The decrease was primarily due to the impact of reduced demand and a one-time litigation settlement charge. Our gross margin decreased by approximately 230 basis points to 35.8% in 2019 from 38.1% in 2018. The decrease in gross margin was primarily due to a competitive pricing environment and decreased demand for our products.

Business and Macroeconomic Environment Influence on Cost Savings and Restructuring Activities

The semiconductor industry has traditionally been highly cyclical, has often experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions, and may experience significant uncertainty and volatility in the future. We believe our business today is driven more by secular growth drivers and not solely by macroeconomic and industry cyclicality, as was the case historically. As experienced in 2019, we could again experience period-to-period fluctuations in operating results due to general industry or economic conditions.

During the year ended December 31, 2019, geopolitical and macroeconomic factors continued to adversely impact product demand in the semiconductor industry. In light of these factors, we expect that such demand for our products could be adversely affected in the short-term. We also believe, however, that secular megatrends in the automotive, industrial, and cloud-power end-markets will continue to drive long-term growth in the semiconductor industry.

In response to the above industry trends, we are investing and taking other measures to further strengthen our position in the automotive, industrial, and cloud-power end-markets. In an effort to mitigate adverse demand trends in the semiconductor industry, we have historically pursued, and expect to continue to pursue, cost-saving initiatives to align our overall cost structure, capital investments and other expenditures with our expected revenue, spending and capacity levels based on our current sales and manufacturing projections. We have recognized efficiencies from previously implemented restructuring activities and programs and continue to implement profitability enhancement programs to improve our cost structure. We have historically taken significant actions to align our overall cost structure with our expectations of market conditions by focusing on synergies-related cost reductions arising from each of our acquisitions. However, there can be no assurances that we will adequately forecast economic conditions or that we will effectively align our cost structure, capital investments and other expenditures with our revenue, spending and capacity levels in the future.

See Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for information relating to our most recent cost-saving initiatives.

Results of Operations

Our results of operations for the year ended December 31, 2019 includes the partial year results from Quantenna, which we acquired on June 19, 2019.

For a discussion and comparison of the results of our operations for the year ended December 31, 2018 with the year ended December 31, 2017, refer to "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Form 10-K for the year ended December 31, 2018 filed with the SEC on February 20, 2019.

Operating Results

The following table summarizes certain information relating to our operating results that has been derived from our audited consolidated financial statements (in millions):

			Year ended December 31,																											Dollar Change
			2019						2018												2018 to 2019
Revenue			$	5,517.9					$	5,878.3											$	(360.4)
Cost of revenue (exclusive of amortization shown below)			3,544.3						3,639.6												(95.3)
Gross profit			1,973.6						2,238.7												(265.1)
Operating expenses:
Research and development			640.9						650.7												(9.8)
Selling and marketing			301.0						324.7												(23.7)
General and administrative			284.0						293.3												(9.3)
Litigation settlement			169.5						—												169.5
Amortization of acquisition-related intangible assets			115.2						111.7												3.5
Restructuring, asset impairments and other charges, net			28.7						4.3												24.4
Goodwill and intangible asset impairment			1.6						6.8												(5.2)
Total operating expenses			1,540.9						1,391.5												149.4
Operating income			432.7						847.2												(414.5)
Other income (expense), net:
Interest expense			(148.3)						(128.2)												(20.1)
Interest income			10.2						6.1												4.1
Loss on debt refinancing and prepayment			(6.2)						(4.6)												(1.6)
Gain on divestiture of business			—						5.0												(5.0)
Licensing income			—						36.6												(36.6)
Other expense			(11.8)						(7.1)												(4.7)
Other income (expense), net			(156.1)						(92.2)												(63.9)
Income before income taxes			276.6						755.0												(478.4)
Income tax provision			(62.7)						(125.1)												62.4
Net income			213.9						629.9												(416.0)
Less: Net income attributable to non-controlling interest			(2.2)						(2.5)												0.3
Net income attributable to ON Semiconductor Corporation			$	211.7					$	627.4											$	(415.7)

Revenue

Revenue was $5,517.9 million and $5,878.3 million for 2019 and 2018, respectively. The decrease of $360.4 million, or 6.1% was primarily attributable to an 8.2%, 4.8% and 1.5% decrease in revenue in PSG, ASG and ISG, respectively, which is further explained below.

Revenue by reportable segment for each were as follows (dollars in millions):

			2019						As a % of Revenue (1)						2018												As a % of Revenue (1)
PSG			$	2,788.3					50.5		%				$	3,038.2											51.7		%
ASG			1,972.3						35.7		%				2,071.2												35.2		%
ISG			757.3						13.7		%				768.9												13.1		%
Total revenue			$	5,517.9											$	5,878.3

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

Revenue from PSG

Revenue from PSG decreased by $249.9 million, or approximately 8%, which was due to a combination of a decrease in volume of products sold and a competitive pricing environment. The revenue in our Protection and Signal Division, Integrated Circuits Division, and High Power Division, decreased by $106.5 million, $96.6 million and $91.5 million, respectively. This was partially offset by an increase in revenue of $30.1 million and $15.0 million from our Foundry Services and Power Mosfet Division, respectively.

