ON SEMICONDUCTOR CORP - FORM 10-Q

ON SEMICONDUCTOR CORP - FORM 10-Q - July 31, 2014

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Attached files

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EXCEL - IDEA: XBRL DOCUMENT - ON SEMICONDUCTOR CORP	Financial_Report.xls
EX-31.2 - EX-31.2 - ON SEMICONDUCTOR CORP	d760205dex312.htm
EX-32.1 - EX-32.1 - ON SEMICONDUCTOR CORP	d760205dex321.htm
EX-2.1 - EX-2.1 - ON SEMICONDUCTOR CORP	d760205dex21.htm
EX-31.1 - EX-31.1 - ON SEMICONDUCTOR CORP	d760205dex311.htm
EX-10.1 - EX-10.1 - ON SEMICONDUCTOR CORP	d760205dex101.htm

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 June 27, 2014

¨	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, zip code 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 x 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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 July 25, 2014:


Title of Each Class		Number of Shares
Common Stock, par value $0.01 per share		441,127,284

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS


Part I: Financial Information
Item 1. Financial Statements (unaudited)			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			38
Item 3. Quantitative and Qualitative Disclosures About Market Risk			54
Item 4. Controls and Procedures			54

Part II: Other Information
Item 1. Legal Proceedings			56
Item 1A. Risk Factors			56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 3. Defaults Upon Senior Securities			57
Item 4. Mine Safety Disclosures			57
Item 5. Other Information			58
Item 6. Exhibits			58
Signatures			59
Exhibit Index			60

(See the glossary of selected terms immediately following this table of contents for definitions of certain abbreviated terms)

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

FORM 10-Q

GLOSSARY OF SELECTED ABBREVIATED TERMS*


Abbreviated Term		Defined Term

2.625% Notes, Series B		2.625% Convertible Senior Subordinated Notes due 2026, Series B

Amended and Restated SIP		ON Semiconductor Corporation Amended and Restated Stock Incentive Plan

AMIS		AMIS Holdings, Inc.

ASU		Accounting Standards Update

ASC		Accounting Standards Codification

ASIC		Application Specific Integrated Circuit

Catalyst		Catalyst Semiconductor, Inc.

CMD		California Micro Devices Corporation

DSP		Digital signal processing

ESPP		ON Semiconductor Corporation 2000 Employee Stock Purchase Plan

FASB		Financial Accounting Standards Board

Freescale		Freescale Semiconductor, Inc.

IP		Intellectual property

IPRD		In-Process Research and Development

KSS		System Solutions Group back-end manufacturing facility in Hanyu, Japan

LED		Light-emitting diode

LSI		Large Scale Integration

Motorola		Motorola Inc.

PulseCore		PulseCore Holdings (Cayman) Inc.

SANYO Semiconductor		SANYO Semiconductor Co., Ltd.

SCI LLC		Semiconductor Components Industries, LLC

SDT		Sound Design Technologies Ltd.

SMBC		Sumitomo Mitsui Banking Corporation

TMOS		T-metal oxide semiconductor

WSTS		World Semiconductor Trade Statistics

*	Terms used, but not defined, within the body of the Form 10-Q are defined in this Glossary.

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(in millions, except share and per share data)

(unaudited)


	June 27, 2014			December 31, 2013
Assets
Cash and cash equivalents	$	598.9		$	509.5
Short-term investments		2.3			116.2
Receivables, net		437.3			383.4
Inventories		632.6			611.8
Other current assets		90.5			89.3

Total current assets		1,761.6			1,710.2
Property, plant and equipment, net		1,141.7			1,074.2
Goodwill		211.6			184.6
Intangible assets, net		245.5			223.4
Other assets		58.0			64.6

Total assets	$	3,418.4		$	3,257.0

Liabilities, Non-Controlling Interest and Stockholders’ Equity
Accounts payable	$	305.4		$	276.8
Accrued expenses		231.9			220.3
Deferred income on sales to distributors		162.6			140.5
Current portion of long-term debt (see Note 7)		169.4			181.6

Total current liabilities		869.3			819.2
Long-term debt (see Note 7)		735.5			760.6
Other long-term liabilities		174.1			190.4

Total liabilities		1,778.9			1,770.2

Commitments and contingencies (See Note 10)
ON Semiconductor Corporation stockholders’ equity:
Common stock ($0.01 par value, 750,000,000 shares authorized, 520,663,680 and 515,888,942 shares issued, 441,195,380 and 440,250,288 shares outstanding, respectively)		5.2			5.2
Additional paid-in capital		3,250.6			3,210.8
Accumulated other comprehensive loss		(45.3	)		(47.4	)
Accumulated deficit		(995.7	)		(1,142.1	)
Less: treasury stock, at cost: 79,468,300 and 75,638,654 shares, respectively		(608.1	)		(572.5	)

Total ON Semiconductor Corporation stockholders’ equity		1,606.7			1,454.0
Non-controlling interest in consolidated subsidiary		32.8			32.8

Total stockholders’ equity		1,639.5			1,486.8

Total liabilities and equity	$	3,418.4		$	3,257.0

See accompanying notes to consolidated financial statements

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in millions, except per share data)

(unaudited)


	Quarter Ended						Six Months Ended
	June 27, 2014			June 28, 2013			June 27, 2014			June 28, 2013
Revenues	$	757.6		$	688.3		$	1,464.1		$	1,349.3
Cost of revenues		484.6			456.5			940.3			913.0

Gross profit		273.0			231.8			523.8			436.3
Operating expenses:
Research and development		84.2			83.1			162.3			171.5
Selling and marketing		47.9			43.3			92.3			83.1
General and administrative		44.7			40.2			85.7			76.4
Amortization of acquisition-related intangible assets		10.4			8.2			18.6			16.6
Restructuring, asset impairments and other, net		4.1			6.1			9.9			0.1

Total operating expenses		191.3			180.9			368.8			347.7

Operating income		81.7			50.9			155.0			88.6

Other income (expense), net:
Interest expense		(7.9	)		(9.3	)		(16.0	)		(19.4	)
Interest income		0.2			0.4			0.4			0.7
Other		(1.2	)		4.1			(1.8	)		5.0
Loss on debt exchange		—			—			—			(3.1	)

Other income (expense), net		(8.9	)		(4.8	)		(17.4	)		(16.8	)

Income before income taxes		72.8			46.1			137.6			71.8
Income tax benefit		16.2			2.6			10.0			0.2

Net income		89.0			48.7			147.6			72.0
Less: Net income attributable to non-controlling interest		(1.0	)		(1.0	)		(1.2	)		(1.7	)

Net income attributable to ON Semiconductor Corporation	$	88.0		$	47.7		$	146.4		$	70.3

Comprehensive income (loss), net of tax:
Net income	$	89.0		$	48.7		$	147.6		$	72.0

Foreign currency translation adjustments		(0.2	)		2.5			(0.6	)		(5.8	)
Effects of cash flow hedges		1.3			(3.4	)		2.7			(4.3	)
Unrealized loss on available-for-sale securities		—			0.2			—			0.1

Other comprehensive income (loss)		1.1			(0.7	)		2.1			(10.0	)

Comprehensive income		90.1			48.0			149.7			62.0
Comprehensive income attributable to non-controlling interest		(1.0	)		(1.0	)		(1.2	)		(1.7	)

Comprehensive income attributable to ON Semiconductor Corporation	$	89.1		$	47.0		$	148.5		$	60.3

Net income per common share attributable to ON Semiconductor Corporation:
Basic	$	0.20		$	0.11		$	0.33		$	0.16

Diluted	$	0.20		$	0.11		$	0.33		$	0.16

Weighted average common shares outstanding:
Basic		441.1			450.7			440.7			450.1

Diluted		444.5			453.3			444.5			452.9

See accompanying notes to consolidated financial statements

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(unaudited)


	Six Months Ended
	June 27, 2014			June 28, 2013
Cash flows from operating activities:
Net income	$	147.6		$	72.0
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		110.3			103.6
Gain on sale or disposal of fixed assets		(0.3	)		(7.1	)
Loss on debt exchange		—			3.1
Amortization of debt issuance costs		0.7			0.6
Provision for excess inventories		11.5			39.9
Non-cash share-based compensation expense		21.9			16.4
Non-cash interest		3.3			5.8
Non-cash asset impairment charges		1.8			—
Non-cash foreign currency translation gain		—			(21.0	)
Reversal of deferred tax asset valuation allowance		(21.5	)		—
Other		2.7			(5.9	)
Changes in assets and liabilities (exclusive of the impact of acquisitions):
Receivables		(44.0	)		(56.5	)
Inventories		(13.4	)		(33.3	)
Other assets		—			32.1
Accounts payable		(0.2	)		2.9
Accrued expenses		4.1			(13.8	)
Deferred income on sales to distributors		22.1			18.4
Other long-term liabilities		(20.1	)		(16.8	)

Net cash provided by operating activities		226.5			140.4

Cash flows from investing activities:
Purchases of property, plant and equipment		(96.5	)		(84.7	)
Proceeds from sales of property, plant and equipment		0.2			8.4
Deposits utilized (made) for purchases of property, plant and equipment		1.3			(1.5	)
Purchase of businesses, net of cash acquired		(90.9	)		—
Proceeds from held-to-maturity securities		116.2			124.2
Purchases of held-to-maturity securities		(2.3	)		(162.3	)

Net cash used in investing activities		(72.0	)		(115.9	)

Cash flows from financing activities:
Proceeds from issuance of common stock under the employee stock purchase plan		2.5			2.1
Proceeds from exercise of stock options		15.4			6.6
Payments of tax withholding for restricted shares		(5.4	)		(2.2	)
Repurchase of common stock		(30.8	)		(9.4	)
Proceeds from debt issuance		15.0			26.2
Payment of capital lease obligations		(21.0	)		(21.8	)
Repayment of long-term debt		(40.7	)		(107.6	)
Dividend to non-controlling shareholder of consolidated subsidiary		(1.2	)		—

Net cash used in financing activities		(66.2	)		(106.1	)

Effect of exchange rate changes on cash and cash equivalents		1.1			(9.2	)

Net increase (decrease) in cash and cash equivalents		89.4			(90.8	)
Cash and cash equivalents, beginning of period		509.5			486.9

Cash and cash equivalents, end of period	$	598.9		$	396.1

See accompanying notes to consolidated financial statements

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-owned and majority-owned subsidiaries (“ON Semiconductor” or the “Company”), uses a thirteen-week fiscal quarter accounting period for each quarter, with the first three quarters ending on the last Friday in March, June and September, and the fourth quarter ending on December 31. The three months ended June 27, 2014 and June 28, 2013 each contained 91 days. The six months ended June 27, 2014 and June 28, 2013 contained 178 days and 179 days, respectively.

The accompanying unaudited financial statements as of June 27, 2014 have been prepared in accordance with generally accepted accounting principles in the United States of America for unaudited interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America for audited financial statements. Additionally, the balance sheet as of December 31, 2013 was derived from audited financial statements, but also does not include all disclosures required by accounting principles generally accepted in the United States of America 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, 2013 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (“2013 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 Company condensed certain prior year amounts in our consolidated financial statements to conform to the current year presentation.

The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America 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 following: (i) measurement of valuation allowances relating to trade receivables, inventories and deferred tax assets; (ii) estimates of future payouts for customer incentives, warranties, and restructuring activities; (iii) assumptions surrounding future pension obligations; (iv) fair values of stock options and of financial instruments (including derivative financial instruments); (v) evaluations of uncertain tax positions; and (vi) future cash flows used to assess and test for impairment of long-lived assets and, if applicable, goodwill. Actual results could differ from these estimates.

