Attached files

file filename
EX-10.3 - AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT - DONALD COLVIN - ON SEMICONDUCTOR CORPdex103.htm
EX-10.5 - AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT - ROBERT CHARLES MAHONEY - ON SEMICONDUCTOR CORPdex105.htm
EX-31.1 - CERTIFICATION BY CEO PURSUANT TO SECTION 302 - ON SEMICONDUCTOR CORPdex311.htm
EX-10.2 - AMENDMENT NO. 8 TO EMPLOYMENT AGREEMENT - KEITH JACKSON - ON SEMICONDUCTOR CORPdex102.htm
EX-31.2 - CERTIFICATION BY CFO PURSUANT TO SECTION 302 - ON SEMICONDUCTOR CORPdex312.htm
EX-10.1 - PERFORMANCE BASED RESTRICTED STOCK UNITS AWARD AGREEMENT - ON SEMICONDUCTOR CORPdex101.htm
EX-32.1 - CERTIFICATION BY CEO AND CFO PURSUANT TO SECTION 906 - ON SEMICONDUCTOR CORPdex321.htm
EX-10.6 - AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT - GEORGE H. CAVE - ON SEMICONDUCTOR CORPdex106.htm
EX-10.4 - AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT - W. JOHN NELSON - ON SEMICONDUCTOR CORPdex104.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 2, 2010

Or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

(Commission File Number) 000-30419

 

 

ON SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   36-3840979

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

5005 E. McDowell Road

Phoenix, AZ 85008

(602) 244-6600

(Address and telephone number, including area code, of principal executive offices)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x    Accelerated filer  ¨
Non-accelerated filer  ¨    Smaller reporting company  ¨
(Do not check if a smaller reporting company)   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the issuer’s class of common stock as of the close of business on April 30, 2010:

 

Title of Each Class

 

Number of Shares

Common Stock, par value $0.01 per share  

429,703,024

 

 

 


Table of Contents

INDEX

 

Part I: Financial Information

  

Item 1. Financial Statements

   1

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

   36

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   56

Item 4. Controls and Procedures

   57

Part II: Other Information

  

Item 1. Legal Proceedings

   58

Item 1A. Risk Factors

   61

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

   62

Item 3. Defaults Upon Senior Securities

   62

Item 4. (Removed and Reserved)

   62

Item 5. Other Information

   62

Item 6. Exhibits

   63

Signatures

   64

Exhibit Index

  


Table of Contents

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions, except share and per share data)

(unaudited)

 

     April 2,
2010
    December 31,
2009
 

Assets

    

Cash and cash equivalents

   $ 560.7      $ 525.7   

Short-term investments

     —          45.5   

Receivables, net

     298.9        260.9   

Inventories, net

     297.6        269.9   

Other current assets

     48.4        51.5   

Deferred income taxes, net of allowances

     14.6        15.1   
                

Total current assets

     1,220.2        1,168.6   

Restricted cash

     0.2        5.9   

Property, plant and equipment, net

     741.6        705.5   

Goodwill

     191.7        175.4   

Intangible assets, net

     330.6        298.7   

Other assets

     61.5        60.2   
                

Total assets

   $ 2,545.8      $ 2,414.3   
                

Liabilities, Stockholders’ Equity and Minority Interests

    

Accounts payable

   $ 204.7      $ 172.9   

Accrued expenses

     141.6        135.5   

Income taxes payable

     2.9        5.0   

Accrued interest

     4.6        0.9   

Deferred income on sales to distributors

     109.1        98.8   

Current portion of long-term debt

     111.3        205.9   
                

Total current liabilities

     574.2        619.0   

Long-term debt

     823.5        727.6   

Other long-term liabilities

     45.0        49.3   

Deferred income taxes, net of allowances

     15.4        13.8   
                

Total liabilities

     1,458.1        1,409.7   
                

Commitments and contingencies (See Note 12)

    

ON Semiconductor Corporation stockholders’ equity:

    

Common stock ($0.01 par value, 750,000,000 shares authorized, 477,044,434 and 474,427,706 shares issued, 429,394,709 and 427,254,100 shares outstanding, respectively)

     4.8        4.7   

Additional paid-in capital

     2,939.9        2,916.6   

Accumulated other comprehensive loss

     (65.1     (64.9

Accumulated deficit

     (1,441.4     (1,504.4

Less: treasury stock, at cost; 47,649,725 and 47,173,606 shares, respectively

     (370.8     (367.0
                

Total ON Semiconductor Corporation stockholders’ equity

     1,067.4        985.0   

Minority interests in consolidated subsidiaries

     20.3        19.6   
                

Total equity

     1,087.7        1,004.6   
                

Total liabilities and equity

   $ 2,545.8      $ 2,414.3   
                

See accompanying notes to consolidated financial statements

 

1


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(in millions, except per share data)

(unaudited)

 

     Quarter Ended  
     April 2,
2010
    April 3,
2009
 

Revenues

   $ 550.2      $ 379.1   

Cost of product revenues

     322.1        267.0   
                

Gross profit

     228.1        112.1   

Operating expenses:

    

Research and development

     65.2        43.6   

Selling and marketing

     35.6        29.0   

General and administrative

     31.5        27.3   

Amortization of acquisition-related intangible assets

     7.8        7.2   

Restructuring, asset impairments and other, net

     3.8        9.6   
                

Total operating expenses

     143.9        116.7   
                

Operating income (loss)

     84.2        (4.6
                

Other income (expenses), net:

    

Interest expense

     (16.4     (17.7

Interest income

     0.1        0.4   

Other

     (2.8     (2.2

Loss on debt repurchase

     —          (2.2
                

Other income (expenses), net

     (19.1     (21.7
                

Income (loss) before income taxes

     65.1        (26.3

Income tax provision

     (1.4     (7.2
                

Net income (loss)

     63.7        (33.5

Less: Net income attributable to minority interests

     (0.7     (0.4
                

Net income (loss) attributable to ON Semiconductor Corporation

   $ 63.0      $ (33.9
                

Comprehensive income (loss):

    

Net (loss) income

   $ 63.7      $ (33.5

Foreign currency translation adjustments

     (0.2     (15.1

Effects of cash flow hedge

     —          0.1   
                

Comprehensive (loss) income

     63.5        (48.5

Less: Comprehensive income attributable to minority interest

     (0.7     (0.4
                

Comprehensive income (loss) attributable to ON Semiconductor Corporation

   $ 62.8      $ (48.9
                

Net income (loss) per common share attributable to ON Semiconductor Corporation:

    

Basic

   $ 0.15      $ (0.08
                

Diluted

   $ 0.14      $ (0.08
                

Weighted average common shares outstanding:

    

Basic

     428.1        413.6   
                

Diluted

     440.9        413.6   
                

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(unaudited)

 

     Quarter Ended  
     April 2,
2010
    April 3,
2009
 

Cash flows from operating activities:

    

Net income (loss)

     63.7      $ (33.5

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     39.7        39.7   

Gain on sale and disposal of fixed assets

     (2.1     (1.3

Non-cash portion of loss on debt repurchase

     —          0.5   

Amortization of debt issuance costs and debt discount

     0.7        0.9   

Provision for excess inventories

     (1.1     7.6   

Non-cash stock compensation expense

     13.7        12.7   

Non-cash interest

     8.7        9.9   

Deferred income taxes

     2.3        0.3   

Other

     (1.0     (0.3

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

    

Receivables

     (32.1     (3.9

Inventories

     (17.6     28.6   

Other assets

     8.2        12.7   

Accounts payable

     9.8        (26.3

Accrued expenses

     5.2        (9.9

Income taxes payable

     (2.1     1.1   

Accrued interest

     3.7        3.7   

Deferred income on sales to distributors

     10.3        (13.3

Other long-term liabilities

     (0.5     (0.5
                

Net cash provided by operating activities

     109.5        28.7   
                

Cash flows from investing activities:

    

Purchases of property, plant and equipment

     (41.0     (22.3

Funds received (deposits utilized) for purchases of property, plant and equipment

     (0.9     0.2   

Purchases of businesses, net of cash acquired

     (66.8     —     

Proceeds from held-to-maturity securities

     45.5        —     
                

Net cash used in investing activities

     (63.2     (22.1
                

Cash flows from financing activities:

    

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

     1.6        1.0   

Proceeds from debt issuance

     0.2        —     

Proceeds from exercise of stock options

     4.5        0.4   

Payment of capital lease obligation

     (9.2     (6.2

Purchase of treasury stock

     (3.8     (0.8

Repayment of long-term debt

     (4.4     (56.8
                

Net cash used in financing activities

     (11.1     (62.4
                

Effect of exchange rate changes on cash and cash equivalents

     (0.2     (0.5
                

Net increase (decreases) in cash and cash equivalents

     35.0        (56.3

Cash and cash equivalents, beginning of period

     525.7        458.7   
                

Cash and cash equivalents, end of period

   $ 560.7      $ 402.4   
                

Supplementary disclosure of non-cash investing and financing activities

    

Common stock issuance for debt repurchase

   $ —        $ 28.5   

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1: Background and Basis of Presentation

ON Semiconductor Corporation, together with its wholly and majority-owned subsidiaries (the “Company”), is a premier supplier of high performance, energy efficient, silicon solutions for green electronics. The Company’s broad portfolio of power and signal management, logic, discrete and custom devices helps customers efficiently solve their design challenges in automotive, communications, computing, consumer, industrial, LED lighting, medical, military/aerospace and power applications.

On January 27, 2010, the Company completed the purchase of California Micro Devices Corporation, a Delaware corporation (“CMD”), whereby CMD became a wholly-owned subsidiary of the Company (see Note 6: “Acquisitions” for further discussion). The Company is separately maintaining CMD’s systems and much of its control environment until the Company is able to integrate CMD’s processes into the Company’s own systems and control environment. The Company currently expects to complete this integration of CMD’s operations into the Company’s systems and control environment by the end of fiscal 2010.

The accompanying unaudited financial statements as of April 2, 2010, and for the three months ended April 2, 2010 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of the Company’s management, the interim information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The footnote disclosures related to the interim financial information included herein are also unaudited. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto for the year ended December 31, 2009, included in the Company’s Annual Report on Form 10-K. The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the full year.

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates have been used by management in conjunction with the measurement of valuation allowances relating to trade and tax receivables, inventories and deferred tax assets; estimates of future payouts for customer incentives, warranties, and restructuring activities, assumptions surrounding future pension obligations and related trust returns; the fair value of stock options and of financial instruments (including derivative financial instruments); and future cash flows associated with long-lived assets and goodwill impairment charges. Actual results could differ from these estimates.

Note 2: Liquidity

The Company’s long-term debt is due at various times ranging from 2010 to 2026, depending on the debt instrument (see Note 9: “Long-Term Debt”). The Company’s long-term debt agreements also include various covenants which the Company was in compliance with as of April 2, 2010 and expects to remain in compliance with any default covenants over the next twelve months. The Company’s ability to service its long-term debt, to remain in compliance with the various covenants and restrictions contained in these financing agreements and to fund working capital, capital expenditures and business development efforts, will depend on its ability to generate cash from operating activities, as well as general economic, financial, competitive, legislative, regulatory and other conditions, many of which are largely beyond its control. Subsequent to quarter end, the Company’s Board of Directors approved the early termination and prepayment of the Amended and Restated Credit Agreement (“Senior Bank Facility”), including the prepayment of a term loan with approximately $169.8

 

4


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

million of aggregate principal amount outstanding, which will be prepaid using the existing cash on hand. Even after taking into account the anticipated prepayment of the Senior Bank Facilities, management believes that cash flows from operating activities (coupled with existing cash balances) will be adequate to fund the Company’s operating and capital needs through the next twelve months. To the extent that results or events differ from the Company’s financial projections, estimates or business plans, the Company’s liquidity may be adversely impacted in a manner that was not foreseeable.