Revenue from ASG

Revenue from ASG decreased by $98.9 million, or approximately 5%, which was also due to a combination of a decrease in volume of products sold and a competitive pricing environment. The revenue in our Industrial and Offline Power Division and our Signal Processing, Wireless and Medical Division, decreased by $100.5 million and $56.4 million, respectively. This was partially offset by $84.8 million of revenue from Quantenna, which was acquired during 2019.

Revenue from ISG

Revenue from ISG decreased by $11.6 million, or 1.5%, which was due to a decrease in our Industrial Sensing Division revenue of $20.8 million, primarily due to decreased demand, which was partially offset by an increase in revenue in other divisions.

Revenue by Geographic Location

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

			2019						As a % of Revenue (1)						2018						As a % of Revenue (1)
Singapore			$	1,713.1					31.0		%				$	1,955.0					33.3		%
Hong Kong			1,417.3						25.7		%				1,489.1						25.3		%
United Kingdom			921.6						16.7		%				946.5						16.1		%
United States			810.3						14.7		%				862.7						14.7		%
Other			655.6						11.9		%				625.0						10.6		%
Total			$	5,517.9											$	5,878.3

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

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

Our gross profit by reportable segment was as follows (dollars in millions):

			2019									As a % of Segment Revenue (1)												2018									As a % of Segment Revenue (1)
PSG			$	976.0								35.0		%										$	1,110.1								36.5		%
ASG			794.8									40.3		%										878.3									42.4		%
ISG			275.4									36.4		%										317.1									41.2		%
Gross profit for all segments			$	2,046.2																				$	2,305.5
Unallocated manufacturing costs (2)			(72.6)									(1.3)		%										(66.8)									(1.1)		%
Total gross profit			$	1,973.6								35.8		%										$	2,238.7								38.1		%

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

(2) Unallocated manufacturing costs are presented as a percentage of total revenue (includes expensing of the fair market value step-up of inventory of $19.6 million during 2019 and $1.0 million during 2018).

The decrease in gross profit of $265.1 million, or approximately 12%, was primarily due to the impact of the decrease in sales volume, higher fixed costs due to the expansion in our manufacturing capacity as well as the expensing of $19.6 million excess over book value of inventory, commonly referred to as the fair market value step-up, from the Quantenna acquisition.

Gross margin decreased to 35.8% during 2019 compared to 38.1% during 2018. The decrease was due to a competitive pricing environment resulting in a decline in average selling prices, higher demand for lower margin products, increased manufacturing costs due to a higher mix of external manufacturing and decreased demand for our products, as explained in the revenue section.

Operating Expenses

Research and Development

Research and development expenses were $640.9 million and $650.7 million for 2019 and 2018, respectively, representing approximately 12% of revenue in 2019 and 11% of revenue for 2018. The decrease in research and development expenses of $9.8 million, or approximately 2%, was primarily related to a decrease in variable compensation in 2019, which was partially offset by expenses in Quantenna.

Selling and Marketing

Selling and marketing expenses were $301.0 million and $324.7 million for 2019 and 2018, respectively, representing approximately 5% of revenue in 2019 and 6% of revenue in 2018. The decrease in selling and marketing expenses of $23.7 million, or approximately 7%, was primarily related to a decrease in variable compensation in 2019, which was partially offset by expenses in Quantenna.

General and Administrative

General and administrative expenses were $284.0 million and $293.3 million, representing approximately 5%, of revenue for 2019 and 2018, respectively. The decrease in general and administrative expenses of $9.3 million, or approximately 3%, was due to a decrease in variable compensation in 2019, which was partially offset by an increase in acquisition-related expenses and the expenses in Quantenna.

Litigation Settlement

Litigation settlement expense was $169.5 million for 2019, compared to zero for 2018. On October 19, 2019, we entered into the Settlement Agreement with PI pursuant to which the parties agreed to withdraw all outstanding legal and administrative disputes. Pursuant to the Settlement Agreement, we paid PI $175.0 million in cash on October 22, 2019, of which $5.5 million was previously accrued.

Amortization of Acquisition—Related Intangible Assets

Amortization of acquisition-related intangible assets was $115.2 million and $111.7 million for 2019 and 2018, respectively. The increase of $3.5 million, or approximately 3%, during 2019 compared to 2018 was primarily due to the amortization of our technology-related intangible assets acquired from the SensL acquisition, which began in 2019, along with the amortization of intangible assets acquired from Quantenna.

See Note 5: ''Acquisitions, Divestitures and Licensing Transactions'' and Note 6: ''Goodwill and Intangible Assets'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information with respect to the acquired intangible assets.

Restructuring, Asset Impairments and Other Charges, Net

Restructuring, asset impairments and other charges, net was $28.7 million and $4.3 million for 2019 and 2018, respectively. The information below summarizes the major activities in each year.