Note 2:

Recent Accounting Pronouncements

ASU No. 2014-09 - “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”)

In May 2014, the FASB issued ASU 2014-09, which applies to any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards, superceding the revenue recognition requirements in Topic 605. Pursuant to ASU 2014-09, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange, as applied through a multi-step process to achieve that core principle. The related amendments are effective for reporting periods beginning after December 15, 2016 and early adoption is not permitted. The Company is currently evaluating the impact that the adoption of ASU 2014-09 may have on the Company’s Consolidated Financial Statements.

Note 3:

Acquisitions

The Company pursues strategic acquisitions from time to time to leverage its existing capabilities and further build its business. Such acquisitions are accounted for as business combinations pursuant to ASC 805 “Business Combinations.” Accordingly, acquisition costs are not included as components of consideration transferred, but are accounted for as expenses in the period in which the costs are incurred. During the quarter and six months ended June 27, 2014, the Company incurred acquisition related costs of approximately $3.7 million and $4.0 million, respectively.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Acquisition of Truesense Imaging, Inc. (“Truesense”)

On April 30, 2014, the Company acquired 100% of Truesense for approximately $95.1 million in cash, subject to customary closing adjustments. During the second quarter of 2014, Truesense was incorporated into the Company’s Application Products Group. The acquisition of Truesense strengthens the Company’s product portfolio targeting industrial end-markets such as machine vision, surveillance, and intelligent transportation systems by complementing the Company’s existing high-speed, high-resolution, power-efficient image sensing solutions with Truesense’s high-performance image sensors for low-light, low-noise.

The following table presents the initial allocation of the purchase price of Truesense to the assets acquired and liabilities assumed on April 30, 2014 based on their fair values (in millions):


	Allocation
Cash and cash equivalents	$	4.2
Receivables, net		8.8
Inventories		18.8
Other current assets		2.6
Property, plant and equipment		25.6
Goodwill		27.0
Intangible assets		33.1
In-process research and development		7.5

Total assets acquired		127.6

Accounts payable		3.8
Other current liabilities		5.6
Other non-current liabilities		23.1

Total liabilities assumed		32.5

Net assets acquired	$	95.1

Acquired intangible assets include $7.5 million of IPRD assets, which are to 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. A discount rate of 21% was used in the present value calculations, and was derived from a weighted-average cost of capital analysis, adjusted to reflect the risks inherent in the acquired research and development operations.

Other acquired intangible assets of $33.1 million include: customer relationships of $20.4 million (five year weighted-average useful life) and developed technology of $12.7 million (twelve year weighted-average useful life).

Goodwill of $27.0 million was assigned to the Application Products Group. Among the factors that contributed to goodwill arising from the acquisition were the potential synergies expected to be derived from combining Truesense with the Company’s existing image sensor business. These synergies provide the capability of providing a broad range of high-performance image sensors to the industrial end-market. Goodwill will not be amortized but instead tested for impairment at least annually (more frequently if certain indicators are present). The $27.0 million of goodwill as of June 27, 2014 is not expected to be deductible for tax purposes.

The initial purchase price allocation is subject to change as the Company finalizes its determination relating to the valuation of net assets acquired from Truesense. Accordingly, future adjustments may impact the initial amount of goodwill represented in the table above.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

The following unaudited pro-forma consolidated results of operations for the quarters and six months ended June 27, 2014 and June 28, 2013 have been prepared as if the acquisition of Truesense had occurred on January 1, 2013 and includes adjustments for depreciation expense, amortization of intangibles, interest expense and the effect of taxes (in millions, except per share data):


	Quarter Ended				Six Months Ended
	June 27, 2014		June 28, 2013		June 27, 2014		June 28, 2013
Revenues	$	765.3	$	708.2	$	1,490.4	$	1,385.1
Gross profit	$	276.2	$	240.6	$	534.1	$	452.1
Net income attributable to ON Semiconductor Corporation	$	88.5	$	49.2	$	147.3	$	71.1
Net income per common share attributable to ON Semiconductor Corporation:
Basic	$	0.20	$	0.11	$	0.33	$	0.16
Diluted	$	0.20	$	0.11	$	0.33	$	0.16

Acquisition of Aptina, Inc. (“Aptina”)

On June 9, 2014, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Aptina, pursuant to which, at the effective time of the merger, Aptina would become an indirect wholly-owned subsidiary of ON Semiconductor, for an estimated purchase price of approximately $400.0 million in cash, subject to customary closing adjustments as set forth in the Merger Agreement. The transaction remains subject to the satisfaction or waiver of various closing conditions and is subject to certain regulatory approvals.

Note 4:

Goodwill and Intangible Assets

Goodwill

The following table summarizes goodwill by relevant operating segment as of June 27, 2014 and December 31, 2013 (in millions):


	Balance as of June 27, 2014							Balance as of December 31, 2013
	Goodwill		Accumulated Impairment Losses			Carrying Value		Goodwill		Accumulated Impairment Losses			Carrying Value
Operating Segment:
Application Products Group	$	574.4	$	(410.2	)	$	164.2	$	547.4	$	(410.2	)	$	137.2
Standard Products Group		76.0		(28.6	)		47.4		76.0		(28.6	)		47.4

	$	650.4	$	(438.8	)	$	211.6	$	623.4	$	(438.8	)	$	184.6

Goodwill is tested for impairment annually on the first day of the fourth quarter unless a triggering event would require an interim analysis. 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. While management did not identify any triggering events through June 27, 2014 that would require an interim impairment analysis, the Company’s current projections include assumptions of current industry and market conditions, which could negatively change, and in turn, may adversely impact the fair value of the Company’s goodwill, intangible assets and other long-lived assets. As a result, the carrying value of the reporting units containing the Company’s goodwill may exceed their fair value in future impairment tests.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Intangible Assets

Intangible assets, net, were as follows as of June 27, 2014 and December 31, 2013 (in millions):


	June 27, 2014
	Original Cost		Accumulated Amortization			Foreign Currency Translation Adjustment			Accumulated Impairment			Carrying Value		Useful Life (in Years)
Intellectual property	$	13.9	$	(9.7	)	$	—		$	(0.4	)	$	3.8		5-12
Customer relationships		300.7		(114.0	)		(27.3	)		(23.0	)		136.4		5-18
Patents		43.7		(20.1	)		—			(13.7	)		9.9		12
Developed technology		158.9		(75.0	)		—			(2.4	)		81.5		5-13
Trademarks		14.0		(6.5	)		—			(1.1	)		6.4		15
In-process research and development		7.5		—			—			—			7.5

Total intangibles	$	538.7	$	(225.3	)	$	(27.3	)	$	(40.6	)	$	245.5


	December 31, 2013
	Original Cost		Accumulated Amortization			Foreign Currency Translation Adjustment			Accumulated Impairment Losses			Carrying Value		Useful Life (in Years)
Intellectual property	$	13.9	$	(9.4	)	$	—		$	(0.4	)	$	4.1		5-12
Customer relationships		280.3		(105.5	)		(27.4	)		(23.0	)		124.4		5-18
Patents		43.7		(19.0	)		—			(13.7	)		11.0		12
Developed technology		146.2		(66.7	)		—			(2.4	)		77.1		5-12
Trademarks		14.0		(6.1	)		—			(1.1	)		6.8		15

Total intangibles	$	498.1	$	(206.7	)	$	(27.4	)	$	(40.6	)	$	223.4

Amortization expense for acquisition-related intangible assets amounted to $10.4 million and $18.6 million for the quarter and six months ended June 27, 2014, respectively, and $8.2 million and $16.6 million for the quarter and six months ended June 28, 2013, respectively. Amortization expense for intangible assets, with the exception of the $7.5 million of IPRD assets that will be amortized once the corresponding projects have been completed, is expected to be as follows over the next five years and thereafter (in millions):


Period	Estimated Amortization Expense
Remainder of 2014	$	24.0
2015		44.3
2016		34.6
2017		30.3
2018		25.8
Thereafter		79.0

Total estimated amortization expense	$	238.0

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Note 5:

Restructuring, Asset Impairments and Other, Net

A summary description of the activity included in the “Restructuring, Asset Impairments and Other, Net” caption on the Company’s Consolidated Statements of Operations and Comprehensive Income for the quarter and six months ended June 27, 2014 is as follows (in millions):


	Restructuring		Impairment		Other			Total
Quarter ended June 27, 2014
System Solutions Group Voluntary Retirement Program	$	2.3	$	—	$	(1.7	)	$	0.6
KSS facility closure		3.1		—		(1.4	)		1.7
Other		0.5		1.3		—			1.8

Total	$	5.9	$	1.3	$	(3.1	)	$	4.1

Six months ended June 27, 2014
System Solutions Group Voluntary Retirement Program	$	7.3	$	—	$	(4.5	)	$	2.8
KSS facility closure		6.7		—		(1.4	)		5.3
Other		0.5		1.3		—			1.8

Total	$	14.5	$	1.3	$	(5.9	)	$	9.9

The following is a rollforward of the accrued restructuring charges from December 31, 2013 to June 27, 2014 (in millions):


	Balance as of December 31, 2013		Charges		Usage			Balance as of June 27, 2014
Estimated employee separation charges	$	25.2	$	13.6	$	(21.2	)	$	17.6
Estimated costs to exit		1.0		0.9		(1.0	)		0.9

Total	$	26.2	$	14.5	$	(22.2	)	$	18.5

Activity related to the Company’s Restructuring, asset impairments and other, net for programs that had not been completed as of June 27, 2014, is as follows:

System Solutions Group Voluntary Retirement Program

During the fourth quarter of 2013, the Company initiated a voluntary retirement program for employees of certain of its System Solutions Group subsidiaries in Japan (the “Q4 2013 Voluntary Retirement Program”). Approximately 350 employees opted to retire under the Q4 2013 Voluntary Retirement Program of which approximately 340 employees had retired by June 27, 2014. The remaining employees who accepted retirement packages are expected to retire by the end of 2014. For the six months ended June 27, 2014, the Company recognized approximately $7.3 million of employee separation charges related to the Q4 2013 Voluntary Retirement Program. The Company expects to incur an additional $0.2 million in employee separation charges related to this program through the end of 2014.

As part of the Q4 2013 Voluntary Retirement Program, approximately 70 contractor positions were also identified for elimination, of which all had exited by June 27, 2014. During the six months ended June 27, 2014, an additional 40 positions were identified for elimination, as an extension of this program, consisting of 20 employees and 20 contractors, substantially all of which had exited by June 27, 2014.

As a result of the Q4 2013 Voluntary Retirement Program, the Company recognized a pension curtailment benefit associated with the affected employees of $1.7 million and $4.5 million during the quarter and six months ended June 27, 2014, respectively, which is recorded in Restructuring, asset impairments and other, net. As of June 27, 2014, the accrued liability for the Q4 2013 Voluntary Retirement Program associated with employee separation charges was $4.3 million. See Note 6: “Balance Sheet Information” for additional information.

During the quarter ended June 27, 2014, the Company initiated further voluntary retirement activities, applicable to an additional 60 to 70 positions, for certain of its System Solutions Group subsidiaries in Japan, consisting of employees and contractors which are expected to be eliminated during the third quarter of 2014.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

KSS Facility Closure

On October 6, 2013, the Company announced a plan to close KSS (the “KSS Plan”). Pursuant to the KSS Plan, a majority of the production from KSS was transferred to other of the Company’s manufacturing facilities. The KSS Plan includes the elimination of approximately 170 full time and 40 contract employees. During the quarter ended June 27, 2014, the Company recorded approximately $3.0 million of employee separation charges and $0.1 million of exit costs related to the KSS Plan. The Company expects to record additional KSS Plan severance costs and related employee benefit plan expenses of approximately $1.8 million along with other exit costs of approximately $3.0 million to $4.0 million, offset by a pension curtailment gain of approximately $0.6 million through the end of 2014.

As a result of the KSS facility closure, the Company recognized a $1.4 million pension curtailment benefit associated with the affected employees during the quarter and six months ended June 27, 2014, which is recorded in Restructuring, asset impairments and other, net. See Note 6: “Balance Sheet Information” for additional information.