Note 3: Restricted Cash

In July 2009, the Company’s Philippine subsidiary secured a bank loan which allows for borrowings of up to $14.0 million, of which $ 9.9 million had been drawn down from this loan and was outstanding as of April 2, 2010. The loan agreement stipulates that the proceeds of the loan are to be used exclusively to finance the expansion of the Philippine manufacturing facility. Of the $9.9 million outstanding under this agreement, $0.2 million has not yet been applied to this purpose and, therefore is to be classified as restricted cash.

Note 4: Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in the Company’s acquisitions (see Note 6: “Acquisitions” for further discussion).

Goodwill is evaluated for potential impairment on an annual basis or whenever events or circumstances indicate that impairment may have occurred using a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the estimated fair value of the reporting unit containing goodwill with the related carrying amount. If the estimated fair value of the reporting unit exceeds its carrying amount, the reporting unit’s goodwill is not considered to be impaired and the second step of the impairment test is unnecessary. If the reporting unit’s carrying amount exceeds its estimated fair value, the second step of the test must be performed to measure the amount of the goodwill impairment loss, if any. The second step of the test compares the implied fair value of the reporting unit’s goodwill, determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of such goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company performs its annual impairment analysis as of the first day of the fourth quarter of each year. Adverse changes in operating results and/or unfavorable changes in economic factors used to estimate fair values could result in a non-cash impairment charge in the future.

The Company has determined that its product families, which are components of its operating segments, constitute reporting units for purposes of allocating and testing goodwill, because they are one level below the operating segments, they constitute individual businesses and the Company’s segment management controllers regularly review the operating results of each product family. As of each acquisition date, all goodwill was assigned to the product families that were expected to benefit from the synergies of the respective acquisition. The amount of goodwill assigned to each reporting unit was the difference between the fair value of the reporting unit and the fair value of identifiable assets and liabilities allocated to the reporting unit as of the acquisition date. The Company determined the fair value of a reporting unit using the income approach, which is based on the present value of estimated future cash flows using management’s assumptions and forecasts as of the acquisition date.

 

5


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

A reconciliation of the cost of the goodwill from each of the above acquisition transactions to the carrying value as of April 2, 2010 and December 31, 2009 for each reporting unit that contains goodwill, is as follows, in millions:

 

            Balance as of December 31, 2009   For the Quarter Ended April 2, 2010   Balance as of April 2, 2010

Acquisition

 

Operating
Segment

 

Reporting Unit

  Goodwill   Accumulated
Amortization
    Accumulated
Impairment
Losses
    Carrying
Value
  Goodwill
Acquired
  Purchase
Price
Adjustments
    Impairment
Losses
  Goodwill   Accumulated
Amortization
    Accumulated
Impairment
Losses
    Carrying
Value

Cherry acquisition:

                     
 

Automotive & Power Group:

                     
   

Analog Automotive

  $ 21.8   $ (4.2   $ —        $ 17.6   $ —     $ —        $ —     $ 21.8   $ (4.2   $ —        $ 17.6
 

Computing & Consumer Products:

                   
   

Signal & Interface

    29.1     (5.6     —          23.5     —       —          —       29.1     (5.6     —          23.5

Leshan additional interest:

                     
 

Standard Products:

                     
   

Small Signal

    3.8     —          —          3.8     —       —          —       3.8     —          —          3.8

AMIS acquisition:

                     
 

Digital & Mixed-Signal Product Group:

                   
   

Industrial

    238.7     —          (214.7     24.0     —       —          —       238.7     —          (214.7     24.0
   

Foundry

    146.2     —          (131.4     14.8     —       —          —       146.2     —          (131.4     14.8
   

Medical

    79.7     —          (59.9     19.8     —       —          —       79.7     —          (59.9     19.8
   

Military/Aerospace

    44.8     —          —          44.8     —       —          —       44.8     —          —          44.8

Catalyst acquisition:

                     
 

Standard Products:

                     
   

Memory Products

    14.1     —          —          14.1     —       —          —       14.1     —          —          14.1

PulseCore acquisition:

                     
 

Digital & Mixed-Signal Product Group:

                   
   

Memory Products

    13.0     —          —          13.0     —       (3.8     —       9.2     —          —          9.2

CMD acquisition:

                     
 

Standard Products:

                     
   

Memory Products

    —       —          —          —       20.3     (0.2     —       20.1     —          —          20.1
                                                                               
      $ 591.2   $ (9.8   $ (406.0   $ 175.4   $ 20.3   $ (4.0   $ —     $ 607.5   $ (9.8   $ (406.0   $ 191.7
                                                                               

Certain adjustments to goodwill were recorded during the quarter ended April 2, 2010 for the finalization of contingent tax liabilities.

 

6


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Intangible Assets

The Company’s acquisitions resulted in intangible assets consisting of values assigned to intellectual property, assembled workforce, customer relationships, non-compete agreements, patents, developed technology, trademarks, acquired software and in-process research and development. These are stated at cost less accumulated amortization and are amortized over their economic useful life ranging from 2 to 18 years using the straight-line method and are reviewed for impairment when facts or circumstances suggest that the carrying value of these assets may not be recoverable.

Intangible assets, net were as follows as of April 2, 2010 and December 31, 2009 (in millions):

 

     April 2, 2010
     Original
Cost
   Accumulated
Amortization
    Foreign Currency
Translation Adjustment
    Carrying
Value
   Useful Life
(in Years)

Intellectual property

   $ 13.9    $ (5.7   $ —        $ 8.2    5-12

Assembled workforce

     6.7      (5.0     —          1.7    5

Customer relationships

     248.8      (37.7     (27.2     183.9    5-18

Non-compete agreements

     0.5      (0.3     —          0.2    1-3

Patents

     16.7      (3.2     —          13.5    12

Developed technology

     107.1      (14.8     —          92.3    5-12

Trademarks

     11.0      (1.1     —          9.9    15

In-process research and development

     20.6      —          —          20.6    8

Acquired software

     1.0      (0.7     —          0.3    2
                                

Total intangibles

   $ 426.3    $ (68.5   $ (27.2   $ 330.6   
                                
     December 31, 2009
     Original
Cost
   Accumulated
Amortization
    Foreign Currency
Translation Adjustment
    Carrying
Value
   Useful Life
(in Years)

Intellectual property

   $ 13.9    $ (5.3   $ —        $ 8.6    5-12

Assembled workforce

     6.7      (4.7     —          2.0    5

Customer relationships

     244.8      (33.2     (27.2     184.4    5-18

Non-compete agreements

     0.5      (0.3     —          0.2    1-3

Patents

     16.7      (2.9     —          13.8    12

Developed technology

     89.4      (12.2     —          77.2    5-12

Trademarks

     11.0      (0.9     —          10.1    15

In-process research and development

     2.0      —          —          2.0    8

Acquired software

     1.0      (0.6     —          0.4    2
                                

Total intangibles

   $ 386.0    $ (60.1   $ (27.2   $ 298.7   
                                

 

7


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Amortization expense for intangible assets amounted to $8.4 million for the quarter ended April 2, 2010, of which $0.6 million was included in cost of revenues; and $7.8 million for the quarter ended April 3, 2009, of which $0.6 million was included in cost of revenues. Amortization expense for intangible assets, with the exception of $20.6 million of in-process research and development 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):

 

    Intellectual
Property
  Assembled
Workforce
  Customer
Relationships
Assets
  Non-compete
Agreements
  Patents   Developed
Technology
  Trademarks   Software   Total

Remainder of 2010

  $ 1.3   $ 1.0   $ 13.4   $ 0.2   $ 1.0   $ 7.9   $ 0.6   $ 0.3   $ 25.7

2011

    1.1     0.7     17.8     —       1.3     10.5     0.8     —       32.2

2012

    0.7     —       17.8     —       1.3     10.5     0.8     —       31.1

2013

    0.7     —       13.1     —       1.3     10.5     0.8     —       26.4

2014

    0.7     —       13.1     —       1.3     10.3     0.8     —       26.2

Thereafter

    3.7     —       108.7     —       7.3     42.6     6.1     —       168.4
                                                     

Total estimated amortization expense

  $ 8.2   $ 1.7   $ 183.9   $ 0.2   $ 13.5   $ 92.3   $ 9.9   $ 0.3   $ 310.0
                                                     

Note 5: New Accounting Pronouncements Adopted

Adoption of Accounting Standards Update No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”), which amends the disclosure guidance with respect to fair value measurements. Specifically, the new guidance requires disclosure of amounts transferred in and out of Levels 1 and 2 fair value measurements, a reconciliation presented on a gross basis rather than a net basis of activity in Level 3 fair value measurements, greater disaggregation of the assets and liabilities for which fair value measurements are presented and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, with the exception of the new guidance around the Level 3 activity reconciliations, which is effective for fiscal years beginning after December 15, 2010. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

Note 6: Acquisitions

Acquisition of California Micro Devices Corporation

On January 27, 2010, the Company completed the purchase of CMD, whereby CMD became a wholly-owned subsidiary of the Company. At the effective time of the merger, the Company purchased all of CMD’s issued and outstanding shares of common stock at a purchase price of $4.70 per share, for a total cash payment of approximately $109.5 million and $3.7 million of estimated fair value of stock options and restricted stock for total consideration of $113.2 million. Total acquisition-related costs were approximately $2.0 million. CMD is primarily engaged in application specific integrated passive (ASIP) devices in the wireless, computing and consumer electronics end-markets. In addition, CMD’s expertise in protection solutions for the high brightness LED (HBLED) market, and its strengths in inductor capacitor-based EMI (electromagnetic interface) filtering and low capacitance ESD (electrostatic discharge) protection, complement the Company’s existing portfolio of protection and lighting solutions.

 

8


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

The following table presents the allocation of the purchase price of CMD, to the assets acquired based on their estimated fair values (in millions):

 

Cash and cash equivalents

   $ 42.8   

Receivables, net

     5.0   

Inventory

     9.0   

Other current assets

     2.0   

Property, plant and equipment

     1.7   

Goodwill

     20.3   

Intangible assets

     21.7   

In-process research and development

     18.6   

Other non-current assets

     0.1   
        

Total assets acquired

     121.2   
        

Accounts payable

     (6.2

Other current liabilities

     (1.6

Long-term accrued liabilities

     (0.2
        

Total liabilities assumed

     (8.0
        

Net assets acquired

   $ 113.2   
        

Of the $40.3 million of acquired intangible assets, $18.6 million was assigned to IPRD assets that will be amortized over the useful life upon successful completion of the projects. The value assigned to IPRD was determined by considering the importance of products under development to the overall development plan, estimating costs to develop the purchased IPRD into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The fair value of IPRD was determined using the income approach. The income approach recognizes that the current value of an asset or liability is premised on the expected receipt or payment of future economic benefits generated over its remaining life. A discount rate of 13.2% was used in the present value calculations, and was derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks inherent in the acquired research and development operations. Total IPRD is composed of four primary projects, with approximately $1.0 million of costs expected to be incurred until completion. The expected completion date is 2011.

The remaining $21.7 million of acquired intangible assets have a makeup of: (i) developed technology of $17.7 million (8-year weighted-average useful life) and (ii) customer relationships of $4.0 million (10-year weighted average useful life).

Of the total purchase price paid of $113.2 million, approximately $20.3 million was allocated to goodwill. Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets was the acquisition of an assembled workforce of experienced semiconductor engineers. The Company expects these experienced engineers to provide the capability of developing and integrating advanced technology into next generation products. Goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). The $20.3 million of goodwill was assigned to the standard products group, none of which is expected to be deductible for tax purposes.

The initial allocation of the purchase price is based on management estimates and assumptions, and other information compiled by management, which utilized established valuation techniques appropriate for the high-

 

9


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

technology industry, which were either the income approach, cost approach or market approach, depending upon which was the most appropriate based on the nature and reliability of the data available. The cost approach takes into account the cost to replace (or reproduce) the asset and the effect on the asset’s value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is a technique used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date. As of April 2, 2010, management of the Company had not received all information necessary to finalize the allocation of the purchase price. Management expects to complete this during the 2010 fiscal year. Such adjustments are not expected to be material.