2019

During 2019, we recorded $28.7 million of restructuring charges primarily related to the post-Quantenna acquisition related restructuring program as well as certain restructuring actions undertaken by us aimed at cost savings, primarily through workforce reductions.

2018

During 2018, we recorded approximately $4.3 million of net charges attributable to the asset impairments and severance charges relating to the restructuring programs in effect during the period, offset by gain on sale of certain assets.

For additional information, see Note 7: ''Restructuring, Asset Impairments and Other Charges, net'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Goodwill and Intangible Asset Impairment

Goodwill and intangible asset impairments were $1.6 million and $6.8 million for 2019 and 2018, respectively. The information below summarizes the major activities in each year.

2019

During 2019, we abandoned two of our previously capitalized IPRD projects and recorded intangible asset impairment charges of $1.6 million.

2018

During 2018, we recorded $3.3 million of goodwill impairment charges and $3.5 million relating to the impairment in the value of one project as a result of the indefinite-lived impairment test performed during the fourth quarter of 2018.

See Note 6: ''Goodwill and Intangible Assets'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Other Income and Expenses

Interest Expense

Interest expense increased by $20.1 million, or approximately 16%, to $148.3 million during 2019 compared to $128.2 million in 2018, primarily due to an increase in the outstanding long-term debt balance incurred relating to the acquisition of Quantenna. We recorded amortization of debt discount to interest expense of $37.8 million and $36.1 million for 2019 and 2018, respectively. Our average gross amount of long-term debt balance (including current maturities) during 2019 and 2018 was $3,344.1 million and $3,057.0 million, respectively. Our weighted average interest rate on our gross amount of long-term

debt (including current maturities) was 4.4% and 4.2% per annum in 2019 and 2018, respectively. See “Liquidity and Capital Resources—Key Financing and Capital Events” below and Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a description of our indebtedness and our refinancing activities.

Loss on Debt Refinancing and Prepayment

2019

Loss on debt refinancing and prepayment increased by $1.6 million, or approximately 35%, from $4.6 million in 2018 to $6.2 million in 2019. During 2019, we recorded a loss on debt refinancing and prepayment of $5.8 million related to the Seventh Amendment and $0.4 million related to the Fifth Amendment.

We recorded a debt extinguishment charge of $2.6 million related to refinancing of the Term Loan "B" Facility and expensed $2.0 million of unamortized debt discount and issuance costs attributable to the partial pay-down of the Term Loan "B" Facility during 2018.

See Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Gain on Divestiture of Business

Gain on divestiture of business was zero in 2019, compared to $5.0 million for 2018. During 2018, we divested the transient voltage suppressing diodes business we acquired from Fairchild to TSC America, Inc. and recorded a gain of $4.6 million. For additional information, see Note 5: ''Acquisitions, Divestitures and Licensing Transactions'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Licensing Income

Licensing income was zero in 2019 compared to $36.6 million for 2018. The 2018 licensing income was primarily due to the achievement of the established criteria based on which income was recognized under the various licensing agreements. We completed recognizing all licensing income under existing agreements as of December 31, 2018.

See Note 5: ''Acquisitions, Divestitures and Licensing Transactions'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for more information.

Other Income (Expense)

Other expense increased by $4.7 million, or approximately 66%, from expense of $7.1 million in 2018 to expense of $11.8 million in 2019. The increase in other expense is attributed to an increase in recognized actuarial loss of $9.8 million, which was partially offset by $7.8 million of indemnification gain relating to the resolution of a foreign tax dispute and other IP related claims recognized in 2019.

Income Tax Provision

We recorded an income tax provision of $62.7 million and $125.1 million in 2019 and 2018, respectively.

The income tax provision for the year ended December 31, 2019 consisted primarily of $66.4 million for income and withholding taxes of certain of our foreign and domestic operations, $6.0 million relating to the resolution of a foreign tax dispute and $3.3 million of new reserves and interest on existing reserves for uncertain tax positions in foreign jurisdictions and $2.1 million of prior year adjustments. These amounts were offset by discrete benefits of $9.2 million relating to the release of reserves and interest for uncertain tax positions in foreign jurisdictions related to prior years and $5.9 million relating to equity award excess tax benefits.

The income tax provision for the year ended December 31, 2018 consisted primarily of $180.0 million for income and withholding taxes of certain of our foreign and domestic current year operations and $35.2 million related to the finalization of the Company's tax impacts of U.S. tax reform. These expenses were offset by a one-time benefit of $48.2 million related to U.S. tax method changes made during the year that impacted the Company’s Global Intangible Low Tax Income (“GILTI”) inclusion, a benefit of $17.1 million relating to an increase in deferred tax assets expected to be realized in the foreseeable future due to the liquidation of a foreign subsidiary, a benefit of $14.0 million relating to the lapse of the statute of limitations on certain unrecognized tax benefits, a benefit of $7.6 million relating to equity award excess tax benefits and a benefit of $3.2 million relating to changes in valuation allowance.