As of June 27, 2014, the accrued liability associated with employee separation charges was $12.7 million for the KSS Plan.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Note 6:

Balance Sheet Information

Certain significant amounts included in the Company’s balance sheet as of June 27, 2014 and December 31, 2013 consist of the following (dollars in millions):


	June 27, 2014			December 31, 2013
Receivables, net:
Accounts receivable	$	438.4		$	384.4
Less: Allowance for doubtful accounts		(1.1	)		(1.0	)

	$	437.3		$	383.4

Inventories:
Raw materials	$	96.4		$	89.2
Work in process		337.4			319.6
Finished goods		198.8			203.0

	$	632.6		$	611.8

Other current assets:
Prepaid expenses	$	25.8		$	24.8
Value added and other income tax receivables		29.7			31.7
Other		35.0			32.8

	$	90.5		$	89.3

Property, plant and equipment, net (1):
Land	$	53.2		$	52.3
Buildings		493.0			467.7
Machinery and equipment		2,025.7			1,918.4

Total property, plant and equipment		2,571.9			2,438.4
Less: Accumulated depreciation		(1,430.2	)		(1,364.2	)

	$	1,141.7		$	1,074.2

Accrued expenses:
Accrued payroll	$	107.4		$	91.3
Sales related reserves		55.9			54.2
Restructuring reserves		18.5			26.2
Accrued pension liability		8.6			10.4
Accrued interest		2.7			1.9
Other		38.8			36.3

	$	231.9		$	220.3

(1)	Included in property, plant, and equipment are approximately $9.1 million of fixed assets which are held-for-sale as of June 27, 2014.

Warranty Reserves

The activity related to the Company’s warranty reserves for the six months ended June 27, 2014 and June 28, 2013, respectively, is as follows (in millions):


	Six Months Ended
	June 27, 2014			June 28, 2013
Beginning Balance	$	6.0		$	10.2
Provision		1.1			2.0
Usage		(1.3	)		(5.1	)

Ending Balance	$	5.8		$	7.1

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Defined Benefit Plans

The Company maintains defined benefit plans for certain of its foreign subsidiaries. The Company recognizes the aggregate amount of all overfunded plans as assets and the aggregate amount of all underfunded plans as liabilities in its financial statements. As of June 27, 2014, the total accrued pension liability for underfunded plans was $110.1 million, of which the current portion of $8.6 million was classified as accrued expenses. As of December 31, 2013, the total accrued pension liability for underfunded plans was $128.9 million, of which the current portion of $10.4 million was classified as accrued expenses.

The Company recorded a pension curtailment gain of $3.1 million and $5.9 million included in Restructuring, asset impairments and other, net for the quarter and six months ended June 27, 2014, respectively, related to the Q4 2013 Voluntary Retirement Program and KSS facility closure. See Note 5: “Restructuring, Asset Impairments and Other, Net” for additional information.

The components of the Company’s net periodic pension expense for the quarters ended June 27, 2014 and June 28, 2013 are as follows (in millions):


	Quarter Ended						Six Months Ended
	June 27, 2014			June 28, 2013			June 27, 2014			June 28, 2013
Service cost	$	2.4		$	2.9		$	4.9		$	6.6
Interest cost		1.5			1.6			3.0			3.6
Expected return on plan assets		(0.9	)		(1.1	)		(1.8	)		(2.2	)
Curtailment gain		(3.1	)		(2.9	)		(5.9	)		(11.9	)
Actuarial loss		—			—			—			13.6

Total net periodic pension cost	$	(0.1	)	$	0.5		$	0.2		$	9.7

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Note 7:

Long-Term Debt

The Company’s long-term debt consists of the following (dollars in millions):


	June 27, 2014			December 31, 2013
Senior Revolving Credit Facility due 2018, interest payable quarterly at 1.75% and 2.00% respectively	$	120.0		$	120.0
Loan with Japanese bank due 2014 through 2018, interest payable quarterly at 1.98% and 2.00%, respectively (1)		254.8			273.7
2.625% Notes, Series B (net of discount of $18.3 million and $21.7 million, respectively) (2)		338.6			335.2
Loan with Hong Kong bank, interest payable weekly at 1.90% and 1.91%, respectively		25.0			40.0
Loans with Philippine bank due 2014 through 2015, interest payable monthly and quarterly at an average rate of 2.15% and 2.16%, respectively		36.7			39.2
Loan with Chinese bank due 2014, interest payable quarterly at 3.33% and 3.34%, respectively		7.0			7.0
Loan with Singapore bank, interest payable weekly at 1.40% and 1.94%, respectively		30.0			15.0
Loan with British finance company, interest payable monthly at 0.0% and 1.57%, respectively		—			0.2
U.S. real estate mortgages payable monthly through 2016 at an average rate of 4.86%		27.2			28.1
U.S. equipment financing payable monthly through 2016 at 2.94%		7.1			9.5
Canada equipment financing payable monthly through 2017 at 3.81%		5.1			5.9
Canada revolving line of credit, interest payable quarterly at 1.83% and 1.84%, respectively		15.0			15.0
Capital lease obligations		38.4			53.4

Long-term debt, including current maturities		904.9			942.2
Less: Current maturities		(169.4	)		(181.6	)

Long-term debt	$	735.5		$	760.6

(1)	This loan represents SCI LLC’s unsecured loan with SMBC, which is guaranteed by the Company.

(2)	Interest is payable on June 15 and December 15 of each year at 2.625% annually. The 2.625% Notes, Series B may be put back to the Company at the option of the holders of the notes on December 15 of 2016 and 2021 or called at the option of the Company on or after December 20, 2016.

Expected maturities relating to the Company’s long-term debt as of June 27, 2014 are as follows (in millions):


Period	Expected Maturities
Remainder of 2014	$	81.5
2015		130.9
2016		426.8
2017		39.6
2018		243.5
Thereafter		0.9

Total	$	923.2

For purposes of the table above, the 2.625% Notes, Series B are assumed to mature at the earliest put date.

For additional information with respect to the Company’s long-term debt, see Note 8: “Long-Term Debt” of the notes to the Company’s audited Consolidated Financial Statements included in Part IV, Item 15 of the 2013 Form 10-K.

Debt Guarantees

ON Semiconductor was the sole issuer of the 2.625% Notes, Series B. See Note 16: “Guarantor and Non-Guarantor Statements” for the condensed consolidated financial information for the issuer of the 2.625% Notes, Series B, the guarantor subsidiaries and the non-guarantor subsidiaries.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Note 8:

Earnings Per Share and Equity

Earnings Per Share

Calculations of net income per common share attributable to ON Semiconductor are as follows (in millions, except per share data):


	Quarter Ended				Six Months Ended
	June 27, 2014		June 28, 2013		June 27, 2014		June 28, 2013
Net income attributable to ON Semiconductor Corporation	$	88.0	$	47.7	$	146.4	$	70.3

Basic weighted average common shares outstanding		441.1		450.7		440.7		450.1
Add: Incremental shares for:
Dilutive effect of share-based awards		3.4		2.6		3.8		2.8

Diluted weighted average common shares outstanding		444.5		453.3		444.5		452.9

Net income per common share attributable to ON Semiconductor Corporation:
Basic	$	0.20	$	0.11	$	0.33	$	0.16

Diluted	$	0.20	$	0.11	$	0.33	$	0.16

Basic net income per common share is computed by dividing net income attributable to ON Semiconductor Corporation by the weighted average number of common shares outstanding during the period.

The number of incremental shares from the assumed exercise of stock options and assumed issuance of shares relating to restricted stock units is calculated by applying the treasury stock method. Share-based awards whose impact is considered to be anti-dilutive under the treasury stock method were excluded from the diluted net income per share calculation. The excluded number of anti-dilutive share-based awards was approximately 7.1 million and 13.2 million for the quarters ended June 27, 2014 and June 28, 2013, respectively, and 7.4 million and 12.9 million for the six months ended June 27, 2014 and June 28, 2013, respectively.

The dilutive impact related to the Company’s 2.625% Notes, Series B is determined in accordance with the net share settlement requirements prescribed by ASC Topic 260, Earnings Per Share. Under the net share settlement calculation, the Company’s convertible notes are assumed to be convertible into cash up to the par value, with the excess of par value being convertible into common stock. A dilutive effect occurs when the stock price exceeds the conversion price for each of the convertible notes. In periods when the share price is lower than the conversion price, the impact is anti-dilutive and therefore has no impact on the Company’s earnings per share calculations.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Equity

Share Repurchase Program

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


	Quarter Ended					Six Months Ended
	June 27, 2014		June 28, 2013			June 27, 2014		June 28, 2013
Number of repurchased shares (1)		1.1		1.5			3.3		1.5
Beginning accrued share repurchases (2)		1.3		—			0.6		—
Aggregate purchase price	$	10.1	$	12.1		$	30.2	$	12.1
Less: ending accrued share repurchases (3)	$	—	$	(2.7	)	$	—	$	(2.7	)

Total cash used for share repurchases	$	11.4	$	9.4		$	30.8	$	9.4

Weighted-average purchase price per share (4)	$	9.57	$	7.87		$	9.27	$	7.87
Available for future purchases at period end	$	113.2	$	232.6		$	113.2	$	232.6

(1)	None of these shares had been reissued or retired as of June 27, 2014, but may be reissued or retired by the Company at a later date.

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

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

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

Shares for Restricted Stock Units Tax Withholding

Treasury stock is recorded at cost and is presented as a reduction of stockholders’ equity in the accompanying consolidated financial statements. Shares with a fair market value equal to the applicable statutory minimum amount of the employee withholding taxes due are withheld by the Company upon the vesting of restricted stock units to pay the applicable statutory minimum amount of employee withholding taxes and are considered common stock repurchases. The Company then pays the applicable statutory minimum amount of withholding taxes in cash. The amount remitted for the quarter and six months ended June 27, 2014 was $0.9 million and $5.4 million, respectively, for which the Company withheld approximately 0.1 million and 0.6 million shares of common stock, respectively, that were underlying the restricted stock units that vested. None of these shares had been reissued or retired as of June 27, 2014; however, these shares may be reissued or retired by the Company at a later date.

Non-Controlling Interest

The Company’s entity which operates assembly and test operations in Leshan, China is owned by a joint venture company, Leshan-Phoenix Semiconductor Company Limited (“Leshan”). The Company owns a majority of the outstanding equity interests in Leshan and its investment in Leshan has been consolidated in the Company’s financial statements.

At December 31, 2013, the non-controlling interest balance was $32.8 million. This balance was unchanged at $32.8 million as of June 27, 2014 due to the non-controlling interest’s $1.2 million share of the earnings for the six months ended June 27, 2014, offset by a $1.2 million dividend paid to the non-controlling shareholder.

At December 31, 2012, the non-controlling interest balance was $29.6 million. This balance increased to $31.3 million at June 28, 2013 due to the non-controlling interest’s $1.7 million share of the earnings for the six months ended June 28, 2013.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Note 9:

Share-Based Compensation

Total share-based compensation expense related to the Company’s employee stock options, restricted stock units and ESPP for the quarters ended June 27, 2014 and June 28, 2013 was comprised as follows (in millions):


	Quarter Ended				Six Months Ended
	June 27, 2014		June 28, 2013		June 27, 2014		June 28, 2013
Cost of revenues	$	1.7	$	1.4	$	3.1	$	2.5
Research and development		2.2		1.7		4.0		3.1
Selling and marketing		2.2		1.6		3.7		2.7
General and administrative		7.3		5.9		11.1		8.1

Share-based compensation expense before income taxes	$	13.4	$	10.6	$	21.9	$	16.4

Related income tax benefits ⁽¹⁾		—		—		—		—

Share-based compensation expense, net of taxes	$	13.4	$	10.6	$	21.9	$	16.4

⁽¹⁾	A majority of the Company’s share-based compensation relates to its domestic subsidiaries; therefore, no related deferred income tax benefits are recorded due to historical net operating losses at those subsidiaries.