The Company has determined that pro forma results of operations for CMD are not significant for inclusion.

Acquisition of AMIS Holdings, Inc.

On March 17, 2008, the Company completed the purchase of AMIS, whereby AMIS became a wholly-owned subsidiary of the Company.

The Company had $12.4 million of accrued liabilities for estimated costs to exit certain activities of AMIS, of which $0.7 million were for employee separation costs and $11.7 million were for exit costs outstanding as of December 31, 2009. During the quarter ended April 2, 2010, the Company reduced the employee separation costs accrual related to the involuntary termination or relocation of employees performing overlapping or duplicative functions throughout AMIS by $0.4 million. Additionally, the Company reduced the estimated exit costs associated with the decommissioning costs resulting from the shutdown of the fabrication facility of $0.6 million.

The following is a rollforward of the accrued liabilities for estimated costs to exit certain activities of AMIS from the date of acquisition through April 2, 2010:

 

     December 31,
2009
   Adjustments    Usage     April 2,
2010

Estimated employee separation costs:

          

December 31, 2009 through April 2, 2010

   $ 0.7    $ —      $ (0.4   $ 0.3
                            

Estimated costs to exit:

          

December 31, 2009 through April 2, 2010

   $ 11.7    $ —      $ (0.6   $ 11.1
                            

Note 7: Restructuring, Asset Impairments and Other, Net

The activity related to the Company’s restructuring, asset impairments and other, net for programs that were either initiated in 2010 or had not been completed as of December 31, 2009, are as follows (in millions):

Restructuring

Restructuring Activities Related to the 2010 Acquisition of CMD

In January 2010, the Company acquired CMD and announced plans to integrate and restructure the overlapping operations of CMD and the Company, in part for cost savings purposes (see Note 6: “Acquisitions” for further discussion). As part of these plans, certain duplicative positions were or are expected to be eliminated. During the first quarter of 2010, a total of 10 employees, including five former executive officers of CMD, were notified that their positions were being eliminated or consolidated. As of April 2, 2010, four of these individuals had been terminated. It is anticipated that all of these terminations will be completed at the end of fiscal 2010.

 

10


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

During the quarter ended April 2, 2010, the Company recorded employee separation charges of approximately $2.6 million related to these terminations. These charges have been included in restructuring, asset impairment and other, net on the consolidated statement of operations for the quarter ended April 2, 2010. All terminations associated with this plan are expected to be completed by the end of the fourth quarter of 2010, with the related termination benefits paid out by the end of the fourth quarter of 2010.

 

     Balance at
Beginning
of Period
   Charges    Usage     Adjustments    Balance at
End of
Period

Cash employee separation charges:

             

Quarter Ended April 2, 2010

   $ —      $ 2.6    $ (0.8   $ —      $ 1.8
                                   

Restructuring Activities Related to the 2009 Design Centers Closures

Cumulative charges of $1.5 million, net of adjustments, have been recognized through April 2, 2010, related to the 2009 Design Center closures. During the third quarter of 2009, the Company announced plans to consolidate into fewer product development centers for cost savings purposes by closing several design centers. A total of 47 employees were notified during the third quarter of 2009 that their positions with the Company were being terminated. Additionally, during the quarter ended April 2, 2010, 16 employees were notified that their positions with the Company were being eliminated or consolidated, of which six have been terminated. During the quarter ended April 2, 2010, the Company recorded employee separation charges of $0.2 million and $0.1 million in exit costs related to this activity. These charges have been included in restructuring, asset impairment and other, net on the consolidated statement of operations for the quarter ended April 2, 2010. All terminations and related payments associated with these plans are expected to be completed by the end of the second quarter of 2010.

 

     Balance at
Beginning
of Period
   Charges    Usage     Adjustments    Balance at
End of
Period

Cash employee separation charges:

             

Quarter Ended April 2, 2010

   $ 0.3    $ 0.2    $ (0.4   $ —      $ 0.1
                                   

Exit Costs:

             

Quarter Ended April 2, 2010

   $ 0.1    $ 0.1    $ (0.2   $ —      $ —  
                                   

Restructuring Activities Related to the 2009 Global Workforce Reduction

Cumulative employee separation charges of $13.0 million, net of adjustments, have been recognized through April 2, 2010, related to the first quarter of 2009 announced plans to reduce worldwide personnel for cost savings purposes. A total of 570 employees were notified during 2009, of which 567 of these individuals have been terminated. These charges have been included in restructuring, asset impairment and other, net on the consolidated statement of operations for the quarter ended April 2, 2010. All terminations associated with this plan are expected to be completed by the end of the fourth quarter of 2010, with substantially all related termination benefits paid out by the end of the fourth quarter of 2010.

 

     Balance at
Beginning
of Period
   Charges    Usage     Adjustments    Balance at
End of
Period

Cash employee separation charges:

             

Quarter Ended April 2, 2010

   $ 0.7    $ —      $ (0.3   $ 0.1    $ 0.5
                                   

 

11


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Other

During the first quarter of 2010, the Company, agreed to make a $0.8 million cash payment in settlement of various litigation matters with the former minority interest shareholders of a Czech subsidiary acquired by the Company. These settlement charges have been included in restructuring, asset impairment and other, net on the consolidated statement of operations for the quarter ended April 2, 2010.

A reconciliation of the activity in the tables above to the “Restructuring, asset impairments and other, net” caption on the consolidated statement of operations for the three months ended April 2, 2010, is as follows (in millions):

 

     Quarter Ended
April 2, 2010

Restructuring

  

2010 Charges:

  

Cash employee separation charges

   $ 2.8

Exit costs

     0.1

Less: net adjustments to reserves

     0.1

Other

  

Settlement of lawsuit

     0.8
      
   $ 3.8
      

 

12


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Note 8: Balance Sheet Information

 

     April 2,
2010
    December 31,
2009
 

Receivables, net:

    

Accounts receivable

   $ 307.4      $ 270.2   

Less: Allowance for doubtful accounts

     (8.5     (9.3
                
   $ 298.9      $ 260.9   
                

Inventories, net:

    

Raw materials

   $ 37.3      $ 35.4   

Work in process

     170.6        151.6   

Finished goods

     89.7        82.9   
                
   $ 297.6      $ 269.9   
                

Property, plant and equipment, net:

    

Land

   $ 43.9      $ 42.0   

Buildings

     436.0        429.7   

Machinery and equipment

     1,475.7        1,420.2   
                

Total property, plant and equipment

     1,955.6        1,891.9   

Less: Accumulated depreciation

     (1,214.0     (1,186.4
                
   $ 741.6      $ 705.5   
                

Accrued expenses:

    

Accrued payroll

   $ 61.3      $ 55.9   

Sales related reserves

     36.1        32.7   

Restructuring reserves

     2.4        1.1   

Acquisition related restructuring charges

     11.4        12.5   

Accrued pension liability

     0.1        0.2   

Other

     30.3        33.1   
                
   $ 141.6      $ 135.5   
                

Accumulated other comprehensive loss:

    

Foreign currency translation adjustments

   $ (64.8   $ (64.6

Unrealized prior service cost of defined benefit pension plan

     (0.1     (0.1

Prior service cost from pension legal plan amendment

     (0.2     (0.2
                
   $ (65.1   $ (64.9
                

The activity related to the Company’s warranty reserves for the three months ended April 2, 2010 and April 3, 2009, respectively is as follows (in millions):

 

     Quarter Ended  
     April 2, 2010     April 3, 2009  

Beginning Balance

   $ 3.2      $ 3.9   

Provision

     —          0.5   

Usage

     (0.2     (0.4
                

Ending Balance

   $ 3.0      $ 4.0   
                

 

13


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

The Company maintains defined benefit plans for some of its foreign subsidiaries. The Company recognizes the aggregate amount of all overfunded plans as an asset and the aggregate amount of all underfunded plans as a liability in its financial statements. As of April 2, 2010 and December 31, 2009, the total accrued pension liability for underfunded plans was $19.0 million and $19.0 million, respectively, of which the current portion of $0.6 million and $0.3 million, respectively, were classified as accrued expenses. As of April 2, 2010 and December 31, 2009, the total pension asset for overfunded plans was $15.7 million and $16.2 million, respectively. The components of the Company’s net periodic pension expense for the quarter ended April 2, 2010 and April 3, 2009 are as follows (in millions):

 

     Quarter Ended  
     April 2, 2010     April 3, 2009  

Service Cost

   $ 1.0      $ 0.5   

Interest cost

     0.8        0.5   

Expected return on plan assets

     (0.8     (0.3

Amortization of prior service cost

     0.1        0.1   
                

Total net periodic pension cost

   $ 1.1      $ 0.8   
                

 

14


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Note 9: Long-Term Debt

Long-term debt consists of the following (dollars in millions):

 

    April 2,
2010
    December 31,
2009
 

Senior Bank Facilities:

   

Term Loan, interest payable monthly at 1.99788% and 2.00063%, respectively

  $ 169.8      $ 170.2   

Revolver

    —          —     
               
    169.8        170.2   

Zero Coupon Convertible Senior Subordinated Notes due 2024 (1)

    99.1        96.9   

1.875% Convertible Senior Subordinated Notes due 2025 (2)

    77.9        76.5   

2.625% Convertible Senior Subordinated Notes due 2026 (3)

    394.1        389.0   

2.25% Loan with Japanese bank due 2010, interest payable semi-annually

    1.5        3.6   

Loan with Philippine banks due 2010 through 2012, interest payable quarterly at 1.25125% and 1.28438%, respectively

    17.9        18.7   

Loan with Philippine bank due 2010 through 2013, interest payable quarterly at 1.00194% and 1.00563%, respectively

    10.1        10.5   

Loan with Philippine bank due 2010 through 2013, interest payable quarterly at 1.50719% and 1.50375%, respectively

    5.7        5.9   

Loan with Philippine banks due 2010 through 2014, interest payable quarterly at 5.99875% and 6.03063%, respectively

    9.9        10.3   

Short-term loan with Chinese bank due 2010, interest payable quarterly at 3.25% and 3.2725%, respectively

    7.0        7.0   

Short-term loan with Chinese bank due 2010, interest payable quarterly at 2.74938% and 2.7825%, respectively

    7.0        7.0   

Short-term loan with Chinese bank due 2010, interest payable quarterly at 2.74938% and 2.7825%, respectively

    6.0        6.0   

Short-term loan with Chinese bank due 2010, interest payable quarterly at 5.29013% and 5.25063%, respectively

    7.0        7.0   

Short-term loan with Chinese bank due 2010, interest payable quarterly at 4.24875% and 4.28063%, respectively

    7.0        7.0   

Short-term loan with Chinese bank due 2010, interest payable quarterly at 2.2525%

    12.0        12.0   

Loan with British finance company, interest payable monthly at 1.77% and 1.75%, respectively

    23.3        23.1   

1.875% Loan with Japanese bank due 2010 through 2013, interest payable semi-annually

    2.6        2.6   

Short-term loan with Japanese bank due 2010, interest payable monthly at 1.01% and 1.06%, respectively

    1.6        1.6   

Capital lease obligations

    75.3        78.6   
               
    934.8        933.5   

Less: Current maturities

    (111.3     (205.9
               
    823.5        727.6   
               

 

15


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

(1) The Zero Coupon Convertible Senior Subordinated Notes due 2024 may be put back to the Company at the option of the holders of the notes on April 15 of 2012, 2014 and 2019. See Note 16: “Subsequent Events” for discussion of the extension of the put date and earliest call date of the Zero Coupon Convertible Senior Subordinated Notes due 2024.
(2) The 1.875% Convertible Senior Subordinated Notes due 2025 may be put back to the Company at the option of the holders of the notes on December 15 of 2012, 2015 and 2020.
(3) The 2.625% Convertible Senior Subordinated Notes due 2026 may be put back to the Company at the option of the holders of the notes on December 15 of 2013, 2016 and 2021.