In line with the OECD’s BEPS conclusions and changes to tax laws in the United States and certain countries in the European Union, we are considering simplifying our corporate structure by repatriating the economic rights to our intellectual property to the United States during the second half of 2020. The impact of such repatriation may have a material impact on our 2020 effective tax rate.

We expect our effective tax rate, before discrete items or the impact mentioned above from the proposed repatriation of the economic rights to our intellectual property, to be between 22% and 26% until we fully utilize all of our U.S. federal net operating losses. The primary difference between our effective tax rate and the federal statutory rate of 21% is due to foreign taxes for which the Company will not receive a U.S. tax credit as a result of U.S. tax reform until our U.S. federal net operating losses are fully utilized. Once our U.S. federal net operating losses are fully utilized, we expect our future effective tax rate, before discrete items, to approximate, or be lower than, the federal statutory rate of 21%. We anticipate our U.S. federal net operating losses and credits will be substantially utilized by 2021.

Our cash tax, as a percentage of income before income taxes (“Cash Tax Rate”), has historically been significantly lower than our effective tax rate due to the current utilization of our U.S. federal net operating losses and credits. During 2019, our Cash Tax Rate approximated our effective tax rate primarily due to the litigation settlement with PI. We expect our future Cash Tax Rate to be lower than our effective tax rate until our U.S. federal net operating losses and credits are fully utilized.

We continue to maintain a full valuation allowance on our U.S. state deferred tax assets and a valuation allowance on foreign net operating losses and tax credits in certain other foreign jurisdictions, a substantial portion of which relate to Japan net operating losses which are projected to expire prior to utilization.

For additional information, see Note 16: ''Income Taxes'' in the notes to the audited consolidated financial statements included elsewhere in this Form 10-K.

Liquidity and Capital Resources

This section includes a discussion and analysis of our cash requirements, off-balance sheet arrangements, contingencies, sources and uses of cash, operations, working capital and long-term assets and liabilities.

Contractual Obligations

Our principal outstanding contractual obligations relate to our long-term debt, operating leases and purchase obligations. The following table summarizes our contractual obligations at December 31, 2019 and the effect such obligations are expected to have on our liquidity and cash flow in the future (in millions):

			Payments Due by Period
Contractual obligations (1)			Total						2020						2021						2022						2023						2024						Thereafter
Long-term debt, excluding finance leases (2)			$	4,332.1					$	868.9					$	117.7					$	117.1					$	691.4					$	890.3					$	1,646.7
Operating leases			144.8						31.3						26.0						21.4						15.1						14.1						36.9
Purchase obligations (3):
Capital purchase obligations			47.4						43.9						3.2						0.1						0.1						0.1						—
Inventory and external manufacturing purchase obligations			216.1						183.0						7.7						6.8						6.6						6.5						5.5
Information technology, communication and mainframe support services			14.2						10.0						2.8						0.6						0.6						0.2						—
Other (4)			387.9						38.1						10.6						337.7						1.5						—						—
Total contractual obligations			$	5,142.5					$	1,175.2					$	168.0					$	483.7					$	715.3					$	911.2					$	1,689.1

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(1)The table above excludes approximately $28.1 million of liabilities related to unrecognized tax benefits because we are unable to reasonably estimate the timing of the settlement of such liabilities.

(2)Includes interest payments at applicable rates as of December 31, 2019.

(3)These represent our off-balance sheet arrangements (See “Liquidity and Capital Resources—Off-Balance Sheet Arrangements” for a description of our off-balance sheet arrangements).

(4)During 2019, we incurred additional commitments of $330.0 million relating to the pending acquisition of a manufacturing facility which is included in the contractual obligations table. See Note 5: ''Acquisitions, Divestitures and Licensing Transactions'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for more information.

The table also excludes our pension obligations. We expect to make cash contributions to comply with local funding requirements and required benefit payments of approximately $17.3 million and $5.0 million, respectively, in 2020. This future payment estimate assumes we continue to meet our statutory funding requirements. The timing and amount of contributions may be impacted by a number of factors, including the funded status of the plans. Beyond 2020, the actual amounts required to be contributed are dependent upon, among other things, interest rates, underlying asset returns and the impact of legislative or regulatory actions related to pension funding obligations. See Note 12: ''Employee Benefit Plans'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for more information on our pension obligations.

Our balance of cash and cash equivalents was $894.2 million as of December 31, 2019. We believe that our cash flows from operations, coupled with our existing cash and cash equivalents, and cash available from our Revolving Credit Facility, will be adequate to fund our operating and capital needs for at least the next 12 months. Total cash and cash equivalents at December 31, 2019 include approximately $371.9 million available in the United States. We require a substantial amount of cash in the United States for operating requirements, debt service, debt repayments and acquisitions. While we hold a significant amount of cash and cash equivalents outside the United States in various foreign subsidiaries, we have the ability to obtain cash in the United States in order to cover our domestic needs, through distributions from our foreign subsidiaries, by utilizing existing credit facilities or through new bank loans or debt obligations.