At June 27, 2014, total estimated unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested stock options granted prior to that date was $4.1 million. At June 27, 2014, total estimated unrecognized share-based compensation expense, net of estimated forfeitures, related to non-vested restricted stock units with time-based service conditions and performance-based vesting criteria granted prior to that date was $57.6 million. The total intrinsic value of stock options exercised during the quarter and six months ended June 27, 2014 was $3.1 million and $6.4 million, respectively. The Company recorded cash received from the exercise of stock options of $5.8 million and $15.4 million during the quarter and six months ended June 27, 2014. The Company recorded no related income tax benefits during the quarter and six months ended June 27, 2014.

Share-Based Compensation Information

Share-based compensation expense recognized in the Consolidated Statement of Operations and Comprehensive Income is based on awards ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures for stock options were estimated to be approximately 11.0% and 11.0% in the quarters and six months ended June 27, 2014 and June 28, 2013, respectively. Pre-vesting forfeitures for restricted stock units were estimated to be approximately 5.0% and 5.0% in the quarters and six months ended June 27, 2014 and June 28, 2013, respectively.

Shares Available

As of December 31, 2013, there was an aggregate of 37.4 million shares of common stock available for grant under the Company’s Amended and Restated SIP and 4.3 million shares available for issuance under the ESPP. As of June 27, 2014, there was an aggregate of 36.7 million shares of common stock available for grant under the Amended and Restated SIP and 3.9 million shares available for issuance under the ESPP.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Stock Options

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


	Six Months Ended June 27, 2014
	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (In-The-Money)
Outstanding at December 31, 2013		14.0		$	7.89
Granted		—			—
Exercised		(2.4	)		6.56
Canceled		(0.3	)		10.19

Outstanding at July 27, 2014		11.3		$	8.10		3.2	$	16.0

Exercisable at July 27, 2014		9.2		$	8.28		2.8	$	12.1

Additional information about stock options outstanding at June 27, 2014 with exercise prices less than or above $9.09 per share, the effective closing price of the Company’s common stock at June 27, 2014, 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 $9.09		4.8	$	6.59		2.0	$	7.13		6.8	$	6.75
Above $9.09		4.4	$	10.16		0.1	$	9.70		4.5	$	10.15

Total outstanding		9.2	$	8.28		2.1	$	7.25		11.3	$	8.10

Restricted Stock Units

Restricted stock units vest over one to three years with service-based requirements or performance-based requirements and 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 and employees of the Company as of June 27, 2014, and changes during the six months ended June 27, 2014 (number of shares in millions):


	Six Months Ended June 27, 2014
	Number of Shares			Weighted Average Grant Date Fair Value
Non-vested shares underlying restricted stock units at December 31, 2013		10.8		$	8.52
Granted		3.5			9.32
Released		(1.9	)		8.37
Forfeited		(3.1	)		10.14

Non-vested shares underlying restricted stock units at June 27, 2014		9.3		$	8.32

Stock Grant Awards

During the quarter and six months ended June 27, 2014, the Company granted approximately 0.1 million shares of stock pursuant to stock grant awards to certain directors of the Company with immediate vesting and a weighted average grant date fair value of $8.66 per share.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Note 10:

Commitments and Contingencies

Leases

The following is a schedule by year of future minimum lease obligations under non-cancelable operating leases as of June 27, 2014 (in millions):


Remainder of 2014	$	17.0
2015		14.5
2016		10.8
2017		8.3
2018		6.3
Thereafter		31.1

Total	$	88.0

Environmental Contingencies

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

As part of the Recapitalization, the Company was granted various manufacturing facilities, one of which was located in the Czech Republic. In regards to this site, the Company has ongoing remediation projects to respond to releases of hazardous substances that occurred prior to the Recapitalization 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 is located on property that has localized soil contamination. In connection with the purchase of the facility, the Company entered into a settlement agreement and covenant not to sue with the State of Rhode Island. This agreement requires that remedial actions be undertaken and a quarterly groundwater monitoring program be initiated by the former owners of the property. Based on the information available, any costs to the Company in connection with this matter have not been, and are not expected to be, material.

As a result of its acquisition of AMIS, the Company is a “primary responsible party” to an environmental remediation and clean-up at AMIS’s former corporate headquarters in Santa Clara, California. Costs incurred by AMIS have included implementation of the clean-up plan, operations and maintenance of remediation systems, and other project management costs. However, AMIS’s former parent company, a subsidiary of Nippon Mining, contractually agreed to indemnify AMIS and the Company for any obligations relating to environmental remediation and clean-up at this location. Based on the information available, any costs to the Company in connection with this matter have not been, and are not expected to be, material.

The Company’s former manufacturing location in Aizu, Japan is located on property where soil and ground water contamination has been detected. The Company believes that the contamination originally occurred during a time when the facility was operated by a prior owner. The Company has worked with local authorities to implement a remediation plan and expects remaining remediation costs to be covered by insurance. Based on information available, any costs to the Company in connection with this matter have not been, and are not expected to be, material.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Financing Contingencies

In the normal course of business, the Company provides standby letters of credit or other guarantee instruments to certain parties initiated by either the Company or its subsidiaries, as required for transactions such as, but not limited to, purchase commitments, agreements to mitigate collection risk, leases, utilities or customs guarantees. The Company’s senior revolving credit facility includes $40.0 million of availability for the issuance of letters of credit. A $0.2 million letter of credit was outstanding under the senior revolving credit facility as of June 27, 2014. The Company also had outstanding guarantees and letters of credit outside of its senior revolving credit facility totaling $5.2 million as of June 27, 2014.

As part of securing financing in the normal course of business, the Company issued guarantees related to its receivables financing, certain capital lease obligations, equipment financing, lines of credit and real estate mortgages, which totaled approximately $62.9 million as of June 27, 2014. The Company is also a guarantor of SCI LLC’s unsecured loan with SMBC, which had a balance of $254.8 million as of June 27, 2014. See Note 7: “Long-Term Debt” for further information on this loan.

Based on historical experience and information currently available, the Company believes that in the foreseeable future 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 IP infringement, property damage including environmental contamination, personal injury, failure to comply with applicable laws, the Company’s negligence or willful misconduct, or breach of representations and warranties and covenants related to such matters as title to sold assets.

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

The Company and its subsidiaries provide for indemnification of directors, officers and other persons in accordance with limited liability 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.

While the Company’s future obligations under certain agreements may contain limitations on liability for indemnification, other agreements do not contain such limitations and under such agreements it is not possible to predict the maximum potential amount of future payments due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under any of these indemnities have not had a material effect on the Company’s business, financial condition, results of operations or cash flows. Additionally, the Company does not believe that any amounts that it may be required to pay under these indemnities in the future will be material to the Company’s business, financial position, results of operations or cash flows.

Legal Matters

The Company is currently 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 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.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Note 11:

Fair Value Measurements

Fair Value of Financial Instruments

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 27, 2014 and December 31, 2013 (in millions):


	Balance as of June 27, 2014		Quoted Prices in Active Markets (Level 1)		Balance as of December 31, 2013		Quoted Prices in Active Markets (Level 1)
Description
Assets:
Cash and cash equivalents:
Demand and time deposits	$	442.9	$	442.9	$	447.5	$	447.5
Money market funds		156.0		156.0		62.0		62.0
Liabilities:
Foreign currency exchange contracts	$	0.1	$	0.1	$	0.1	$	0.1

Short-term investments have an original maturity to the Company between three months and one year, are classified as held-to-maturity and are carried at amortized cost as the Company has the intent and the ability to hold these securities until maturity. Short-term investments classified as held-to-maturity as of June 27, 2014 and December 31, 2013 were as follows (in millions):


	Balance at June 27, 2014				Balance at December 31, 2013
	Carried at Amortized Cost		Fair Value		Carried at Amortized Cost		Fair Value
Short-term investments held-to-maturity
Commercial paper	$	—	$	—	$	15.5	$	15.5
Corporate bonds		2.3		2.3		93.7		93.7
Government agencies		—		—		7.0		7.0

	$	2.3	$	2.3	$	116.2	$	116.2

The Company’s financial assets are valued using market prices on active markets (Level 1). The Company’s short-term investments balance of $2.3 million as of June 27, 2014 is classified as held-to-maturity and is carried at amortized cost. There was no unrealized gain or loss on these short-term investments as of June 27, 2014.

The carrying amounts of other current assets and liabilities, such as accounts receivable and accounts payable, approximate fair value based on the short-term nature of these instruments.

Fair Value of Long-Term Debt, Including Current Portion

The carrying amounts and fair values of the Company’s long-term borrowings (excluding capital lease obligations, real estate mortgages and equipment financing) as of June 27, 2014 and December 31, 2013 are as follows (in millions):


	June 27, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion
2.625% Notes, Series B	$	338.6	$	418.0	$	335.2	$	392.6
Long-term debt	$	488.5	$	490.2	$	510.2	$	511.4

The fair value of the Company’s 2.625% Notes, Series B was estimated based on market prices in active markets (Level 1). The fair value of other long-term debt was estimated based on discounting the remaining principal and interest payments using current market rates for similar debt (Level 2) as of June 27, 2014 and December 31, 2013.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Note 12: Financial Instruments

Foreign Currencies

As a multinational business, the Company’s transactions are denominated in a variety of currencies. When appropriate, the Company uses forward foreign currency contracts to reduce its overall exposure to the effects of currency fluctuations on its results of operations and cash flows. The Company’s policy prohibits trading in currencies for which there are no underlying exposures, or entering into trades for any currency to intentionally increase the underlying exposure.

The Company primarily hedges existing assets and liabilities associated with transactions currently on its balance sheet.

As of June 27, 2014 and December 31, 2013, the Company had outstanding foreign exchange contracts with notional amounts of $132.5 million and $101.7 million, respectively. Such contracts were obtained through financial institutions and were scheduled to mature within one to three months. Management believes that these financial instruments should not subject the Company to increased risks from foreign exchange movements because gains and losses on these contracts should offset losses and gains on the underlying assets, liabilities and transactions to which they are related. The following schedule shows the Company’s net foreign exchange positions in U.S. dollars as of June 27, 2014 and December 31, 2013 (in millions):


	June 27, 2014					December 31, 2013
	Buy (Sell)			Notional Amount		Buy (Sell)			Notional Amount
Euro	$	(31.7	)	$	31.7	$	(30.5	)	$	30.5
Japanese Yen		(23.3	)		23.3		(6.7	)		6.7
Malaysian Ringgit		42.6			42.6		35.8			35.8
Philippine Peso		16.9			16.9		11.7			11.7
Other Currencies		12.7			18.0		10.6			17.0

	$	17.2		$	132.5	$	20.9		$	101.7

The Company is exposed to credit-related losses if counterparties to its foreign exchange contracts fail to perform their obligations. As of June 27, 2014, the counterparties to the Company’s foreign exchange contracts are highly rated financial institutions and no credit-related losses are anticipated. Amounts payable or receivable under the contracts are included in other current assets or accrued expenses in the accompanying Consolidated Balance Sheet. For the quarters ended June 27, 2014 and June 28, 2013, realized and unrealized foreign currency transaction loss was $1.1 million and a gain of $4.3 million, respectively. For the six months ended June 27, 2014 and June 28, 2013, realized and unrealized foreign currency transaction loss was $1.8 million and a gain of $4.8 million, respectively.

As of June 27, 2014 and December 31, 2013, the Company had balances for contracts not designated as cash flow hedges of $0.1 million and $0.1 million, respectively, that were classified as other liabilities.

Cash Flow Hedges

The Company is exposed to global market risks associated with fluctuations in interest rates and foreign currency exchange rates. The Company addresses these risks through controlled management that includes the use of derivative financial instruments to economically hedge or reduce these exposures. The Company does not enter into derivative financial instruments for trading or speculative purposes.