Annual maturities relating to the Company’s long-term debt as of April 2, 2010 are as follows (in millions):

 

             Actual
Maturities
Remainder 2010      $ 100.7
2011        37.8
2012        213.3
2013        573.3
2014        5.8
      Thereafter        3.9
          
  Total      $ 934.8
          

 

16


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Debt Guarantees

The Company is the sole issuer of the Zero Coupon Convertible Senior Subordinated Notes due 2024, the 1.875% convertible senior subordinated notes due 2025 and the 2.625% convertible senior subordinated notes due 2026 (collectively, the “Notes”). The Company’s domestic subsidiaries, except those domestic subsidiaries acquired through the acquisitions of AMIS, Catalyst, PulseCore, and CMD (collectively, the “Guarantor Subsidiaries”), fully and unconditionally guarantee on a joint and several basis the Company’s obligations under the Notes. The Guarantor Subsidiaries include SCI LLC, Semiconductor Components Industries of Rhode Island, Inc., as well as holding companies whose net assets consist primarily of investments in the joint venture in Leshan, China and equity interests in the Company’s other foreign subsidiaries. The Company’s other remaining subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) are not guarantors of the Notes. Condensed consolidated financial information for the issuer of the Notes, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries is as follows (in millions):

 

    Issuer   Guarantor                  
    ON Semiconductor
Corporation (1)
  SCI
LLC
    Other
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total

As of April 2, 2010

           

Cash and cash equivalents

  $ —     $ 189.1      $ —        $ 371.6      $ —        $ 560.7

Receivables, net

    —       46.6        —          252.3        —          298.9

Inventories, net

    —       43.2        —          253.1        1.3        297.6

Other current assets

    —       6.7        —          41.7        —          48.4

Deferred income taxes

    —       5.5        —          9.1        —          14.6
                                           

Total current assets

    —       291.1        —          927.8        1.3        1,220.2

Property, plant and equipment, net

    —       165.3        2.7        577.4        (3.8     741.6

Deferred income taxes

    —       —          —          —            —  

Goodwill and other intangible assets

    —       192.7        37.2        329.8        (37.4     522.3

Investments and other assets

    1,643.1     1,368.7        47.3        26.0        (3,023.4     61.7
                                           

Total assets

  $ 1,643.1   $ 2,017.8      $ 87.2      $ 1,861.0      $ (3,063.3   $ 2,545.8
                                           

Accounts payable

  $ —     $ 33.6      $ 0.1      $ 171.0      $ —        $ 204.7

Accrued expenses and other current liabilities

    7.5     74.7        0.9        175.6        1.7        260.4

Deferred income on sales to distributors

    —       27.3        —          81.8        —          109.1
                                           

Total current liabilities

    7.5     135.6        1.0        428.4        1.7        574.2

Long-term debt

    567.9     208.9        —          46.7        —          823.5

Other long-term liabilities

    —       18.7        0.3        26.0        —          45.0

Deferred Income Taxes

    —       6.3        —          9.1          15.4

Intercompany

    0.3     (142.7     (48.9     (14.2     205.5        —  
                                           

Total liabilities

    575.7     226.8        (47.6     496.0        207.2        1,458.1

Total ON Semiconductor Corporation stockholders’ equity (deficit)

    1,067.4     1,791.0        134.8        1,365.0        (3,290.8     1,067.4

Minority interests in consolidated subsidiaries

    —       —          —          —          20.3        20.3
                                           

Total stockholders’ equity

    1,067.4     1,791.0        134.8        1,365.0        (3,270.5     1,087.7
                                           

Total liabilities and stockholders’ equity

  $ 1,643.1   $ 2,017.8      $ 87.2      $ 1,861.0      $ (3,063.3   $ 2,545.8
                                           

 

17


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

    Issuer   Guarantor                
    ON Semiconductor
Corporation (1)
  SCI
LLC
    Other
Subsidiaries
    Non-Guarantor
Subsidiaries
  Eliminations     Total

As of April 3, 2009

           

Cash and cash equivalents

  $ —     $ 98.2      $ —        $ 304.2   $ —        $ 402.4

Receivables, net

    —       32.3        —          160.3     —          192.6

Inventories, net

    —       29.4        —          287.7     (17.9     299.2

Other current assets

    —       6.5        0.1        41.0     (0.4     47.2

Deferred income taxes

    —       5.5        —          7.7     —          13.2
                                         

Total current assets

    —       171.9        0.1        800.9     (18.3     954.6

Property, plant and equipment, net

    —       161.2        3.0        585.3     (4.6     744.9

Deferred income taxes

    —       —          —          —         —  

Goodwill

    —       168.9        37.2        310.2     (41.5     474.8

Investments and other assets

    1,404.3     1,203.8        41.2        678.9     (3,291.5     36.7
                                         

Total assets

  $ 1,404.3   $ 1,705.8      $ 81.5      $ 2,375.3   $ (3,355.9   $ 2,211.0
                                         

Accounts payable

  $ —     $ 24.7      $ 0.2      $ 109.6   $ —        $ 134.5

Accrued expenses and other current liabilities

    4.4     66.3        0.8        151.2     1.9        224.6

Deferred income on sales to distributors

    —       28.7        —          72.2     —          100.9
                                         

Total current liabilities

    4.4     119.7        1.0        333.0     1.9        460.0

Long-term debt

    568.5     233.0        —          42.7     0.1        844.3

Other long-term liabilities

    —       25.1        0.4        20.7     (0.3     45.9

Deferred Income Taxes

    —       5.5        —          6.5       12.0

Intercompany

    0.3     (234.1     (48.3     76.5     205.6        —  
                                         

Total liabilities

    573.2     149.2        (46.9     479.4     207.3        1,362.2

Total ON Semiconductor Corporation stockholders’ equity (deficit)

    831.1     1,556.6        128.4        1,895.9     (3,580.9     831.1

Minority interests in consolidated subsidiaries

    —       —          —          —       17.7        17.7
                                         

Total stockholders’ equity

    831.1     1,556.6        128.4        1,895.9     (3,563.2     848.8
                                         

Total liabilities and stockholders’ equity

  $ 1,404.3   $ 1,705.8      $ 81.5      $ 2,375.3   $ (3,355.9   $ 2,211.0
                                         

 

18


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

    Issuers     Guarantor
Subsidiaries
                   
    ON Semiconductor
Corporation  (1)
    SCI
LLC
    Other
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

For the quarter ended April 2, 2010

           

Revenues

  $ —        $ 172.1      $ —        $ 691.3      $ (313.2   $ 550.2   

Cost of revenues

    —          112.0        0.7        518.7        (309.3     322.1   
                                               

Gross profit

    —          60.1        (0.7     172.6        (3.9     228.1   
                                               

Research and development

    —          13.2        2.5        49.5        —          65.2   

Selling and marketing

    —          14.6        0.2        20.8        —          35.6   

General and administrative

    —          2.3        0.2        29.0        —          31.5   

Amortization of acquisition related intangible assets

    —          4.0          4.8        (1.0     7.8   

Restructuring, asset impairments and other, net

    —          —          —          3.8        —          3.8   
                                               

Total operating expenses

    —          34.1        2.9        107.9        (1.0     143.9   
                                               

Operating income (loss)

    —          26.0        (3.6     64.7        (2.9     84.2   

Interest expense, net

    (13.1     (2.8     —          (0.4     —          (16.3

Other

    —          0.8        —          (3.6     —          (2.8

Equity in earnings

    76.1        43.3        1.5        —          (120.9     —     
                                               

Income (loss) before income taxes and minority interests

    63.0        67.3        (2.1     60.7        (123.8     65.1   

Income tax provision

    —          5.3        —          (6.7     —          (1.4
                                               

Net income (loss)

    63.0        72.6        (2.1     54.0        (123.8     63.7   

Net income (loss) attributable to minority interest

    —          —          —          —          (0.7     (0.7
                                               

Net income (loss) attributable to ON Semiconductor Corporation

  $ 63.0      $ 72.6      $ (2.1   $ 54.0      $ (124.5   $ 63.0   
                                               

Net cash provided by operating activities

  $ —        $ 34.9      $ —        $ 74.6      $ —        $ 109.5   
                                               

Cash flows from investing activities:

           

Purchases of property, plant and equipment

    —          (15.1     —          (25.9     —          (41.0

Funds deposited for purchases of property, plant and equipment

    —          —          —          (0.9     —          (0.9

Proceeds from sales of held-to-maturity securities

    —          —          —          45.5        —          45.5   

Purchase of a business, net of cash acquired

    —          —          —          (66.8     —          (66.8

Proceeds from sales of property, plant and equipment

    —          —          —          —          —          —     
                                               

Net cash used in investing activities

    —          (15.1     —          (48.1     —          (63.2
                                               

Cash flows from financing activities:

           

Intercompany loans

    —          (239.3     —          239.3        —          —     

Intercompany loan repayments

    —          128.8        —          (128.8     —          —     

Proceeds from debt issuance

    —          —          —          0.2          0.2   

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

    —          1.6        —          —          —          1.6   

Proceeds from exercise of stock options

      4.5        —          —          —          4.5   

Repurchase of Treasury Stock

    —          (3.8     —          —          —          (3.8

Dividends to minority shareholder of consolidated subsidiary

    —          —          —          —          —          —     

Equity injections from Parent

    —          —          —          —          —          —     

Subsidiary declared dividend

    —          —          —          —          —          —     

Payment of capital lease obligation

    —          (8.0     —          (1.2     —          (9.2

Repayment of long term debt

    —          (0.5     —          (3.9     —          (4.4
                                               

Net cash used in financing activities

    —          (116.7     —          105.6        —          (11.1
                                               

Effect of exchange rate changes on cash and cash equivalents

    —          —          —          (0.2     —          (0.2
                                               

Net increase (decrease) in cash and cash equivalents

    —          (96.9     —          131.9        —          35.0   

Cash and cash equivalents, beginning of period

    —          286.0        —          239.7        —          525.7   
                                               

Cash and cash equivalents, end of period

  $ —        $ 189.1      $ —        $ 371.6      $ —        $ 560.7   
                                               

 

19


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

    Issuers     Guarantor Subsidiaries                    
    ON Semiconductor
Corporation  (1)
    SCI LLC     Other
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

For the quarter ended April 3, 2009

           

Revenues

  $ —        $ 93.6      $ —        $ 486.2      $ (200.7   $ 379.1   

Cost of revenues

    —          86.9        0.3        356.9        (177.1     267.0   
                                               

Gross profit

    —          6.7        (0.3     129.3        (23.6     112.1   
                                               

Research and development

    —          19.7        2.4        21.6        (0.1     43.6   

Selling and marketing

    —          10.4        0.4        18.2        —          29.0   

General and administrative

    —          (32.8     0.1        17.6        42.4        27.3   

Restructuring, asset impairments and other, net

    —          2.8        (0.1     14.0        0.1        16.8   
                                               

Total operating expenses

    —          0.1        2.8        71.4        42.4        116.7   
                                               

Operating income (loss)

    —          6.6        (3.1     57.9        (66.0     (4.6

Interest expense, net

    (14.4     (1.1     —          (1.9     0.1        (17.3

Loss on debt prepayment

    (2.2     —          —          —          —          (2.2

Other

    —          (1.0     —          (1.2     —          (2.2

Equity in earnings

    (17.3     (21.1     0.8        119.2        (81.6     —     
                                               

Income (loss) before income taxes and minority interests

    (33.9     (16.6     (2.3     174.0        (147.5     (26.3

Income tax provision

    —          (1.5     —          (5.7     —          (7.2
                                               

Net income (loss)