See Note 9: ''Long-Term Debt,'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for a discussion of our long-term debt. See "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" included elsewhere in this Form 10-K for a discussion of restrictions on our ability to pay dividends and our stock repurchase activities.

Off-Balance Sheet Arrangements

In the ordinary course of business, we provide standby letters of credit or other guarantee instruments to certain parties in connection with certain transactions including, but not limited to: material purchase commitments, agreements to mitigate collection risk, leases, utilities or customs guarantees. As of December 31, 2019, our 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 our Revolving Credit Facility as of December 31, 2019, which reduces our borrowing capacity dollar-for-dollar. As of December 31, 2019, we also had outstanding guarantees and letters of credit outside of our Revolving Credit Facility in the amount of $11.7 million.

As part of securing financing in the ordinary course of business, we issued guarantees related to certain of our subsidiaries' finance lease obligations, equipment financing, lines of credit and real estate mortgages, which totaled $1.8 million as of December 31, 2019. Based on historical experience and information currently available, we believe that we will not be required to make payments under the standby letters of credit or guarantee arrangements for the foreseeable future.

We have not recorded any liability in connection with these letters of credit and guarantee arrangements. See Note 9: ''Long-Term Debt,'' and Note 13: ''Commitments and Contingencies'' in the notes to our audited consolidated financial statements found elsewhere in this Form 10-K for additional information.

Contingencies

We are a party to a variety of agreements entered into in the ordinary course of business pursuant to which we may be obligated to indemnify 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 us require us to indemnify the other party against losses due to IP infringement, environmental contamination and other property damage, personal injury, our failure to comply with applicable laws, our negligence or willful misconduct or our breach of representations, warranties or covenants related to such matters as title to sold assets.

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

We maintain directors’ and officers’ insurance policies that indemnify our directors and officers against various liabilities, including certain liabilities under the Exchange Act, that might be incurred by any director or officer in his or her capacity as such.

The Fairchild acquisition agreement provides for indemnification and insurance rights in favor of Fairchild’s then current and former directors, officers and employees. Specifically, we have agreed that, for no fewer than six years following the Fairchild acquisition, we 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 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 insurance policies in effect as of the date of the Quantenna Agreement.

While our 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 our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under any of these indemnities have not had a material effect on our business, financial condition, results of operations or cash flows, and we do not believe that any amounts that we may be required to pay under these indemnities in the future will be material to our business, financial condition, results of operations or cash flows.

See "Legal Proceedings" and Note 13: ''Commitments and Contingencies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for possible contingencies related to legal matters. See also "Business—Government Regulation" for information on certain environmental matters.

Sources and Uses of Cash

We require cash to fund our operating expenses and working capital requirements, including outlays for strategic acquisitions and investments, for research and development, to make capital expenditures, to repurchase our common stock and other Company securities, and to pay debt service, including principal and interest and finance lease payments. We expect interest expense to remain significant in future periods as we continue to service our debt. Our principal sources of liquidity are cash on hand, cash generated from operations and funds from external borrowings and equity issuances. In the near term, we expect to fund our primary cash requirements through cash generated from operations and with cash and cash equivalents on hand. We also have the ability to utilize our Revolving Credit Facility.

As part of our business strategy, we review acquisition and divestiture opportunities and proposals on a regular basis. During 2019, we completed the acquisition of Quantenna. See Note 5: ''Acquisitions, Divestitures and Licensing Transactions'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

We believe that the key factors that could affect our internal and external sources of cash include:

• Factors that affect our results of operations and cash flows, including the impact on our business and operations as a result of changes in demand for our products, competitive pricing pressures, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, the impact of our restructuring programs on our production and cost efficiency and our ability to make the research and development expenditures required to remain competitive in our business; and

• Factors that affect our access to bank financing and the debt and equity capital markets that could impair our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing, and our ability to maintain compliance with covenants under our debt agreements in effect from time to time.

Our ability to service our long-term debt, including our 1.625% Notes, 1.00% Notes, Revolving Credit Facility and Term Loan "B" Facility, to remain in compliance with the various covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance, as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control.

If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us. We believe that cash flow from operating activities coupled with existing cash and cash equivalents and existing credit facilities will be adequate to fund our operating and capital needs, as well as enable us to maintain compliance with our various debt agreements, through at least the next 12 months. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.

During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures for inventory, operating expenditures and capital expenditures to reflect the current market conditions and our projected sales and

demand. Our capital expenditures are primarily directed toward production equipment and capacity expansion. Our capital expenditure levels can materially influence our available cash for other initiatives. For example, during 2019, we paid approximately $534.6 million for capital expenditures, while in 2018 we paid approximately $514.8 million. While our capital expenditures have historically been approximately 6% to 7% of annual revenue, we incurred capital expenditures of approximately 10% and 9% of annual revenue in 2019 and 2018, respectively, and expect to incur capital expenditures of approximately 8% of revenue in 2020 to further improve our manufacturing cost structure. Future capital expenditures are expected to be lower, however, may be impacted by events and transactions that are not currently forecasted.