The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual cash flows resulting from transactions in foreign currencies will be adversely affected by changes in exchange rates. The Company enters into forward contracts that are designated as foreign-currency cash flow hedges of selected forecasted payments denominated in currencies other than U.S. dollars. All the contracts mature within 12 months and upon maturity, the amount recorded in accumulated other comprehensive income is reclassified into earnings. The Company documents all relationships between designated hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

All derivatives are recognized on the balance sheet at their fair value and classified based on the instrument’s maturity date. The total notional amount of outstanding derivatives designated as cash flow hedges as of June 27, 2014 was approximately $42.5 million, which is primarily comprised of cash flow hedges for Malaysian Ringgit/U.S. dollar and Philippine Peso/U.S. dollar currency pairs.

For the quarter and six months ended June 27, 2014, the Company recorded a net loss of $0.1 million and $1.4 million, respectively, associated with cash flow hedges recognized as a component of cost of revenues. As of June 27, 2014, the Company had a zero liability balance for contracts designated as cash flow hedging instruments. As of December 31, 2013, the Company had a $1.8 million liability balance for contracts designated as cash flow hedging instruments that were classified as other liabilities. As of June 27, 2014, the Company had a $0.8 million asset balance for contracts designated as cash flow hedging instruments that were classified as other assets. As of December 31, 2013, the Company had no asset balances for contracts designated as cash flow hedging instruments.

Note 13:

Changes in Accumulated Other Comprehensive Loss

Amounts comprising the Company’s accumulated other comprehensive loss and reclassifications for the six months ended June 27, 2014 are as follows (net of tax of $0, in millions):


	Foreign Currency Translation Adjustments			Effects of Cash Flow Hedges			Unrealized Gains and Losses on Available-for-Sale Securities		Total
Balance as of December 31, 2013	$	(46.0	)	$	(1.8	)	$	0.4	$	(47.4	)

Other comprehensive income (loss) prior to reclassifications		(0.6	)		4.1			—		3.5
Amounts reclassified from accumulated other comprehensive loss		—			(1.4	)		—		(1.4	)

Net current period other comprehensive gain		(0.6	)		2.7			—		2.1

Balance as of June 27, 2014	$	(46.6	)	$	0.9		$	0.4	$	(45.3	)

Amounts which were reclassified from accumulated other comprehensive loss to the Company’s Consolidated Statements of Operations and Comprehensive Income during the quarter and six months ended June 27, 2014 were as follows (net of tax of $0, in millions):


	Amounts Reclassified from Accumulated Other Comprehensive Loss
	Quarter Ended June 27, 2014			Six Months Ended June 27, 2014			Affected Line Item Where Net Income is Presented
Effects of cash flow hedges	$	(0.1	)	$	(1.4	)	Cost of revenues

Included in accumulated other comprehensive loss as of June 27, 2014 is approximately $9.4 million of foreign currency translation losses related to the Company’s subsidiary that owns the KSS facility, which utilizes the Japanese Yen as its functional currency. In connection with the previously announced restructuring plan, the Company intends to liquidate and wind-down the legal entity. Upon the substantial liquidation of the KSS entity, the Company will evaluate the need to release any amount remaining in accumulated other comprehensive income to its results of operations, as required by the appropriate accounting standards.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Note 14:

Supplemental Disclosures

Supplemental Disclosure of Cash Flow Information

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


	For the Six Months Ended
	June 27, 2014			June 28, 2013
Non-cash financing activities:
Capital expenditures in accounts payable	$	80.1		$	56.9
Equipment acquired or refinanced through capital leases	$	6.1		$	2.1
Cash (received) paid for:
Interest income	$	(0.4	)	$	(0.7	)
Interest expense	$	11.2		$	11.3
Income taxes	$	8.6		$	7.4

Supplemental Disclosure of Income Tax Information

The income tax benefit for the quarter ended June 27, 2014 consisted of the reversal of $21.5 million of our previously established valuation allowance against our U.S. deferred tax assets as a result of a net deferred tax liability recorded as part of the Truesense acquisition and the reversal of $3.2 million for reserves and interest for uncertain tax positions in foreign taxing jurisdictions that were effectively settled or for which the statute lapsed during the quarter ended June 27, 2014, partially offset by $6.6 million for income and withholding taxes of certain of our foreign and domestic operations and $1.9 million of new reserves and interest on existing reserves for uncertain tax positions in foreign taxing jurisdictions.

The income tax benefit for the six months ended June 27, 2014 included the reversal of $21.5 million of the Company’s previously established valuation allowance against its U.S. deferred tax assets as a result of a net deferred tax liability recorded as part of the Truesense acquisition and the reversal of $3.6 million for reserves and interest for uncertain tax positions in foreign taxing jurisdictions that were effectively settled or for which the statute lapsed during the quarter ended June 27, 2014, partially offset by $12.9 million for income and withholding taxes of certain of our foreign and domestic operations and $2.2 million of new reserves and interest on existing reserves for uncertain tax positions in foreign taxing jurisdictions.

The Company’s provision for income taxes is subject to volatility and could be adversely impacted by earnings being lower than anticipated in countries that have lower tax rates and earnings being higher than anticipated in countries that have higher tax rates. The Company’s effective tax rate for the quarter and six months ended June 27, 2014 was a benefit of 22.3% and 7.3%, respectively, which differs from the U.S. statutory federal income tax rate of 35% due to our domestic tax losses and tax rate differential in our foreign subsidiaries, as well as the reversal of valuation allowances and certain reserves and interest for potential liabilities in foreign taxing jurisdictions that were effectively settled or for which the statute lapsed during the quarter and six months ended June 27, 2014. The Company continues to maintain a full valuation allowance on all of its domestic and substantially all of its Japan related deferred tax assets; however, it is reasonably possible that a substantial portion of the valuation allowance on the Company’s domestic deferred tax assets will be reversed within one year of June 27, 2014, which is not expected to have a material effect on the Company’s cash taxes. As of December 31, 2013, the valuation allowance on our domestic deferred tax assets was approximately $524 million.

Note 15:

Segment Information

As of June 27, 2014, the Company was organized into three operating segments, which also represented its three reporting segments: Application Products Group, Standard Products Group and System Solutions Group. Each of the Company’s major product lines has been examined and each product line has been assigned to a segment based on the Company’s operating strategy. Because many products are sold into different end-markets, the total revenue reported for a segment is not indicative of actual sales in the end-market associated with that segment, but rather is the sum of the revenue from the product lines assigned to that segment. These segments represent the Company’s view of the business and as such are used to evaluate progress of major initiatives and allocation of resources.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Revenues, gross profit and operating income for the Company’s reportable segments for the quarters and six months ended June 27, 2014 and June 28, 2013, respectively, are as follows (in millions):


	Application Products Group		Standard Products Group		System Solutions Group			Total
For the quarter ended June 27, 2014:
Revenues from external customers	$	301.2	$	303.7	$	152.7		$	757.6
Segment gross profit	$	136.9	$	110.2	$	31.0		$	278.1
Segment operating income (loss)	$	36.5	$	60.7	$	(0.1	)	$	97.1
For the quarter ended June 28, 2013:
Revenues from external customers	$	251.5	$	276.4	$	160.4		$	688.3
Segment gross profit	$	110.4	$	106.0	$	20.5		$	236.9
Segment operating income (loss)	$	22.2	$	65.3	$	(23.0	)	$	64.5


	Application Products Group		Standard Products Group		System Solutions Group			Total
For the six months ended June 27, 2014:
Revenues from external customers	$	580.7	$	596.6	$	286.8		$	1,464.1
Segment gross profit	$	263.0	$	216.4	$	56.0		$	535.4
Segment operating income (loss)	$	74.3	$	120.9	$	(8.8	)	$	186.4
For the six months ended June 28, 2013:
Revenues from external customers	$	496.5	$	541.6	$	311.2		$	1,349.3
Segment gross profit	$	217.3	$	200.5	$	29.1		$	446.9
Segment operating income (loss)	$	49.7	$	122.9	$	(68.7	)	$	103.9

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
	June 27, 2014			June 28, 2013
Gross profit for reportable segments	$	278.1		$	236.9
Unallocated amounts:
Other unallocated manufacturing costs		(5.1	)		(5.1	)

Gross profit	$	273.0		$	231.8

Operating income for reportable segments	$	97.1			64.5
Unallocated amounts:
Restructuring and other charges		(4.1	)		(6.1	)
Other unallocated manufacturing costs		(5.1	)		(5.1	)
Other unallocated operating expenses		(6.2	)		(2.4	)

Operating income	$	81.7		$	50.9

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)


	Six Months Ended
	June 27, 2014			June 28, 2013
Gross profit for reportable segments	$	535.4		$	446.9
Unallocated amounts:
Other unallocated manufacturing costs		(11.6	)		(10.6	)

Gross profit	$	523.8		$	436.3

Operating income for reportable segments		186.4			103.9
Unallocated amounts:
Restructuring and other charges		(9.9	)		(0.1	)
Other unallocated manufacturing costs		(11.6	)		(10.6	)
Other unallocated operating expenses		(9.9	)		(4.6	)

Operating income	$	155.0		$	88.6

The Company’s consolidated assets are not specifically assigned to its individual reporting segments. Rather, assets used in operations are generally shared across the Company’s reporting segments. See Note 6: “Balance Sheet Information” for additional information.

The Company operates in various geographic locations. Sales to unaffiliated customers have little correlation with the location of manufacturers. It is, therefore, not meaningful to present operating profit by geographical location.

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


	Quarter Ended
	June 27, 2014		June 28, 2013
United States	$	126.1	$	98.5
Japan		66.8		75.7
China		220.9		198.5
Singapore		189.7		180.9
United Kingdom		118.3		102.6
Other		35.8		32.1

	$	757.6	$	688.3


	Six Months Ended
	June 27, 2014		June 28, 2013
United States	$	238.1	$	197.4
Japan		132.1		147.3
China		423.6		397.9
Singapore		370.1		347.3
United Kingdom		235.5		200.3
Other		64.7		59.1

	$	1,464.1	$	1,349.3

For the quarters and six months ended June 27, 2014 and June 28, 2013, there were no individual customers which accounted for more than 10% of the Company’s total revenues.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

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


	June 27, 2014		December 31, 2013
United States	$	284.2	$	255.3
Czech Republic		114.5		111.1
Malaysia		225.3		213.9
Philippines		188.4		173.8
Other		329.3		320.1

	$	1,141.7	$	1,074.2

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Note 16:

Guarantor and Non-Guarantor Statements

ON Semiconductor is the sole issuer of the 2.625% Notes, Series B. ON Semiconductor’s 100% owned domestic subsidiaries, except those domestic subsidiaries acquired through the acquisitions of AMIS, Catalyst, PulseCore, CMD, SDT, SANYO Semiconductor and Truesense (collectively, the “Guarantor Subsidiaries”), fully and unconditionally guarantee, subject to customary releases, on a joint and several basis ON Semiconductor’s obligations under the 2.625% Notes, Series B. The Guarantor Subsidiaries include SCI LLC, Semiconductor Components Industries of Rhode Island, Inc., as well as other 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. ON Semiconductor’s other remaining subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) are not guarantors of the 2.625% Notes, Series B. The repayment of the unsecured 2.625% Notes, Series B is subordinated to the senior indebtedness of ON Semiconductor and the Guarantor Subsidiaries on the terms described in the indenture for the 2.625% Notes, Series B.