    (33.9     (18.1     (2.3     168.3        (147.5     (33.5

Net loss attributable to minority interests

    —          —          —          —          (0.4     (0.4
                                               

Net income (loss) attributable to ON Semiconductor Corporation

  $ (33.9   $ (18.1   $ (2.3   $ 168.3      $ (147.9   $ (33.9
                                               

Net cash provided by operating activities

  $ —        $ (216.0   $ —        $ 244.7      $ —        $ 28.7   
                                               

Cash flows from investing activities:

           

Purchases of property, plant and equipment

    —          (5.8     —          (16.5     —          (22.3

Funds deposited for purchases of property, plant and equipment

    —          —          —          0.2        —          0.2   
                                               

Net cash used in investing activities

    —          (5.8     —          (16.3     —          (22.1
                                               

Cash flows from financing activities:

           

Intercompany loans

    —          247.2        —          (247.2     —          —     

Intercompany loan repayments

    —          (101.6     —          101.6        —          —     

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

    —          1.0        —          —          —          1.0   

Proceeds from exercise of stock options and warrants

    —          0.4        —          —          —          0.4   

Repurchase of Treasury Stock

    —          (0.8     —          —          —          (0.8

Payment of capital lease obligation

    —          (4.9     —          (1.3     —          (6.2

Repayment of long term debt

    —          (34.7     —          (22.1     —          (56.8

Equity injections from Parent

    —          —          —          —          —          —     

Subsidiary declared dividend

    —          —          —          —          —          —     
                                               

Net cash provided by (used in) financing activities

    —          106.6        —          (169.0     —          (62.4
                                               

Effect of exchange rate changes on cash and cash equivalents

    —          —          —          (0.5     —          (0.5
                                               

Net increase (decrease) in cash and cash equivalents

    —          (115.2     —          58.9        —          (56.3

Cash and cash equivalents, beginning of period

    —          213.4        —          245.3        —          458.7   
                                               

Cash and cash equivalents, end of period

  $ —        $ 98.2      $ —        $ 304.2      $ —        $ 402.4   
                                               

 

20


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

 

(1) The Company is a holding company and has no operations apart from those of its operating subsidiaries. Additionally, the Company does not maintain a bank account; rather SCI LLC, its primary domestic operating subsidiary, processes all of its cash receipts and disbursements on its behalf.

See also Note 12: “Commitments and Contingencies—Other Contingencies” for further discussion of the Company’s guarantees.

Note 10: Equity

Income per share calculations for the quarter ended April 2, 2010 and April 3, 2009, are as follows (in millions, except per share data):

 

     Quarter Ended  
     April 2,
2010
   April 3,
2009
 

Net income (loss) applicable to ON Semiconductor Corporation

   $ 63.0    $ (33.9
               

Basic weighted average common shares outstanding

     428.1      413.6   

Add: Incremental shares for:

     

Dilutive effect of stock options

     11.0      —     

1.875% convertible senior subordinated notes

     1.8      —     
               

Diluted weighted average common shares outstanding

     439.1      413.6   
               

Income (loss) per common share attributable to ON Semiconductor Corporation

     

Basic:

   $ 0.15    $ (0.08
               

Diluted:

   $ 0.14    $ (0.08
               

Basic income (loss) per share is computed by dividing net income by the weighted average number of common shares outstanding during the period.

The number of incremental shares from the assumed exercise of stock options is calculated by applying the treasury stock method. For the three months ended April 3, 2009, the effects of stock option shares and restricted stock units were not included because the related impact would have been anti-dilutive, as the Company generated a net loss. Common shares relating to employee stock options where the exercise price exceeded the average market price of the Company’s common shares or the assumed exercise would have been anti-dilutive were also excluded from the diluted earnings per share calculation. The excluded option shares were 13.7 million and 38.0 million for the quarters ended April 2, 2010 and April 3, 2009, respectively.

For the quarter ended April 3, 2009, the assumed conversion of the 1.875% convertible senior subordinated notes was also excluded in determining diluted net income per share. The 1.875% convertible senior subordinated notes are convertible into cash up to the par value of $95.0 million, based on a conversion price of $7.00 per share. The excess of fair value over par value is convertible into stock. As of April 3, 2009, the Company’s common stock traded below $7.00; thus, the effects of an assumed conversion would have been anti-dilutive and therefore were excluded. However, as of April 1, 2010 (the last day of the quarter was a holiday), the Company’s common stock traded above $7.00 and was not excluded.

For the quarters ended April 2, 2010 and April 3, 2009, the assumed conversion of the Zero Coupon Convertible Senior Subordinated Notes was also excluded in determining diluted net income per share. The Zero

 

21


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Coupon Convertible Senior Subordinated Notes are convertible into cash up to the par value of $99.4 million and $260.0 million, based on a conversion price of $9.82 per share at April 2, 2010 and April 3, 2009, respectively. The excess of fair value over par value is convertible into stock. As of April 2, 2010 and April 3, 2009, the Company’s common stock traded below $9.82; thus, the effects of an assumed conversion would have been anti-dilutive and therefore were excluded.

For the quarters ended April 2, 2010 and April 3, 2009, the assumed conversion of the 2.625% convertible senior subordinated notes was also excluded in determining diluted net income per share. The 2.625% convertible senior subordinated notes are convertible into cash up to the par value of $484.0 million, based on a conversion price of $10.50 per share. The excess of fair value over par value is convertible into stock. As of April 2, 2010 and April 3, 2009, the Company’s common stock traded below $10.50; thus, the effects of an assumed conversion would have been anti-dilutive and therefore were excluded.

Additionally, warrants held by non-employees to purchase 5.3 million shares of the Company’s common stock, which were obtained from the AMIS acquisition, were outstanding as of April 2, 2010 and April 3, 2009, but were not included in the computation of diluted net income per share as the effect would have been anti-dilutive under the treasury stock method.

Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the accompanying consolidated financial statements. Shares withheld upon the vesting of restricted stock units to pay applicable employee withholding taxes are considered common stock repurchases. Upon vesting, the Company currently does not collect the applicable employee withholding taxes from employees. Instead, the Company automatically withholds, from the restricted stock units that vest, the portion of those shares with a fair market value equal to the amount of the employee withholding taxes due, which is accounted for as a repurchase of common stock. The Company then pays the applicable withholding taxes in cash. The amounts remitted in the quarter ended April 2, 2010 were $3.8 million for which the Company withheld 476,119 shares of common stock, that were underlying the restricted stock units that vested. None of these shares had been reissued or retired as of April 2, 2010, but may be reissued or retired by the Company at a later date.

At December 31, 2009, the minority interest balance was $19.6 million. This balance increased to $20.3 million at April 2, 2010 due to the minority interest’s $0.7 million share of the earnings for the quarter, which has been reflected in the Company’s consolidated statement of operations for the quarter ended April 2, 2010.

At December 31, 2008, the minority interest balance was $17.3 million. This balance increased to $17.7 million at April 3, 2009 due to the minority interest’s $0.4 million share of the earnings for the quarter, which has been reflected in the Company’s consolidated statement of operations for the quarter ended April 3, 2009.

Note 11: Employee Stock Benefit Plans

At December 31, 2009 there was an aggregate of 20.6 million shares of common stock available for grant under the Company’s stock option and restricted stock unit plans which subsequently expired on February 17, 2010. An amended and restated stock incentive plan has been submitted for shareholder approval at the annual shareholder meeting on May 18, 2010. At April 2, 2010, contingent upon shareholder approval, there was an aggregate of 26.3 million shares of common stock available for grant under the Company’s new amended and restated stock incentive plan.

 

22


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Stock Options

The weighted-average estimated fair value of stock options granted during the quarters ended April 2, 2010 and April 3, 2009 was $3.55 and $2.27 per share, respectively. The weighted-average assumptions associated with the stock options granted during the period are as follows:

 

     Quarter Ended
     April 2,
2010
   April 3,
2009

Volatility

   44.1%    77.3%

Risk-free interest rate

   2.5%    1.7%

Expected term

   5.6 years    5.0 years

Pre-vesting forfeitures were estimated to be approximately 12% for the quarter ended April 2, 2010 and 12% for the quarter ended April 3, 2009, based on historical experience.

A summary of stock option transactions for all stock option plans follows (in millions, except per share and term data):

 

     Quarter Ended April 2, 2010
     Number
of
Shares
    Weighted-
Average
Exercise
Price
   Weighted -
Average
Remaining
Contractual
Term
(in years)
   Aggregate
Intrinsic
Value
(In-The-
Money)

Outstanding at December 31, 2009

   29.4      $ 7.48      

Assumed in acquisitions

   2.9        8.23      

Grants

   0.1        8.08      

Exercised

   (0.8     5.79      

Cancellations

   (0.4     8.38      
              

Outstanding at April 2, 2010

   31.2      $ 7.58    5.3    $ 45.3
                        

Exercisable at April 2, 2010

   23.9      $ 7.68    4.6    $ 35.4
                        

Additional information about stock options outstanding at April 2, 2010 with exercise prices less than or above $8.06 per share, the closing price of the Company’s common stock at April 2, 2010, follows (number of shares in millions):

 

     Exercisable    Unexercisable    Total

Exercise Prices

   Number
of
Shares
   Weighted
Average
Exercise
Price
   Number
of
Shares
   Weighted
Average
Exercise
Price
   Number
of
Shares
   Weighted
Average
Exercise
Price

Less than $8.06

   14.1    $ 5.55    4.5    $ 5.84    18.6    $ 5.62

Above $8.06

   9.8    $ 10.76    2.8    $ 9.46    12.6    $ 10.47
                       

Total outstanding

   23.9    $ 7.68    7.3    $ 7.23    31.2    $ 7.58
                       

 

23


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Restricted Stock Units and Awards

Restricted stock units that vest over two to four years with service-based requirements as well as restricted stock units that vest based on performance-based requirements are payable in shares of the Company’s common stock upon vesting. The following table presents a summary of the status of the Company’s restricted stock units granted to certain officers, directors, and employees of the Company as of April 2, 2010, and changes during the three months ended April 2, 2010 (number of shares in millions):

 

     Quarter Ended April 2,
2010
     Number of
Shares
    Weighted-
Average
Grant Date
Fair Value

Nonvested shares of restricted stock units at December 31, 2009

   15.1      $ 4.17

Granted

   2.8        8.16

Released

   (1.5     4.36

Forfeited

   (0.2     4.58
            

Nonvested shares of restricted stock units at April 2, 2010

   16.2      $ 4.83
            

During the three months ended April 2, 2010, the Company granted 0.1 million shares in restricted stock awards with a weighted average grant date fair value of $8.16 per share to members of the Board of Directors. The awards vested and were issued immediately upon the effective date of the grant.

Employee Stock Purchase Plans

As of April 2, 2010, there were 6.2 million shares available for issuance under the 2000 Employee Stock Purchase Plan (“ESPP”). The weighted-average fair value of shares issued under the ESPP during the quarters ended April 2, 2010 and April 3, 2009 were $2.12 per share and $1.30 per share, respectively. The weighted-average assumptions used in the pricing model are as follows:

 

Employee Stock Purchase Plan

   Quarter Ended
April 2,
        2010         
    Quarter Ended
April 3,
        2009         
 

Expected life (in years)

   0.25      0.25   

Risk-free interest rate

   0.1   0.1

Volatility

   46.0   120.0

 

24


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Share-Based Compensation Expense

Total share-based compensation expense, related to the Company’s stock options, restricted stock units, restricted stock awards and employee stock purchase plan, recognized for the quarter ended April 2, 2010 and April 3, 2009 was comprised as follows (in millions, except per share data):

 

     Quarter Ended
     April 2,
2010
   April 3,
2009

Cost of revenues

   $ 3.3    $ 2.9

Research and development

     2.5      2.0

Selling and marketing

     2.6      2.4

General and administrative

     5.3      5.4
             

Share-based compensation expense before income taxes

     13.7      12.7

Related income tax benefits (1)

     —        —  
             

Share-based compensation expense, net of taxes

   $ 13.7    $ 12.7
             

 

(1) Most of the Company’s share-based compensation relates to its domestic subsidiaries which have historically experienced recurring net operating losses; therefore, no related tax benefits are recorded.