On March 31, 2017, we completed the private unregistered offering of $575.0 million aggregate principal amount of the 1.625% Notes, which amount includes the full exercise of the initial purchasers’ option to purchase additional 1.625% Notes. 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.

On November 30, 2017, we entered into the Third Amendment (as defined below) pursuant to which, among other things, we increased the amount that may be borrowed under the Revolving Credit Facility to $1.0 billion. In connection with the Third Amendment, we prepaid $400.0 million of borrowings under the Term Loan “B” Facility.

On June 12, 2019, the Company entered into the Fifth Amendment (as defined below) to the Amended Credit Agreement. The Fifth Amendment provided for, among other things, modifications to the Amended Credit Agreement to increase the amount that may be borrowed pursuant to the Revolving Credit Facility by $900.0 million to $1.9 billion. The $900.0 million was drawn to partially fund the acquisition of Quantenna on June 19, 2019.

On August 15, 2019, the Company entered into the Sixth Amendment (as defined below) to the Amended Credit Agreement, 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 (as defined below) to the Amended Credit Agreement. The Seventh Amendment provided for, among other things, modifications to the Amended Credit Agreement to 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. We utilized the additional borrowings under the Term Loan "B" Facility to repay $500.0 million of outstanding balance under the Revolving Credit Facility.

As of December 31, 2019, there was $1,630.9 million outstanding under the Term Loan “B” Facility and $800.0 million outstanding under the Revolving Credit Facility. The associated interest expense related to the Term Loan “B” Facility and Revolving Credit Facility has had, and will continue to have, a material impact on our results of operations throughout the term of the Amended Credit Agreement.

During the year ended December 31, 2019, we repurchased 7.8 million shares of common stock worth approximately $138.9 million under the 2018 Share Repurchase Program.

Cash Management

Our ability to manage cash is limited, as our primary cash inflows and outflows are dictated by the terms of our sales and supply agreements, contractual obligations, debt instruments and legal and regulatory requirements. While we have some flexibility with respect to the timing of capital equipment purchases, we must invest in capital equipment on a timely basis to allow us to maintain our manufacturing efficiency and support our platforms of new products.

Primary Cash Flow Sources

Our long-term cash generation is dependent on the ability of our operations to generate cash. Our cash flows from operating activities were $694.7 million, $1,274.2 million, and $1,094.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Our cash flows provided by operating activities for the year ended December 31, 2019 decreased by $579.5 million, or 45.5%, compared to the year ended December 31, 2018. The decrease was primarily attributable to a reduction in net income resulting in lower cash flows, payment of variable compensation for prior year and litigation settlement payments. Our ability to maintain positive operating cash flows is dependent on, among other factors, our success in achieving our revenue goals and manufacturing and operating cost targets.

Our management of our assets and liabilities, including both working capital and long-term assets and liabilities, also influences our operating cash flows, and each of these components is discussed below.

Working Capital

Working capital, calculated as total current assets less total current liabilities, fluctuates depending on end-market demand and our effective management of certain items such as receivables, inventory and payables. In times of escalating demand, our working capital requirements may be affected as we purchase additional manufacturing materials and increase production. Our working capital may also be affected by restructuring programs, which may require us to use cash for severance payments, asset transfers and contract termination costs. In addition, our working capital may be affected by acquisitions and transactions involving our convertible notes and other debt instruments. Our working capital, excluding cash and cash equivalents and the current portion of long-term debt, was $1,043.4 million as of December 31, 2019 and has fluctuated between $767.4 million and $1,043.4 million at the end of each of our last eight fiscal quarters. Our working capital, including cash and cash equivalents and the current portion of long-term debt, was $1,201.6 million as of December 31, 2019 and has fluctuated between $1,022.0 million and $1,797.4 million at the end of each of our last eight fiscal quarters.

Although investments made to fund working capital will reduce our cash balances, these investments are necessary to support business and operating initiatives. For the year ended December 31, 2019, our working capital was most significantly impacted by our payments for variable compensation, litigation settlement payments and capital expenditures. See Note 9: ''Long-Term Debt'' and Note 10: ''Earnings Per Share and Equity'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Long-Term Assets and Liabilities

Our long-term assets consist primarily of property, plant and equipment, intangible assets, deferred taxes and goodwill.

Our manufacturing rationalization plans have included efforts to utilize our existing manufacturing assets and supply arrangements more efficiently. We believe that near-term access to additional manufacturing capacity, should it be required, could be readily obtained on reasonable terms through manufacturing agreements with third parties. We will continue to look for opportunities to make strategic purchases in the future for additional capacity.