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

Condensed consolidating financial information for the issuer of the 2.625% Notes, Series B, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries is as follows (in millions):

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 27, 2014

(in millions)


	Issuer			Guarantor
	ON Semiconductor Corporation			SCI LLC			Other Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
Cash and cash equivalents	$	—		$	302.8		$	—		$	296.1		$	—		$	598.9
Short-term investments		—			2.3			—			—			—			2.3
Receivables, net		—			59.2			—			378.1			—			437.3
Inventories		—			47.5			—			582.3			2.8			632.6
Short-term intercompany receivables		—			—			4.7			67.6			(72.3	)		—
Other current assets		—			24.0			—			66.5			—			90.5

Total current assets		—			435.8			4.7			1,390.6			(69.5	)		1,761.6
Property, plant and equipment, net		—			255.9			3.1			884.3			(1.6	)		1,141.7
Goodwill		—			111.6			37.3			62.7			—			211.6
Intangible assets, net		—			105.5			—			159.7			(19.7	)		245.5
Long-term intercompany receivables		—			—			—			1.8			(1.8	)		—
Other assets		1,945.6			1,921.0			136.3			831.6			(4,776.5	)		58.0

Total assets	$	1,945.6		$	2,829.8		$	181.4		$	3,330.7		$	(4,869.1	)	$	3,418.4

Accounts payable	$	—		$	37.2		$	0.1		$	268.1		$	—		$	305.4
Accrued expenses		0.3			61.5			0.5			169.6			—			231.9
Deferred income on sales to distributors		—			38.6			—			124.0			—			162.6
Current portion of long-term debt		—			67.8			—			101.6			—			169.4
Short-term intercompany payables		—			72.3			—			—			(72.3	)		—

Total current liabilities		0.3			277.4			0.6			663.3			(72.3	)		869.3
Long-term debt		338.6			372.3			—			24.6			—			735.5
Other long-term liabilities		—			20.5			0.1			153.5			—			174.1
Long-term intercompany payables		—			1.8			—			—			(1.8	)		—

Total liabilities		338.9			672.0			0.7			841.4			(74.1	)		1,778.9
Common stock		5.2			24.6			50.9			173.9			(249.4	)		5.2
Additional paid-in capital		3,250.6			2,370.6			260.1			1,497.7			(4,128.4	)		3,250.6
Accumulated other comprehensive loss		(45.3	)		(46.9	)		—			(39.2	)		86.1			(45.3	)
Accumulated deficit		(995.7	)		(190.5	)		(130.3	)		856.9			(536.1	)		(995.7	)
Less: treasury stock, at cost		(608.1	)		—			—			—			—			(608.1	)

Total ON Semiconductor Corporation stockholders’ equity		1,606.7			2,157.8			180.7			2,489.3			(4,827.8	)		1,606.7
Non-controlling interest in consolidated subsidiary		—			—			—			—			32.8			32.8

Total equity		1,606.7			2,157.8			180.7			2,489.3			(4,795.0	)		1,639.5

Total liabilities and equity	$	1,945.6		$	2,829.8		$	181.4		$	3,330.7		$	(4,869.1	)	$	3,418.4

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2013

(in millions)


	Issuer			Guarantor
	ON Semiconductor Corporation			SCI LLC			Other Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
Cash and cash equivalents	$	—		$	267.9		$	—		$	241.6		$	—		$	509.5
Short-term investments		—			116.2			—			—			—			116.2
Receivables, net		—			49.8			—			333.6			—			383.4
Inventories		—			46.7			—			562.1			3.0			611.8
Short-term intercompany receivables		—			—			4.1			7.6			(11.7	)		—
Other current assets		—			17.8			—			71.5			—			89.3

Total current assets		—			498.4			4.1			1,216.4			(8.7	)		1,710.2
Property, plant and equipment, net		—			252.3			3.1			820.6			(1.8	)		1,074.2
Goodwill		—			111.5			37.3			35.8			—			184.6
Intangible assets, net		—			113.0			—			132.2			(21.8	)		223.4
Long-term intercompany receivables		—			—			—			3.3			(3.3	)		—
Other assets		1,790.2			1,600.6			136.1			837.3			(4,299.6	)		64.6

Total assets	$	1,790.2		$	2,575.8		$	180.6		$	3,045.6		$	(4,335.2	)	$	3,257.0

Accounts payable	$	—		$	39.1			0.5			237.2			—		$	276.8
Accrued expenses		1.0			50.8			0.2			168.3			—			220.3
Deferred income on sales to distributors		—			32.3			—			108.2			—			140.5
Current portion of long-term debt		—			79.3			—			102.3			—			181.6
Short-term intercompany payables		—			11.7			—			—			(11.7	)		—

Total current liabilities		1.0			213.2			0.7			616.0			(11.7	)		819.2
Long-term debt		335.2			396.1			—			29.3			—			760.6
Other long-term liabilities		—			42.2			0.1			148.1			—			190.4
Long-term intercompany payables		—			3.3			—			—			(3.3	)		—

Total liabilities		336.2			654.8			0.8			793.4			(15.0	)		1,770.2
Common stock		5.2			0.3			50.9			201.6			(252.8	)		5.2
Additional paid-in capital		3,210.8			2,335.1			259.8			1,402.6			(3,997.5	)		3,210.8
Accumulated other comprehensive loss		(47.4	)		(49.2	)		—			(38.6	)		87.8			(47.4	)
Accumulated deficit		(1,142.1	)		(365.2	)		(130.9	)		686.6			(190.5	)		(1,142.1	)
Less: treasury stock, at cost		(572.5	)		—			—			—			—			(572.5	)

Total ON Semiconductor Corporation stockholders’ equity		1,454.0			1,921.0			179.8			2,252.2			(4,353.0	)		1,454.0
Non-controlling interest in consolidated subsidiary		—			—			—			—			32.8			32.8

Total equity		1,454.0			1,921.0			179.8			2,252.2			(4,320.2	)		1,486.8

Total liabilities and equity	$	1,790.2		$	2,575.8		$	180.6		$	3,045.6		$	(4,335.2	)	$	3,257.0

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE QUARTER ENDED JUNE 27, 2014

(in millions)


	Issuer			Guarantor Subsidiaries
	ON Semiconductor Corporation			SCI LLC			Other Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
Revenues	$	—		$	177.2		$	4.0		$	1,050.1		$	(473.7	)	$	757.6
Cost of revenues		—			142.9			0.3			816.3			(474.9	)		484.6

Gross profit		—			34.3			3.7			233.8			1.2			273.0
Operating expenses:
Research and development		—			13.2			2.9			68.1			—			84.2
Selling and marketing		—			20.9			0.2			26.8			—			47.9
General and administrative		—			17.3			0.3			27.1			—			44.7
Amortization of acquisition related intangible assets		—			3.8			—			7.6			(1.0	)		10.4
Restructuring, asset impairments and other, net		—			0.9			—			3.2			—			4.1

Total operating expenses		—			56.1			3.4			132.8			(1.0	)		191.3

Operating income (loss)		—			(21.8	)		0.3			101.0			2.2			81.7
Other income (expense), net:
Interest expense		(4.2	)		(3.1	)		—			(0.6	)		—			(7.9	)
Interest income		—			—			—			0.2			—			0.2
Other		—			1.5			—			(2.7	)		—			(1.2	)
Equity in earnings		92.2			97.1			2.3			—			(191.6	)		—

Other income (expense), net		88.0			95.5			2.3			(3.1	)		(191.6	)		(8.9	)
Income before income taxes		88.0			73.7			2.6			97.9			(189.4	)		72.8
Income tax benefit (provision)		—			18.9			(0.3	)		(2.4	)		—			16.2

Net income		88.0			92.6			2.3			95.5			(189.4	)		89.0
Net income attributable to non-controlling interest		—			—			—			—			(1.0	)		(1.0	)

Net income attributable to ON Semiconductor Corporation	$	88.0		$	92.6		$	2.3		$	95.5		$	(190.4	)	$	88.0

Comprehensive income attributable to ON Semiconductor Corporation	$	89.1		$	93.9		$	2.3		$	95.3		$	(191.5	)	$	89.1

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE QUARTER ENDED JUNE 28, 2013

(in millions)


	Issuer			Guarantor Subsidiaries
	ON Semiconductor Corporation			SCI LLC			Other Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Total
Revenues	$	—		$	150.2		$	3.2	$	1,086.3		$	(551.4	)	$	688.3
Cost of revenues		—			121.2			—		891.8			(556.5	)		456.5

Gross profit		—			29.0			3.2		194.5			5.1			231.8
Operating expenses:
Research and development		—			12.3			2.7		68.1			—			83.1
Selling and marketing		—			18.0			0.2		25.1			—			43.3
General and administrative		—			11.0			0.2		29.0			—			40.2
Amortization of acquisition related intangible assets		—			3.8			—		5.4			(1.0	)		8.2
Restructuring, asset impairments and other, net		—			—			—		6.1			—			6.1

Total operating expenses		—			45.1			3.1		133.7			(1.0	)		180.9

Operating income (loss)		—			(16.1	)		0.1		60.8			6.1			50.9
Other income (expense), net:
Interest expense		(5.6	)		(2.5	)		—		(1.2	)		—			(9.3	)
Interest income		—			—			—		0.4			—			0.4
Other		—			(13.3	)		—		17.4			—			4.1
Equity in earnings		53.3			79.8			2.5		0.1			(135.7	)		—

Other income (expense), net		47.7			64.0			2.5		16.7			(135.7	)		(4.8	)
Income before income taxes		47.7			47.9			2.6		77.5			(129.6	)		46.1
Income tax (provision) benefit		—			(3.1	)		—		5.7			—			2.6

Net income		47.7			44.8			2.6		83.2			(129.6	)		48.7
Net income attributable to non-controlling interest		—			—			—		—			(1.0	)		(1.0	)

Net income attributable to ON Semiconductor Corporation	$	47.7		$	44.8		$	2.6	$	83.2		$	(130.6	)	$	47.7

Comprehensive income attributable to ON Semiconductor Corporation	$	47.0		$	43.2		$	2.6	$	85.7		$	(131.5	)	$	47.0

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 27, 2014

(in millions)


	Issuer			Guarantor Subsidiaries
	ON Semiconductor Corporation			SCI LLC			Other Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
Revenues	$	—		$	347.2		$	7.9		$	2,024.2		$	(915.2	)	$	1,464.1
Cost of revenues		—			282.3			0.5			1,573.0			(915.5	)		940.3

Gross profit		—			64.9			7.4			451.2			0.3			523.8
Operating expenses:
Research and development		—			25.4			5.9			131.0			—			162.3
Selling and marketing		—			40.2			0.4			51.7			—			92.3
General and administrative		—			30.5			0.6			54.6			—			85.7
Amortization of acquisition related intangible assets		—			7.5			—			13.1			(2.0	)		18.6
Restructuring, asset impairments and other, net		—			1.3			—			8.6			—			9.9

Total operating expenses		—			104.9			6.9			259.0			(2.0	)		368.8

Operating income (loss)		—			(40.0	)		0.5			192.2			2.3			155.0
Other income (expense), net:
Interest expense		(8.2	)		(6.6	)		—			(1.2	)		—			(16.0	)
Interest income		—			0.1			—			0.3			—			0.4
Other		—			0.9			—			(2.7	)		—			(1.8	)
Equity in earnings		154.6			195.7			2.9			—			(353.2	)		—

Other income (expense), net		146.4			190.1			2.9			(3.6	)		(353.2	)		(17.4	)
Income before income taxes		146.4			150.1			3.4			188.6			(350.9	)		137.6
Income tax benefit (provision)		—			24.6			(0.3	)		(14.3	)		—			10.0

Net income		146.4			174.7			3.1			174.3			(350.9	)		147.6
Net income attributable to non-controlling interest		—			—			—			—			(1.2	)		(1.2	)

Net income attributable to ON Semiconductor Corporation	$	146.4		$	174.7		$	3.1		$	174.3		$	(352.1	)	$	146.4

Comprehensive income attributable to ON Semiconductor Corporation	$	148.5		$	177.2		$	3.1		$	173.7		$	(354.0	)	$	148.5

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 28, 2013

(in millions)