At April 2, 2010, total unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested stock options and non-vested restricted stock units granted prior to that date was $17.7 million, which will be ratably recognized through the first quarter of 2014 and $36.3 million, which will be ratably recognized through the first quarter of 2013, respectively. The total intrinsic value of stock options exercised during the quarter ended April 2, 2010 was $1.7 million. The Company recorded cash received from the exercise of stock options of $4.5 million and cash from issuance of shares under the ESPP of $1.6 million and recorded no related tax benefits during the quarter ended April 2, 2010. Upon option exercise, restricted stock units vesting or completion of a purchase under the ESPP, the Company issues new shares of stock.

Note 12: Commitments and Contingencies

Leases

The following is a schedule by year of future minimum lease obligations under non-cancelable operating leases as of April 2, 2010 (in millions):

 

Remainder of 2010

   $ 15.1

2011

     15.6

2012

     13.6

2013

     10.6

2014

     6.3

Thereafter

     17.8
      

Total (1)

   $ 79.0
      

 

(1) Minimum payments have not been reduced by minimum sublease rentals of $0.1 million due in the future under subleases.

 

25


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Other Contingencies

The Company’s headquarters and manufacturing facility in Phoenix, Arizona is located on property that is a “Superfund” site, a property listed on the National Priorities List and subject to clean-up activities under the Comprehensive Environmental Response, Compensation, and Liability Act. Motorola is actively involved in the cleanup of on-site solvent contaminated soil and groundwater and off-site contaminated groundwater pursuant to consent decrees with the State of Arizona. As part of the August 4, 1999 recapitalization, Motorola has retained responsibility for this contamination, and has agreed to indemnify the Company with respect to remediation costs and other costs or liabilities related to this matter.

In the Czech Republic the Company has ongoing remediation projects to respond to releases of hazardous substances that occurred during the years that this facility was operated by government-owned entities. In each case, the remediation project consists primarily of monitoring groundwater wells located on-site and off-site with additional action plans developed to respond in the event activity levels are exceeded at each of the respective locations. The government of the Czech Republic has agreed to indemnify the Company and the respective subsidiaries, subject to specified limitations, for remediation costs associated with this historical contamination. Based upon the information available, total future remediation costs to the Company are not expected to be material.

The Company’s design center in East Greenwich, Rhode Island has adjoining property that has localized soil contamination. In connection with the purchase of the facility, the Company entered into a Settlement Agreement and Covenant Not to Sue with the State of Rhode Island. This agreement requires that remedial actions be undertaken and a quarterly groundwater monitoring program be initiated by the former owners of the property. Based on the information available, any costs to the Company in connection with this matter are not expected to be material.

As a result of the acquisition of AMIS, the Company is a “primary responsible party” to an environmental remediation and cleanup at AMIS’ 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’ former parent company, a subsidiary of Nippon Mining, contractually agreed to indemnify AMIS and the Company for any obligation relating to environmental remediation and cleanup at this location. The Company has not offset the receivable from Nippon Mining’s subsidiary against the estimated liability on the consolidated balance sheets. Therefore, a receivable from Nippon Mining’s subsidiary is recorded on the accompanying consolidated balance sheets as of April 2, 2010 related to this matter for approximately $0.1 million. The Company does not believe that the liability and receivable amounts are material to the Company’s consolidated financial position, results of operations or cash flows.

A bank guarantee issued on behalf of the Company under a non-reusable commitment credit with the bank has an outstanding amount of $4.4 million as of April 2, 2010. The Belgian bank that issued the guarantee has the right to create a mortgage on the real property of one of the Company’s European subsidiaries in the amount of $3.0 million but had not done so as of April 2, 2010. The Company also has outstanding guarantees and letters of credit outside of its revolving facility and the non-reusable commitment credit totaling $12.1 million as of April 2, 2010.

As part of securing financing in the normal course of business, the Company issued guarantees related to two of its capital lease obligations which totaled approximately $23.9 million as of April 2, 2010. In addition, SCI LLC, the Company’s primary domestic operating subsidiary, guarantees on an unsecured basis approximately $1.5 million of a loan by one of its Japanese subsidiaries. For its operating leases, the Company expects to make cash payments and similarly incur expenses totaling $79.0 million as payments come due. The

 

26


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Company had not recorded any liability in connection with these operating leases, letters of credit and guarantee arrangements.

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

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 intellectual property 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 is a party to various agreements with Motorola which were entered into in connection with the Company’s separation from Motorola. Pursuant to these agreements, the Company has agreed to indemnify Motorola for losses due to, for example, breach of representations and warranties and covenants, damages arising from assumed liabilities or relating to allocated assets, and for specified environmental matters. The Company’s obligations under these agreements may be limited in terms of time and/or amount and payment by the Company is conditioned on Motorola making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge Motorola’s claims.

The Company faces risk of exposure to warranty and product liability claims in the event that its products fail to perform as expected or such failure of its products results, or is alleged to result, in bodily injury or property damage (or both). 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 indemnity rights to such customers for valid warranty claims.

In connection with the acquisition of the LSI’s Gresham, Oregon wafer fabrication facility, and ADI’s PTC Business, we entered into various agreements with LSI and ADI, respectively. Pursuant to certain of these agreements, we agreed to indemnify LSI and ADI, respectively, for certain things limited in most instances by time and/or monetary amounts.

The Company and its subsidiaries provide for indemnification of directors, officers and other persons in accordance with limited liability agreements, certificates of incorporation, by-laws, articles of association or similar organizational documents, as the case may be. The Company maintains directors’ and officers’ insurance, which should enable it to recover a portion of any future amounts paid.

In addition to the above, from time to time the Company provides standard representations and warranties to counterparties in contracts in connection with sales of its securities and the engagement of financial advisors and also provides indemnities that protect the counterparties to these contracts in the event they suffer damages as a result of a breach of such representations and warranties or in certain other circumstances relating to the sale of securities or their engagement by the Company.

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

 

27


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

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, and results of operations or cash flows.

Legal Matters

The Company currently is involved in a variety of legal matters that arise in the normal course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters, including the matters described or referred to in the next paragraphs will have a material effect on the Company’s financial condition, results of operations or cash flows. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company’s business, consolidated financial position, results of operations or cash flows could be materially and adversely affected.

Securities Class Action Litigation

During the period July 5, 2001 through July 27, 2001, the Company was named as a defendant in three shareholder class action lawsuits that were filed in federal court in New York City against the Company and certain of its former officers, current and former directors and the underwriters for its initial public offering. The lawsuits allege violations of the federal securities laws and have been docketed in the U.S. District Court for the Southern District of New York (“District Court”) as: Abrams v. ON Semiconductor Corp., et al., C.A. No 01-CV-6114; Breuer v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6287; and Cohen v. ON Semiconductor Corp., et al., C.A. No. 01-CV-6942. On April 19, 2002, the plaintiffs filed a single consolidated amended complaint that supersedes the individual complaints originally filed. The amended complaint alleges, among other things, that the underwriters of the Company’s initial public offering improperly required their customers to pay the underwriters’ excessive commissions and to agree to buy additional shares of the Company’s common stock in the aftermarket as conditions of receiving shares in the Company’s initial public offering. The amended complaint further alleges that these supposed practices of the underwriters should have been disclosed in the Company’s initial public offering prospectus and registration statement. The amended complaint alleges violations of both the registration and antifraud provisions of the federal securities laws and seeks unspecified damages. The Company understands that various other plaintiffs have filed substantially similar class action cases against approximately 300 other publicly-traded companies and their public offering underwriters in New York City, which have all been transferred, along with the case against the Company, to a single federal district court judge for purposes of coordinated case management. The Company believes that the claims against it are without merit and have defended, and intend to continue to defend, the litigation vigorously. The litigation process is inherently uncertain, however, and the Company cannot guarantee that the outcome of these claims will be favorable for the Company.

On July 15, 2002, together with the other issuer defendants, the Company filed a collective motion to dismiss the consolidated, amended complaints against the issuers on various legal grounds common to all or most of the issuer defendants. The underwriters also filed separate motions to dismiss the claims against them. In addition, the parties have stipulated to the voluntary dismissal without prejudice of the Company’s individual former officers and current and former directors who were named as defendants in the Company’s litigation, and they are no longer parties to the litigation. On February 19, 2003, the District Court issued its ruling on the motions to dismiss filed by the underwriter and issuer defendants. In that ruling the District Court granted in part and denied in part those motions. As to the claims brought against the Company under the antifraud provisions of the securities laws, the District Court dismissed all of these claims with prejudice, and refused to allow plaintiffs the opportunity to re-plead these claims. As to the claims brought under the registration provisions of the

 

28


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

securities laws, which do not require that intent to defraud be pleaded, the District Court denied the motion to dismiss these claims as to the Company and as to substantially all of the other issuer defendants as well. The District Court also denied the underwriter defendants’ motion to dismiss in all respects.

In June 2003, upon the determination of a special independent committee of the Company’s Board of Directors, the Company elected to participate in a proposed settlement with the plaintiffs in this litigation. Had it been approved by the District Court, this proposed settlement would have resulted in the dismissal, with prejudice, of all claims in the litigation against the Company and against any of the other issuer defendants who elected to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. This proposed issuer settlement was conditioned on, among other things, a ruling by the District Court that the claims against the Company and against the other issuers who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the settlement unless an investor opted to be excluded from the settlement in a timely and appropriate fashion.

On December 5, 2006, the U.S. Court of Appeals for the Second Circuit (“Court of Appeals”) issued a decision in In re Initial Public Offering Securities Litigation that six purported class action lawsuits containing allegations substantially similar to those asserted against the Company could not be certified as class actions due, in part, to the Court of Appeals’ determination that individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of this ruling. On April 6, 2007, the Court of Appeals denied the plaintiffs’ petition for rehearing of the Court of Appeals’ December 5, 2006 ruling. The Court of Appeals, however, noted that the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision. In light of the Court of Appeals’ December 5, 2006 decision regarding certification of the plaintiffs’ claims, the District Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including the Company.

On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. The issuer defendants and the underwriter defendants separately moved to dismiss the claims against them in the amended complaints in the six focus cases. On March 26, 2008, the District Court issued an order in which it denied in substantial part the motions to dismiss the amended complaints in the six focus cases.

On February 25, 2009, the parties advised the District Court that they have reached an agreement-in-principle to settle the litigation in its entirety. A stipulation of settlement was filed with the District Court on April 2, 2009. On June 9, 2009, the District Court preliminarily approved the proposed global settlement. Notice was provided to the class, and a settlement fairness hearing, at which members of the class had an opportunity to object to the proposed settlement, was held on September 10, 2009. On October 6, 2009, the District Court issued an order granting final approval to the settlement. That order remains subject to appeal. There have been separate appeals filed objecting to the definition of the settlement class and fairness of the settlement. Additional appeals as to the fairness of the settlement may also be filed. The settlement calls for a total payment of $586 million from all defendants, including underwriters, of which $100 million is allocated to the approximately 300 issuer defendants. Under the settlement, the Company’s insurers are to pay the full amount of settlement share allocated to the Company, and the Company would bear no financial liability. The Company, as well as the officer and director defendants (current and former) who were previously dismissed from the action pursuant to tolling agreements, are to receive complete dismissals from the case. While the Company can make no assurances or guarantees as to the outcome of these proceedings, based upon the

 

29


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Company’s current knowledge, the Company believes that the final result of this action will have no material effect on its consolidated financial position, results of operations or cash flows.