Our long-term liabilities, excluding long-term debt and deferred taxes, consist of liabilities under our foreign defined benefit pension plans, operating lease liabilities and contingent tax reserves. In regard to our foreign defined benefit pension plans, our annual funding of these obligations is equal to the minimum amount legally required in each jurisdiction in which the plans operate. This annual amount is dependent upon numerous actuarial assumptions. For additional information, see Note 12: ''Employee Benefit Plans'', "Note 8: ''Balance Sheet Information'' and Note 16: ''Income Taxes'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Key Financing and Capital Events

Overview

For the past several years, we have undertaken various measures to secure liquidity to pursue acquisitions, repurchase shares of our common stock, reduce interest costs, amend existing key financing arrangements and, in some cases, extend a portion of our debt maturities to continue to provide us additional operating flexibility. Certain of these measures continued in 2019. Set forth below is a summary of certain key financing events affecting our capital structure during the last three years. For further discussion of our debt instruments, see Note 9: ''Long-Term Debt'' and for further discussion on Share Repurchase Programs, see Note 10: ''Earnings Per Share and Equity'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Recent Events

2019 Financing Events

Amendments to the Amended Credit Agreement

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 by $900.0 million 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 June 19, 2019, the Company drew $900.0 million of the Revolving Credit Facility to partially fund the acquisition of Quantenna.

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 (defined above), 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.

Share Repurchase Program

During the year ended December 31, 2019, we repurchased 7.8 million shares of our common stock for an aggregate purchase

price of $138.9 million pursuant to the 2018 Share Repurchase Program.

2018 Financing Events

Amendments to the Amended Credit Agreement

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

Pursuant to the Fourth Amendment, ABR Loans will accrue interest at (i) a base rate per annum equal to the highest of (x) the Federal funds rate plus 0.50%, (y) the prime commercial lending rate announced by the Agent from time to time as its prime lending rate and (z) the Adjusted LIBO Rate for a one month interest period (or if such day is not a business day, the immediately preceding business day) (determined after giving effect to any applicable “floor”) plus 1.00%; provided that, the Adjusted LIBO Rate for any day shall be based on the LIBO Rate (as defined in the Amended Credit Agreement), subject to the interest rate floors set forth in the Amended Credit Agreement, plus (ii) an applicable margin equal to (x) 0.25% with respect to borrowings under the Revolving Credit Facility (with step-ups as set forth in the Amended Credit Agreement) or (y) 0.75% with respect to borrowings under the Term Loan “B” Facility.

During the year ended December 31, 2018 we prepaid $70.0 million of borrowings under the Term Loan “B” Facility.

Share Repurchase Program

During the year ended December 31, 2018, we repurchased 16.8 million shares of our common stock for an aggregate purchase price of $315.0 million under the 2014 Share Repurchase Program.

2017 Financing Events

Amendments to the Amended Credit Agreement

On April 15, 2016, we and the Guarantors entered into the Amended Credit Agreement. On March 31, 2017, we and the Guarantors entered into the Second Amendment to the Amended Credit Agreement (the "Second Amendment"), which among other things, reduced the interest rates payable under the Term Loan "B" Facility.

On November 30, 2017, we and the Guarantors entered into the Third Amendment to the Amended Credit Agreement (the “Third Amendment”). The Third Amendment provided for, among other things, modifications to the Amended Credit Agreement to reduce the interest rate payable under the Term Loan “B” Facility and to increase the amount that may be borrowed pursuant to the Revolving Credit Facility to $1.0 billion.

In connection with the Third Amendment, we prepaid $400.0 million of borrowings under the Term Loan “B” Facility, using the proceeds from the borrowings under the Revolving Credit Facility. Additionally, we also prepaid $200.0 million of borrowings under the Term Loan "B" Facility during 2017.

Issuance of 1.625% Notes

On March 31, 2017, we completed a private placement of $575.0 million of our 1.625% Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 1.625% Notes are governed by an indenture (the “1.625% Indenture”) between the Company, the guarantors party thereto, and Wells Fargo Bank, National Association, as trustee. 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 our subsidiaries that is a borrower or guarantor under our Amended Credit Agreement.

Share Repurchase Program

During the year ended December 31, 2017, we repurchased approximately 1.6 million shares of our common stock for an aggregate purchase price of $25.0 million pursuant to the 2014 Share Repurchase Program in connection with the offering of the 1.625% Notes.

Debt Guarantees and Related Covenants

As of December 31, 2019, we were in compliance with the indentures relating to our 1.00% Notes and 1.625% Notes and with covenants relating to our Term Loan “B” Facility, Revolving Credit Facility and our other debt agreements. Our 1.00% Notes are senior to the existing and future subordinated indebtedness of ON Semiconductor and its guarantor subsidiaries. Our 1.625% Notes rank equally in right of payment to all of our existing and future senior debt and as unsecured obligations are subordinated to all of our existing and future secured debt. See Note 9: ''Long-Term Debt'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K for additional information.

Critical Accounting Policies and Estimates

The accompanying discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. We utilize the following critical accounting policies in the preparation of our financial statements.

Use of Estimates. The preparation of financial statements in accordance with GAAP requires us 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. We evaluate these estimates and judgments on an ongoing basis and base our estimates on experience, current and expected future conditions, third-party evaluations and various other assumptions that we believe 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.