	Issuer			Guarantor Subsidiaries
	ON Semiconductor Corporation			SCI LLC			Other Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Total
Revenues	$	—		$	328.3		$	6.4	$	2,034.1		$	(1,019.5	)	$	1,349.3
Cost of revenues		—			233.5			0.2		1,711.0			(1,031.7	)		913.0

Gross profit		—			94.8			6.2		323.1			12.2			436.3
Operating expenses:
Research and development		—			53.9			5.2		112.4			—			171.5
Selling and marketing		—			34.7			0.3		48.1			—			83.1
General and administrative		—			16.1			0.4		59.9			—			76.4
Amortization of acquisition related intangible assets		—			7.6			—		11.0			(2.0	)		16.6
Restructuring, asset impairments and other, net		—			1.0			—		(0.9	)		—			0.1

Total operating expenses		—			113.3			5.9		230.5			(2.0	)		347.7

Operating income (loss)		—			(18.5	)		0.3		92.6			14.2			88.6
Other income (expense), net:
Interest expense		(11.7	)		(4.9	)		—		(2.8	)		—			(19.4	)
Interest income		—			0.2			—		0.5			—			0.7
Other		—			(5.5	)		—		10.5			—			5.0
Loss on debt exchange		(3.1	)		—			—		—			—			(3.1	)
Equity in earnings		85.1			104.7			4.1		—			(193.9	)		—

Other income (expense), net		70.3			94.5			4.1		8.2			(193.9	)		(16.8	)
Income before income taxes		70.3			76.0			4.4		100.8			(179.7	)		71.8
Income tax (provision) benefit		—			(0.9	)		—		1.1			—			0.2

Net income		70.3			75.1			4.4		101.9			(179.7	)		72.0
Net income attributable to non-controlling interest		—			—			—		—			(1.7	)		(1.7	)

Net income attributable to ON Semiconductor Corporation	$	70.3		$	75.1		$	4.4	$	101.9		$	(181.4	)	$	70.3

Comprehensive income attributable to ON Semiconductor Corporation	$	60.3		$	63.0		$	4.4	$	95.8		$	(163.2	)	$	60.3

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 27, 2014

(in millions)


	Issuer			Guarantor Subsidiaries
	ON Semiconductor Corporation			SCI LLC			Other Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
Net cash provided by operating activities	$	—		$	14.1		$	0.7		$	215.2		$	(3.5	)	$	226.5

Cash flows from investing activities:
Purchases of property, plant and equipment		—			(29.0	)		(0.7	)		(66.8	)		—			(96.5	)
Proceeds from sales of property, plant and equipment		—			—			—			0.2			—			0.2
Deposits utilized for purchases of property, plant and equipment		—			—			—			1.3			—			1.3
Purchase of businesses, net of cash acquired		—			—			—			(90.9	)		—			(90.9	)
Proceeds from held-to maturity securities		—			116.2			—			—			—			116.2
Purchases of held-to-maturity securities		—			(2.3	)		—			—			—			(2.3	)
Contribution from subsidiaries		18.3			—			—			—			(18.3	)		—

Net cash provided by (used in) investing activities		18.3			84.9			(0.7	)		(156.2	)		(18.3	)		(72.0	)

Cash flows from financing activities:
Intercompany loans		—			(65.3	)		—			65.3			—			—
Intercompany loan repayments to guarantor		—			65.5			—			(65.5	)		—			—
Payments to parent		—			(23.0	)		—			—			23.0			—
Proceeds from issuance of common stock under the employee stock purchase plan		2.5			—			—			—			—			2.5
Proceeds from exercise of stock options		15.4			—			—			—			—			15.4
Payments of tax withholding for restricted shares		(5.4	)		—			—			—			—			(5.4	)
Repurchase of common stock		(30.8	)		—			—			—			—			(30.8	)
Proceeds from debt issuance		—			—			—			15.0			—			15.0
Payment of capital leases obligations		—			(19.2	)		—			(1.8	)		—			(21.0	)
Repayment of long-term debt		—			(22.1	)		—			(18.6	)		—			(40.7	)
Dividend to non-controlling shareholder of consolidated subsidiary		—			—			—			—			(1.2	)		(1.2	)

Net cash used in financing activities		(18.3	)		(64.1	)		—			(5.6	)		21.8			(66.2	)

Effect of exchange rate changes on cash and cash equivalents		—			—			—			1.1			—			1.1

Net increase in cash and cash equivalents		—			34.9			—			54.5			—			89.4
Cash and cash equivalents, beginning of period		—			267.9			—			241.6			—			509.5

Cash and cash equivalents, end of period	$	—		$	302.8		$	—		$	296.1		$	—		$	598.9

ON SEMICONDUCTOR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 28, 2013

(in millions)


	Issuers			Guarantor Subsidiaries
	ON Semiconductor Corporation			SCI LLC			Other Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Total
Net cash (used in) provided by operating activities	$	—		$	(5.5	)	$	—	$	151.5		$	(5.6	)	$	140.4

Cash flows from investing activities:
Purchases of property, plant and equipment		—			(16.3	)		—		(68.4	)		—			(84.7	)
Proceeds from sales of property, plant and equipment		—			0.1			—		8.3			—			8.4
Deposits utilized for purchases of property, plant and equipment		—			—			—		(1.5	)		—			(1.5	)
Proceeds from held-to maturity securities		—			124.2			—		—			—			124.2
Purchase of held-to-maturity securities		—			(162.3	)		—		—			—			(162.3	)
Contribution from subsidiaries		80.4			—			—		—			(80.4	)		—

Net cash provided by (used in) investing activities		80.4			(54.3	)		—		(61.6	)		(80.4	)		(115.9	)

Cash flows from financing activities:
Intercompany loans		—			(403.7	)		—		403.7			—			—
Intercompany loan repayments to guarantor		—			539.6			—		(539.6	)		—			—
Payments to parent		—			(86.0	)		—		—			86.0			—
Proceeds from issuance of common stock under the employee stock purchase plan		2.1			—			—		—			—			2.1
Proceeds from exercise of stock options		6.6			—			—		—			—			6.6
Payments of tax withholding for restricted shares		(2.2	)		—			—		—			—			(2.2	)
Repurchase of common stock		(9.4	)		—			—		—			—			(9.4	)
Proceeds from debt issuance		—			—			—		26.2			—			26.2
Payment of capital leases obligations		—			(19.7	)		—		(2.1	)		—			(21.8	)
Repayment of long-term debt		(77.5	)		(3.0	)		—		(27.1	)		—			(107.6	)

Net cash (used in) provided by financing activities		(80.4	)		27.2			—		(138.9	)		86.0			(106.1	)

Effect of exchange rate changes on cash and cash equivalents		—			—			—		(9.2	)		—			(9.2	)

Net increase (decrease) in cash and cash equivalents		—			(32.6	)		—		(58.2	)		—			(90.8	)
Cash and cash equivalents, beginning of period		—			212.1			—		274.8			—			486.9

Cash and cash equivalents, end of period	$	—		$	179.5		$	—	$	216.6		$	—		$	396.1

See also Note 10: “Commitments and Contingencies— Financing Contingencies” for discussion certain of the Company’s guarantees.

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 Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (“2013 Form 10-K”), filed with the Securities and Exchange Commission (the “Commission”) on February 21, 2014, and our unaudited consolidated financial statements for the fiscal quarter and six months ended June 27, 2014, 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 risk, uncertainties, and other factors. Actual results could differ materially because of the factors discussed below or elsewhere in this Form 10-Q. See Part II, Item 1A. “Risk Factors” of this Form 10-Q and Part I, Item 1A. “Risk Factors” of our 2013 Form 10-K.

Company Highlights for the Quarter Ended June 27, 2014

•

Total revenues of approximately $757.6 million

•

Gross margin of approximately 36.0%

•

Net income of $0.20 per diluted share

•

Cash, cash equivalents and short-term investments of approximately $601.2 million

•

Completed the acquisition of Truesense Imaging, Inc. (“Truesense”) for approximately $95.1 million in cash

Executive Overview

This Executive Overview presents summary information regarding our industry, markets, business and operating trends only. For further information regarding the events summarized herein, see Item 2 “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 WSTS group to evaluate overall semiconductor market trends and to track our progress against the market in the areas we provide semiconductor components. The most recently published estimates from WSTS project a compound annual growth rate in our serviceable addressable market of approximately 4% during 2014 through 2016. These are not our projections and may not be indicative of actual results. We, like many of our competitors, view this information as helpful third party projections and estimates.

Business Overview

ON Semiconductor Corporation and its subsidiaries (“we,” “us,” “our,” “ON Semiconductor,” or the “Company”) is driving innovation in energy efficient electronics. Our extensive portfolio of power and signal management, logic, discrete and custom devices helps customers efficiently solve their design challenges in advanced electronic systems and products. Our power management and motor driver semiconductor components control, convert, protect and monitor the supply of power to the different elements within a wide variety of electronic devices. Our custom ASICs use analog, DSP, mixed-signal and advanced logic capabilities to act as the brain behind many of our automotive, medical, military/aerospace, consumer and industrial customers’ products. Our data management semiconductor components provide high-performance clock management and data flow management for precision computing, communications and industrial systems. Our image sensors, optical image stabilization and auto focus devices provide advanced imaging solutions for optical systems. Our standard semiconductor components serve as “building blocks” within virtually all types of electronic devices. These various products fall into the logic, analog, discrete, image sensors and memory categories used by the WSTS group.

We serve a broad base of end-user markets, including automotive, communications, computing, consumer electronics, medical, industrial, smart grid and military/aerospace. Our devices are found in a wide variety of end-products including automotive electronics, smartphones, media tablets, wearable electronics, computers, servers, industrial building and home automation systems, consumer white goods, LED lighting, power supplies, networking and telecom equipment, medical diagnostics, imaging and hearing health, and sensor networks.

Our portfolio of devices enables us to offer advanced ICs and the “building block” components that deliver system level functionality and design solutions. Our extensive product portfolio consisted of approximately 46,000 products as of June 27, 2014 and we shipped approximately 22.3 billion units in the first six months of 2014, as compared to 20.4 billion units in the first six months of 2013. We offer micro packages, which provide increased performance characteristics while reducing the critical board space inside today’s ever shrinking electronic devices and power modules, delivering improved energy efficiency and reliability for a wide variety of high power applications. We believe that our ability to offer a broad range of products, combined with our global manufacturing and logistics network, provides our customers with single source purchasing on a cost-effective and timely basis.

Acquisitions

Acquisition of Truesense

On April 30, 2014, we completed the purchase of Truesense, whereby Truesense became our wholly-owned subsidiary. The aggregate purchase price of this transaction was approximately $95.1 million, subject to customary closing adjustments. We believe that the acquisition of Truesense strengthens our product portfolio targeting industrial end-markets such as machine vision, surveillance, and intelligent transportation systems by complementing our existing high-speed, high-resolution, power-efficient image sensing solutions with Truesense’s high-performance image sensors for low-light, low-noise.

Acquisition of Aptina, Inc. (“Aptina”)

On June 9, 2014, we entered into an agreement and plan of merger (the “Merger Agreement”) with Aptina, pursuant to which, at the effective time of the merger, Aptina would become an indirect wholly-owned subsidiary of ON Semiconductor, for an estimated purchase price of approximately $400.0 million in cash, subject to customary closing adjustments as set forth in the Merger Agreement. The transaction remains subject to the satisfaction or waiver of various closing conditions and is subject to certain regulatory approvals.

See Note 3: “Acquisitions” of the notes to our unaudited consolidated financial statements located elsewhere in this Form 10-Q for additional information.

Segments

As of June 27, 2014, we were organized into three operating segments, which also represented our three reporting segments: Application Products Group, Standard Products Group, and System Solutions Group. Each of our major product lines has been assigned to a segment 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 associated with our operating segments, and may move product families or individual devices from one operating segment to another.