Other Litigation

On January 27, 2010, the Company completed its acquisition of all of the outstanding shares of common stock of CMD through a cash tender offer of $4.70 per share, which was then followed by the merger of Purchaser (defined below) and CMD, in accordance with the December 14, 2009 definitive merger agreement (“Merger Agreement”) which the Company previously announced it had entered into with CMD (“Transaction”). Shortly after the Company signed the Merger Agreement and announced the tender offer, the Company was named as a defendant in three purported class action lawsuits, described below, filed in California and Delaware against the Company, CMD, CMD’s Board of Directors and Pac-10 Acquisition Corporation, a direct, wholly-owned subsidiary of the Company (“Purchaser”).

On December 14, 2009, a purported class action lawsuit was filed in the Superior Court of Santa Clara County, California (“Court”) captioned Robert Varrenti, et al. v. Robert Dickinson, Edward Ross, John Sprague, David Wittrock, David Sear, Jon Castor, John Fichthorn, J. Michael Gullard, Kenneth Potashner, California Micro Devices, ON Semiconductor Corporation and Pac-10 Acquisition Corporation (No. 109CV159469). On December 29, 2009, the plaintiff filed an amended complaint. On December 21, 2009, a second purported class action lawsuit was filed in the Court of Chancery in the State of Delaware captioned Annamarie Medeiros et al. v. California Micro Devices, Jon S. Castor, Robert V. Dickinson, Edward C. Ross, John Fichthorn, J. Michael Gullard, Kenneth Potashner, David L. Wittrock, Pac-10 Acquisition Corporation and ON Semiconductor Corporation (No. 5159) On January 4, 2010, a third purported class action lawsuit was filed in the Court of Chancery in the State of Delaware captioned Sanjay Israni, et al. v. California Micro Devices, Robert V. Dickinson, Edward C. Ross, Jon S. Castor, John Fichthorn, J. Michael Gullard, Kenneth Potashner, David L. Wittrock, ON Semiconductor Corporation and Pac-10 Acquisition Corporation (No. 5181). All three lawsuits contain similar allegations, stating generally that the proposed Transaction is the product of a breach of fiduciary duties by CMD’s Board of Directors by failing to adequately discharge their duties in negotiating and agreeing to the Transaction and that the Company and the Purchaser assisted in that breach. All three lawsuits requested an injunction enjoining the consummation of the Transaction. The Israni complaint also included a request for damages.

On January 19, 2010, the parties entered into a memorandum of understanding (“MOU”) to settle the three lawsuits and on February 10, 2010, the parties entered into a stipulation of settlement. The settlement, like the MOU, calls for CMD to agree to make available to shareholders certain additional information, which has been completed, and CMD or its insurer to agree to pay plaintiffs’ counsel for fees and expenses not to exceed $495,000. The Company expects CMD’s insurer to pay $245,000 of this total amount. This payment did not affect the amount of consideration paid to the stockholders of CMD in connection with the Transaction. The stipulation of settlement was filed with the Court on March 29, 2010 and a hearing to preliminarily approve the settlement is scheduled for May 7, 2010. See the MOU document at Exhibit 10.1 to CMD’s Form 8-K filed with the SEC on January 20, 2010, and see a summary of the MOU in the Company’s Amendment No. 3 to Schedule TO filed with the SEC on January 20, 2010, which summary is incorporated by reference herein.

The defendants maintain that the lawsuits are completely without merit. Nevertheless, the defendants agreed to the settlement in order to avoid costly litigation, eliminate the risk of delaying the closing of the Transaction, and because the only effect of the settlement on CMD stockholders was to provide additional disclosure. While the Company can make no assurances or guarantees as to the outcome of these proceedings, based upon our current knowledge, the Company believes that the final result of this action will have no material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

30


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Intellectual Property Matters

The Company faces risk to exposure from claims of infringement of the intellectual property rights of others. In the ordinary course of business, the Company receives letters asserting that its products or components breach another party’s rights. These threats may seek that the Company make royalty payments, that the Company stop use of such rights, or other remedies.

Prior to the acquisition of AMIS by us on March 17, 2008, in January 2003, Ricoh Company, Ltd. (“Ricoh”) filed in the U.S. District Court for the District of Delaware a complaint against AMIS and other parties (including Synopsys, Inc. (“Synopsys”), alleging infringement of a patent owned by Ricoh. AMIS promptly tendered the defense of this claim to Synopsys, and Synopsys agreed to assume the defense of the case on AMIS’ behalf to the extent that the Synopsys software that AMIS licensed from Synopsys is alleged to constitute the basis of Ricoh’s claim of infringement. The case has been transferred to the U.S. District Court for the Northern District of California. Ricoh is seeking an injunction and damages in an unspecified amount relating to such alleged infringement. The patents relate to certain methodologies for the automated design of custom semiconductors. The case was scheduled to go to trial in March 2007; however, in December 2006, the court issued an order staying the case pending a re-examination proceeding filed by Synopsys before the U.S. Patent & Trademark Office (“PTO”) challenging the validity of the patent claims at issue in this case. Since that time, Synopsys filed a total of three re-examination petitions with the PTO challenging the validity of the claims at issue which the PTO granted and consolidated all three re-examinations into one proceeding before a single examiner. The re-examination proceeding was completed in September 2008, and the PTO examiner issued a final rejection of all claims in the asserted patent over prior art. Ricoh has appealed that final rejection to the PTO Board of Appeals, which has yet to schedule a hearing date. In April 2008, the court lifted the stay despite the ongoing re-examination proceeding in the PTO. In September 2008, the court granted defendants request to refile a summary judgment motion on non-infringement that had been vacated as moot when the stay was imposed in December 2006. On March 6, 2009, the judge issued a ruling denying the summary judgment motion without prejudice because of a factual dispute over a patent claim element. After an exchange of briefs by the parties related to the disputed claim element, the judge held a further hearing on the matter on June 12, 2009. On October 23, 2009, the judge issued his ruling on the disputed claim element. Based on the judge’s ruling, Synopsys filed another motion for summary judgment on non-infringement on January 8, 2010. A hearing on that motion was held on March 8, 2010 and on April 14, 2010 the judge granted Synopsys’ motion for summary judgment. A status conference is scheduled for May 10, 2010. The Company believes that the asserted claims are without merit, and even if meritorious, that it will be indemnified against damages by Synopsys, and that resolution of this matter will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Note 13: Recent Accounting Pronouncements

In April 2010, FASB issued ASU No. 2010-17, “Revenue Recognition—Milestone Method”, which is included in ASC 605—Milestone Method of Revenue Recognition. This ASU codifies the consensus reached in EITF 08-9, “Milestone Method of Revenue Recognition” (“EITF 08-9”), and addresses the accounting when entities enter into revenue arrangements with multiple payment streams for a single deliverable or a single unit of accounting. The pronouncement shall be applied prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010, with earlier application and retrospective application permitted. The Company is currently assessing the impact of ASU No. 2010-17 on its financial position and results of operations.

 

31


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Note 14: Fair Value of Financial Instruments

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of April 2, 2010 and December 31, 2009 (in millions):

 

    Balance as of
April 2, 2010
  Quoted Prices in
Active Markets
(Level 1)
  Balance as of
December 31, 2009
  Quoted Prices in
Active Markets
(Level 1)

Description

               

Assets:

       

Cash and cash equivalents:

       

Demand and time deposits

  $ 230.0   $ 230.0   $ 172.2   $ 172.2

Money market funds

    69.2     69.2     42.0     42.0

Treasuries

    261.5     261.5     311.5     311.5

Short-term investments

       

Commercial paper

    —       —       20.0     20.0

Treasuries and agencies

    —       —       25.5     25.5
                       

Total cash, cash equivalents and short-term investments

  $ 560.7   $ 560.7   $ 571.2   $ 571.2

Other Current Assets

       

Foreign currency exchange contracts

    0.6     0.6     0.4     0.4
                       

Total financial assets

  $ 561.3   $ 561.3   $ 571.6   $ 571.6
                       

Liabilities:

       

Foreign currency exchange contracts

  $ 0.5   $ 0.5   $ 0.5   $ 0.5
                       

The Company’s financial assets and liabilities are valued using market prices on active markets (Level 1). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Cash and cash equivalents are short-term, highly liquid investments with original or remaining maturities of three months or less when purchased.

As of April 2, 2010 the Company held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.

Long-Term Debt, Including Current Portion

The carrying amounts and fair values of the Company’s long-term borrowings (excluding capital lease obligations) at April 2, 2010 and December 31, 2009 are as follows (in millions):

 

     April 2, 2010    December 31, 2009
     Carrying
Amount
   Fair
Value
   Carrying
Amount
   Fair
Value

Long-term debt, including current portion

           

Level 1

   $ 571.1    $ 714.8    $ 562.4    $ 771.7

Level 2

   $ 169.8    $ 167.2    $ 170.2    $ 163.8

Level 3

   $ 118.6    $ 114.8    $ 122.3    $ 114.4

 

32


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

The following is a rollforward of fair value measurement using significant unobservable inputs (Level 3) of long-term debt, including current portion from December 31, 2009 to April 2, 2010 as follows (in millions):

 

Beginning balance as of December 31, 2009

   $ 114.4   

Gain (loss) recorded during 2010

     —     

Gain (loss) not recorded during 2010

     4.1   

New debt

     0.2   

Principal payments

     (3.9
        

Ending balance as of April 2, 2010

   $ 114.8   
        

The fair value of Level 3 financial instruments was determined by discounting the remaining payments of the outstanding debt using estimated current rates at April 2, 2010.

Note 15: Segment Information

Revenues, gross profit and operating income for the Company’s reportable segments for the three months ended April 2, 2010 and April 3, 2009 are as follows (in millions):

 

    Automotive &
Power Group
    Computing &
Consumer Group
  Digital & Mixed-
Signal Product Group
  Standard
Products Group
  Total

For quarter ended April 2, 2010:

         

Revenues from external customers

  $ 125.9      $ 124.2   $ 122.0   $ 178.1   $ 550.2

Segment gross profit

  $ 44.8      $ 52.9   $ 78.2   $ 65.8   $ 241.7

Segment operating income (loss)

  $ 15.6      $ 20.7   $ 35.2   $ 39.1   $ 110.6

For quarter ended April 3, 2009:

         

Revenues from external customers

  $ 84.7      $ 85.8   $ 90.0   $ 118.6   $ 379.1

Segment gross profit

  $ 22.3      $ 26.8   $ 45.4   $ 28.0   $ 122.5

Segment operating income (loss)

  $ (2.5   $ 2.3   $ 12.3   $ 10.4   $ 22.5

Depreciation and amortization expense is included in segment operating income. Reconciliations of segment gross profit and segment operating income to the financial statements are as follows (in millions):

 

     Quarter Ended  
     April 2,
2010
    April 3,
2009
 

Gross profit for reportable segments

   $ 241.7      $ 122.5   

Unallocated amounts:

    

Other unallocated manufacturing costs

     (13.6     (10.4
                

Gross profit

   $ 228.1      $ 112.1   
                

Operating income for reportable segments

   $ 110.6      $ 22.5   

Unallocated amounts:

    

Restructuring and other charges

     (3.8     (9.6

Other unallocated manufacturing costs

     (13.6     (10.4

Other unallocated operating expenses

     (9.0     (7.1
                

Operating income (loss)

   $ 84.2      $ (4.6
                

 

33


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

Revenues by geographic location and product line, including local sales and exports made by operations within each area, based on shipments from the respective country are summarized as follows (in millions):

 

     Quarter Ended
     April 2,
2010
   April 3,
2009

United States

   $ 119.2    $ 113.7

Other Americas

     1.7      0.5

United Kingdom

     93.4      47.7

Belgium

     0.1      27.4

China

     172.2      100.2

Singapore

     130.2      62.2

Other Asia/Pacific

     32.9      26.7

Other Europe

     0.5      0.7
             
   $ 550.2    $ 379.1
             

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

 

     April 2,
2010
   December 31,
2009

United States

   $ 186.4    $ 170.7

China

     91.3      94.9

Europe

     108.8      109.5

Malaysia

     122.1      114.3

Other Asia/Pacific

     124.3      105.9

Japan

     66.7      68.8

Belgium

     38.9      38.7

Other Americas

     3.1      2.7
             
   $ 741.6    $ 705.5
             

For the quarter ended April 2, 2010, one of the Company’s customers accounted for 11% of the Company’s total revenues. For the quarter ended April 3, 2009, one of the Company’s customers accounted for 10% of the Company’s total revenues.