Revenue**.** We generate revenue from sales of our semiconductor products to OEMs, electronic manufacturing service providers and distributors. We also generate revenue, to a much lesser extent, from product development agreements and manufacturing services provided to customers. We recognize revenue when we satisfy a performance obligation in an amount reflecting the consideration to which we expect to be entitled. For sales agreements, we have identified the promise to transfer products, each of which is distinct, to be the performance obligation. For product development agreements, we have identified the completion of a service defined in the agreement to be the performance obligation. We apply 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. We allocate the transaction price to each distinct product based on its relative stand-alone selling price. In determining the transaction price, we evaluate whether the price is subject to refund or adjustment to determine the net consideration to which we expect to be entitled. Substantially all of our revenue is recognized at the time control of the products transfers to the customer.

Sales to certain distributors, primarily those with ship and credit rights, can be subject to price adjustment on certain products. We develop an estimate of their expected claims under the ship and credit program based on the historical claims data submitted by product and customer and expected future claims, which requires the use of estimates and assumptions related to the amount of each claim as well as the historical period used to develop the estimate.

Our 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. 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, we recognize a related asset for the right to recover returned products with a corresponding reduction to cost of goods sold. We record a reserve for cash discounts as a reduction to accounts receivable and

a reduction to revenue, based on the experience with each customer. Although payment terms vary, most distributor agreements require payment within 30 days. In addition, the Company offers cash discounts to certain customers for payments received within an agreed upon time, generally 10 days after shipment.

Inventories**.** We carry our inventories at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or net realizable value and record provisions for potential 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 provisions can influence our results from operations. For example, when demand falls for a given part, all or a portion of the related inventory that is considered to be in excess of anticipated demand is reserved, impacting our cost of revenue and gross profit. If demand recovers and the parts previously reserved are sold, we will generally recognize a higher than normal margin. However, the majority of product inventory that has been previously reserved is ultimately discarded. Although we do sell some products that have previously been written down, such sales have historically been relatively consistent over the period and the related impact on our margins has not been significant.

Share-Based Compensation. We record compensation expense for all share-based payment awards including RSUs and ESPPs and measure them at the grant date, based on the estimated fair value of the award, recognized as an expense over the employee’s requisite service period. Determining the amount of share-based compensation to be recorded requires us to develop estimates to be used in calculating the grant-date fair value of the award. We calculate the grant-date fair value of the award using valuation models, which are based on historical information and judgment regarding market factors and trends. For the past several years, we have utilized RSUs as our primary equity incentive compensation for employees. We have outstanding awards with service, performance, and market-based vesting provisions.

Income Taxes. Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which we 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 we determine 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 we determine 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.

We recognize and measure 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. Our 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 our effective tax rate.

Business Combination. We use significant estimates and assumptions in allocating the purchase price of acquired business by utilizing established valuation techniques appropriate for the technology industry to record the acquired assets and liabilities at fair value. We utilize 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. 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 and involves significant assumptions as to cash flows, associated expenses, long-term growth rates and discount rates. The cost approach takes into account the cost to replace (or reproduce) the asset and involves assumptions relating to the asset's value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date. 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.

Impairment of Goodwill, Indefinite-lived Intangible Assets and Long-Lived Assets. We evaluate our goodwill for potential impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Our impairment evaluation consists of a qualitative assessment, and if deemed necessary, a quantitative test is performed which compares the fair value of a reporting unit with its carrying amount, including goodwill.

If the fair value of the reporting unit exceeds the carrying value of the net assets associated with that unit, goodwill is not considered impaired. If the carrying value of the net assets associated with the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and will be determined as the amount by which the reporting units carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Determining the fair value of our 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. We determine the fair value of our 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. We consider historical rates and current market conditions when determining the discount and long-term growth rates to use in its analysis. We consider 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.

We are required to test our IPRD assets for impairment annually using the guidance for indefinite-lived intangible assets. An IPRD asset is considered to be impaired when the asset’s carrying amount is greater than its fair value. Our impairment evaluation consists of first assessing qualitative factors, and if deemed necessary, we calculate the fair value of the IPRD asset and record an impairment charge if the carrying amount exceeds fair value. We determine 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.

We evaluate the recoverability of the carrying amount of our property, plant and equipment and intangible assets (excluding IPRD), whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be fully recoverable. Impairment is first assessed when the undiscounted expected cash flows derived for 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. We continually apply our best judgment when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments and the fair value of an impaired asset group. The dynamic economic environment in which we operate and the resulting assumptions used to estimate future cash flows impact the outcome of our impairment tests.

Contingencies**.** We are involved in a variety of legal matters that arise in the normal course of business. Based on the available information, we evaluate the relevant range and likelihood of potential outcomes and we record the appropriate liability when the amount is deemed probable and reasonably estimable.

For a further listing and discussion of our accounting policies, see Note 2: ''Significant Accounting Policies'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 4: ''Recent Accounting Pronouncements'' in the notes to our audited consolidated financial statements included elsewhere in this Form 10-K.