Business and Macroeconomic Environment

We have recognized efficiencies from implemented restructuring activities and programs and continue to implement profitability enhancement programs to improve our cost structure. However, 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. While there have been recent indications of improving conditions, our business environment continues to experience significant uncertainty and volatility. We have historically reviewed, and will continue to review, our cost structure, capital investments and other expenditures to align our spending and capacity with our current sales and manufacturing projections.

Outlook

ON Semiconductor Third Quarter 2014 Outlook

Based upon product booking trends, backlog levels, and estimated turns levels, we estimate that our revenues will be approximately $765 million to $795 million in the third quarter of 2014. Backlog levels for the third quarter of 2014 represent approximately 80% to 85% of our anticipated third quarter 2014 revenues. We estimate average selling prices for the third quarter of 2014 will be down approximately one to two percent when compared to the second quarter of 2014. For the third quarter of 2014, we estimate that gross margin as a percentage of revenues will be approximately 35.6% to 37.6%.

Results of Operations

Quarter Ended June 27, 2014 Compared to the Quarter Ended June 28, 2013

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 June 27, 2014 and June 28, 2013 (in millions):


	Quarter Ended
	June 27, 2014			June 28, 2013			Dollar Change
Revenues	$	757.6		$	688.3		$	69.3
Cost of revenues		484.6			456.5			28.1

Gross profit		273.0			231.8			41.2
Operating expenses:
Research and development		84.2			83.1			1.1
Selling and marketing		47.9			43.3			4.6
General and administrative		44.7			40.2			4.5
Amortization of acquisition-related intangible assets		10.4			8.2			2.2
Restructuring, asset impairments and other, net		4.1			6.1			(2.0	)

Total operating expenses		191.3			180.9			10.4

Operating income		81.7			50.9			30.8

Other income (expense), net:
Interest expense		(7.9	)		(9.3	)		1.4
Interest income		0.2			0.4			(0.2	)
Other		(1.2	)		4.1			(5.3	)

Other income (expense), net		(8.9	)		(4.8	)		(4.1	)

Income before income taxes		72.8			46.1			26.7
Income tax benefit		16.2			2.6			13.6

Net income		89.0			48.7			40.3
Less: Net income attributable to non-controlling interest		(1.0	)		(1.0	)		—

Net income attributable to ON Semiconductor Corporation	$	88.0		$	47.7		$	40.3

Revenues

Revenues were $757.6 million and $688.3 million for the quarters ended June 27, 2014 and June 28, 2013, respectively. The increase in revenues for the quarter ended June 27, 2014 compared to the quarter ended June 28, 2013 was attributed to our Application Products Group and Standard Products Group, both of which experienced increases in revenue as a result of an improved demand environment, along with approximately $13.3 million of additional revenue in the Application Products Group provided by the acquisition of Truesense on April 30, 2014, partially offset by decreased revenue from our System Solutions Group due to the continued impact of a softening of the consumer end-markets.

As compared to the quarter ended June 28, 2013, we experienced a decline in average selling prices of approximately 4%, offset by favorable changes in volume and mix, which resulted in a net increase in revenue of approximately 10% for the quarter ended June 27, 2014.

Our revenues by reportable segment for the quarters ended June 27, 2014 and June 28, 2013 were as follows (dollars in millions):


	Quarter Ended June 27, 2014		As a % of Total Revenue ⁽¹⁾			Quarter Ended June 28, 2013		As a % of Total Revenue ⁽¹⁾
Application Products Group	$	301.2		39.8	%	$	251.5		36.5	%
Standard Products Group		303.7		40.1	%		276.4		40.2	%
System Solutions Group		152.7		20.2	%		160.4		23.3	%

Total revenues	$	757.6				$	688.3

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

Revenues from the Application Products Group increased by $49.7 million, or approximately 20%, from the second quarter of 2013 to the second quarter of 2014. This increase is primarily attributable to a $29.7 million, or approximately 22%, increase in revenues from our ASIC products, combined with an increase in revenues from our analog products of $14.3 million, or approximately 16%. These increases are the result of an improved demand environment as well as the addition of revenue provided by the acquisition of Truesense.

Revenues from the Standard Products Group increased by $27.3 million, or approximately 10%, from the second quarter of 2013 to the second quarter of 2014. This increase is primarily attributable to a $18.3 million, or approximately 17%, increase in revenue from our discrete products, combined with an increase in revenues from our analog products of $9.7 million, or approximately 13%, as a result of an improved demand environment.

Revenues from the System Solutions Group decreased by $7.7 million, or approximately 5%, from the second quarter of 2013 to the second quarter of 2014. This decrease is primarily attributable to a $6.0 million, or approximately 6% decrease in revenue from our LSI products along with decreases from a softening of the consumer end-markets.

Revenues by geographic location for the quarters ended June 27, 2014 and June 28, 2013 were as follows (dollars in millions):


	Quarter Ended June 27, 2014		As a % of Total Revenue ⁽¹⁾			Quarter Ended June 28, 2013		As a % of Total Revenue ⁽¹⁾
United States	$	126.1		16.6	%	$	98.5		14.3	%
Japan		66.8		8.8	%		75.7		11.0	%
China		220.9		29.2	%		198.5		28.8	%
Singapore		189.7		25.0	%		180.9		26.3	%
United Kingdom		118.3		15.6	%		102.6		14.9	%
Other		35.8		4.7	%		32.1		4.7	%

Total	$	757.6				$	688.3

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

A majority of our end customers, served directly or through distribution channels, are manufacturers of electronic devices. For the quarters ended June 27, 2014 and June 28, 2013, we had no single customer that accounted for 10% or more of our total revenues.

Gross Profit

Our gross profit by reportable segment for the quarters ended June 27, 2014 and June 28, 2013 was as follows (dollars in millions):


	Quarter Ended June 27, 2014			As a % of Segment Revenue (1)			Quarter Ended June 28, 2013			As a % of Segment Revenue (1)
Application Products Group	$	136.9			45.5	%	$	110.4			43.9	%
Standard Products Group		110.2			36.3	%		106.0			38.4	%
System Solutions Group		31.0			20.3	%		20.5			12.8	%

Gross profit by segment	$	278.1					$	236.9
Unallocated manufacturing costs ⁽²⁾		(5.1	)		(0.7	)%		(5.1	)		(0.7	)%

Total gross profit	$	273.0			36.0	%	$	231.8			33.7	%

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

⁽²⁾	Unallocated manufacturing costs are shown as a percentage of total revenue.

Our gross profit was $273.0 million in the second quarter of 2014 compared to $231.8 million in the second quarter of 2013. The gross profit increase of $41.2 million, or approximately 18%, during the second quarter of 2014 is primarily due to increased capacity utilization and cost savings realized from previous restructuring activities, partially offset by decreased average selling prices.

Gross profit as a percentage of revenues increased from approximately 33.7% in the second quarter of 2013 to approximately 36.0% in the second quarter of 2014. This increase was primarily driven by favorable changes in volume and mix across certain product lines as well as a larger proportion of revenues generated from our Applications Products Group and Standard Products Group which experience higher gross margin levels than our System Solutions Group.

Operating Expenses

Research and development expenses were $84.2 million for the second quarter of 2014 compared to $83.1 million for the second quarter of 2013, representing an increase of $1.1 million, or approximately 1%. This increase in research and development expenses is primarily associated with increased personnel costs in our Application Products Group and Standard Products Group along with increased performance-based compensation as a result of improved performance results for the second quarter of 2014 compared to the second quarter of 2013, partially offset by decreased research and development expenses in our System Solutions Group attributable to decreased payroll related expenses resulting from our 2013 restructuring and cost saving activities.

Selling and marketing expenses were $47.9 million for the second quarter of 2014 compared to $43.3 million for the second quarter of 2013, representing an increase of $4.6 million, or approximately 11%. This increase is primarily associated with increased sales commissions and increased payroll related expenses associated with performance-based compensation as a result of improved performance results for the second quarter of 2014 compared to the second quarter of 2013.

General and administrative expenses were $44.7 million in the second quarter of 2014 compared to $40.2 million in the second quarter of 2013, representing an increase of $4.5 million, or approximately 11%. This increase in general and administrative expenses is primarily associated with increased payroll related expenses associated with performance-based compensation as a result of improved performance results for the second quarter of 2014 compared to the second quarter of 2013.

Other Operating Expenses

Amortization of Acquisition—Related Intangible Assets

Amortization of acquisition-related intangible assets was $10.4 million and $8.2 million for the quarters ended June 27, 2014 and June 28, 2013, respectively. The increase in amortization of acquisition-related intangible assets is attributable to the amortization of intangible assets assumed as a result of our acquisition of Truesense.

Restructuring, Asset Impairments and Other, Net

Restructuring, asset impairments and other, net was $4.1 million for the quarter ended June 27, 2014 compared to $6.1 million for the quarter ended June 28, 2013. The information below summarizes certain activities for each respective quarter. See Note 5: “Restructuring, Asset Impairments and Other, Net” of the notes to our unaudited consolidated financial statements included elsewhere in this Form 10-Q for additional information.

Quarter Ended June 27, 2014

During the fourth quarter of 2013, we initiated a voluntary retirement program for certain employees of our System Solutions Group subsidiaries in Japan (the “Q4 2013 Voluntary Retirement Program”). Approximately 350 employees opted to retire pursuant to the Q4 2013 Voluntary Retirement Program, of which 340 employees had retired by June 27, 2014. The remaining employees who accepted retirement packages are expected to retire by the end of 2014. As part of these restructuring activities, approximately 70 contractor positions were also identified for elimination, all of which were exited as of June 27, 2014. As an extension of this program, we also identified approximately 40 additional positions for elimination, consisting of 20 employees and 20 contractors, substantially all of which had existed by June 27, 2014. We anticipate total cost savings for the Q4 2013 Voluntary Retirement Program, which includes the above referenced headcounts, to be within the range of our previously disclosed expectations of $36 million to $45 million during the first year following the completion of the anticipated headcount reductions.

During the quarter ended June 27, 2014, we initiated further voluntary retirement activities for certain of our System Solutions Group subsidiaries in Japan, applicable to an additional 60 to 70 positions, consisting of employees and contractors, which are expected to be eliminated during the third quarter of 2014.

During the quarter ended June 27, 2014, we recorded net charges of approximately $0.6 million in connection with the Q4 2013 Voluntary Retirement Program, which consisted of employee severance charges of $2.3 million, partially offset by pension and related retirement liability adjustments associated with the affected employees, which resulted in a pension curtailment benefit of $1.7 million.

Additionally, during the quarter ended June 27, 2014, we recorded approximately $1.7 million of net charges related to our previously announced plan to close our KSS facility.

Quarter Ended June 28, 2013

During the first quarter of 2013, we initiated a voluntary retirement program for employees of certain of our System Solutions Group subsidiaries in Japan. During the quarter ended June 28, 2013, we recorded net charges of approximately $3.9 million in connection with this program, which consisted of employee severance charges of $6.8 million, partially offset by pension and related retirement liability adjustments associated with the affected employees, which resulted in a pension curtailment benefit of $2.9 million.

Operating Income

Information about operating income (loss) from our reportable segments for the quarters ended June 27, 2014 and June 28, 2013 is as follows (in millions):


	Application Products Group		Standard Products Group		System Solutions Group			Total
For quarter ended June 27, 2014:
Segment operating income (loss)	$	36.5	$	60.7	$	(0.1	)	$	97.1
For quarter ended June 28, 2013:
Segment operating income (loss)	$	22.2	$	65.3	$	(23.0	)	$	64.5

Reconciliations of segment information to the financial statements is as follows (in millions):


	Quarter Ended
	June 27, 2014			June 28, 2013
Operating income for reportable segments	$	97.1		$	64.5
Unallocated amounts:
Restructuring, asset impairments and other charges, net		(4.1	)		(6.1	)
Other unallocated manufacturing costs		(5.1	)		(5.1	)
Other unallocated operating expenses (1)		(6.2	)		(2.4	)

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