Note 16: Subsequent Events

On April 12, 2010, the Company amended the Indenture for its Zero Coupon Convertible Senior Subordinated Notes due 2024.

The amendments include:

 

   

One additional opportunity to require the Company to purchase the notes on April 15, 2012. The terms of this put option are otherwise identical to the purchase option currently governing the notes whereby holders of the notes had the option to require the Company to purchase the notes on April 15, 2010; and

 

   

Additional call protection, eliminating the Company’s ability to redeem the notes at its option from and after April 15, 2010 until April 15, 2012.

 

34


Table of Contents

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(unaudited)

 

As a result of this offer, approximately $3.1 million of the $99.4 million par value of notes outstanding prior to this amendment were tendered, leaving $96.3 million par value of notes outstanding under the amended terms which, net of debt discount, has been included in long-term debt as of April 2, 2010.

On May 5, 2010, the Company’s Board of Directors approved the early termination and prepayment of the Senior Bank Facility, including the prepayment of a term loan with approximately $169.8 million of aggregate principal amount outstanding. The prepayment and termination of the Senior Bank Facility is expected to occur during the second quarter of 2010 using existing cash on hand.

 

35


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

You should read the following discussion in conjunction with our audited historical consolidated financial statements, which are included in our Form 10-K, filed with the SEC on February 25, 2010, and our unaudited consolidated financial statements for the fiscal quarter ended April 2, 2010, included elsewhere in this Form 10-Q. Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks, uncertainties and other factors. Actual results could differ materially because of certain factors discussed below or elsewhere in this Form 10-Q. See Part II, Item 1A. “Risk Factors” of this Form 10-Q and our most recent Form 10-K.

Company Highlights During the Quarter Ended April 2, 2010

 

   

Total revenues of approximately $550.2 million, an increase of approximately 11% from the fourth quarter of 2009

 

   

Record GAAP gross margin of 41.5%

 

   

GAAP net income of $0.14 per fully diluted share

 

   

Completion of the acquisition of California Micro Devices (“CMD”)

Executive Overview

This Executive Overview presents summary information regarding our industry, markets and operating trends only. For further information regarding the events summarized herein, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in its entirety.

Industry Overview

We participate in unit and revenue surveys and use data summarized by the World Semiconductor Trade Statistics (“WSTS”) group to evaluate overall semiconductor market trends and also to track our progress against the total market in the areas we provide semiconductor components. The most recently published estimates of WSTS project a compound annual revenue growth rate in our total addressable market of approximately 2.9% during 2010 through 2012. These are not our projections and may not be indicative of actual results, but we, like many of our competitors, use this information as a useful, third-party projection.

Business and Company Overview

We are a premier supplier of high performance, energy efficient, silicon solutions for green electronics. Our broad portfolio of power and signal management, logic, discrete and custom devices helps customers efficiently solve their design challenges in automotive, communications, computing, consumer, industrial, LED lighting, medical, military/aerospace and power applications. We design, manufacture and market an extensive portfolio of semiconductor components that addresses the design needs of sophisticated electronic systems and products. Our power management semiconductor components control, convert, protect and monitor the supply of power to the different elements within a wide variety of electronic devices. Our custom application specific integrated circuits use analog, digital signal processing, mixed-signal and advanced logic capabilities to act as the brain behind many of our automotive, medical, military, aerospace, consumer and industrial customers’ unique products. Our data management semiconductor components provide high-performance clock management and data flow management for precision computing and communications systems. Our standard semiconductor components serve as “building block” components within virtually all electronic devices. These various products fall into the logic, analog and discrete categories used by WSTS.

 

36


Table of Contents

We serve a broad base of end-user markets, including power supply, automotive, communications, computer, consumer, medical, industrial, mobile phone and military/aerospace. Applications for our products in these markets include portable electronics, computers, game stations, servers, automotive and industrial automation control systems, routers, switches, storage-area networks and automated test equipment.

Our extensive portfolio of devices enables us to offer advanced integrated circuits and the “building block” components that deliver system level functionality and design solutions. Our product portfolio currently comprises approximately 42,000 products and we shipped approximately 9.1 billion units in the first three months of 2010 as compared to approximately 5.8 billion units in the first three months of 2009. We specialize in micro packages, which offer increased performance characteristics while reducing the critical board space inside today’s ever shrinking electronic devices. We believe that our ability to offer a broad range of products provides our customers with single source purchasing on a cost-effective and timely basis.

On January 27, 2010, we completed the purchase of CMD, via a tender offer at a price of $4.70 per share of CMD stock, whereby CMD became our wholly-owned subsidiary. The aggregate purchase price of this all cash transaction was approximately $113.2 million. We believe that the combination will significantly strengthen our offering of application specific integrated passive (ASIP) devices to protect products in the wireless, computing and consumer electronics end-markets. In addition, CMD’s expertise in protection solutions for the high brightness LED (HBLED) market and its strengths in inductor capacitor-based EMI (electromagnetic interference) filtering and low capacitance ESD (electrostatic discharge) protection, complement our existing portfolio of protection and lighting solutions.

We are organized into four operating segments, which also represent four reporting segments: automotive and power group, standard products, computing and consumer products and digital and mixed-signal product group. Each of our major product lines has been assigned to a segment, as illustrated in the table below, based on our 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 revenues from the product lines assigned to that segment. From time to time we reassess the alignment of our product families and devices to our operating segments and may move product families or individual devices from one operating segment to another.

 

Automotive & Power Group

 

Computing & Consumer
Products

  Digital & Mixed-Signal
Products Group
  Standard Products
MOSFETs   DC-DC Conversion   Medical   Bipolar Power
Analog Automotive   Analog Switches   Integrated Sensor
Products (“ISP”)
  Thyristor
Auto Power   AC-DC Conversion   Military & Aerospace   Small Signal
LDO & Vregs   Low Voltage   Industrial   Zener
Mixed-Signal Automotive   Standard Logic   Communications &
High Voltage
  Protection
  Power Switching   High Frequency   Rectifier
  Signal & Interface   Foundry and
Manufacturing Services
  Filters
      Memory Products

We have approximately 356 direct customers worldwide, and we also service approximately 242 significant original equipment manufacturers indirectly through our distributor and electronic manufacturing service provider customers. Our direct and indirect customers include: (1) leading original equipment manufacturers in a

 

37


Table of Contents

broad variety of industries, such as Continental Automotive Systems, Delta, Samsung, Hella, LG Electronics, Motorola, Boston Scientific, Delphi, Huawei Technology, Seagate Technology, Sony Ericsson, Bosch, General Electric, Raytheon, Alcatel, Siemens, and Visteon ; (2) electronic manufacturing service providers, such as Flextronics, Jabil, Sanmina and (3) global distributors, such as Avnet, World Peace, Arrow, Wintech, Yosun, EBV Elektronik, and Future.

We currently have major design operations in Arizona, Rhode Island, Idaho, California, Texas, Oregon, China, Romania, Switzerland, the Czech Republic, Korea, Belgium, Canada, Germany, India, Ireland, and France, and we currently operate manufacturing facilities in Arizona, Oregon, Idaho, Belgium, China, the Czech Republic, Japan, Malaysia, the Philippines, and Thailand.

New Product Innovation

As a result of the success of our research and development initiatives, excluding the introduction of lead-free products, we introduced 247 new product families in 2009. During the three months ended April 2, 2010, we introduced an additional 46 new product families. Our new product development efforts continue to be focused on building solutions in power management that appeal to customers in focused market segments and across multiple high growth applications. As always, 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 regularly. We deploy people and capital with the goal of maximizing our investment in research and development in order to position us for continued growth. As a result, we often invest at the greatest opportunity to refresh existing products in our commodity logic, analog, and discrete products. We invest in these initiatives when we believe there is a strong customer demand or opportunities to innovate our current portfolio in high growth markets and applications.

Cost Savings and Restructuring Activities

We continue to implement profitability enhancement programs to improve our cost structure and, as a result, we expect to rank, as compared to our primary competitors, among the lowest in terms of cost structure.

Our profitability enhancement programs will continue to focus on:

 

   

transferring production to lower cost regions;

 

   

increasing die manufacturing capacity in a cost-effective manner by moving production from 4” and 6” wafers to 8” wafers and smaller geometrics resulting in an increase to the number of die per wafer;

 

   

reducing the number of product platforms and process flows; and

 

   

Focusing production on profitable product families.

Macroeconomic Environment

While we have recognized efficiencies from implemented restructuring activities and continue to implement profitability enhancement programs to improve our cost structure, the United States and global economy is currently undergoing a period of unprecedented volatility. In addition, the semiconductor industry has traditionally been highly cyclical and has often experienced significant downturns in connection with, or in anticipation of, declines in general economic conditions. These macroeconomic factors have affected our customers and suppliers which in turn has affected our business, including sales, the collection of receivables, and results of operations. Although we view many of these macroeconomic environment issues as temporary, our continuing outlook for the future will ultimately affect our future emphasis on marketing to various industries, our future research and development efforts into new product lines and our segments in general.

 

38


Table of Contents

Outlook

Based on current booking trends, backlog levels and estimated turns levels, we anticipate that total revenues will be approximately $565.0 million to $580.0 million in the second quarter of 2010. Backlog levels at the beginning of the second quarter of 2010 were up from backlog levels at the beginning of the first quarter of 2010 and represent over 90% of our anticipated second quarter 2010 revenues. We expect average selling prices for the second quarter of 2010 will be down approximately 1% from the first quarter of 2010. We expect cash capital expenditures of approximately $45.0 million to $55.0 million in the second quarter of 2010.

For the second quarter of 2010, we expect gross profit as a percentage of revenues to be approximately 41.5% to 42.5%. For the second quarter of 2010, we also expect total operating expenses of approximately $138.0 million to $142.0 million, which includes amortization of acquisition-related intangible assets, restructuring and other charges of $10.0 million.

We anticipate interest expense, net of interest income, and other expenses will be approximately $17.0 million for the second quarter of 2010, which includes non-cash interest expense of approximately $7.0 million relating to our convertible senior subordinated notes. We expect provision for income taxes to be approximately $4.0 million in the second quarter of 2010, with cash payments of income taxes to be approximately $3.0 million in the second quarter of 2010. We also expect share-based compensation expense of approximately $13.0 million to $14.0 million in the second quarter of 2010.

Results of Operations

Quarter Ended April 2, 2010 Compared to Quarter Ended April 3, 2009

The following table summarizes certain information relating to our operating results that has been derived from our unaudited consolidated financial statements for the quarters ended April 2, 2010 and April 3, 2009. The amounts in the following table are in millions:

 

     Quarter ended        
     April 2,
2010
    April 3,
2009
    Dollar Change  

Revenues

   $ 550.2      $ 379.1      $ 171.1   

Cost of revenues

     322.1        267.0        55.1   
                        

Gross profit

     228.1        112.1        116.0   

Operating expenses:

      

Research and development

     65.2        43.6        21.6   

Selling and marketing

     35.6        29.0        6.6   

General and administrative

     31.5        27.3        4.2   

Amortization of acquisition-related intangible assets

     7.8        7.2        0.6   

Restructuring, asset impairments and other net

     3.8        9.6        (5.8
                        

Total operating expenses